The Central Bank of Kenya has warned that dominance of a few large firms at the Nairobi Securities Exchange could destabilise the market in the event of sudden selloffs.
In the Kenya Financial Sector Stability Report 2019, CBK warns that the NSE is vulnerable to "concentration risks" arising from having only a handful of firms dominating trading at the bourse.
CBK also cites other risks as dominance by foreign investors, and the high concentration of Treasury securities in the Bonds market.
"As at December 2018, the top five companies accounted for 65.82 per cent market capitalisation from 64.83 per cent in 2017, of which, Safaricom accounted for 42.31 per cent. Secondly, foreign investors accounted for 63.28 per cent of total equity turnover in 2018 compared to 63.23 per cent in 2017. While this is positive news, abrupt sell-offs by this investor category can lead to excess volatility, as noted in the first half of 2018 following an interest rates hike in the advanced economies and emerging markets and the consequent search for yield," notes CBK in the report, prepared jointly with four other financial sector regulatory agencies.
During the period under review, government bonds trading accounted for more than 99 per cent of the fixed income market segment.
The banking sector regulator cautions that the shocks could either originate domestically or from foreign economies.
The top five NSE companies by market capitalisation are Safaricom, Equity Bank, East African Breweries Ltd, KCB and Co-op Bank.
According to CBK, the bourse also faces the risk of low liquidity in the equity market, limited issuance of corporate bonds, low uptake of new and existing products and services (Exchange Traded Funds, Real Estate Investment Trusts and Asset Backed Securities) and crypto-assets related challenges.
Other threats include market infrastructure failures, cyber risks, political and economic risks.
Last year, the NSE 20-Share-Index, equity turnover and market capitalisation was largely influenced by foreign equity outflows in search of higher yields, profit taking, and adverse domestic and global policy pronouncements, said the CBK report.
According to the Capital Markets Authority, new listings of state-owned enterprises and plans to roll out a product uptake and market deepening strategy targeting "large cap" private companies to list on the NSE could rejuvenate the markets."On concentration by five companies, only a large issue by some state-owned enterprises such as Kenya Pipeline, National Oil Corporation or private firms such as Bidco or Airtel can mitigate the risk. Otherwise it is risk we […]