Muna Wahome
27 February 2010
Nairobi — Capital Markets Authority (CMA) is considering a proposal to liberalise the stock market that could hammer the final nail in the coffin of stand-alone brokers. Sunday Nation understands a long-standing moratorium on licensing new stockbrokers could be lifted if the proposal is approved.
The immediate impact of the long-awaited measure would be to reduce the book value of a number of brokers to close to zero or negative. "That would increase the number of players in a very shallow market. The business is not enough; it is like looking for water in the Kalahari," protested Faida Investment Bank CEO Bob Karina.
"This is not the right time. We need more than 50 listed companies before we can do this." No new licenses have been issued for a decade, maintaining a monopoly of 20 players who have ridiculously overpriced the licence.
Indeed, since Francis Thuo collapsed under the weight of mismanagement after the death of its eponymous founder, all brokers value their licence at a questionable Sh251 million, which is the price paid for the Nairobi Stock Exchange seat held by the firm.
But a knowledgeable player told the Sunday Nation that in the takeover of Cross Field by ABC Bank and Bob Mathews by Co-operative Bank, the so-called valuation was shredded to pieces. It is estimated that in both cases this valuation ranged from Sh150 million to Sh172 million.
Yet for brokers, the Sh251 million figure forms the bedrock of their so-called assets. In effect, even technically insolvent players are now flaunting that value as part of their worth. Insiders, however, say the value of the Francis Thuo seat, sold to Russian investment banker Renaissance Capital during the Nairobi Stock Exchange (NSE) boom, is overstated.
The daily turnover then was instructively Sh3 billion compared to the current Sh250 million mean. According to informants, the new proposal had indeed been evaluated by a technical committee of the CMA but was unexpectedly referred back by the board to the same committee.
The impact of adopting this proposal would be a serious shake up of the market. For one, it would create a price discovery mechanism for the NSE seats. That price would subsequently as much depend on the prevailing market conditions as well as the number of players itching to get the licence.
Two, and more importantly, the liberalisation would give banks a chance to cheaply get a toehold in the hitherto well-protected turf. In its wake, it might leave a lot of brokers holding worthless papers.
Notably, banks are more liquid and better capitalised than stand-alone brokers or even the so-called investment banks, and clients know that. Brokers need just Sh5 million to operate although the figure is set to go up to Sh50 million next year as banks seek 10 times that in minimum.
Balance sheets
That means commercial banks are better able to meet their financial obligations as their balance sheets can withstand sustained losses arising from brokerage operations for long. Supervision of the banking industry is, in any case, superior to that of the capital markets where a coterie of brokers has been resisting scrutiny for years.
A number of banks have entered the business after taking over brokers, for the most part to rescue them from impending collapse. However, according to industry sources most of the banks have been shocked by the kind of realities they have encountered even after doing due diligence.
The banks that have taken over stockbrokerages so far include Co-operative Bank, which owns the majority stake in Kingdom Securities, Chase Bank, which owns Genghis Capital, and CFC Stanbic, ABC and NIC banks' stock-broking arms.
Ngenye Kariuki, recently put under statutory management with CMA saying it was Sh227 million technically insolvent, was also on the way to getting acquired by Naushad Merali's s Equatorial Bank. However, talks collapsed, prompting the regulator to move in on the Corner House-based broker. Earlier talks over a buy-out with Tsavo Securities had collapsed.
Highest point
The broker, together with the ill-fated Shah Munge & Partners (founded by the mercurial Chandulal Shah), the fallen Nyaga Stockbrokers, Dyer & Blair, Francis Thuo and Francis Drummond were the only brokers for years. A number of others were licensed from 1990s to bring the total to 20 at the highest point.
"The move is long overdue," said Fred Mweni of Tsavo. "The moratorium is illegal, and in the past CMA board admitted it had no legal basis to freeze the licence when our company challenged them in 2007." Stockbrokers have lately been making huge losses and most are hopeful CMA would hold the move awaiting the demutualisation of the NSE, which is in the works.
The proposal to open up the brokerage field is thus understandably likely to meet the headwinds of existing players' opposition. Brokers have in the past opposed banks' involvement in the trading of listed Treasury bonds, but CMA and Central Bank have since allowed banks primary dealership, allowing them to buy and sell on their own behalf.
Their self-serving pitch is that bank participation constitutes a "vertical" monopoly. Market analysts believe that lifting the so-called moratorium would jog the brokers from their monopoly-induced slumber and get them to face up to competition. "They would have to merge with each other or banks to survive," said an official close to CMA who is not authorised to speak publicly on the matter.