THE KENYAN FINANCIAL SYSTEM The financial system facilitates tthe The he tran tr transformation ansf sfor orm mat atio ion n of of sav ving vi ings ngs iin into nto nt to o iinvestment nves nv estm tmen entt & cconsumption. onsumption. are ssystematically ystematically interrelated.. interrelated
The fi The finan fina nanci nanc ncia cial ial all sy syst system stem em consists of of::
Financial
assets Financial intermediaries and Financial markets
The primary primary function of of the system is to allocate the capital resources in an economy.. economy
FINANCIAL ASSETS
If µA¶ transfers funds to µB¶, µA¶ receives a If financial asset, which represents a cclaim financial laim agai ag against ains nstt th the the e incom omee and assets of f µµB¶. B¶. From tthe he point point of f view of f µB¶, such a ccl clai laaim im re repr pres esen eseents ent nts tss a financi fina financial ncial al lia liabil liability. bility ity.
Note: For every financial asset, there iiss a For corr co corresponding rres espo pond ndin ing g fi fina fin nanc nan anc ncia cial ial li liab liability. abil ilit ity y. F Financial inancial assets are the b assets ba basi sic sic p prod pr roduc oduct ucts of f th he e fi fina financial nan ncial system.. There are three broad types o system of f fina fi financial nanc ncia iall as asse assets: sets ts: mo oney on neey, y, de debt debt bt and stock. stock .
Money (notes and coins) is issued by tthe Money he Central bank Central k of Kenya and by C Commercial ommercial banks banks as d dem de emaan and nd de depo posi sits ts an and and debt is issued by by a variety of organizations, including tthe he gove go government vern rnm men entt of of Kenya and nd its ts ag age agencies. enc nciies.
Equity and preference is issued by business Equity business organizations.. organizations Debt capital entails a fixed interest aand Debt nd princ pr principal incipa ipall re repay repa payme paym ymen ment ent ntt burden. burde bur den n.
Exam Ex Examples ampl ples es of of fin finan fina fi nanc ancia ncia cial iall ass assets asse as sets ets ts (se (secur (securiti (sec curiti urities) ities es)) are: are:
Equity (Ordinary) Shares
Preference Shares
Debentures
Treasury bills and Bonds
Commercial Comm ercial Papers Pap ers
Company Deposits
FINANCIAL INTERMEDIARIES
Fina Fi Financial nanc ncia iall Int nter nterm ermed edi ediar arie aries ies are institutions o or r firms that mediate or firms r stand b bet bet be etwe tween ween en ul ulti ultimate tim mat atee lenders and ultim lenders ima imate bo bor borrow owe owers or r between between those with b those bud bu udge dg get et su sur surpl plus plus us and those who rrun un budge bu budget dgett de defi deficits. fici cits ts.
Below are examples of financial intermediaries:
Commercial Comm ercial banks b anks
Building Societies
Merchant Banks
Development Banks
Post Office Savings Bank
Savings and Credit CoCo-operative -operative Societies (SACCOS)
Insurance companies
Unit trusts (mutual funds)
Investment Trusts
Investment companies
Pension funds e.g. N.S.S.F
Finance Houses Capital Markets and Nairobi Stock S tock Exchange Market
Foreign Exchange Bureaux
The Government
Acceptance Houses
Stock Exchange Market
The central function of all ffinancial The inancial inte in intermediaries term rmed edia iari ries es is is to co coll colllec leect ct su surp rplu luse sess (s (sav (savings) avin ings gs)) of o of othe ot th her er r ec econ onom omic ic un unit units its and to lend them to tthe he defi de deficit fici citt sp spen spenders. ende ders rs. If If tth thes heese se in inte term rmedi ediar arie iess did did n not ot perform perform this function, it would be n necessary ecessary for individual depositors to agree tterms for erms directly with iin directly indi ndi nd divi iv vidu idu dua dual aall borrowers. borr bo rrow ower erss. A Although, lthough, this iiss a b this bit bit it in inco conv nven enie ienc ncin ing, g, th ther there ere are ssome ome inst in instances stan ance cess wh wher where ere it b bec becom ecom ome omes eess ne nece neccess cessar ssa sary ary ry y to do so so - fo orr exa xam xampl ple ple a cco com ompa om mpan pany pa n ny y ra rais isi isin iing ng g fu fun fund n nds dss di dire directly rect ctly ly from the public. from publ pu bliic.
BENEFITS OR FUNCTIONS OF FINANCIAL INTERMEDIARIES
Maturity transformation
Majority of Majority f deposits is for very sshorthort-term -term (Bank deposits), whereas most loans aare (Bank re requi required uirred for or lo onge on ng ger er r p per peri pe erio riod iods ods dss (m (mor ortg orttgag tga gage ages ges ess ar are are ffor or years).. F Fina Fi in nanc an ncia ciial al in inte int nte term ermed rmedia iari ries es ar aree 20 to 25 years) able to overcome this maat able atur tu urit riity ty mis ism ismatc tch tch by by offfering a wide range of of offering fd depo de ep posi ossit it ac acco coun unts ts,, th thus us helping to ensure that not all the de helping dep depositors¶ pos osiitor orss¶ fun funds und ds aar are re wi with thdr draw awn n at at the same ttime. ime.
Fina Fi Financial nanc ncia iall In Inte Interm ter erm rmedi mediar ediiarie ed aries ies also h have ave acceess ss to to such as the iinternter wholesalle e money mark ets ets such bank bank market, where they can raise sshorthort-term -term fina fi finance nanc ncee sh shou ould ld th they ey en enco coun unte ter terr r so som me shortage. shor sh orta tage ge.
Risk Transformation
Indi In Individual divid vidua uall de depos depo posit posi sit itor tors ors ar are are ge gene ner nera rrall allly ly y re relu relluct luc uct ctan tant ant tto o lend all their lend r savings to other r ind ndi ndivi vid vidua ual uals o or r com co companies, mpa pani nies es,, p pr prin pr rinci inc ncip cipa ipal pall ally lly ly y be bec becau ause ause se of f the risk k o of f default or ffraud. default raud. In nte nt termed dia di iaries eeffectively ffeectively ff ena enable nabl blee lende der ders to spread this risk k over r a w wide ide variety of variety f borrowers. borrowers. IIn Inte nter nt term erm rmed med edia iar iari rries ies ie ess al also also so h have ave the ex the expe peri rien ence ce an and and the ssk skil kiills lllss ne need needed eded ed to to im impr improve pro ove cred cr credit edit it m management. anag an agem emen entt. Tra rans nsfo form rmat atio ion n of of risk k ccan an also b also be be re refe ref efer ferr err rred red to aass Ri Rissk k reduction.
Aggregation
The majority of The f retail deposits are rrelatively elatively small, averaging under small, r ssh. h. 20, 0,000 ,000. 000.00 .00, 00, w while hile loans are typically larger, with m loans mortgages ortgages being being for r ssh. h. 500, 00,000 ,000. 000.00 .0 00 0 and above. above. F Financial inancial intermediaries can overcome this ssize intermediaries ize mismatch b mismatch by y agg ggr ggre rrega eg gati atting ing sm smal alll de depo deposi possits po sits, ts, aand, nd,, nd if necessary, by accessing the w if wholesale holesale mon money oney ey maar arke rket rk kets ets tss fo for forr r fu fund funding. ndin ing g.
Geographic Location
A further difficulty that individual depositors and and ind in individual div iviidu duaal borrr rro rowers might experiie ien ence is the simple simple pro p problem robl blem em of of lo loca loccat catin ing g on onee an anot othe oth her her rw with wi ith it thin hin th heir he eiir r own area or or their own ciir their irc rclle e of of contacts. con onta taccts. A de depo pos posi ssito itor it tor, or, r,, fo for for rr exa xam mpl ple, e, in Nairobi Nairobi is unlikely to know off th the the exis iste ten tenc n nce ce of of a likely likely borrower borrower in Eldorate. Eldorate. In Inte Interm termed rmedia ediar iarie ies ies ov verc ve errcom co ome me these these search and location problems through theirr national search national bran br branch anch ch ne netw twor twork ork, k,, aan and nd mor ore ore re rece cen cent n ntly tly tl ly yb by y the the int intro rodu duct ctio ion n of telep tel telephone epho hone ne banking. banki ba nking ng.
Induce Savings
Savers require store of value to hold ttheir Savers heir savings iin. savings n. F Finan Fi in nancia anccial ial in inte term rmed ediar edia iarie iari ries ies, es, s,, as assi assiste sisted sted by by the financial markets, promote savings by the by providing providing a wide range of f financial asse set sets aass store of store f v value. alue. For save ver vers (w (we (wea eealt allth th ho hold hollder lders) ers), s), tthis hiss hi offe of offers ferrs am amp ple choi oice oice ce of f p por portf orttfol or tfo fol olio lios ios wi wit wit ith th at att attractive trac acti tive ve combi com combinations bina nati tions ons of of iin inco ncom nc com ome, me, sa safe fety ty,, yi yiel yield, eld, eetc. tc.
Law of Large Numbers
The ec The econ eco con onom nomic omic b basi ba assis is of of fi fina fin nanc nan anci ncia cial ial all in inst stit stitu itut ituti utio tion ions ons nss lli lie ies in the the econ ec economy onom omy yo of f la larg large rge ssc sca calle e in in po portf porrtfolio po rtf tfo olio oli lio om manag ma anag an nagem agem ement ent aan and nd in in the law off la the larg large rge numbers. num nu mbe bers rs. Ba Bank Banks, nks, s, ins insura insur in suran uranc ance nce ce e companies, compan com panies, ies, unit tr unit tru ust stss and oth other other er fina financ finan fin anci ncial cial ial al ins institu titutio tions ns o operat ope pera pe rate tee o on n the the assu as assumption, sum mpt ptiion on,, ssu sup upp por po orteed d by statistical law of large large numbers that not all creditors (depositors) will numbers will withd wi withdraw thdra raw w th thei eir eir rr de depo posi sits ts aatt th the the sa sam same ti tim mee,, an and d th tha that while whi hile le others are withdrawing, others (new or old) are others are depo de depositing possit itin ing go or r paying in cash. cash. Th Thes These ese int inter erm medi ediar arie iess are are theref the therefore refore ore aabl able ble to make ake lia liabil biliti ities es ttha that hat are mor oree liquid. liqu li quid id.
Professional Management
The large size of assets portfolios that financial The financial intermediaries have allows them to employ intermediaries employ pro p professional rofe fess ssio iona nall maan anag naage gerrs rs, s, who are wellwell-versed -v versed ersed in the the complexities off mod complexities ode odern fin nanc na an nce ce, in appr pra prais isi ising ng loan loaan lo proposals, proposals, evaluating investment opportunities, opportunities, moni monitoring onito tori ring ng lloa loans oan nss an and and inve investm inves inv estm stment tmen ents, ts, s, aana analys naly na lysi lysis sis iss tth the he e market marke kett and other developments etc. and etc. this is important as as ind in individual div iviidu duaal ow owne nerrs (s (sav (saver avers) ers) cca can ann not no ot afford the cost of of profes pro professional fessio sional nal m manag ma anag an nagem agem ement ent aan and nd d ot othe oth the her err su supp ppor ortt staff. staf st aff f . They They do not in general also have th do the the kn know kno owle owledg ledge, dgee, dg e, tti tim ime or or desi de desire sire re to man anag agee o on n th thei their eirr own. own ow n.
FINANCE HOUSES
These are basically lending o These organizations. rganizations. They are known forr ssmallerThey maller -scale -sscale cale lending o on n cons co consumer nsum umer er go good goo oods ods, ds, s,, bu utt many also of offe fer ferr r co corp corporate rpor orat atee loan packages. loan packages. Th heir he eir ir ac acti activi tivit vitie ies ies are re ssometimes omeetimes om ref referred efer errred to to as tth the he se seco cond conda ndar ndary ary ry y b ban banki ban anki king ng se sect sector. ctor or .
Wholesale Fi Finance
Finance houses fund their Finance r o oper op per pe era ratti tion io ons nss m mainly ain inly ly through the who through ole ol lesale fi fina financ nance nce market rrather ather than tth than thei heeir ir r at attr trac acti ting ng de depo dep posi pos osi sits its ts from om th he eg general eneral public.. Funds are p public pla pl laced with F Fina Fi ina nanc ncee ho hous houses usees on uns on nse nsecur ure ured b bas ba asiiss for r periods from om three tto o six m six months. onth on thss.
Finance houses offerr more or less the same Finance same serv se services rvic ices es o offe of fffere erred ed by ot othe other herr fin finan fina fi nanc ancia ncia cial iall in inst institu ins stitu titutio ituti tion tions ons nss like like commercial banks, build commercial ldiing sociie iet etiie ies es, etc. etc. The The serv se services rvic ices es of of Fin Financ Fina Fi nanc ance ncee ho hous houses hou uses ses es are: aree: ar
Unsecured Loans
These are us These usua usua ual uall llly ly fi fixe fixedxed d-rate -rate rate loans for r terms o of f one to five years, which can be used forr aany one ny purpose purpose ± ± ho hol holi llida id day, ay y,, bu buil buiildi ilding ding ng or or buying a h house, ouse, bus b business, usin ines ess, s, ag agri agr gri ricu icult cul ult ltur ture, ure, e, eetc. tc. These services aare re provi pr provided ovided ded thr throug thro th rough ough ugh h ag agen enci cies es wi with with th ssa sale alles es ou outl outlets. tlet etss.
Secured Loans
Finance houses also provide secured loans for home improvement improvement & other purposes.
Hire Purchase
Ah hire hi irre e p purc purc pu urcha rcha hase se co com comp m mpan pany pa any ny y (h (hir ireee) g give gi ive iv ves es g good go oo ods ds on hire hire to a user (hirer) who pays periodic hire purchase purchase installments.. O installments On n payment off final hire purchase purchase insta in installment, stallm llment ent,, th thee o owne ow wne ners rsh rshi h hip ip po of f the goods is is transferred traans tr nsfe ferr rreed to the hirerr from the hiree. to hiree. Typically, in in a hire hire purc pu purchase rcha hase se tr tran ansa sac sact cctio tio ti ion, on, tth the he hir ire iree ch char charge arges ges iin inte nttere errest esstt on on a flat ra flat rate rate te basis. basis. This is means tha hatt iin inte nttere errest esstt is charged on on the am the amou amount ount nt ffi fina in nanc anc nced ed iin n th the the b beg beg be egin ginni inn in ning nin ing ng g aan and nd not on the the dimini dim diminishing inish shin ing g balances. bala ba lanc nces es. Underr th this thiis is ssy syst ysstem teem m of of purchase, purrch pu chas ase, e, the goo the ood oods b belo be ellong on ng g to the he le lend len ndin ndi din ing ng in inst insti stit stitu itut tutio utio tion ion nu unti un nttil il they they are fu are full lly y pa paid id for. for fo r .
Leasing
This is This is a method of f acquiring a p phy physi hysica sical cal as asse asset sett for a fixed period and is co for omm om mmonly used by by bus b businesses usiine ness ssees fo for forr aac acqu cqu qui quir iirin riing ng co com mpa pany ny ve veh vehi h hic iclle les es aand nd expensive items of equipment such as expensive as photocopiers.. The le photocopiers lend lendin nding ing or orga gani niza zati tion on re reta retains tain inss the ownership of the f the item, receiveess payments paym pa ymeent ntss over a ssp over spec peeci ciffi fied ieed d pe perrio iod iod ((say say 3 years) years) and then then takes back takes k the item to sell to rec recoup reco oup up out outst outstanding stan andi ding ng cost, sometim cost, ime imes to the person who has been been lea leasing easi sing ng it it..
Factoring
Som So Some me Fi Fina nanc ncee ho hous uses es pr provi prov pr ovide ovid ide dee fa fact ctor oring ing se serv services rvic ices es to businesses. to businesses. So So they manage a ccompany¶s ompany¶s inv invoices nvoi oice cess and de debt bto btor o ors rs an and and d co coll lleect (a (and nd reta tain in)) th thee money owed to the ccompany. money ompany. The factor factor (Finance house) buys trade debts from iits (Finance ts clients aatt a discou clients ount oun ntt and nd make kes kes pr pro ofi fitt when tthe he debts aar debts are re re real realized. aliz ized ed.
MERCHANT BANKS
Merchant Bank Merchant nks nks are also known as w wholesale holesale banks banks or investment banks. banks. They are are specialized specialized banks concern with tthe he arrangement of arrangement f finance and in iinvestment nvestment managem management, emeent, for r larg ge e cor orp orpor oraate cli lie lients iin n a big big w way. a y.
They are o They ofte of ftten en in invo invo vol volv lved lve ved ed d in aad advis dvi dv visin isiing ng com compa companies panie niess on the on he iss ssui ssuing uin ui ng ng of f new share or r llo loan oaan n ca capi pita tal, l, an and d many Merchant banks are also active in the many the field of field f p pen pen pe ensi nsion sion on fu fund fun nd dm management. anag an agem ement ent.
Origi igins ns of Merchant Bank ing
The origins of The f Meer erch rcchan haant nt Ba Bank Banki nking ng lie ± as tthe he name suggests ± in the financing o name of f inte in international tern rnat atio ional nal tr trad trade. adee. Th heir he eiirr ea earl rlie iest st bu busi sine ness nesss ss wa wass accep ac acceptance, cepta tanc nce, e, wh whic ich h st star staarte art rted ted ed d whe hen n eea earl arrly ly ym merchant erch er chan antt baank b bankers nker erss acc ccep cce cep epte pted ted bi bil bills of f eex exch xcha chan nge ng ge (basically (ba basi siccal ally ly promising prom pr omiising to p pay pay ay in inte tern rnat atio ation iona ional nall ally lly ly y tr trade traded aded g goods oods and services). and serv se rvic ices es)).
Services offered by Merchant Banks
They accept, discount and purchase genuine trade bills with emphasis on the international trade i.e. they give acceptance credit. They provide import/export advice to business engaged in international trade. Merchant banks give short sho rt term and medium term loans to companies. co mpanies.
They arrange lease and hire purchase purchas e finance to their customers. They fin They financ fina fi nanc ance ncee pro propert proper pro perty ty y deve developm lopment ent (mortgages). (mortg (m ortgages ages)). They manage investment funds, with their th eir main clients being pension funds f unds and insurance companies. companies. Merchant banks act as underwriters for businesses going public or floating such shares.
Difference between Merchant Banks and Commercial Banks Merchant Bank s
Comme Commercial B ank s
Undertake wholesale wholesale banking
Banking Undertake retail
Usually do not provide personal accounts to small depositors
Usually offer different accounts even to small depositors
Their customers customers are usually big companies
Their customers are usually small savers & a few big companies
Merchant banks offer leasing & hire purchase facilities for heavy equipments and machinery
Commercial Banks do not usually offer leasing and hire purchase facilitie facilitiess except under special circumstances
Merchant banks lend on longlong -term -term basis because they also borrow long
Commercial Banks usually lend shortshort term because they mostly accept demand deposits
DEVELOPMENT BANKS
These are sp These pec pe eciaal ali lized fina nanc nanci ncial iinstitutions, nstitutions ns,, whi which hich ch p per per pe erfo rfo form rm the he twiin n fu func fun unc nct ctio ions ions of f providing prov oviidi din ng medium and longmedium long-term -tterm erm finance to private private entrepreneurs and of performing v entrepreneurs various arious promotional promotional roles conducive to eeconomic conomic development.. development
As the n As nam na ame sugg ggeests, the hey hey are de deve developmentvellopm pmeentoriented banks and therefore as banks tthey oriented hey provide provide ffinance. inance. They are different ffrom rom com co commercial mme merc rcial ial ba banks banks nks in tth the he fo foll llow owin ing g wa ways ways: ys:
Development Bank s
Comme Commercial B ank s
Do not seek or accept deposits of money from the general public
Accept deposits of money from the general public
Specialize in providing medium and long--term long -term finance
Specialize in providing shortshort -term -term finance
Main objective is to promote pr omote economic development by promoting investment and enterprise
Main objective is to accept deposits of money from the general public for lending & investment
Th hee development promot omotiional roles may tak e the follow followi following forms: ms:
Provision of risk capital
Underwriting of new issues
Arranging for foreign exchange loans
Identification of investment projects and opportunities
Provision of technical advice Provision of both local loc al and foreign market information Evaluation of project reports
THE FINANCIAL MARKETS IN KENYA
The fi The finan fina nanci nanc ncia cial ial all mar arket arke kett can b be be de defi define fined d as the ssum um total of total f all cca capi api pittaal al, l, mon oney oney ey and nd se secu sec ecur cur urit rit ity ym market arke ar kett inst in institutions stit itut utio ions ns ope opera oper op erat rati atin ting ing ng g in an economy. econom omy y. This also also include individuals, com include omp panies, iinstitutions nstitutions and governm and nmeent, who buy (borrow) and sell sell (lend) money to d (lend) dif di ifffe fer eren ntt parties aatt a price price (int (i (interest nter eres estt or or di divi vide viden dend) dend nd) d)) de dete term rmin ined ed by by tth the he m market arke ar kett for forces orcces of of de dem mand and nd su uppl up pp ply ly of fm money. oney.
THE MONEY MARKET
This is a market market for shortshort -term -term funds (instruments), (instrum ents), i.e. finance for fo r business for about 2 years. Examples are:
Bank Overdrafts
Short Term Loans
Promissory Notes
Bills Of Exchange
Trade Credit
Guilt Edged Securities (Govt. Securities)
Bankers¶ Certificate Of Deposits
Commercial Papers
Financial Insti Institut tutiions or Intermed mediiaries that sell shortt-te -term funds are:
The Government
Commercial Banks
Acceptance Houses
Discounting Houses
Merchant Banks
Buyers of such f inances are:
Individuals
Companies
Government
Financial Institutions
Characteristics of the Money Market
The market provides short short--term -term finance only The securities bought and sold in this market market are highly negotiable as they can be bought and sold sol d easily The finance in this market is usually not secured and The and depe de depends pend ndss o on n th the the go good odwi will ll o of f th the the b bor borr bo orro rrow rowe ower wer er ro or r buyer buyer This finance is used to solve liquidity problems of the concerned parties
This finance is very expensive as compared to other sources It is not a p It per perfe erfect fect ct mar arke kett be beca becaus cause use e the d demand emand for ssu for such ucch h fi fina nanc ncee fa far farr r ex exccee eeds ds its ts ssupply upp up ply This market market brings together to gether the buyers and sellers of the shortshort -term -term securities
THE CAPITAL MARKETS
The markets are for longlong-term -term funds i.e. finances that are available over 2 years. This market is not well developed in Kenya. This market is divided divi ded into two. The security market is The is a market forr long term term securities like equity shares, preference shares, securities shares, debent deb debentures enture uress aand nd govt. govt. stocks. stocks. The long long--term -term loan market is a market for longlong-term -term loans, mortgage finance, lease finance and higher purchase finance.
Financial institutions (intermediaries) (intermediaries) that sell Long--term Long -term funds (Participants in the Capital Market) are:
The Government of Kenya
The Stock Exchange
Investment Banks
Investment Companies
Insurance Companies
Pension Funds
Commercial Comm ercial Banks Bank s
Hire Purchase Companies
Services Rendered by the Capital Market
They offer lon long g-te -term f inance to the businesses, which is used to acquire fixed assets. They encourage foreig ign n investments in the securities of the quoted qu oted companies. They f ac acilitate the purchase and sale of shares and other securities.
The market provides The provides perman nent ent f fi nance neccess ne necessary ssar ary y for or a sst stro trrong on ng g fi fina nanc ncia iall ba base base se of fg going oing concerns, concerns, ee...g g..,, g. equity share ccapital, apital, irrede irredeemable deem emaabl blee pr pre prefe fer ferenc nce nce shares, cconvertible onvertible debe de debentures bent ntur ures es an and d conv convert conver ertibl erti tibl ible blee pr pref prefer pre efer ferenc eren ence ce e sh shar shares. ares es. The market provides useful information and advice to investors.
The market enables individuals and companies to obtain longlong-term -term finance, which they can sell in the money market market in form of shortshort -term -term loans. The market is responsible for an orderly secondary market, which facilitates the liquidation of longlong -term -term investments.
It promotes the culture of thrift or savings. The fact that institutions exist and that there is some returns expected from investments, encourages savings. The stock exchange assists in the transfer of savings to investment in productive product ive enterprises as an alternative alternati ve to keeping the savings idle.
It assists in the rational and efficient allocation of capital, which is a scarce resource. The stock market promote higher standards of accounting, resource management and transparency in the management of business
Difference between the Money Mark et et and the Capital Mark et et Money M oney M Market arket
C Capital apital Market Market
1
Goodwill of borrower qualifies him for the finance
Goodwill of the borrower is not important, but his ability to raise securities is what matters
2
Finance is usually obtained in cash
Finance is usually obtained in kind, e.g. in form of assets
3
Finance is expensive
Finance is usually cheap
4
This market does not deal with the foreign exchange for investment reasons
It is a channel through which foreign foreig n investments i nvestments come into the country
5
Finance here is usually
Finance here is usually secured
THE STOCK EXCHANGE MARKET
The Stock Exchange Market is a place where securities are bought and sold It is usually a building or part of the same where members mem bers of the exchange, acting as brokers or dealers buy or sell securities.
This is an organized capital market for securities inform of shares, preference shares, debentures debent ures etc. The stock exchange deals primarily in the secondary issues (second hand securities) Not all companies or businesses busine sses can have their securities traded in the stock stoc k exchange market, market, unless they are members members i.e. listed or quoted quo ted in the market
Unllik Un Unlike ikee ot othe oth ther her er r mar arke kets ts,, o one on ne is no not not p per perm pe erm rmit mit itte ted d tto o buy buy and sell shares diir and ire rectly in the stock k exchange exchange market.. Accor market ord ording ng to the rules, you can only do do your buying and selling through a licensed your licensed member off the st member sto stock k exc xcha hang han nge nge maar arke rk ket et called a µstoc µs µstockbroker¶ tockbr kbrok oker¶ er¶ or or a µs µsha µshare hare re broker¶. brok br oker er¶¶. Stoc St Stockbrokers ockb kbro roke kers rs aar are re the only on one ones aau auth uth ut thor hor oriz ize ized eed d tto o buy buy and se and sell sell ll se sec secu ccur uri ur ritti tie ies ie es on behalff off others forr some some commission.. This commission is commission is a fee called called brokerage brokerage and is fixed by the Stock k exchange exchange market.. market
THE R OLE OLE OF THE STOCK EXCHANGE
Raising Capital for Businesses
The Stock Exchange provides The provides companies with tth with the he fa faci cili litty to to rraise aise capital for forr ex fo expa expansion pans nsiion throug thr through ough h se sell selling llin ing g shares to to tthe he investing investing public public.. public
Mobilizing Savings for Investment
Whe When hen n p pe peop pe eop ople le dr draaw th thei their eir r ssa savi avi av ving ing ngss aan and nd inv ves ve est in in shares, shaares, sh it leads to it to a more ra rat ratio ion ional al aal allo llloca occati attion io on n off resources resources beeca b because caus usee fu fun fund n nds, ds, ds s,, w whic wh hic ich h could have b bee been een cco cons ons on nsum sum umed ed,, or kept in idle kept idle deposits with banks banks,, are mob obiiliz izeed and and redi re redirected dire rect cted ed tto o promote promote business activity acti ac tiv vit ity y wi with witth th benefits ben be nef efiits for several economic sectors such as for as agriculture agriculture,, commerce and industry industry,, resulting in in a stronger stronger econo ec economic onom mic growth growth and and higher high hi gher er productivity productivity levels levels..
Facilitate Company Growth
Com Co Companies mpa pani nies es vi view vie ew w acq acqui acqu ac quis uisi isit siti itio tions ions ons ns as as aan n opportunity oppo op port rtun unit ity y to eexpand to xpand product product llines lines, ines, iin incr nccrea reease asse e di dist distribution stri ribu buti tion on chan ch channels, anne nells, he hedg hedge dge e ag agai agaains ainst nst vo vola lati tili lity ty,, in incr increa crease ease se iits ts market sshare market share, hare, or or acquire other r n necessary ecessary business assets assets.. A takeover takeover bid bid bid o orr a merger agrree ag agreement eem ment th thr throu ough ough gh tthe he stock stock m market arket is is one of of the simplest and most common ways tto the o com co company mpa pany ny gr gro grow o owing wiing ng b by by y ac acqu quis isit itio ion n or or ffusion. usion.
Redistribution of Wealth
By giving a wiid By ide de sp spec spectr ectrum trum of of people a chance chance to buy shares and therefore become partto partowners (shareholders owners shareholders)) of profitable profitable profit pr ofitabl ablee ent enterp enterprises, enterprises erpri rises ses, the stoc the ock ock k mar arke kett helps ps to red duc du uce lar arg ge iincome ncom omee inequalities.. Both casual and professional inequalities professional stock iinvestors stock nvestors through stock stock price price rise rise aand nd dividends get get a ch han ha ance to share in th he e p pr prof pr rof ofit ofiits itss of pro p promising rom mis isin ing g bu busi bussine siness ness ss tha hat hat were set up by o other ther people.. people
Corporate Governance
By h havi ha avin av ving ing ng g a wid de e an and d va vari ried ed sc scope scope ope of of own owners owne ow ners ers, rs,, com compani panies es gen genera erally lly ten tend tend tto o impr im improve prov ovee on on their their management standards stan st anda dard rdss and and efficiency in in order r to sa sat satisfy tis isfy fy the de the dem man ands ds of of th these these ese sha shareh shar sh areh reholde ehold olders older ers rss aan and nd the mor oree st stri ring ngen entt rul rules rules es for or public publ pu bliic corpor cor corporations porati ations ons b by by y pu publ publ pu blic ic st stoc stock sto ock ck k ex excha change ngess an and and tthe he gov govern government. ernme ment nt. Con Conseq Consequently, sequen uently tly,, it is alleged tthat it hat public pu p ubl blic ic co com companies mpa pan nie iess (companies (com omp panies that are owned by by shar sh shareholders areh ehol olde ders rs w who wh ho ar are are mem embe bers rs of of th the the ge gene nera rall p pu publ pu ublic bliic bl ic an and and ttr trad raade de e sh shar shares ares es on on publi pu public blicc ex excha exch change chang anges nges) es) s)) te tend tend nd to h have ha av ve e be bette bett be tter tter er r ma manag nageme ement nt rec records reco re cord ords rdss th than than privately an privately privately-held co held com companies mpa pani nies es (those (tho (t hose se co compa com mpa pani nies es whe here re sh shar shares ares es are no ott pu publ publ pu blic bliicly icl cly ly y tr trad traded, aded ed,, ofte of often ten n ow owne owned ned by tth the he co com compan mpa pany ny y fo foun unde ders rs an and/ d/or d/or or or th thei eir eirr r fa fam mil ilies ilie iess an and d heir irs, irs, s, or or othe ot otherwise herw rwis isee b by y a sm sma smal aall ll gr grou gro rou oup up of of investors). inve in vest stor ors) s). Ho How Howev wev ever er,, so som me wellwell we ll-documented -documented cases are kno cases own ow wn where it is alleged that there has b bee been een co cons considerable nsid ider erab able le slip sl slippage ippa pag ge in corporate corpor cor porate ate gov govern governance ernanc ancee on on the part of f som ome ome pu publ publ pu blic bliic ic co com companies mpa pani nies es (e. e..g g g.. E Enron En nro ron n Corporation Corpora Cor Corporation, poratio tion n, MCI MCI Wo Worl WorldCom, WorldCom rldC dCom om, Pets Pets..com .com com,, Uchumi Uchumi)). ).
Creates Investment Opportunities for Small Investors
As opposed to other As r businesses that rrequire equire huge ca huge capi pita pittal tall ou outl tlay ay,, in inve vest stin ing g in shares is o open pen to both the large and small to small stock stock iinvestors nvestors because because a person buys the number r of f sshares hares they can aafford. they fford. T Ther Th heeref reefor for oree th the the S Stoc St to ock ck k Exchange Exc xcha hang ngee provides provides an extra source of f income to ssmall mall savers.. savers
Government Raises Capital for Development Projects
The Government and even local authorities like The like muni municipalities unici cipa pali litie tiess may d dec de eciid ide de to b bor borr orrow ow mo oney on neey y in order order to finance huge inf to nfra nfrast rastr struc uct uctur ure ure p proj pr ro oje jects such as as sewerage and water treatment works or housing sewerage housing estates by selling anotherr category of estates of securities known as known as bonds bonds.. These bon nds nd ds can be ra rais raise ised through thrrou th oug gh the St the Sto Stock ck Exc xcha hang han nge nge e wh wher ereb eby y meem embe mb bers errss off the public public buy buy them. them. When the Government orr Municipal Municipal Council gets thi Council his his alt lter erna nattiv ivee sso sour ou urc rce off funds, it no no longer has the need to ove longer ver verta tax tax tth the he people in orderr to to finance development. finance developm deve lopment ent.
Barometer of the economy
At the stock At k ex xcha xc chang h an nge ge, sha har hare prices rise aand nd fall depending, largely, o fall on n market forces forces.. Shaare p Sh Share pr pric pr ric ices es te tend tend nd to rise or r rem ema emai aain in st stab sta tab abl ble w when hen he n com companies ompa pan nies and the the economy in in general sshow how signs of signs f stability and growth. growth. An economic recession,, de recession dep depressio ion n, o or r financial fina fi nanc ncia iall cr cris crisis isis is could eventually lead tto eventually o a stock stock market ccrash crash. rash. The Therefore herref efor oree th thee mov ovem emen emeent entt of of sh shar shaare re pr pric price ices and nd in in general of tthe general he stock stock iindexes ndexes can can be aan n indi in indicator dica cato torr of of th he e ge gene ner nera rral all tr tren treend nd in th the the eeconomy. cono co nom my.
Listing Requirements
The listing requirements are the set o The of f condi co conditions nditi tions ons im impos imposed posed ed by a given sst stoc toc ock ock k k ex exc exchange cha hang ngee upon co upon com mpa pani nies es th that that at want to be listed on that that exchange.. S exchange Such Su ucch h co cond ndit itio itiions ions so som met etim eti tim imes mes iinclude nclu nc lude de minimum number minimum r of shares o outstanding, utstanding, min minimum inim imum um m mark ma arke ar rket ket ett ca capi pita tali liza zati tion, on, an and and minimum minimum annu an annual nual al in inco income. com me.
Requirements by stock exchange
Com Companies omp panies have to meet th he e re requ requir quiirem qu iremen emeents em ent nts tss o of f the exc the xcha xchan hange ge in order r to have the heirr st hei stoc stocks ocks ks aand nd shar sh shares ares es li list listed sted ed and tr trad tra rade aded ded ed d th ther there, ere, e, b but but re requi requirements quire rem ment entss vary by sst vary stoc to ock ck k ex exch exchange: chan ange ge:
Requirements for Listing (Quoting) on the Nairobi Stock Exchange Market
The company in requiring quotation quo tation must register with the Registrar of companies as a limited company. The company must have a fully paid capital of not less than Ksh. 2,000,000.00 with a nominal value of between Ksh. 5.00 and Ksh. 10.00.
The company must supply the Stock Exchange authority with details of its directors, legal advisers, and company secretary and company auditors. The company must inform the stock exchange authorities of its current distribution of shares.
The company must supply the stock exchange authority with the following:
Audited financial statements
Articles and memorandum memorandum of association a ssociation
Chairman¶s report
The company must be ready to offer 20% of its share capital to the public.
et Authority The Capital Mark et (CMA)
The Capital mar The ark arke k ket et aut utho uthor hority ty was es est established tabl bliished in 1990 tto o sst stim tim imu imul u ulat lat la ate te th the the e de deve velo vellopm lop opm pmen ment ent of of longlongterm debt and equity m term markets. arkets. The main main obje ob objectives ject ctiv ives es ar are are:
To protect the investors To provide enough incentives for long term investments
To advice the government on matters To matters conc co concerning ncer erni ning ng th thee de deve velop velo lopm pmen men entt of of C Capi Ca api pit pita ttal al m market arke ar kett To license brokers, dealers, Unit Trusts, Investment bankers, and other participants
To protect an To nd d com ompe pens nsa nsat aate te any ny inve ves vestor or w who ho may suffer may r loss resulting from brokers o or r dealers To regulate and oversee the issue and subsequent trading both in primary and secondary markets instruments
The ca The capi pita pittal tal mar arke kett Au Auth Aut utho thor hor orit rity ity ha hass es esta tabl blis bli iishe she sh hed ed a traadi tr trading ding ng fl flo floor or in tth the he N Nai Nairo airrobi ai rob obi bii st stoc ock ock k k Ma Mark Marke rket and a training of training f staff to increase their r ttechnical echnical expertise.. It expertise It also has powers to control tthe he acti ac activities tivi viti ties es of of the M Market. arket.
BENEFITS OF
INVESTING
Income:
This is in form of dividend equities eq uities or interest on bonds.
long -term -term Capital gains: This is in form of long price appreciation, shotshot -term -term price gains, and bonus and rights issues.
Tax advantages
Withholding tax is usually low as compared to other investments.
Collateral
Securities can be used as collateral to secure financing (loan).
Confidentiality
Financial securities are intangible and therefore guarantee confidentiality in management managem ent of wealth.
Flexibility
Shares are traded in units and lots that aare Shares re affordable by investors of affordable f different iincome ncome levels.. Bonds are also fairly affordable aass levels compared to other compared r forms of f inv ves ve estmeen ent nts llike ike rea real eall es est estate. tat atee.
Liquidity
Securities are easily transferable aatt a llow Securities ow trans transaction nsaaction cos ost ost as compared to otherr aassets ssets such as real estate. such estate. An An investor r can ttherefore herefore get in and out at h get his hi is co conv convenience. nven enie ienc ncee.
Hedge Against Inflation
Share prices over a long term tend to out perform inflation. Therefore, investment in securities
Spreading of Risk & Maximization of Returns
The range an The nd dv var va arie ietty o off se secu curi riti ties es li liste listed sted in tthe he stock exchanges provide investors aan stock n opportunity to minimize their opportunity r exposure tto o specific company risk specific k by spreading ttheir heir inve in investments vest stm men ents ts ac acro across ross ss a w wide wi id de e se sele lect ctio ctiion ion n of of sstocks. tocks.
Operating Convenience
Since investing in securities repr Since pres prese esent nts nts tthe he separation of separation of o owne ow wne nerrship fr from om mana nage gem men ent, ent, t, iitt therefore therefore does not require personal personal commitment of commitment f the investor r for r it to g give ive return.. Investors are therefore saved the return the occu oc occupational cupat patio ional nal ha haza hazards zards rd s o off caree eerrs, as opposed to to other businesses that need the personal other personal pre p presence rese senc ncee an and d in invo invol volv volve lvem vem emen mentt of of tth the he entrepreneur. entr en trepr epren eneu eur r .
