Every year the Capital Markets Authority (CMA) holds a stakeholders’ roundtable to brainstorm policy proposals to improve the working of the capital markets. This year the forum was held this week. Here is my contribution.
First, capital market regulators around the world are the kings of capital. They rank higher than the central banks or are at least at the same level. Central banks have a bigger reputation and public profile, because they are the bankers for governments and manage interest rates. Why should capital market regulators rank higher?
Bank are regulated by central banks, insurance companies by the insurance regulator. Kenyan saving and credit cooperatives are regulated by Sacco Regulatory Authority – SASRA. Regardless of your primary regulator, it is the CMA that enables you to raise capital.
Such a high role should, like the CBK, get constitutional mandate. Second, the CMA controls the tools that other regulators need to unleash the power of the capital market. As yet many of these tools are underdeveloped and underutilised. For example, in keeping with global best practice, the Central Bank has demanded that all banks use risk-based pricing to determine the interest rate they charge you for your loan.
Risk-based pricing of commercial loans cannot work properly without a well-developed culture of credit ratings. At the moment, banks rely on their own internal ratings scales, a somewhat poor measure because each bank can only see their own clients, which is a small sample of all corporate borrowers.
And the power to license and regulate credit rating agencies, whose credit rating scales are based on the full sample of all corporate borrowers lies with CMA! For individuals, the Central Bank got around this problem by licensing credit reference bureaus which use total industry data to calculate individual credit scores.
There is a big opportunity for CMA to enable the capital markets finance micro and small business. Most surveys estimate the number of micro and small business to well over 7.5 million compared to only 3,000 large companies. Further, the MSMEs employ more than 17 million Kenyans. One useful measure is to look at those using loan financing in their business. Useful as it points to the need for capital.
As at December 2022, there were 1.18 million active MSME loan accounts in the banking sector valued at Ksh.783.3 billion. At the end of last year, there were 361 regulated saccos, with Kshs 890.30 Billion in assets and Kshs 620.45 Billion in 2022. There are thousands more unregulated saccos.
An obvious question is whether one securities exchange can serve the needs of all these segments of economic activity. In Canada, they took a rather difference approach. Most large cities had a securities exchange. These exchanges are now operating under one banner - the TSX Venture Exchange.
There are about 1,700 small capitalisation companies listed, many in mining. Investors know that they are putting their money in higher risk ventures. In earlier days the investments were referred to a penny stocks as they tended to trade at very low prices. But the day the mining company strikes gold in their new mine, well, the stock prices would skyrocket and the investor would hit pay dirt. There is of course the main exchange at Toronto.
The CMA should license a venture capital exchange for small businesses. Similarly, it could boost the Saccos sector by licensing an exchange for Sacco shares.
There are other major opportunities for CMA to allow or drive innovation to reduce information asymmetry. To achieve this requires that they deepen and extend use of credit rating agencies, which they license, and credit reference bureaus, which are licensed by the Central Bank.
Asset and collateral registries, which are run by the Business Registration Service (BRS), should be put to better use. CMA and other regulators could use credit rating to speed up issue and issuer approvals, and to improve investor protection.
All the regulators should use credit ratings for risk-based pricing. Kenya, alongside other African countries is up in arms, alleging bias on the part of western-based credit rating agencies. As the regulator, CMA must scrutinise who they are letting in. In addition, governments should themselves have the courage to go beyond the western controlled rating oligopoly. If you are not using the agencies you have licensed, should you really complain?
Investors conducting business valuations, credit rating agencies rating a company and regulators, all depend on the information put together by auditors, lawyers and other service providers. CMA should accredit these service providers. Such accreditation signals to them that they are under watch, and that the quality of their work must be beyond reproach.
