Local Investment Banks Safe, Say Experts

In April when the Safaricom share sale opened to the public, Equity Bank made an entry into the stock market ruffling feathers in an industry where competition is best left to take a perking order.

The entry kicked off a debate with stockbrokers and investment bankers arguing that active participation of commercial banks in the stock market would be the wrong thing to happen.

"To interlink the two would be mixing water with oil," Suntra Investment Bank chief executive James Muringu noted.

Commercial banks, he pointed out, are to blame for the poor saving culture in the country and for giving poor returns on deposits. Equally, he said, the same are also to blame for the low investment levels given their high cost of capital.

Investment banks on the contrary are out to link owners of capital with users at a cost that will spur investment and make people want to save more.

"If we insist on stand alone units then the main losers will be the capital market in Kenya," NIC Bank managing director James Macharia noted.

At the time, NIC Capital a subsidiary of NIC Bank had just concluded a 51 per cent buyout of Solid Securities making it one of the few banks in Kenya to have a direct link to stock market.

The debate is back informed though by different events that are happening thousands of miles away from Kenya.

Over the last three months, a number of big investment banks in the United States have collapsed or have been bought by commercial banks.

For the American investment banks, the current credit crisis was a return to the very beginning and an end to 75 years that kicked off with the Great Depression of 1929.

After the depression that saw the collapse of financial institutions, the US Government legislated separation of investment banks and commercial banks as a way of safeguarding depositors' money.

The new law ushered in a less-regulated investment banking industry comprising the big five firms - Morgan Stanley, Goldman Sachs, Lehman Brothers, Merrill Lynch and Bear Stearns.

However, come mid September, Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America. Bear Stearns also sold itself to JP Morgan Chase - a successful blend of investment and commercial banks.

JP Morgan Chase was one of the few investment banks that took advantage of relaxing of the earlier rule that restricted commercial banks from playing in the stock market.

By end of September Morgan Stanley and Goldman Sachs applied for commercial bank licenses signalling what analysts termed "the end of high-wire finance on Wall Street." The argument supporting the new trend is that investment banks cannot survive without the benefit of having access to cheaper source of funding that is deposits from the public.

The reasoning that Kenya should pick up the trend and kick off a voluntary merger of commercial banks and investment banks has not endeared itself to investment bankers.

"The investment banks we have here are different from those that are collapsing in America. In the US, investment banks do more than just advising their customers on where to put their money, they lend, they sell depravities," Standard Investment Bank and treasurer to the Kenya Stockbrokers Association Job Kihumba says.

Tsavo Securities managing director Fred Mweni agrees saying no comparison exists between what investment banks in America do and what happens locally. If anything, he says, comparison should not be with the top-collapsed five, but the smaller banks still in operation with little or no difficulties.

"What we have here is nothing more than just stockbrokers," Mr Mweni says. "There are very strong stockbrokers operating in the US experiencing little or no problem; that is what we need to look at and compare with." Small investment banks and stockbrokers are surviving , he said..

With no such instruments, Kenya investment bankers argue that there is nothing to fear. All that needs to be done is to increase capitalisation of local institutions.