Q: Could you provide some information about the background and the place within the economy of the Nairobi Stock Exchange?

A: Stock trading in Kenya dates back to the 1920s, but there was no formal market at the time. The Nairobi Stock Exchange was established in 1954 as a satellite of the London Stock Exchange. However, Africans and Asians were not permitted to trade securities until the independence in 1963, so the stock trade at the time was confined to the resident European community.

The first years of independence were marked by steady economic growth and improving confidence in the market, so the exchange handled a number of highly oversubscribed public issues. The oil crisis in 1972 hampered the growth as inflationary pressures depressed share prices. In 1975, a capital gains tax of 35% was introduced, leading to further losses. During the same period, the exchange also lost its regional character because Tanzania and Uganda started nationalizations and introduced restrictions. The East African Community dissolved in 1977.

In 1980, the Kenyan Government realized the need for reforms to achieve economic development and a stable financial system. It’s stated policy was aimed at enhancing the role of the private sector, streamlining the public sector, broadening the base of local ownership, and enhancing the development of the capital markets. In 1988, the government made the first privatization through the NSE as it sold 20% of the Kenya Commercial Bank.

During the 1990s, an extensive modernization included a move to new premises, a computerized delivery and settlement system, and a modern information centre. The restrictions on foreign ownership in local companies were relaxed, thus encouraging foreign investments. In 1996, the largest issue in the history of the NSE, the privatization of Kenya Airways, came to the market. In 1998, the government introduced further tax incentives and Kenya adopted the International Accounting Standards.

Since 2000, there has been a focus on facilitating the development of the collective investment schemes to encourage domestic savings. Collective investment schemes set up by employers on behalf of employees are now exempt from income tax. There is also an increasing focus on partnership and integration with other African exchanges and a move towards setting up a regional exchange. The goal of the East African Community, re-launched in 1999, is to have a fully integrated capital market with one regional stock exchange by the end of 2009.

Q: How large is the Nairobi Stock Exchange in terms of volume, brokers, and listed companies?

A: The number of stockbrokers has steadily increased through the years from six brokers at the inception to 19 brokers currently. There are 54 equities and 8 corporate bonds. 68 treasury bonds are listed on the fixed income segment.

Trading activity has been rising, especially after the implementation of the Automated Trading System in 2006. Last year the equity turnover increased by 160% to a record of Kshs. 94.95 billion. The volume of shares traded rose by 66% to 1,454.67 million, while the number of deals increased 239% to 598,301. The bond turnover grew even faster, up 257.42% for the year to Kshs. 48.58 billion

Q: What do you believe makes the NSE attractive? What is your strategy for attracting new investors?

A: We aim to position ourselves as an affordable cost-effective platform for local and regional companies to raise capital and enhance their public profiles. That is why keeping the expenses for brokers and investors low is a major strategy. The commission rates have been reduced considerably to between 2% and 1 % on a sliding scale for equities and 0.0625% for all fixed interest securities.

There are also many tax incentives. The withholding tax on dividend income is 5% for local residents and 10% for non-residents. The capital gains tax was suspended in 1985, while the withholding tax on interest income from listed corporate bonds and treasury bonds is 15%.

A newly listed company pays corporate tax at a lower rate of 20% for a period of 5 years, provided that these companies offer at least 40% of their shares to the Kenyan public. The companies that successfully apply for listing get a tax amnesty on their past omitted income, if they make full disclosure and oblige to pay all their future taxes. The IPO-related costs are tax deductible.

The law also encourages institutions to set up Special Purpose Vehicles (SPVs) for issuing asset backed securities, because the investment income of SPVs is exempt from income tax. Registered venture capital funds enjoy tax holidays of up to ten years on their income.

Q: Do you undertake any initiatives for the education of new investors?

A: We believe that an informed investor is a market’s best friend, so we have programs for educating both investors and stock brokers. In collaboration with the Central Depository and Settlement Corporation, the NSE organized a series of workshops related to educating the market participants on the legal and regulatory issues, and market automation among others. We also organize seminars together with professional speakers from the stock broking community, investment banks, and investment advisors.

Last year, we facilitated more than 90 educational seminars, catering to secondary and tertiary institutions, professional bodies and institutional investors. We held four issuer workshops targeting the private sector and the state corporations in the tourism, IT, agro processing, and infrastructure sectors. These workshops aimed to clarify the listing process, the accessibility of the capital markets, and the incentives that the government has granted over the years.

One of the areas where we focus our educational efforts is the savings and credit co-operative societies (SACCOS) sector, with the idea to illustrate the investment and fundraising opportunities available through the NSE. Kenya’s SACCOS is the most vibrant in Africa and accounts for approximately 8% of the GDP with over 3,000 registered SACCOS in Kenya. We also sponsor stands at industry events, especially agricultural and trade shows, to disseminate information on how to invest in listed securities, the rights of the investor and the role of the securities exchange, the Capital Markets Authority and the stock broker in the investment process.

We have also redesigned our website to provide up-to-date information. Key features of the site include market information from the trading floor that is updated immediately after the trading session, as well as updates of company announcements and news.

Q: The consolidation of exchanges is a global trend. What is the role and the future of the NSE in this environment?