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CMA developing hybrid bonds market

NAIROBI, Kenya Apr 8 – The Capital Markets Authority (CMA) is developing a hybrid bond market as part of a reform process to deepen the sector.

The reforms are geared at increasing corporate participation in the highly government-dominated bonds market.

Speaking during a stakeholder consultative meeting, CMA Chief Executive Officer Stella Kilonzo said a vibrant bond market would help the country mobilise long-term savings and capital required to fund development projects in the country.

"Our bond turnover has increased since 2005 but we are saying that there is still more that can be done to help mobilise resources," Mrs Kilonzo said.

Interest in bond issuing has seen turnover rise from Sh49 billion in 2006 to Sh479 billion last year raising an estimated Sh190 billion, which constituted 17.5 percent of the country\’s GDP.

Mrs Kilonzo said that the reforms in the bond market would focus on enhancing the legal and regulatory framework to support its growth.

She said with the restructuring, the authority had set a target of increasing the level to 30 percent of GDP by the end of 2012.

"We have a target which is to increase our bond turnover and this reform process is meant to help us meet this target," she said.

Over the last five years, the bonds market had witnessed increased liquidity and high turnover due to automation of trading and settlement, lengthening of the government bond maturity to thirty years and a yield curve due to the issuance of benchmark bonds among other reforms.

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However of concern to the CMA is the dominance of the government in the bonds market accounting for 91 percent of total participation while big corporate companies still shy away.

She said corporates preferred getting direct lending from banks and trading with equity instruments rather than bonds. Another hurdle has been the stringent disclosure requirements since bonds have to be listed on the Nairobi Stock Exchange to be traded.

"The perception is that the listing process is tedious and takes too long and they would rather seek other alternatives," Mrs Kilonzo said.

The reform process and the adoption of the hybrid bond market model are expected to make it more attractive for investors as a long-term instrument for raising capital.

The Central Bank of Kenya is also working on new rules that will limit direct selling of Treasury Bonds to banks and cash-rich institutional investors in a move that will set the stage for more State borrowing and loosen commercial banks\’ grip on public debt offers.

The move is expected to set the stage for entry of international investment banks to be the primary buyers of Treasury securities.

Other investors will then trade government bonds in the secondary market, unlike currently when all buyers can put direct bids for government bonds in auctions.

"Our bond turnover has increased very well but we are saying there is more that can be done so that we are just not a market for Kenya but really an international market," Mrs Kilonzo said.

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