Financial marketsThe Stock Market in Kenya

Melyn AtienoDecember 6, 202122512 min
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A stock is a security that allows a holder to own a share in the company that issues the stock. Companies that issue stocks are those that need to raise money from investors, to grow and invest in the company. Investors who buy shares from the company receive a return on their investment or dividends when the company makes profits. Some investors choose to buy stocks at a certain price and once the stock price goes up, they sell the shares to make a profit. Most investors invest in stocks to help them build wealth, especially in the long run. It is always advisable to invest in stocks from a company that is performing well, to avoid making big losses. Stocks are traded through security or stock markets where investors and firms are allowed to take risks and get rewards in return.

According to Sheilla Nyasha (2014) ( https://www.researchgate.net/publication/315586264_The_Dynamics_Of_Stock_Market_Development_In_Kenya ), Kenya’s stock market traces its origin back to the 1920s, when Kenya was still a British colony. At that time, there was no formal market, therefore, there were no rules or regulations that helped to guide people who were dealing in stocks. Stockbroking was conducted by accountants, auctioneers and lawyers as a side-business, where they met and exchanged prices over a cup of coffee. Trading took place based on gentlemen’s agreements, in which standard commissions were charged, with clients being expected to honour their contractual agreements by making good delivery and settling any relevant costs (Nairobi Stock Exchange, 1996).

In 1954, the Nairobi Stock Exchange, which later changed its name to Nairobi Securities Exchange, (NSE) was formed, with only 46 listed companies registered under the Societies Act(Chapter 108, Laws of Kenya). The main roles of NSE include; listing of companies, market surveillance, monitoring activities of listed companies and so much more. The establishment of Nairobi Stock Exchange, which is regulated by the Capital Markets Authority, came after the London Stock Exchange approved of the need to create a professional stockbroking firm. Back then, the only people who could buy and sell shares were the European community, since Asians and Africans were not allowed to trade in securities until 1963, when Kenya gained independence. Thereafter, the activity in the stock market greatly reduced because there was uncertainty of how the economy would perform, post-independence. Fortunately, there was stable economic growth for the first three years after independence, and confidence in the stock market was restored. However, when the oil crisis of 1972 occurred, inflation increased, and this led to repressed share prices in the stock market(Nairobi Stock Exchange, 2002). In 1985, the Nairobi Stock Exchange lost its regional character in the East African region when exchange controls and inter-territorial restrictions were introduced in Uganda and Tanzania. This is according to Nairobi Stock Exchange(2002).

Performance of a stock market is usually measured by aggregating the total companies’ stock market performance(Dobbs and Koller, 2005). Kenya’s stock market is relatively developed in the African context. The Nairobi Securities Exchange has progressively increased the value of investors in some periods increasing the speculative aspect of the market , but in other periods, the returns have been whipped by bearish markets, leaving investors in panic. This is according to an article written by Nathan Mwenda Muturi, 2019. (https://ir-library.ku.ac.ke/bitstream/handle/123456789/20063/Systematic%20risk%20and%20perfomance……………..pdf?sequence=1&isAllowed=y).

Source: tradingeconomics.com

The graph above, shows how the stock market has been performing over the past ten years, based on the performance of the 20 best performing companies in Kenya. In 2020, due to the COVID-19 pandemic, the Nairobi Securities Exchange had an equity turnover of Ksh. 778.82 million, which was a 3% fall from Ksh. 802.35 million. Meanwhile, the bond turnover increased by 46% in Kenya. According to Economists, the coronavirus fears sparked investor rush for government bonds away from the volatile stock markets. Furthermore, Kenya’s stock market halted trading in March 2020,  as investors dumped shares in blue chip companies over concerns of the likely impact of Coronavirus on the country’s economy. This is according to theeastafrican.co.ke.

As we all know, the key to economic growth is in a country’s financial sector. The stock market of Kenya has helped steer the country towards economic growth. Through the stock market, companies can raise funds without necessarily borrowing from the banks which offer very high interest rates. This has helped companies to save a lot in terms of costs and focus on the growth of the company. Growth of  a company increases output hence increasing the country’s revenue, in the form of taxes. Between 2006 and 2016, Jubilee Holdings, Kenya’s largest insurance company, recorded a ten-year return of +743.6%. During the ten years, its net insurance premium revenue grew by 660% and this definitely increased the shareholder’s returns. Through the stock market, Jubilee holdings was able to invest in Diamond trust bank, real estate, and under-sea fibre optic cables and this enabled the company to increase its insurance income and benefit directly from the country’s most promising projects. This has also given the company an opportunity to expand its operations throughout East Africa. This is according to a report written by Ryan Hoover at Investing in Africa (https://investinginafrica.net/kenyas-ten-best-stocks-decade/ ).

Kenya’s stock market still faces challenges due to low capitalization. There are a limited number of listed companies and a limited number of investors participating in the stock market. This gives investors limited options when it comes to looking for companies to invest in. Furthermore, most investors have little confidence in the Kenyan stock market due to continuous fluctuation of the share prices which creates a lot of uncertainty. According to https://www.kenyaplex.com/resources/6137-challenges-facing-capital-markets-in-kenya.aspx, there has also been quite a number of losses experienced in the past and brokerages that went under. Due to such reasons, investors opt for other investment options, and that explains the reason why there are a limited number of investors participating in the stock market.

Currently, the Nairobi Securities Exchange has around 50 listed companies and 12.1932 Million shares traded so far. The equity turnover stands at 402. 073 million.  According to the Kenyan wallstreet(https://kenyanwallstreet.com/list-of-best-worst-performers-at-the-nse-in-2020/), in the year 2020, the top gainers were Nairobi Business Ventures whose share price shot up by 490% during the year and Safaricom, whose shares gained more than 8%. Despite the COVID-19 pandemic, these two companies still performed well in the stock market.

Melyn Atieno

Melyn Atieno. Strathmore University of Mathematical Sciences Writer at Cue Africa Email: melynatieno@gmail.com LinkedIn: Melyn Were

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