NAIROBI, October 13 – The unfolding global financial crisis should serve as a lesson for Kenya to push for higher capitalised financial institutions, the Capital Markets Authority (CMA) said on Monday.
CMA Chairman Professor Chege Waruingi said proposals to increase capitalisation for investment banks from Sh30 million to Sh250 million, and Sh5 million to Sh50 million for stockbrokers should be adopted by Parliament.
“There is a case for highly capitalised financial institutions in line with the Finance Bill 2008-2009 for investment banks and stockbrokers and the Finance Act 2007-2008 requiring banks to inject higher capital,” said Prof Waruingi.
The market regulator is also proposing a risk-based supervision approach for the financial sector; “risk management by each financial institution, with the regulator risk-profiling and continuously reviewing the risks independently.” Currently, there is over reliance on the institutions themselves.
The accounting profession, Prof Waruingi added, should be vigilant to ensure companies announced realistic results.
“This is because both the regulator and investors place a lot of premium on the audited accounts when assessing regulatory risks and investment choices respectively,” Prof Waruingi explained.
He cited the US economy – the genesis of the current crisis – where asset prices were inflated, and profits of various financial institutions were inflated as compared to corporate profits of non-financial industry players.
“Accountants must be vigilant and never let anything cloud their judgments about the underlying commercial realities of firms,” he stressed.
Prof Waruingi was however quick to assure investors that the local markets were unlikely to be affected by the crisis.
“Ironically, the low level of development of our market and its minor presence in the global context has ensured that Kenya does not suffer direct contagion effect,” he said.
The CMA boss further explained that the global crisis resulted from credit problems, and not directly due to stock trading strategies in the equity market. He faulted the subprime mortgage lending regime in the United States, saying most of the lenders were insincere about the associated risks.
“Most of these loans were adjustable rate mortgages with low rates for the first few years, and then ridiculously high interest rates later at the reset point. But many of the subprime lenders had a habit of downplaying the risks when dishing out record numbers of these loans to Americans,” he observed.
Panic has gripped the Nairobi Stock Exchange in recent days, as a result of the global crisis. The market had to be halted for 15 minutes on Wednesday after the NSE-20 Share Index slumped by five percent.
The bearish run continued on Monday, with the 20 Share Index shedding 67.13 while the NSE All share Index eased 0.57 points.