New Brokers Raise Quality Levels At Stock Exchange

<p>The entry of stronger players into the stock broking fraternity has transformed how firms do business by increasing confidence in the market and attracting more foreign investors.

A shake-up at the Nairobi Stock Exchange resulted in five weak brokerage firms being bought out by banks and foreign entities in the investment industry.

The latest entrant into the market is Old Mutual which bought out Reliable securities' license after it was placed under statutory management last year.

The firm has for several years been seeking a seat at the bourse.

"Corporate governance has been an issue at Reliable and we are planning to put in place proper controls," said Old Mutual Kenya's CEO Tavaziva Madzinga, adding that they plan to integrate in the next three months, which may see the brokerage firm being rebranded.

Over the last three years another four stockbrokers have been acquired by banks and foreign institutions.

These include collapsed Francis Thuo whose seat at the NSE was taken over by Renaissance Capital; Cross Field Securities which was bought out by ABC Bank and renamed ABC Capital; Solid Investment Stockbrokers which was taken over by NIC Bank and renamed NIC Capital; and Bob Matthews Stockbrokers taken over by Co-operative Bank and renamed Kingdom Securities.

"These new market entrants have changed the way brokers have been doing business through the introduction of better practices," said Hidalgo Group's Steve Biko.

A spot check by Business Daily indicated that there has been an improvement in the way these new market licensee's communicate with investors, a complete departure from before when information was not easily forthcoming.

Both phone communications and regular updates of clients through emails and announcements was cited by investors with accounts in NIC Capital and Kingdom Securities, which was not the case before the two entities were taken-over.

The new brokers have also adapted increased transparency in terms of client involvement and reporting of results.

A look at the income statements from brokers over the last two years indicated new entrants were publishing more detailed in terms of disclosures compared to older players in the market.

Inconsistency in the reporting structure of different investment banks and stockbrokers has even prompted the Capital Markets Authority to draft new reporting standards for market players.

The authority requested the institute of Certified Public Accountants (ICPAK) to develop a reporting template for its licensees, who were upto last year not publishing statements.

The use of technology has also improved, with features like text or email alerts and direct credit of investors' accounts when they make a sale, being employed to make the investment process easier and relaxed for customers.

Most of the brokers that were bought out by the new market entrants were experiencing capitalization problems.

With the December 2010 deadline for investment banks and brokers to beef up their capitalization only six months away, the buyouts have ensured that weak players have attained this new requirement in time.

Similarly, ownership benchmarks that were revised recently by the CMA will not be a big problem as all the new entrants already comply with the requirements.

Furthermore, the new licensees have brought into the market experts with vast knowledge in the handling complex deals.

Increased surveillance on these new market entrants -- in most cases by more than one regulator, as is the case of bank's that have acquired a stockbrokerage firm being monitored by both the CMA and the Central bank -- has enhanced corporate governance standards.

Foreign entities

Similarly, foreign entities that have bought distressed Kenyan stock brokers, like Renaissance Capital and Old Mutual, are also monitored by regulatory authorities in their countries of origin.

For example, Old mutual, a South African listed insurance and asset management firm, is regulated by the market regulator there and with its operation spanning several countries, including the US and UK, the firm is likely to upholds the highest standards in the Kenyan market to match those developed countries.

"Participation of foreign investors in any market relies heavily on the strength of market intermediaries," said Mr Biko, adding that increased activities in the foreigners front at the NSE is due to entry of these new players.

These will help beef-up corporate governance, which has appeared questionable in recent years after several stockbrokers were floundered.