Over the past decade, Kenya has taken considerable steps towards deepening financial inclusion. This is reflected in the 2016 FinAccess Household Survey which shows that slightly more than three-quarters of Kenyans are now formally included by the financial system, which is a 50% increase over the past 10 years.
According to the report, the percentage of Kenyans relying on informal services providers decreased from 32.11% in 2006 to 7.2% in 2015. Thanks to technology, 18% of Kenyans now use new mobile banking services such as M-Shwari and M-Pesa, a scenario that has pushed the proportion of bank account users to 38%, up 10% from 2013, while traditional bank accounts have decreased.
Despite the significant progress seen towards enhancing financial inclusion, there is much less success in the use of investment products, such as shares, mutual funds and treasuries. The study showed that the use of investment products decreased to 10.6% in 2016 compared to 11.6% in 2013. Findings by the same survey also revealed that the number of Kenyans familiar with the Nairobi Securities Exchange (NSE) stood at only 38%. It seems that a lack of awareness could be why less than 30% of daily market transactions at the NSE are attributed to local individual investors.
But there is hope. Mobile phone platforms are being used to increase awareness and participation. Data shows that 26% of Kenya’s adult population own a smartphone or other smart devices. The uptake of mobile banking services has led to an increase in the banks’ penetration in the past 10 years, from 14% in 2006 to 38.4% in 2015. Investment managers, stockbrokers and insurance companies will also be buoyed by market studies that show that 71% of the population uses financial services provided by mobile financial service providers. This is a clear sign that mobile phones are the best way to encourage investments.
In light of this, the Kenyan government is launching the mobile-traded government security, M-Akiba. Kenyans with as little as $30 will be able to bid for the upcoming five-year income tax-free bond using their M-Pesa accounts. Investors will rejoice; M-Akiba returns are expected to be better than the current fixed deposit rates and most money market accounts. Stockbrokers have not been left behind either – at least three of them have recently launched mobile apps aimed at retail investors looking to buy shares, monitor their portfolio holdings and check account balances via their mobile phones.
But, the road ahead is not without obstacles. One is the low incomes among Kenyans. According to household survey, 75% of adults earn less than $150 per month. This may hinder most Kenyans from taking up financial products. A lack of trust among women towards formal financial institution is another major challenge. According to the latest quarterly report by the Capital Markets Authority (CMA), women account for merely a third of the total number of investors. Low levels of education in the country are also an issue, with 60% of the population not completing a secondary level of education. With this in mind, it could be daunting when it comes to selling sophisticated financial products, such as derivatives and exchanged traded funds. Even among the educated, stakeholders will have to fight to shake off the persistent fascination with real estate.
At least Kenya is showing resolve to deal with the challenges. There is a big chance to make real changes to how people invest; all that is needed is a phone.

More Phones more finance

Exchange-traded funds (ETFs) are one of the greatest financial innovations in recent years. ETFs, which are essentially investment funds traded like other securities on securities exchange, much like stocks, have enjoyed remarkable success since being introduced in the 1980s. The global ETF industry, and its related products, is now estimated to have assets worth $2.6 trillion listed on 61 exchanges. Not to be left behind, Africa has steadily been growing its share in this burgeoning industry. Currently, there are six nations offering ETFs: South Africa, Botswana, Ghana, Nigeria, Egypt and Namibia. South Africa, a long-time leader in this area, has 34 ETFs ranging from those based on indexes to those based on commodities.
Kenya, through the Nairobi Securities Exchange (NSE), is seeking to become the latest entrant. In a bid to raise its profile, the Capital Markets Authority (CMA) of Kenya has been planning to launch the new product since July 2013. Partly aimed at attracting foreign investors, the expected launch comes at a time when the local equity market is increasingly attracting international investor interest. As the global markets become increasingly correlated, forcing portfolio managers around the world to become more familiar with frontier markets such as Kenya’s, it appears the new product is set to meet ready demand.
NSE’s Head of Market and Product Development, Donald Ouma, says that ETFs will be an affordable form of investment for retail investors as they give broad exposure to equities without having to spend a huge amount of cash. The new product promises to give investors the ability to track indices of various stocks spread out in various countries that would otherwise have been expensive or tricky to come by before.
Furthermore, ETFs are expected to improve liquidity of the overall market which currently spots turnover rates lower than 10%. The low fee structure also means benefits from the relatively lower expense ratios are passed to the investor. Locally, the average mutual fund charges an advertised management fee of 2%. The new product is also set to give easy access to alternative assets such as oil, gold and currencies. The latter could have come handy this year as the local currency lost nearly 5% of its value against the US dollar.
However, limited available exposure could leave potential growth opportunities out of reach of ETF investors. Since the NSE’s main index is still limited to a small number of stocks, ETF promoters may find it challenging to achieve a respectable scale. Another potential roadblock could be slow retail acceptance. According to the Ernst &amp; Young, EY Global ETF Survey: 2015 and beyond, outside the US, the ETF industry’s biggest long-term challenge is low retail adoption. With no way around this, acceptance by retail investors will certainly take time to realize despite huge potential for retail growth. Nevertheless, the benefits outweigh the challenges.
In the initial years, I see Kenya’s ETF industry dominated by very large funds and issuers such as the FTSE Group. The latter, which already has two off-shore NSE-based tradable indexes; FTSE NSE Kenya 15 Index and FTSE NSE 25 Index, plans to list its FTSE-based indexes. South African group, Absa Capital, is said to be in talks with CMA and NSE to list its gold-backed ETF, the New Gold ETF. More large-scale issuers are likely to enter the market. Ultimately, this will strengthen the industry’s outlook by giving investors a broader choice of ETF promoters and product range.
Moving forward, as the growing wave of international interest continues to focus on markets like Kenya, certain key factors will be crucial to ensure the success of the new industry; price transparency, education, investor engagement, patience, liquidity and technology. If ETFs are to fulfil their undoubted potential for long-term growth, all the stakeholders need to ensure that these building blocks are in place. If this happens, then NSE-listed ETFs could easily revolutionize the securities markets in the region.

Revolutionary  And Rewarding

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When Atlas Development &amp; Support Services, an African-focused company involved in oil and gas exploration, listed its shares on the Nairobi Securities Exchange late last year, it showed that recent discoveries in East Africa are creating a stir.
Since the discovery of significant quantities of oil in Uganda in 2006, more discoveries have followed in quick succession, especially in the past five years. In fact, more hydrocarbons have been discovered in the past three years than anywhere else. As a result, oil and gas has become one of the top sectors, rated by investment value, in the region.
Not so long ago, East Africa was considered a sleepy backwater for the upstream oil and gas industry. It has now become a main area of focus for exploration. Efforts by Tullow Oil, one of the exploration and production giants, have so far delivered around 1.7 billion gross barrels of oil in Uganda and over 600 million in Kenya. While onshore exploration has opened up oil plays in these countries, offshore exploration success in Tanzania has heralded a major new focus on the development of the region as a liquefied natural gas (LNG) hub. Significant gas finds in Mozambique are expected to make the country the second-largest exporter of LNG in Africa, after Nigeria, by 2025. In 2012, one third of all global oil and gas discovered was in Mozambique.
Some of the projects are going to have massive transformative impact on the region. Kenya, which launched the world’s largest single turbine geothermal power plant in 2014, is set to generate 30% of the country’s additional power over the next 20 years according to the United Nations Environment Programme. The renewable energy project will also potentially reduce the cost of energy across the country by as much as 50%. The country is considered to be one of the most promising geothermal prospects in the world. In an article by The Guardian, geothermal is described as “the darling of on-grid solutions” for the country and according to the Geothermal Energy Association, the country “will become the world leader if its planned projects are completed on time”.
Similarly, gas finds are expected to transform the economies of Tanzania and Mozambique. Access to the lucrative Asian LNG market has significant benefits for the two countries and could act as a catalyst for meaningful economic development. The windfalls are expected to be used to deliver substantial social, economic and infrastructural improvements. In addition, as Africa starts to focus more and more on securing adequate supplies of crude oil and liquid fuels to satisfy growing local demand, it will boost foreign exchange flows, distribution of wealth, infrastructure development, stability and security of supply.
As exploration gains momentum, the lack of proper developed infrastructure remains a challenge. It is estimated that between $60 billion to $70 billion needs to be invested to strengthen the sector. The future development of the industry is dependent on this. Fears around the shale oil revolution dampening demand for East Africa’s oil, as cited in the 2013 PwC report on shale oil, should ease up as considerable demand still remains from nations such as China and India. Other key challenges the industry is grappling with include a shortage of oil and gas workers, political interference, uncertainty and delays in passing laws.
There is potential for the energy sector to overcome these challenges. The pace of regulations is keeping in step so the region stays in touch with its competitors and investment remains attractive. Wider economic and political factors could also work in East Africa’s favor. If the region continues to build on the current momentum and creates investor friendly policies, there is no doubt that the sector is bound for greater heights.
As the last true oil and gas frontier, East Africa has already taken off. The journey for a brighter tomorrow has begun.

The Last Oil And  Gas Frontier Takes off

The Nairobi Securities Exchange (NSE) 20 Share Index closed last year at an enviable 19.2%, settling at 4,927 points. Similarly, investors’ wealth rose from Ksh1.27 trillion ($14.7 billion) to Ksh1.92 trillion ($22.2 billion)—an equivalent of 51.2%. With government debt and real estate yielding an average of 8.2% and 6% respectively, equities easily became the top performing asset class.
Therefore, with an average inflation of 5.7% throughout last year, it means equities gave the best return in real terms. Persistent foreign investor interest, falling interest rates and general favorable economic conditions are some of the main factors that supported the rally. Notwithstanding the heightened political tension early in the year and the almost 100% rise in overall inflation, the market proved to be more robust than expected.
The top five counters, Centum Investment Company, British American Investments, CFC Insurance, Pan Africa Insurance and Safaricom, all doubled in price within the 12-month period on the back of stellar returns. Laggards of the year included Mumias, Kenol Kobil and Scangroup, which all lost more than 25% of their value due to difficult operating environments and negative sentiment. Safaricom became the first NSE-listed company to rise to a capitalization of Ksh400 billion ($4.6 billion) when its share price went past the Ksh10 mark for the first time.
Foreign investors piled into big caps like East African Breweries, Bamburi Cement, Equity Bank and KCB Bank, as appetite for African equities improved. The Capital Markets Authority (CMA) now indicates that foreigners account for 22.4% of investors’ holdings, up from a low of 7.9% in 2008, according to its third quarter Statistical Bulletin 2013. This group now averages 50% on investors’ monthly participation in the market. Net cash inflows from this investor category for the nine months ending last September amounted to Ksh22.6 billion ($262 million), almost matching the total sum for the full year in 2012, which stood at Ksh21.7 billion ($251 million).
NSE saw its total listings go up to 61 following the listing of Home Afrika, a real estate developer which joined the market by way of introduction. The firm floated 405 million shares on the NSE’s Growth Enterprise Market Segment. There were no delistings during the year. CMC Holdings remained suspended, pending the resolution of corporate governance issues and a take-over bid by the Al–Futtaim Group. Access Kenya and Rea Vipingo were also suspended from active trading following take-over notices.
This year the market is poised to keep up with the trend of the overall economy, in effect setting the stage for the continuation. The former major resistance at the 5,000 level may soon turn into a support area, especially if first quarter numbers are solid. The country is projected to grow by 6.2% this year according to the International Monetary Fund (IMF), an improvement from 5.9% in 2013 and 4.6% the year earlier. However, IMF’s managing director, Christine Lagarde, warned that the gradual tapering of the United States monetary stimulus program in coming months could temper equity returns and massive outflows could ensue as a result.
Nevertheless, one of the sectors expected to do well is the energy sector owing to the confirmation of higher amounts of recoverable oil, over and above the 300 million barrels so far reported; a scenario likely to spur additional capital expenditure into the country. In this regard, Transcentury is best placed to attract investor attention as it is the only listed stock closely involved in oil and gas exploration. Civicon, one of its important subsidiaries, was recently awarded a lucrative contract involving the building of supporting infrastructure around oil exploration blocks in northern Kenya.
Other sectors anticipated to deliver good returns include the banking and consumer sectors according to risk and research firm Stratlink Africa. It argues the two sectors will experience robust growth, fueled by increasing demand for financial services and technology, especially in the mobile banking arena. In this regard, Kenya Airways, Cooperative Bank, NIC Bank and Barclays Kenya provide a potential hunting ground. However, the firm cautioned that there is risk to this outlook, stemming from the uncertainty surrounding the International Criminal Court cases against the president and his deputy.
Nonetheless, the market multiple stands at 16, meaning there are opportunities to be found. I therefore would like to wish all the bargain hunters out there all the best investing in 2014.

Tag: Nairobi Securities Exchange

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More Phones more finance

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The Last Oil And Gas Frontier Takes off

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