What
is the role of the Nairobi Stock Exchange and what role has it played in the
economy of Kenya?
What is a stock exchange? A
stock exchange can be basically defined as an organized market where stock,
bond[1]and shares are issued,
bought and sold through brokers and dealers[2]. It constitutes a part of
the capital market. Institutions seeking long term funds are dominant in the
stock market. Long term funds can be described as funds obtained for a time
frame that exceeds one year[3]. The stock exchange is
also included[4].
In a stock exchange there are
new issues and second hand shares. New issues are shares that are being issued
from a company that is floating its assets for the first time whereas second
hand shares which constitute a larger part of the stock market are shares that
have been circulating in a market for some time. They are therefore attractive
to invest in especially with accurately predicted information.
The stock market can be at a
particular place but the growth of electronic transactions does not favor a
centrally located physical location[5].
According to the Capital
Markets Act a securities exchange is means a market, derivatives exchange,
securities organization or other place at which securities are offered for
sale, purchase or exchange, including any clearing or settlement, with or
without novation, or transfer services connected therewith[6]’.
The Nairobi Stock Exchange was
established in 1954 under the Societies Act. Previously in the 1920’s it was a
European only affair. Africans were only allowed to trade in 1964[7]
Who are the key stakeholders?
1.
Investors: investors make up a fundamental part
of the stakeholders. They introduce money in exchange for shares. Investors
need;
Information
about the market that is timely and accurate, to be relied upon or that gives a
true and fair view of companies in the stock exchange.
Investment
opportunities that can increase their wealth by making profits
Security,
they need protection of their investments by ensuring that the issuers are not
fraudulent or partake in activities that injure the investor
Investor
seek for an avenue of wealth creation and given the viability of the stock
exchange it is suitable
Investors
need transparency of the stock exchange which would enable them to make an
integral based monitoring of their activities
Investors
need an arbitration avenue in the event that disputes arise and given that the
courts are clogged with case backlog. This alternative dispute resolution
method will enable a timely settlement.
Investors
at many times are lay people who do not possess skills to predict and work the
stock exchange[8]
as such they need to be educated on the technical mode of operation of the
stock exchange[9].
The
Nairobi Stock exchange provides all the above outlined services to investors by
providing an effective and efficient transparent avenue for price discovery of
shares of the different listed companies and an avenue for wealth creation and
management[10].
2.
Issuers
Issuers
have a number of needs;
Issuers
prefer a liquid market[11] as an alternative to
raise money as compared to a security based bank loan. Stocks are considered
liquid because they can be rapidly sold and the act of selling has little impact
on the stock's price[12].
Issuers
need a low cost of capital, these are funds that a business uses to run the
business, issuing of shares provides this opportunity to raise low cost
capital.
Issuers
need a vibrant competition from potential investors on their shares. This
broadens the market and thus more investors.
The
Nairobi Stock exchange provides for issuers an opportunity to unlock their
value, to enhance their profile in the capital market; it raises the
shareholder’s value and lastly raises the governance standards[13].
3.
Media
The
media are stakeholders in the stock market their needs include;
Information
on the stock market and clarification on matters that are beyond common
knowledge, the Nairobi Stock Exchange provides the media with accurate and
timely financial information[14].
4.
Government
The
government is a stakeholder in the capital market; the government also needs to
raise funds for its corporations. It uses the capital markets as a barometer of
the economy. It also needs a body to execute its policies. The Nairobi Stock
Exchange provides the government with a platform for policy implementation and
capital raising[15].
5.
Market intermediaries
These
include the other people who are involved in the capital market such a
guarantors, underwriter and lawyers etc. the need business opportunities,
transparency and a chance to enjoy economies of scale. The Nairobi Stock
Exchange provides a robust capital market infrastructure for market
intermediaries to conduct their business.
How
have the various roles of the Nairobi Stock Exchange described above enhanced
the Kenyan economy?
The
Nairobi Securities Exchange provides for an avenue of resource mobilization
directly from the public, this lowers the cost of raising capital and thus more
profits from less capital this has the effect of boosting the economy.
The
government taxes dividends of companies and as such increases government
revenue which in the long run enhances the government ability to monitor the
capital markets and thus boosts the Kenyan economy.
The
Nairobi Stock exchange educates investors on how to interpret financial
information and thereby equipping them with key skills in trading and as such
this boosts the economy by enhancing better traders that make better informed
decisions that lead to more profit.
The
Nairobi Stock Exchange gives room to the growth of related financial services
sector e.g. insurance pension schemes, which nurture the spirit of savings. In
the long run this boosts the economy by diversifying financial services.
The Nairobi
Stock Exchange encourages high standards of accounting and management of
resources. It also allows public disclosure that gives effective efficiency in
the capital growth process and ultimately the economy as a whole[16].
The
Nairobi Stock Exchange facilitates equity financing[17]. Equity financing is the
method of raising capital by selling company stock[18] to investors. In return
for the investment, the shareholders receive ownership interests in the company[19]. Equity financing is
preferred to debt financing. Most countries, both developed and undeveloped,
have been trying to do away with debt financing - especially during recessions.
The
Nairobi Stock Exchange enables futuristic funding in most of the developing
countries, where venture capital in mostly unavailable such as Kenya.
Bibliography
Acts
1.
Capital Markets Act
Books/Articles
2.
Rose. W. Ngugi, Development of the Nairobi Stock
Exchange: A Historical Perspective, KIPPRA Discussion Paper No. 27(2003)
3.
Dr. Jacob Gakeri, ‘Regulating Kenya’s Securities
Markets: An Assessment of the Capital Markets Authority’s Enforcement
Jurisprudence’
4.
Aduda J et al, The Determinants of Stock Market
Development: The Case for the Nairobi Stock Exchange, International Journal of
Humanities and Social Science, Vol. 2 No. 9; May
Internet Sources
5.
http://www.slideshare.net/Freddy56/nairobi-stock-exchange-presentation-on-the-nairobi-stock-exchange
9.
http://www.slideshare.net/Freddy56/nairobi-stock-exchange-presentation-on-the-nairobi-stock-exchange
[6]
Sec 2
[7]
Rose. W. Ngugi, Development of the Nairobi Stock Exchange: A Historical
Perspective, KIPPRA Discussion Paper No. 27(2003)
[8]
Dr. Jacob Gakeri, ‘Regulating Kenya’s Securities Markets: An Assessment of the
Capital Markets Authority’s
Enforcement Jurisprudence’
[9]
Aduda J et al, The Determinants of Stock Market Development: The Case for the
Nairobi Stock Exchange,
International Journal of Humanities and Social
Science, Vol. 2 No. 9; May
