NAIROBI STOCK EXCHANGE: HISTORY

In Kenya, dealing in shares and stocks started in the 1920s when the country was still a British colony. There was, however, no formal market, nor rules or regulations to govern stock-broking activities. Trading took place on gentleman's agreement, in which standard commissions were charged with clients being obligated to honour their contractual commitments of making good delivery and settling relevant costs.

At that time, stock-broking was a sideline business conducted by accountants, auctioneers, estate agents and lawyers, who met to exchange prices over a cup of coffee. Because these firms were engaged in other areas of specialization, the need for association did not arise.

In 1951, an Estate Agent Francis Drummond established the earliest professional Stock broking firm, and impressed upon the then finance minister of Kenya Sir Ernest Vasey the idea of creating a stock exchange in East Africa.

Considering the proposal, which was given by the then finance minister of Kenya Sir Ernest Vasey and Francis Drummond, the London Stock Exchange officials approved to recognize the creation of the Nairobi Stock Exchange as an overseas stock exchange in July, 1953.

The NAIROBI STOCK EXCHANGE (NSE) was constituted in 1954 as a voluntary association of stockbrokers registered under the Societies Act. The business of shares trading was restricted only to the resident European community though Africans and Asians were not permitted to deal in securities.

At the dawn of independence, stock market activity slumped due to uncertainty about the future of independent Kenya. However, after three years of calm and economic growth, confidence in the market was rekindled and the exchange handled a number of highly over-subscribed public issues.

The growth was, however, halted when the oil crisis of 1972 introduced inflationary pressures on the economy which depressed share prices. A 35% capital gains tax introduced in 1975 (suspended since 1985) inflicted further losses to the exchange. At the same time it lost its regional character following the nationalizations, exchange controls and other inter-territorial restrictions introduced in neighboring Tanzania and Uganda.

In the 1980s the Kenyan Government realized the need to design and implement policy reforms to foster sustainable economic development with an efficient and stable financial system. In particular, it set out to enhance the role of the private sector in the economy, reduce the demands of public enterprises on the exchequer, rationalize the operations of the public enterprise sector to broaden the base of ownership and enhance capital market development.

In 1984 an IFC/CBK study, Development of Money and Capital Markets in Kenya, became 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 an environment conducive to the growth and development of the country's capital markets.

In 1988 there was the first privatization through the NSE is the successful sale of a 20% government stake in Kenya Commercial Bank. The sale left the Government of Kenya and affiliated institutions retaining 80% ownership of the bank.

In 1991, the NSE was registered under the Companies Act and phased out the "Call Over" trading system in favor of the floor-based "Open Outcry System".

Notably, in 1994 the NSE 20-Share Index recorded an all-record high of 5030 points on Feb. 18, 1994. The NSE was rated by the International Finance Corporation (IFC) as the best performing market in the world with a return of 179% in dollar terms.

The NSE also moved to more spacious premises at the Nation Centre in July 1994, setting up a computerized delivery and settlement system (DASS). For the first time since the formation of the Nairobi Stock Exchange, the number of stockbrokers increased with the licensing of 8 new brokers.

In 1995 the Kenyan Government also relaxed exchange control for 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 the June 1995 budget to help encourage foreign portfolio investments. A series of incentives are in place to encourage investments in the Nairobi Stock Exchange.

A favorable tax regime exempts listed securities from stamp duty, capital gains tax and value added tax. Withholding tax on dividends is low at 5% for residents and 10% for non-residents. The entire Exchange Control Act was repealed in December 1995.

In 1996, the largest share issue in the history of NSE, the privatization of Kenya Airways, came to the market. Having sold a 26% stake to KLM, the Government of Kenya proceeded to offer 235,423,896 shares (51% of the fully paid and issued shares of Kshs. 5.00 each) to the public at Kshs. 11.25 per share. More than 110,000 shareholders acquired a stake in the airline and the Government of Kenya reduced its stake from 74% to 23%.  The Kenya Airways Privatization team was awarded the World Bank Award for Excellence for 1996 for being a model success story in the divestiture of state-owned enterprises.

In the 2000/2001 budget, the Government offered the extra incentives to capital markets investments. In July 2000, the Central Depository System (CDS) Act was passed by Parliament and sanctioned by the President in August 2000.

The Capital Markets Authority Act was amended and known as the Capital Markets Act. In August 2000, CFC Financial Services the first licensed dealer on the Nairobi Stock Exchange started its operations.

In February 2001, basic reformation of the capital market of Kenya took place and divided the market into four independent market segments: the Main Investments Market Segment (MIMS), the Alternative Investments Market Segment (AIMS), the Fixed Income Securities Market Segment (FISMS) and later Futures and Options Market Segment (FOMS).

In the2001/2002 budget, the Government offered the extra incentives to capital markets investments. On17th April 2002, the CMA declared the sanction of the new NSE trading and settlement rules with amendments. On 26th July 2002, with the introducing of a New Foreign Investor Regulations, there are three categories of investor on the capital markets; local, East African and foreign.

On 5th August 2002, the Nairobi Stock Exchange, the Capital Markets Authority of Kenya, the Association of Kenya Stockbrokers, the CMA Investor Compensation Fund, and 9 institutional investors through the Capital Markets Challenge Fund have signed a Shareholder Agreement for establishment of the Central Depository and Settlement Corporation (CDSC).

On Monday, 11 September 2006 live trading on the automated trading systems of the Nairobi Stock Exchange was implemented.

The number of stockbrokers has grown steadily to 20 from the original six (one of whom still survives) at its inception in 1954. Commission rates, which were once among the highest, have also come down considerably, from 2.5% to between 2% and 1% on a sliding scale for equities and 0.05% for all fixed interest securities for every Shilling.

The biggest challenge facing the NSE is to increase its turnover ratio, currently standing at only 3%. For the foreseeable future, the exchange will have to be driven by local investors who are now being targeted by a public education programme conducted by the NSE through brochures, radio and television programmes, seminars and group presentations.