Kenya’s financial markets are on the right track – here’s how

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There was unprecedented excitement on Africa’s economic prospects between the mid 2000s and the early 2010s. This gave rise to an ‘Africa Rising’ narrative. A narrative that has since been largely abandoned even by the most unwavering of adherents.

In its place, two particular truths have come to the fore. Africa was coming from a low base and was not overtaking anybody else. The description of a “rise” was overreaching. It is now accepted, in the mainstream, that the gains made came from a global commodity boom and a combination of ever reducing costs and improving technology in the consumer electronics industry.

If Africa is transitioning from mkokoteni to motorized modes, well done. Still, applause must be contextualized. Animals were already used to lift heavy goods circa 3500 BC.

Two, like other continents, outcomes will not be mirrored across the whole of Africa. Some countries will combine policy and resources to uplift their citizens while others will only benefit a small portion of the population. Deputy Chief Executive of Barclays Africa Group Limited, Peter Matlare echoes this conclusion. “The ‘Africa Rising’ narrative is now far more nuanced than before, with different regions and indeed countries facing divergent economic prospects.”

Barclays Africa Group Financial Markets Index 2017

Barclays Bank Africa Group Limited set out to reveal these diverging realities by a 3-month survey conducted in 2017. It was made possible through collaboration with, think tank, the Official Monetary and Financial Institutions Forum (OMFIF).

The study, Barclays Africa Group Financial Markets Index 2017, provides more than a snapshot on who is doing how well in implementing policy frameworks to realize progress in financial markets. 17 African countries were assessed on quantitative and qualitative basis, with Barclays Africa Group’s experience significant to providing in-country expertise.

Barclays Africa Group Financial Markets Index 2017

index launch

Why? Managing Director of Barclays Bank Kenya, Jeremy Awori said, at the 17th January, 2018, launch, “As a bank, we are deeply convinced that expanding and deepening financial markets across Africa is a central condition for the next stage of the continent’s development.

“Financial market development offers additional growth and funding opportunities for local firms, providing access to long-term financing in order to help them overcome some of the challenges of low lending rates and high cost across the continent. It also offers opportunities for international and domestic investors to access the markets of fast-growing African countries.”

He added that the index will in fact be produced yearly with the intention, “to drive conversations among policy-makers, market participants and other partners to track progress and address gaps on an ongoing basis.”

 

What was measured?

Morocco, Egypt, Ethiopia, Uganda, Kenya, Tanzania, Rwanda, Mauritius, Mozambique, Zambia, Botswana, Seychelles, South Africa, Namibia, Nigeria, Ghana and Ivory Coast were ranked across 40 indicators captured in 6 study pillars.

Points were weighted equally for indicator and pillar then scored to a maximum of 100 points, from the latest data available going back to 2015. The 6 pillars were:

  1. Market Depth
  2. Access to Foreign Exchange
  3. Market Transparency, Tax and Regulatory Environment
  4. Capacity of Local Investors
  5. Macroeconomic Opportunity
  6. Legality and Enforceability of Standard Financial Markets Master Agreements

Each of the countries demonstrated strengths. Equally, areas for improvements were highlighted. Predictably, South Africa came top with an unmatched 92 point scorecard. The next best countries were in the 60-point cluster.

Increasing Liquidity in Kenya

Kenya was ranked 5th overall, with a score of 59, just one point shy of being included among the second best countries. This was in line with its scores in measures of how liquid financial markets are. The country was 4th on market depth and 6th on access to foreign exchange.

Economies are powered by movement. Labor is driven by mobility and commodity is driven by logistics. In the same way, finance is driven by liquidity. But Kenya was found to hinder itself with regulatory barriers. These bureaucratic barriers are captured by the many regulatory bodies that oversee Kenya’s finance sector.

Africa’s leading financial market, South Africa and other open economies like Ireland have consolidated regulatory bodies in the last 30 years to better experience of the sector. It is great to see that Kenya is on this path with the choice to bring to life the Financial Services Authority. It is hoped the Central Bank of Kenya will follow suit by easing up on its moderate capital controls.

A hands off approach is a silver bullet that will produce the effect of more diversity, depth and increased Forex trade. This will in turn increase the size of the market.

We have an example that this works right in our faces. Liberalization of the Kenyan economy finally allowed the private sector to prosper. Who would have thought that ‘betting’ would be front and center of national conversation some 15 years ago? When sectors are open, people take care of things themselves.

Managing Director & Head of Markets Barclays Rest of Africa (excluding South Africa), George Asante noted this in his presentation of the report.

He said Kenya has a strong “brokerage culture.” Don’t deny it, we already had a secondary market for SGR tickets! This middle-man mentality can be channeled to finance, especially with special segments created. One suggestion given is “a compartment for SMEs.”

Rule of Law

It is always amusing to read about an Africa-specific middle class definition. It does not matter whether you can afford a house-help in Nairobi while your income class counterpart in London cannot. What matters is who can buy the most iPhones.

If Africa is to receive much needed capital injection from abroad, for infrastructure and cheap credit for entrepreneurs, the ‘African exception’ has to go. One respondent put it nicely, “keep it simple, just follow the international norm.”

Kenya is heedful of this advice. Enforcement of contracts was singled out as a strong point of the country; ranking 3rd with a score of 81. This is a good thing that has come out of a heavy regulatory hand. For the good returns our markets offer, we still must assure that investments of investors will be protected.

Kenya is adhering to international standards like the Basel III. Basel Accords are a recommendation for regulation in the banking industry. This latest one came in response to the global financial crisis around a decade ago.

Financial Markets are not an End in Itself

At the same time, Kenya has to take care to avoid the pitfalls of financialization of the economy. Two countries that would be applauded for their open economies, UK and USA, are living the effects of trading the economy at the altar of finance. Financialization is a situation where the sector out-competes other sectors of the economy for scarce resources. In the aforementioned countries, inequality and reduced social mobility are some of the results endured.

It is excellent, then, that the Barclays Africa Group Financial Markets Index 2017 chose to include metrics reaching to other sectors of the economy. Kenya will need to address underlying problems in its economy to realize holistic development of its financial markets.

One of these is low export competitiveness that emanates from years of import-substitution policy. Kenya is now focusing on building an export-led economy and is committing to not leave small businesses behind.

A second issue to be addressed is low GDP per capita, whose effect is low capacity of local investors. This will only be undone by improving living standards across board.

Kenya remains a destination

Even with these shortcomings, Kenya still retains good reputation among African peers and other international investors. The country’s diversified economy is valuable to a resilient financial sector. This reduces risk for investors.

Another attraction is that the country has demonstrated transparency in fiscal and budgetary data in the face of concerns about public debt.

Partners, like Barclays, have little choice but to remain in Kenya. There are not too many better alternatives for those interested in benefiting from Africa’s development.

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