Kenya's Largest IPO opens amid protests over Rogue Stockbrokers

By JUSTUS ONDARI (The Daily Nation)
Rogue stockbrokers, not the electronic trading system, are to blame for the financial crisis facing Nyaga Stockbrokers and other ills afflicting the Kenyan stock market.

According to a survey carried out by the Nation, adequate discipline backed by harsh penalties for any transgression would rid the Nairobi Stock Exchange (NSE) of such wayward brokers.

Noting that similar systems have been successfully employed in other markets worldwide, including the London and New York stock exchanges, many of the people interviewed said the NSE had no option but to embrace information technology (IT).

Mr Bob Karina, the Faida Securities Ltd managing director, said failure to move with the times could keep the NSE off the competitive global financial market. “We cannot reverse the clock. It is either we move with time or perish,” said Mr Karina, whose firm is a member of the NSE.

As investors welcome the Safaricom initial public offering (IPO), which is opening today, human error has been singled out as the main challenge facing the market where greedy brokers dip their fingers in clients’ investments cookie jars illegally.

For Fred Mweni, the Tsavo Securities Limited MD, the developments at the NSE are a manifestation of lack of integrity and corporate governance structures in some of the brokerage firms.

“The system is not to blame because, like any other, it does what man commands it to do even if it is illegal (command),” said Mr Mweni.

Describing the NSE trading system as efficient, versatile and robust, Mr Mweni said: “If individual brokers cannot keep their fingers off their clients money, we should not shift the blame to the system.”

In the wake of the NSE placing Nyaga Stockbrokers under statutory management early this month over financial problems — a year after another stockbroker, Francis Thuo & Partners went under, accusing fingers were pointed at the market’s automation programme.

Many commentators, including Mr Kassim Bharadia, the CEO of ApexAfrica Investment Bank, criticised the system, saying it gives brokers an undue advantage over clients’ investments, a situation that enables some of them to illegally sell clients’ stocks.

The NSE established the Central Depository System Corporation (CDSC) in 2004 before introducing the Automated Trading System (ATS) in 2006, which greatly improved the speed with which transactions and settlement of traded securities are effected.

Besides the buying and selling of stocks going electronic, the former system in which investors had to deal in stocks by physically signing share certificates was phased out through immobilisation. And this has been cited as one of the loopholes being exploited by the brokers to illegally trade in their clients’ money.

However, Mr Karina and Mr Mweni said that is not an issue and singled out weak monitoring and supervision by the market regulator, Capital Market Authority.

Drawing a parallel with the banking industry, which faced many collapses in the 1990s but is currently riding on a profit wave, they said stringent Central Bank of Kenya supervision has kept banks in the straight and narrow path.

Mr Mweni said that even if the bankers have unfettered access to all their depositors’ money just like the stockbrokers, they are wary of misusing it for fear of CBK’s action.

“On top of losing the licence, if a broker who steals a client’s shilling were to be made to pay, say, Sh100,000 and Sh100 to pay Sh1 million no one will try to steal,” he added. Echoing the sentiments, Vincent Kimani of Capital World Limited said it is time CMA acted tough on the brokers.

“Banks are more than stockbrokers and yet CBK effectively oversees their operations. Why does CMA not do the same with the brokers?” said Mr Kimani.

Indeed, following the collapse of the Nyaga Stockbrokers with investments of 130,000 clients, there have been calls for investment banks and stockbrokers to start publishing their quarterly financial results as a way of promoting accountability and good governance in the stock market.

Leading the calls is Mr Bharadia of ApexAfrica Investment Bank, who said that brokerage firms are not different from banks and insurance companies that are forced by law to publish their results.

“It is extremely important that we start publishing the results as the first step to transparency,” Mr Bharadia told a media briefing in Nairobi recently.

Mr Bharadia, whose investment bank’s turnover reached Sh22 billion in 2007 up from Sh2 billion in 2003 to emerge the top investment bank at the NSE, said such a move will enable investors to know how firms managing their investments were performing.