AN    ADDRESS      BY    EDWARD       ODUNDO,       CHIEF     EXECUTIVE,


Mr. Chairman
Distinguished Guest
Ladies and Gentlemen

It gives me great honour and pleasure to address this third conference on
Public Pension Fund Management.

Mr. Chairman, I note that this gathering has attracted a wide and
distinguished representation of pension administrators and key resource
persons from the world’s financial industry. I would therefore like to thank
the organizers for giving me this opportunity to speak on the overview and
evolution of investment instruments in Sub-Saharan Africa. I propose to do
so with a special reference to my country Kenya.

A typical financial market comprises of several institutions including
banks, insurance companies, mutual funds, mortgage firms, finance
companies and stock markets. The development of domestic financial
markets provides opportunity for greater funds mobilization, improved
efficiency in resource allocation and provision of relevant signals for
investment appraisal. Cognizance to this fact, a number of African
countries are making conscious efforts to develop these markets.
While writing about the development of Stock markets in sub-Saharan
Africa in 1997, Emenuga noted that in sub-Saharan Africa banks have
historically dominated long term financial intermediation. In recent years,
however, a more holistic approach has gradually shifted emphasis away
from development of banks to the development of security markets and
other financial instruments. The strength of securities markets that make
them focal points of emphasis in sub-Saharan Africa are their ability to
mobilize long term savings for financing long term ventures, to provide
risk capital, encourage broader ownership of firms and improve efficiency
of resource allocation through competitive pricing mechanism.

This new emphasis is, however, of recent origin. Compared to developed
ones, African markets have fewer market participants, and less
sophisticated and less skilled investment analysts. The earliest Security
Markets to be established in sub-Saharan Africa include the South Africa’s
JSE in 1887, Egypt’s Cairo-Alexandria in 1888 and 1903, Zimbabwe Stock
Exchange in 1946 and Kenya’s Nairobi Stock Exchange in 1954.                The
number of these markets is still on the increase with new markets being
established in East and central Africa. These markets include that of
Malawi in 1994, Tanzania in 1995 and Uganda in 1997 among others.

Some of the biggest markets by market capitalization include JSE, Cairo
Alexandria and Nigeria stock exchange. The Nairobi Stock Exchange (NSE)
is a fairly average security market with a capitalization of about US$ 4
billion at the end of 2003. It is instructive to note that the capitalization of
JSE is way above that of the other security markets in Africa combined.
This serves to expose the emerging nature of most of these markets. A key
ingredient toward enhancing their capacity and therefore their efficiency
has been identified as integration, automation, innovation and openness to
international investors via the internet.
Turning to the Kenyan scenario, the Kenyan financial sector is manifest in a
bank sector of US$ 6.4 billion (Dec 2003) an equity market with a
capitalization of US$ 4 billion (Dec 2003) and a bonds market with an
outstanding value of US$ 2.4 billion (Dec 2003). The key (traditional)
instruments remain equity securities and debt securities. The market is
however now looking forward to the introduction of other instruments like
mutual funds, real estate investment trusts, asset backed securities among
others. Kenya is also in the processes of embracing the Over The Counter
(OTC) market as a halfway home toward listing for firms. This is especially
important given that the market has recently witnessed stagnation in
activity with regard to new listings.

The evolution of the traditional investment instrument in Kenya is a short
one by international standards. The growth has however been tremendous.
Dealing in shares and stocks started in the 1920's when the country was still
a British colony. In 1951, Francis Drummond, an estate agent established
the first professional stock broking firm. He also approached the then
Kenyan Finance Minister, Sir Ernest Vasey and impressed upon him the
idea of setting up a stock exchange in East Africa. Further consultation
thereafter resulted in the constitution of the Nairobi Stock Exchange as a
voluntary association of stockbrokers registered under the Societies Act.
The business of dealing in shares was then confined to the resident
European community.

In 1984 a study by IFC and the Central Bank of Kenya on the "Development
of Money and Capital Markets in Kenya" was adopted as a blueprint for
structural reforms in the financial markets culminating in the formation of
a regulatory body; the Capital Markets Authority (CMA), in 1989, to assist
in the creation of a conducive environment for the growth and
development of the country's investment markets in Kenya.
While the Nairobi Stock Exchange is still classified as emerging in terms of
size, efficiency and market level of complexity, coupled with market
integration to the economy, it indeed witnessed incredible growth
following the legislation to bring in the regulator CMA. NSE was registered
under the Companies Act in 1991, the same year it phased out the "Call
Over" trading system in favour of the floor based Open Outcry System
which is still in place today. Four years later in 1995 the Kenyan
Government relaxed restrictions on foreign ownership in locally controlled
companies subject to an aggregate limit of 20% and an individual limit of
2.5%. These were doubled to 40% and 5% respectively in 1995 to help
encourage foreign portfolio investments and further relaxed in 2002 to
provide for a 25% minimum reserve of the issued share capital for locals
while the balance of the 75% becomes a free float for all classes of investors.
The impending automation is therefore expected to unlock the investment
potential provided by this window to the international community.

The environment of Kenyan investment opportunities has evolved too.
From a regime bent of restrictive legislation, today the financial sector
showcases a number of incentives for investments, including; free
repatriation of capital and returns, sufficient brokerage and investment
banking services, up to date market information, a good financial
infrastructure, absence of capital gains tax, and a government committed to
market reforms.

The sector also allows tax concession of 5.0% for newly listed companies for
5 years after listing, provided the firm lists a minimum of 30% of its fully
issued and authorized share capital on the NSE. At the same time
Employee share ownership plans (ESOPS) enjoy tax concessions on income.
Essentially ESOPS enjoy the same treatment as Collective Investment
Schemes, if they are registered as such with the Capital Markets Authority.
The market also provides a number of incentives for investors with
withholding tax on dividends for Kenyan residents at 5% and 7.5% for
foreigners compared to 15% on interest received from deposits,
government debt securities or corporate debt securities. New and expanded
share capital by listed companies or those seeking listing is exempt from
stamp duty as are transfers of assets to a special purpose vehicle for the
purposes of issuing asset backed securities. Further, expenses incurred by
companies in having their financial instruments rated by an independent
rating agency are tax deductible and there is a 10-year tax holiday for
registered and approved venture capital funds.

The reform of the 1990s heralded an era during which the NSE would
experience substantial growth in annual turnover, market capitalization
and price index. This is not withstanding, the fact that the levels of these
performance indicators still remained low when compared internationally.
In 1990, the turnover was US$ 3 million. This rose to a level of US$ 39.4
million in 1994 registering a whooping 1239% increase on the 1990 level, it
further increased to high of US$ 78.8 million in 1997. This however was
followed by a decline of 26% in 1998 and by a further marginal increase of
12% in 1999. Last year the market however established an all time high of
US$ 194.8 million. Similarly, market capitalization registered a significant
increase since 1990 when it stood at US $ 139.7 million rising to US$ 1.7
billion by 1994. It however fell in the subsequent years to stand at US$ 1.29
billion in 2000 but rose again to US$ 4 billion at the end of 2003.

The Nairobi stock exchange 20-share price index, which is regarded as the
leading stock market performance indicator, rose by a significant 175%
between 1990 and 1993. This trend continued into 1994 with the index
reaching a peak high of 5137.08 in February. The index has however
dropped significantly after 1994 to close at 2303 in 1999, only to rise to
2737.59 at the end of 2003. It is note worthy that in 1994 the NSE was
indeed rated by the International Finance Corporation as the best
performing emerging market in the world with a return of 179% in dollar
terms. The market has also been used by the Kenyan government in its
programme of privatization of state corporations while at the same time a
number of companies have been able to raise capital through it.

On the other hand, in the debt market, the Kenyan government total public
debt stood at US$ 9.12 billion or 70% of the GDP at the end of 2003. Of this,
US$ 4 billions which is 29% of the GDP and 42% of the total public debt is
financed from the domestic financial markets. The key instruments for
domestic borrowing by the government have been treasury bonds and
treasury bills. Recently there has been a deliberate shift of emphasis from
short term borrowing in form of bills to medium and long term borrowing
in bonds. The upsurge in the bonds market is a very recent phenomenon
given that the government listed its first bond in the market in 1996. This
has by and large been made possible by the reforms within the pensions
industry. As a result, the treasury bills rates are currently very low falling
below 2% for much of 2004. This contrasts with 11% at the beginning of
2002 and above 80% at some point in the early 1990s.

It would then follow that the Kenyan debt market has over the years been
dominated by government securities with the first corporate bond being
issued in 1996. Perhaps this could be explained by the crowding out effect
occasioned by excess public borrowing. At the end of 2003 the outstanding
value of bond was US$ 2.3 billion and US$ 98 million for government
bonds and corporate bonds respectively this was an increase from
respective values of US$ 105 million and US$ 10.5 million recorded in 1996.
Currently there are only four companies that have bond listed on the

Its is instructive that the trend in the growth of the professionally managed
pension assets has had an impact on the growth of outstanding bond
holding by pension schemes and indeed the outstanding value of long-term
debt securities in Kenya, especially with regard to the public sector.
Between 2001 and 2003, professionally managed assets within the pension
industry rose from US$ 572million to US$ 1.1 billion. At the same time
government security holding by professionally managed pension funds
rose from US$ 285 million to US$ 505 million while the government bonds
stock rose from US$ 1.2 billion to US$ 2.4 billion.

With regard to the future outlook, there is a deliberate effort to enhance the
diversity of investment instrument in Kenya. This is informed by theory
and experiences else where. Accordingly, emphasis is now being placed in
a number of new developments within the financial sector fraternity which
include but are not limited to the following.

To begin with, the Capital Market Authority gazetted regulations for
collective investment vehicles in 2001. Initially the rules were perceived to
be too stringent for an upcoming market. This not withstanding, the market
is slowly accepting the concept of a mutual funds and unit trusts. Currently
there are three operational mutual funds within the meaning of the Capital
Markets Authority. There is also an additional company listed in the
market that operates as a mutual fund. This new way of investing is
evolving very fast. Indeed there are ongoing consultations to ensure that an
enabling environment is enhanced for collective investment vehicles to

Secondly, the Nairobi Stock exchange has hitherto remained as one of the
oldest stock market in Africa that is yet to automate. Its is however
currently implementing an automation exercise intend to creare a robust
clearing and settlement environment. The technology path in line with the
overall market automation strategy is manifest in four sub projects, namely;
central depository system – CDS, Automated trading system – ATS, broker
back and front office system – BFO,             and real time information

Thirdly, as an answer to the problem of over concentration in property
concerns by investors in Kenya, coupled with the need to develop the
property market, the financial market is now embracing the concept of
asset backed securities and that of Real Estate Investment Trusts. The use of
Special Purpose Vehicle (SPV) has therefore now been allowed some tax
concessions to enhance its employment as a securitization tool.

Fourthly, the concept of OTC markets has been used the world over as a
half way home for private companies that propose to go public. In Kenya
this market is now evolving as one that will provide an arrangement for
transferring shares that are not listed on the stock exchange. The key
ingredient will be liquidity and as a result better price discovery. While it is
desirable to have shares traded on a formal stock exchange for the most
effective pricing mechanism to be effected, an OTC market will act as the
next best alternative by ensuring transferability. The incubation effect is
expected to impact on corporate governance principles, improve share
ownership value, inculcate a culture of commercialism and eventually
result in listing on the main market.

Fifthly, the nation state is increasingly being discredited as an economic
unit. The Kenyan financial sector does not wish to be left behind in
acknowledging this fact. It is in this vein that the governments of the
Eastern African region are pursuing regional integration with a view to
coming up with a centralized regional market. The idea is to increase the
pool of investment instrument and the pool of investors both in complexity,
size and in numbers. To Kenya an amalgamation of theses markets will
result in an instant increase in the number of listed companies and bonds
by 17.3 % and 25.0% respectively to 61 listed companies and 85 bonds.
Lastly, there has been intense duplication and overlap of regulation in
Kenya leading to heavy costs of compliance and increased opportunities for
regulatory arbitrage. In bid to mitigate this stakeholders are looking at
ways of inculcating the required harmony. Kenya is therefore debating
about whether to integrate totally at once, or whether to initially pursue a
half way home in the name of a coordinating body for all the regulatory.

In conclusion, given the diverse nature of the representations here I would
like to emphasize the importance of foreign capital inflow to Kenya and to
Africa in general. It would be very discouraging for the African countries to
create the necessary environment and still fail to attract interest from the
industrialized countries, whether in terms of investment funds, technology
transfer, or knowledge and skills transfer. What Africa is actually looking
for is a regular flow of investment from our partners.

Thank you.

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