Business Daily<\/a> (Nairobi)<\/p>\nGeorge Ngigi<\/p>\n
29 December 2011<\/p>\n
\nThe revocation of stockbroker Ngenye Kariuki and Company’s statutory management order last week appeared to break a four-year jinx during which a broker has collapsed every 12 months.<\/p>\n
Francis Thuo and Partners went under in early 2007, marking the first of a series of stockbroker failures that were largely blamed on weak management and fraudulent selling of investors’ shares by the intermediaries.<\/p>\n
Nyaga Stockbrokers faced the same fate in 2008, followed by Discount Securities in 2009, and in 2010 Ngenye was put under forced management.<\/p>\n
The Capital Markets Authority (CMA) has, however, all but lifted Ngenye’s statutory management order, setting the stage for Kenya’s first revival of a financially troubled broker.<\/p>\n
“Brokers have been able to manage their costs and are prepared for 2012, which could be another challenging year,” said managing director of Faida Securities, Bob Karina. He added that diversification of the intermediaries’ business portfolio into handling international investors, bond trading and consultancy had boosted the financial position of some of the brokers with the largest overhead costs.<\/p>\n
Ngenye Kariuki sold 10 per cent of its share to three investors, which helped to lift its capital base from a negative balance.<\/p>\n
The appearance of stability in the sector could boost investor confidence, which has taken huge blows with every successive collapse.Investors lost in excess of Sh2 billion from the Nyaga and Discount Securities collapses.<\/p>\n
Those who had invested through Nyaga recovered a maximum of Sh50,000 each from CMA’s investor compensation fund, while payments for Discount Securities investors are yet to start.<\/p>\n
Some have attributed the relative stability in the sector to stringent supervision from the regulator and increased prudence by the brokerage firms.<\/p>\n
“Regulation has been good. In the past some firms were operating outside the regulatory framework,” said Kingdom Securities managing director, Mr Geoffrey Odundo. “The firms are also exercising prudence because of extra vetting by clients,” he added.<\/p>\n
Over the past one year the CMA has introduced new capitalisation rules that require investment banks to maintain minimum shareholder funds of Sh250 million and Sh50 million for stockbrokers.<\/p>\n
The CMA has also introduced a back office software system that has increased transparency in the sector by connecting brokers to the securities exchange, besides adopting risk-based supervision.<\/p>\n
The market regulator has also been pushing for demutualisation of the NSE and has drafted changes to the Capital Markets Act to gain more supervisory powers.<\/p>\n
Though the stock market has experienced a bearish run for the better part of the year following persistent rise in the cost of living, foreign investors’ participation has been high, keeping the market active.<\/p>\n
“Most firms have diversified to the foreign markets, which were previously dominated by few players. Foreigners have been really active,” said Mr Odundo. In the nine months to September foreign investors buys and sales had exceeded Sh60 billion. But a prolonged bearish run could strain the brokers’ commission earnings, with the potential of pushing some into financial difficulties.<\/p>\n
Already there are reports of lay-offs in the sector. The capital market has also been affected by the recent surge in interest rates and banks deposit rates following Central Bank’s monetary tightening stance.<\/p>\n
Stockbrokers believe an expected decline of interest rates next year would revamp activity at the bourse as investors hunt for bargain buys, even with a General Election looming.<\/p>\n
The market regulator has pushed brokers to put in place strong corporate governance structures to guarantee their long-term stability. CMA had given stockbrokers until October next year to comply with the new regulations, which require them to install new information technology systems and separate ownership of the firms from management.<\/p>\n
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