Sh3b IFC loan to improve Kenya bonds market

November 7, 2011
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Capital Markets Authority CEO Stella Kilonzo/ File
NAIROBI, Kenya, Nov 7 – The government is set to receive Sh3 billion from the International Finance Corporation (IFC) to deepen the local currency bond market and enhance Kenya’s capacity to mobilise funds for development.

The Programme Manager of an IFC supported initiative dubbed ‘Efficient Securities Markets Institutional Development (ESMID) Evans Osano explained that the funds would go towards streamlining the legal and regulatory framework and ensure the development of a well-functioning securities market.

“The IFC is looking to do a local currency bond issue in Kenya and that has received the regulatory approvals. The amount will be used to finance the (local currency) pipeline,” Osano added.

A local currency bonds market would not only enable the country to attract more Foreign Direct Investments but also instil confidence in the local capital markets.

Kenya has a relatively well developed bonds market through which some Sh82 billion worth of infrastructure bonds have been raised since 2009.

At the end of 2010 for example, the bond turnover as a percentage of the Gross Domestic Product (GDP) increased to 17 percent up from a turnover of five percent in 2009, making Kenya the second biggest bond market in Africa in terms of turnover.

Despite its vibrancy, however, the market is largely dominated by government securities, which accounts for 90 percent of all bonds issued.

While the corporate bond segment has grown with companies such as KenGen, Safaricom and Housing Finance coming into the market, corporates participation is still very low.

The government, through the Capital Markets Authority (CMA), the Finance Ministry and other stakeholders are undertaking initiatives and reforms to ensure efficient markets that will encourage the private sector to harness the local capital.

Such measures include the development of an Over The Counter (OTC) trading platform that portends a less stringent regulatory and transparent framework. Others reforms in the pipeline include the Automated Trading System, Primary Dealers and Market Makers, government bond index and the demutualisation of the securities exchange.

“We have had a lot of gains but obviously there is a lot of scope and based on that, we did convene a bond steering committee with the objective of ensuring that the bond reforms are on going,” CMA Chief Executive Officer Stella Kilonzo said.

To ensure that the market is all inclusive, the government is also mulling the development of a system that will allow retail investors to purchase Treasury Bills and Bonds through their mobile phones.

These programmes notwithstanding, the secondary market has suffered a backlash following the current market conditions characterised by soaring inflation and a steep rise in interest rates.

This has resulted in some potential bond issuers putting on hold their plans to come to the market and thus a reduction in the uptake of these securities.

However, as the government moves to stabilise the macroeconomic environment, there’s optimism that the situation will improve, with the various firms that are considering tapping into the market getting the conviction to do so.

And in an effort to ‘diversify the risks’, the players have learnt that such efforts should not be confined to the country alone but should be extended across the East African region.

“At the East African Securities Regulators Authority, we recently approved regional bond guidelines to facilitate the issuance of bonds within the East African space. From the Kenyan side, we are in the process of having those gazetted,” Kilonzo disclosed.

This development stems from the realisation that the region needs to coordinate the implementation of monetary, fiscal and debt policies in order to benefit from economies of scale.

“Many of the African economies are small with shallow capital markets. It is for this reason that the efforts being taken through the assistance of ESMID (also funded partially by the Swedish International Development Cooperation Agency) to integrate the securities markets is in the right direction,” concurred Finance Permanent Joseph Kinyua through his Director of Debt Management John Murugu.

Such integration is particularly crucial at a time when the global economy is faced with uncertainty and thus gives credence to the importance of the bond market as having the ability to absorb volatility, give governments a tool to reduce the impact of the economic crisis as well as one that has the potential to improve a country’s monetary stability.

In addition, the need for bonds in financing infrastructure development in East Africa and other emerging markets cannot be gained.

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