NAIROBI, October 21- An Economist has recommended the auditing of all stockbrokerage firms twice a year by independent chartered accountants.
International Monetary Fund (IMF) Director for Africa constituency one Mr Peter Gakunu said on Tuesday that by ensuring adequate reporting, the Capital Market Authority (CMA) would help instil the investing public’s market confidence, which had been eroded by reports of financial troubles in many brokerage firms.
“The scope of the audit could cover among other things the existence and efficiency of the internal control system, compliance with all the provisions of the law in respect of the operations of stock brokers,” he suggested.
Mr Gakunu argued that going by the current global financial crisis, Kenyan brokerage firms may not be entirely immune to the lax underwriting and inadequate regulatory frameworks that had wreaked havoc on the global economy making it necessary for stringent regulation.
“The weaknesses in the regulatory framework witnessed in major markets could perhaps be reflected in what could be happening with the stockbrokerage firms in Kenya,” he pointed out.
There have been calls for the CMA to implement a proposal to raise the minimum capitalisation for stockbrokers and investment banks to Sh50 million and Sh250 million respectively as well as compel them to publish their financial results.
Mr Gakunu told Capital Business News that the local brokers’ earnings could also be at risk depending on the extent to which the local stock exchange was exposed to the credit and market-related losses seen in the current global financial crisis.
He added that Kenyan firms were not adequately insulated from these developments and that it would take them time to recover and re-establish their past performance.
“In the current environment, one would expect write-downs of fixed income inventory and a slowdown in business activity such as mergers, acquisitions and origination, to impact negatively on earnings results of all brokers,” he predicted.
The challenge, however, is for regulators to ensure that the interests of investors are protected.
“Effective regulatory authority is needed to ensure that international standards of corporate governance are met with to safeguard resources belonging to Kenyan citizens,” he advised adding that the CMA should be allowed to operate in a transparent and neutral manner.
Regarding the on-going NSSF saga, Mr Gakunu explained that prudently run pension funds were not usually risk takers and the scheme’s portfolio should not have had so much exposure in the stock market.
He stressed that the composition of the board of trustees should be properly structured while the trustees must be competent and have a working knowledge of their own scheme\’s policy documents.
“The role of the board of trustees is to be sensitive to market shifts and to set the broad policy direction, while maintaining appropriate asset allocation and diversification policies as part of their fiduciary duty,” the IMF director added.
He expressed his concern over the ‘unfortunate politicisation’ of the issue instead of taking quick measures to protect the interests of NSSF investments and to calm the market.
Mr Gakunu warned that the implications of this development was a wider impact for the Kenya stock market and should therefore be adequately and decisively addressed.
“The government must clean up the Nairobi Stock Exchange through appropriate regulations and enforcement by empowering CMA. The Capital Markets Authority should be professional and should not be seen as a political outfit,” he emphasised while responding to reports of possible insider trading and political interference.
He added that if investors perceive laxity or incoherence in the action that the authorities take to address this problem, they might overlook Kenya and instead put their money in opportunities that exist elsewhere including in the East African region.
“One of the lessons that everybody has learnt is that you cannot take decisions in isolation. You must coordinate your actions with other countries. Secondly, you must act quickly and decisively. I would urge that these lessons be heeded in the current circumstances,” he concluded.