The Kenyan capital market has an estimated 90,000+ registered online traders trading forex and stocks.
This is no mean feat as Kenya ranks third in Africa behind Nigeria and South Africa on the list of African countries with the highest number of online traders.
Availability of mobile internet all over Kenya, advancement in modern technologies (like API protocols that allow trading apps of different platform providers and exchanges from different parts of the world to be able to communicate with each other).
Smartphones, local online trading Apps and responsible oversight of the capital market by the regulator- the Capital Market Authority (CMA) have also greatly contributed to the growth of the online trading ecosystem in Kenya.
Smartphone users can easily download trading Apps like Meta trader 4 alias MT4 by MetaQuotes Inc. from the forex & CFD brokers.
The Apps are packed with features such as automated trading, copy trading and market analysis capability; or the Online share trading (OST) App by Chelsoft which is very popular among Kenyan stock traders and brokers.
Trades can be initiated with a single click, a far cry from what was obtainable a decade ago when trades were placed via telephone calls.
A Delve into the Ecosystem of the Kenya’s Capital Market
Capital market in Kenya comprises of CMA (the Regulator), Central Depository/Settlement Agency (Central Depository & Settlement Corporation Limited (CDSC)), Approved Exchange (Nairobi Stock Exchange, NSE Kenya), Investment Banks, Credit Rating Agencies, REITs, licensed intermediaries (dealers, stock brokers, forex brokers, money managers, investment & fund managers, investment advisers).
NSE had been around since 1954. But, in 1980s, the Kenyan government felt that the existing financial system was too much dependent on commercial banks for long-term credit.
It became evident that they couldn’t support the desirable economic development goals and also economy mostly comprised of public enterprises (which had limited sources for funding and low public ownership) which was not sustainable for economic growth and development goals.
The government wanted to increase the private sector’s role in the economy and broaden ownership of state-owned enterprises to the public and enhance capital market development.
Current capital market wasn’t properly coordinated and equipped for this and better Capital Market structure was needed to bridge the gap and to bring together the lenders (investors) and borrowers (private companies and government enterprises).
Hence, on recommendations of CBK (Central Bank of Kenya) and International Finance Corporation to strengthen and develop the financial sector, government decided to pass a bill (referred to as Cap 485A under Laws of Kenya)
The bill was to form CMA (Capital Markets Authority) and give them the responsibility to oversee and regulate all activity in the capital market in Kenya. The legislation was passed in 1989, and the CAPITAL MARKETS AUTHORITY (CMA) was born in 1990.
Two legislations were passed namely:
- Capital markets Act
- Central Depositories Act
CMA is a statutory agency with the responsibility of growing the capital market, and ensuring fairness, transparency and orderliness.
They issue licenses and approvals after ensuring that the applicant is” fit and proper” to carry out the business it is applying for.
List of Market participants who require CMA licenses
- The Stockbrokers- These are the ones you give an order to either buy or sell a security on your behalf because they are trained and licensed for that purpose. They operate from the Nairobi Securities Exchange (NSE) which is a self-regulatory organization under CMA.
- The Dealer- These are people or organizations who transact in securities not for other people but for themselves.
- The Fund manager/Investment Adviser- The fund manager helps you keep your investment portfolio balanced by getting rid of unwanted assets and replacing them with more valuable ones. As at December 2021, CMA has licensed 26 fund managers.
The investment adviser on the other hand looks at you and considers things like your age, number of dependents, the goals you want to meet, etc. and advises on the kind of investment portfolio you should hold.
- Authorized Securities Dealers- These are banks given the go ahead to sell fixed income products like Government Bonds, Treasury bills etc. CMA has licensed two Securities Dealers to operate in Kenya. They are Standard Chartered and SBM bank Kenya.
- The Investment Bank- These banks usually play in the primary market. When companies want to go public they coordinate issuance of shares also called initial public offers (IPO). They also play a role in mergers and acquisition.
Their role is mostly advisory and unlike their commercial counterparts, they do not accept deposits. There are about 15 investment banks licensed to operate in Kenya according to information on the CMA website.
- Collective investment Scheme (CIS) - These players bring different investors together to invest in a particular scheme which could be mutual funds, real estate etc. They are trained for this and licensed too.
- Custodians and Authorized Depositories- These are safe keepers of financial documents, agreements, deeds etc. They are also bookkeepers as they reconcile accounts and engage in clearing of financial instruments.
In Kenya, we have the Central Depository & settlement Corporation (CDSC) which is a limited liability company approved by CMA.
It is responsible for safekeeping of transaction instruments and documents from the Nairobi Securities exchange as well as reconciliation and clearing and delivery of all financial transactions.
As at December 2021, the CDSC website listed 43 authorized depository agents called central depository agents CDAs. These agents open and manage securities accounts on behalf of the CDSC.
Simply put, the depository receives financial instruments via central depository agents, confirms their authenticity, and then credits the clients account with the amount on the instrument.
- Real-estate Investment Trust (REIT) - These market players build houses and manage them. Investors could choose to buy into REIT companies and benefit from the house rent and other benefits that may accrue. According CMA website, there are 3 CMA licensed REITs in Kenya.
- Credit rating agency - They give credit scores to companies, stocks, bonds etc. The higher the credit score the surer it is to invest in security. The lower the credit score means that underlying company or borrower has a low probability to pay its debts on time or hasn’t paid its debtors.
- Online Forex Brokers and Money manager – Online Forex Brokers offer trading platforms to their customers and act as link to Forex Market for which they charge spread. Money Managers oversee and manage a client’s trading account for them.
List of non-market participants who CMA grants approvals
The CMA grants approvals to
- Securities Exchanges
- Venture Capitalists
- Central depository
- Credit Rating agency
Online stock and forex trading in Kenya – Understanding similarities and differences
The forex market is a global decentralized market that is open 24 hours a day and in forex trading you trade currency in pairs say EUR/USD.
Forex market is very liquid. It is also easier to predict as a lot of analysis is not needed. Trading is best done when the market is at its peak period/hours.
This peak period is when two markets overlap like if you’re trading GBP/USD currency pair the peak period is when London and New York stock exchanges overlap around 8am to noon EST.
The Kenyan regulator, the CMA, has regulated online forex trading and limited the leverage offered by brokers to clients to 1:400 for any FX currency pair meaning a client cannot do business of more than 400 times his capital.
The stock market is the financial market where you trade on equities, derivatives such as contracts for differences (CFD), options and other complex financial instruments.
Unlike the forex market, the stock market has opening and closing times.
Stock trading usually requires more studying and analysis before deciding to trade.
When trading stock you look at the future as the profit may not always come immediately. Stock trading is done through licensed NSE brokers
Licensed forex brokers in Kenya
Online Forex Trading in Kenya is regulated and Kenya’s CMA has licensed 6 non-dealing forex brokers.
Non-dealing brokers only act as intermediary between the online market and the client.
They do not carry out forex trading on behalf of the customer or act as counterparty. They are:
- FX Pesa by EGM securities
- Scope markets by SCFM limited
- Pepperstone Markets
- Exinity East Africa
- Hot Forex by HFM investment limited
- Windsor markets Kenya Limited
Licensed stockbrokers in Kenya
Kenya’s CMA also licensed 9 stock brokers as at December 2021. They are-
- ABC Capital (offers online trading platform)
- AIB- AXYS Africa (offers online trading platform)
- Francis Drummond & company limited
- Kingdom securities (offers online trading platform)
- Old mutual securities (offers online trading platform)
- Suntra investments (offers online trading platform)
- Securities Africa Kenya Limited
- EFG Hermes Kenya limited
- Kestrel Capital (offers online trading platform)
Stock And Forex Trading Regulations In Kenya
The CMA issues licenses to intending capital market participants. Let us look at forex and stock brokers regulations. They are two license given to forex brokers namely:
- Dealing online forex broker
- Non dealing forex broker
Any intending market participant must first apply to the CMA for a license.
Minimum Capital requirements for stock and forex broker licenses in Kenya
For stockbrokers
A paid-up capital of Sh50,000,000 is required and liquid capital of Sh30,000,000 or 8% of total liabilities is required.
For online Forex brokers
A paid-up share capital of Sh50,000,000 for a dealing fx broker license and Sh30,000,000 for a non-dealing FX broker license.
Must all market participants on the NSE be stockbrokers?
No! Not all market participants on the Nairobi securities exchange are listed as stockbrokers by the CMA.
The NSE website lists 22 companies as market participants but out of these only 9 are listed as licensed on the CMA website as licensed stockbrokers CMA licensing requirements vary for different market participants.