Kenya emerges as a formidable financial centre of Africa

by Patrick Maluki

1. Introduction

With a GDP of US$95.50bn and growing at an average annual rate of 4.5%, Kenya is the largest economy in East Africa and one of the fastest-growing economies in Sub-Saharan Africa.^[1] Not only is it the regional economic, commercial and financial hub^[2], but it is also the logistical gateway of East Africa. The Kenyan port of Mombasa, which is the largest among all regional ports, handles more than 10 million tons of goods on transit to landlocked countries like Uganda and Rwanda.^[3]

As at December 2018, assets within the banking sub-sector of Kenya’s financial system accounted for 49.51% of nominal GDP^[4]. However, in their analysis of Kenya’s financial sector during the period from 1980 to 2012, Nyasha and Odhiambo (2016) find that although Kenya has a predominantly bank-based financial system, its economic growth is enhanced by the development of the stock market.^[5] The Kenyan stock market has a more significant positive impact on the enhancement of economic growth through savings mobilisation, resource allocation, facilitation of risk management, reduction of information asymmetry and control over corporate governance, than the banking sub-sector.

Kenya’s stock exchange and money market is regulated by the Capital Markets Authority (CMA). Short-term financial instruments (those with maturity tenure of one year or less) are traded in money markets. These include treasury bills, certificates of deposit, and repurchase agreements. Long-term financial instruments such as bonds and equity are traded in the stock exchange. The Nairobi Securities Exchange (NSE) handles public equity trading in Kenya. It is a for-profit company, de-mutualised and self-listed in 2014.^[6] The NSE is one of the most highly developed stock markets in Eastern and Central Africa, and among the top five best performing stock markets in Africa.^[7] The average market capitalisation of companies listed on the NSE as of June 2020 was estimated to be US$19.72bn with over 1.4 billion shares traded. This is compared to an average market capitalisation of US$6.62bn and US$6.32bn in Tanzania and Uganda respectively, and respective share volumes of 17.36 million and 274 million.^[8] Furthermore, the NSE has a total of 66 listed companies, with 29 at the Dar es Salaam Stock Exchange (DSE) and 17 at the Uganda Stock Exchange (USE).^[9],[10]

This paper reviews existing literature on Kenyan financial markets, including government reports, academic journal articles and industry news, to assess the current status of equity trading and money market in Kenya. It observes changes in market capitalisation, equity turnover, and fund sizes, among other industry growth and development indicators. Most related studies focus on only one financial market category. However, this paper assesses both capital and money markets to provide potential investors with a broader view of the general financial markets landscape in Kenya. The paper additionally identifies market trends and recommends opportunities for future foreign investment. This involves discussions on relevant policies and regulations so as to guide foreign investors around potential drawbacks and advantages as they navigate the Kenyan financial markets landscape.

2. Current Status of Equity Trading and Money Market in Kenya

Undoubtedly, the COVID-19 global pandemic has had an adverse effect on the world economy. Due to strict containment measures that disrupted trade, travel and economic activity, global economic growth contracted by approximately 3.5% in 2020, compared with a 2.8% increase in 2019. Kenya’s real GDP contracted by 0.4% in the first three quarters of 2020 compared with a 5.3% growth registered within the same period the year before. This was mainly driven by significant declines in the services sector, which includes financial markets. The sector contracted by 3.9% in the first three quarters of 2020 in contrast with the growth of 6.6% during the same period in 2019.^[11] All the same, the African Development Bank projects a 5% growth of Kenya’s GDP in 2021 while the World Bank predicts a more modest 4.5% growth.^[12] Either way it signals partial recovery from the pandemic aided by the COVID-19 vaccine rollout and the implementation of remedial monetary and fiscal policies.

2.1  Equity Trading

At the height of the pandemic in 2020 foreign investors exited the NSE in droves, selling off up to US$1bn worth of shares resulting is an estimated net outflow of US$260m. In 2019, they had purchased US$967.41m and sold US$947.48m worth of shares resulting in a net inflow of US$19.93m for Kenya. However, the first four months of 2021 signalled improvement with a reduced net outflow of about US$227m.^[13]

As of June 2021, the NSE had an approximate total market capitalisation of US$24.50bn - a 10.88% increase from US$22bn in the preceding quarter.^[14] This figure represents the estimated worth of NSE-listed companies, as derived by multiplying their number of shares issued and outstanding at a specified period by the current market price of the shares.^[15] Figure 1 summarises Kenya’s daily market capitalisation between January 2014 and June 2021, showing a trend of growth within the given period.  

Figure 1: Kenya’s Daily Market Capitalisation (Jan 2014 - June 2021) in KSh Billion

Improved performance is also observed in the equity turnover, which increased by 19.69% between the first two quarters of 2021 from US$288m to US$345m.^[16] This confirms increased trading activity at the bourse during the second quarter. The equity turnover is the ratio between the net sales of NSE-listed companies and their average shareholders’ equity. It measures how much revenue they are generating to justify holding their stock as an investor. Figure 2 presents the approximate equity turnover of the top 10 NSE-listed companies between April and June 2021, with most of them recording an improvement by the end of the quarter.

Improved performance in the second quarter of 2021 is additionally seen in trade volumes and share indices. The total number of shares traded in the NSE, which is the trade volume/share volume, rose from 997.75 million in the first quarter to 1,099.65 million. The NSE 20 Share Index recorded 1,927.53 points; a 4.39% increase from 1,846.41 points at the close of the first quarter.^[17] This is a price-weighted index calculated as a mean of the top 20 best-performing stocks^[18] and is used to track the average stock price in Kenyan capital markets. Figure 3 summarises the market’s share volume and NSE 20 Share Index between 2008 and 2021. The values fluctuated within the given period, with the lowest NSE 20 Share Index value being reported at the end of 2020 due to effects of the COVID-19 crisis.

The NSE All Share Index (NASI) increased by 9.4% between the first two quarters of 2021, from 158.62 to 173.53 points. This is a market-capitalisation-weighted index of all listed securities across all sectors and therefore acts as a barometer of the Kenyan economy.^[19] Figure 4 compares NASI performance with performances of select indices across the world between March and June 2021. It may be the smallest exchange among the eight compared but NSE recorded the highest improvement in index performance during the given period. That shows that while Kenya’s economy performed below its potential during the pandemic, it proved more resilient and responsive than her peers. The Kenyan economy grew by only 0.6% in 2020 but this was a better than -7% registered by South Africa, -1.8% by Nigeria and -1.8% by the rest of Sub-Saharan Africa.^[20]

2.2  Money Market

The Kenyan financial market infrastructure is such that money market instruments are mainly traded through pools of investors’ funds managed by various financial institutions. These are generally referred to as Collective Investment Schemes (CISs). As of March 2021, there were 25 fund managers and 24 CISs licensed by the CMA.^[21] Their Assets Under Management (AUM) recorded a 6.08% increase from US$952.78m at the end of 2020 to US$1.01bn in the first quarter of 2021, with 44.41% of the total AUM being invested in government securities. The least amount of AUM at 0.24% was invested in immovable property.^[22]

The most popular fund among CIS is the money market fund. Other funds include fixed-income funds, equity funds, balanced funds and special funds. At the end of 2020, the US$854m in money market funds accounted for 89.6% of all the funds under management by CIS.^[23] Figure 5 shows the trend of investments in different funds between June 2019 and December 2020. Investments in money market funds have been growing faster than investments in the other three fund categories. All the same, equity funds also record steady growth within the given period.

3. Investment Opportunities in Equity Trading and Money Market in Kenya

Asian investment in the Kenyan economy has been steadily rising over the years. A 2020 foreign investment survey by the Kenya National Bureau of Statistics (KNBS) found that, within the sample, investments from Asia had grown by 7.1% from US$1.51m in 2018 to US$1.62m in 2019.^[24] Japan, India and the United Arab Emirates remained the main sources of Asian investment, jointly accounting for 7.6% of the total stock of foreign liabilities. Their investments were mainly in electricity; finance and insurance; wholesale and retail; and, information and communication.^[25]

3.1  Information, Communication and Technology (ICT) Sector

Kenya is regularly referred to as Africa’s ‘Silicon Savannah’ thanks to its pioneering application of mobile money, mobile banking, open-source software, USSD applications, etc. Kenya is also a regional leader in broadband connectivity; value added services and the quality of ICT infrastructure. The government continues to invest in the sector, with US$210m of the FY2021/22 budget being allocated to various ICT initiatives, such as the fast-tracking of the development of Konza Technopolis - Kenya’s first smart city; and, maintenance and rehabilitation of the National Optic Fibre Backbone (NOFBI) Phase II Expansion Cable. The value of telecommunication services expanded by 10.3% from US$3.87bn in 2018 to US$4.27bn in 2019. The pandemic has only helped accelerate digitalisation. On current trend ICT could account for up to 8% of Kenya’s GDP through IT-enabled services and create more than 250,000 jobs by the end of 2021.^[26]

It is therefore no surprise that Safaricom PLC, which by some measure accounts for up to 60% of NSE market share^[27], recorded the highest equity turnover previously shown in Figure 2. It controls most of the mobile telephone service industry, with a 71.2% market share. The other three providers - Airtel, Telkom Kenya and Equitel - control 17.6%, 7.4% and 3.8% respectively.^[28] Most of Safaricom’s revenues are derived from M-PESA, its well-known mobile money platform which accounted for about a third of its revenue as at 31 March 2021^[29] (US$748.39m).^[30] Mobile money continues to be a preferred payment method in Kenya with nearly 95% of mobile users having access to one or more mobile payment platforms. State agencies, utility companies and various service providers have integrated mobile money platforms with their core banking applications making it convenient for end-users to make payments.^[31]

Figure 6 below demonstrates the more than doubling of Safaricom’s share price from US$0.15 as at 31^st March 2015 to US$0.33 as at 31^st March 2021. Its recent expansion into Ethiopia, the largest market in Eastern Africa, greatly increased demand for its stock with its share price further appreciating to US$0.39 as at 14^th September 2021.^[32]

Figure 6: Trend of Safaricom PLC share price in USD (Q1.2015 - Q1.2021)

While investors interested in the Kenyan ICT sector should consider purchasing Safaricom stock, the only listed telecommunication stock, the company’s relatively large size exposes the NSE to market concentration risk.^[33] This paper therefore recommends portfolio diversification through investment in multiple companies, especially non-telecommunication start-ups which have much higher growth potential. Through private equity funds and venture capital funds, foreign investors can purchase stock in unlisted Kenyan start-ups that are innovating in other ICT areas such as e-learning, e-commerce and online courier services, for which post-pandemic demand has greatly increased.

The government has also been pushing for digitalisation of all its services such as company registration, for the enhancement of effective public service delivery as per the Kenya Digital Economy Blueprint. Starting August 2023, local firms with at least 30% substantive Kenyan ownership will be prioritised in government ICT procurement processes.^[34] This creates an additional growth opportunity for local ICT companies, from which foreign investors can purchase profitable private equity.

It is also important to note that venture capital companies incorporated in Kenya enjoy ten-year tax holidays and tax-exempt dividend incomes.^[35] Foreign investors could opt to create local venture capital firms to take advantage of such sops.

3.2  Money Market Funds

Figure 5 above shows the fast growth in investments in money market funds, which account for most of the AUM by CIS. It appeals to wide segments of Kenyan society primarily because it offers a pool of diversified and professionally managed investment options to small investors^[36], with affordable initial capital requirements of as low as US$0.91.^[37] Their focus on government securities further attracts those that are more risk-averse.

The Central Bank of Kenya reports monthly weighted average interest rates of 6.34% and 2.51% for commercial banks’ deposits and savings respectively, as at July 2021.^[38] This has led to their substitution with money market funds that promise up to 10% daily yield.^[39] Additionally, the latter’s low cost of investment due to economies of scale and the convenience of their mobile money transactions which enhance liquidity have seen money market funds become avenues of financial inclusion. Not only does this promote a savings culture among Kenyans, but it also avails domestic capital which reduces dependence on public external debt. This mitigates foreign exchange volatility, adverse offshore events and potential threats to national sovereignty.^[40]

Foreign investors should consider investing in Kenyan money market funds. As Gopaldas notes, interest rates in developed markets are likely to remain much lower than emerging (and frontier) market rates due to enormous government stimulus packages in the former, in response to the COVID-19 crisis.^[41] Furthermore, various tax incentives exist such as exemption of foreign investors in marketable securities, like money market instruments, from Personal Identification Number (PIN) registration upon application to the Kenya Revenue Authority.^[42] This aims to ease the administrative burden of foreign investment in Kenyan capital markets.

Alternatively, foreign money market fund managers may consider creating Kenyan branches/subsidiaries to tap into the growth trend. They can enjoy incentives such as tax exemption for incomes accruing from registered CISs. Furthermore, the 75% cap on foreign ownership of NSE-listed companies was removed in 2015, allowing up to 100% shareholding in some instances.^[43] Foreign investors are also allowed to own up to 70% of local unlisted fund companies.

3.3  East African Community (EAC) Integration

The EAC is an intergovernmental organisation of six partner states - Kenya, Tanzania, Uganda, Rwanda, Burundi and South Sudan. It aims to enhance free movement of all factors of production across partner states and to create a single currency within the existing common market for eventual establishment of a political federation with a single government.^[44]

This process involves the integration of EAC capital markets, currently underway through legal and regulatory harmonisation in banking, accounting, securities market, insurance, payment systems and investment funds.^[45] Regional financial integration enlarges markets and expands the spectrum of opportunities for financial intermediation, making it more cost-effective to improve financial infrastructure and diversify financial services. Efficiency effects also arise from the increased diversification and healthy competition due to a greater number of participants, resulting in lower prices for services.^[46]

Cross-border transactions have grown over the years through the East Africa Payment System (EAPS) - a regional financial transaction channel for banks and traders.^[47] In 2019, a total of 3,020 bank transactions worth US$496.10m were recorded on EAPS, with 69.1% being in Kenya Shillings (Ksh).^[48]  The total market capitalisation for EAC cross-listed shares stands at about US$2.88bn, with 99.84% being taken up by the NSE, whilst 0.16% is shared between the DSE and USE.^[49] Eight NSE-listed companies are cross-listed on the USE; five on the DSE; and four on the Rwanda Stock Exchange (RSE).^{[50],[51],[52]}

EAC integration offers opportunities to foreign investors. The region hosts the second largest single market in Africa with about 177 million consumers^[53], second only to Nigeria at 206 million.^[54] It also hosts three of the fastest-growing African economies in 2021 - Kenya with a GDP growth rate of 4.5%; Tanzania at 4.1%; and Rwanda which is growing at 3.9%.^[55] Kenya aims to become the heart of the EAC financial services industry by 2023^[56] and is already a regional gateway for international capital flows. About 11 multinational and Kenyan-owned banks use Kenya as a hub for their EAC operations and all companies cross-listed and trading regionally are headquartered in Kenya.^[57] Foreign investors interested in the region should equally consider setting up base in Kenya to gain more regional access as integration progresses. They could anticipatorily trade in equities and other financial products from companies registered in partner states, or from Kenyan companies with increasing regional footprint. The Capital Market Master Plan proposes the creation of Kenyan depository receipts by 2023 which will package listed company shares from other EAC exchanges, for convenient trading on the NSE.^[58]

3.4  Islamic Finance

Rising ethical concerns by investors around the world have led to financial sector innovation, with the development of various new products such as green and blue finance, focusing on environmental and marine sustainability. This innovation has also led to the development of Islamic finance, valued at approximately US$2tr worldwide and expected to attract extensive investment over the coming years. In 2018, the value of Islamic finance assets in Sub-Saharan Africa grew by 18% to US$19bn, surpassing Europe, the United States and Australia.^[59] Islamic finance refers to investments and financing mechanisms that are compliant with principles of Sharia Law such as zero interest, profit/loss sharing, and avoidance of forbidden activities like gambling, speculation and pork.^[60]

Kenya seeks to position itself as a regional Islamic financial hub as per the Capital Market Master Plan by leveraging on its geographical position, sizeable Muslim population (11%)^[61] and existing relationships with other Islamic financial hubs like Malaysia and Qatar for technical assistance.^[62] The development of sophisticated shariah-compliant products will deepen the financial sector and enhance financial inclusion within Muslim communities. Various initiatives have been undertaken to provide a regulatory framework for this innovation, such as amendments of tax statutes to provide for equivalent tax treatment of Islamic financial products with conventional financial products.^[63] These are in line with the Vision 2030 goal of transforming Nairobi into a global financial centre offering.

Foreign investors wanting to access Islamic financial products in Kenya could consider the Genghis Capital's Islamic CIS Fund or First Community Bank (FCB) Capital’s Islamic asset management services.^[64] Alternatively, foreign Islamic financial institutions may consider expanding into the Kenyan financial sector, where only 2% of its total banking assets were Sharia-compliant as at 2015^[65] and only three fully-fledged Islamic banks currently exists, including a subsidiary of the Dubai Islamic Bank (DIB).^[66]   

4. Conclusion

This paper set out to present the current status of equity trading and money market in Kenya by assessing various industry growth and development indicators. While most related studies focus on only one Kenyan financial market category, this paper assessed both capital and money markets to provide potential investors with a broader view of the general financial markets landscape. It observed changes in foreign capital flows at the NSE, market capitalisation, equity turnover, trade volumes, share indices and assets under management in various funds. Given the COVID-19 global crisis that disrupted trade, travel and economic activity, capital markets decline was generally observed in 2020. However, improvement of all corresponding metrics was then recorded during the first few months of 2021. This is mainly attributed to the distribution of COVID-19 vaccines and the implementation of remedial monetary and fiscal policies, such as reduction of tax rates and the Central Bank policy rate.^[67] On the contrary, however, consistent improvement is seen in money markets, mainly due to increased investment in low-risk government securities given the prevailing stock market volatility.

The paper also set out to present possible opportunities for future foreign investment based on market trends. It recommends four promising areas, namely: the ICT sector through the purchase of both public and private equity; money market funds through the purchase of participating interests in local funds or the incorporation of foreign fund management companies in Kenya; the East African Community through the purchase of financial products in partner states or investment in Kenyan firms with increasing regional footprint; and Islamic finance through the purchase of such Kenyan products or the expansion of such foreign institutions into Kenya.

The paper also discusses relevant policy considerations for foreign investors, such as existing tax incentives and local equity participation requirements so as to guide them around potential drawbacks and advantages as they navigate the Kenyan financial markets landscape. It is important to emphasise, in conclusion, the need for investors to ensure that all their dealings in Kenyan financial markets are with approved and licensed institutions as per the 2021 CMA Licensees Guide.^[68]