ScanGroup's Dividend Cheques

ScanGroup, East Africa's leading advertising agency, has been mailing its dividend cheques for the 2007 financial year over the last seven days or so. Atached to the cheques is the announcement that ScanGroup has entered into an agreement with Equity Bank (where ScanGroup operated its dividend account) to allow shareholders to encash, free of any bank charges, dividend cheques "of value less than or equal to ten thousand Kenya shillings (10,000.00/-)."



Encashment is allowed at any branch of Equity Bank, Kenya's biggest bank in terms of customer accounts.



Many of ScanGroup's shareholders are, of course, small retail investors, each with only the 300 shares which were allocated during the IPO. So their cheques are a very small fraction of the said maximum. Still, it is a kind thought from both ScanGroup and Equity Bank.



Shareholders with any dividend-related queries are advised to contact Comp-rite Kenya Limited at Tel: (20) 2212-030; or at this Email address: shares@comp-rite.com

Safaricom IPO

The Safaricom IPO closed on 23rd April 2008, at 3.00 p.m. Initial indications are that the offer will be oversubscribed by at least 200%. This means that the percentage of the offer allocated to foreign investors will drop from the initial 35% to 20% -- that is, 20% of the 25% issued shares that was floated. It also suggests that the 10 billion shares on offer at Kshs. 5/- (or roughly $0.08) per share were far from sufficient to soak up the current, and growing, appetite for good shares at the NSE.

So, if 10 billion shares couldn't do it, how many billions more would have? If the Safaricom IPO couldn't do it, which IPO will? It is not likely that the companies likely to float in the next year or so will be able to match Safaricom. In the pipeline are, among others: Co-op Bank, NSE itself, Nakumatt, Trans-Century and Dyer and Blair.

There is something about the percentage of the Safaricom IPO reserved for foreign investors which just does not make sense, or sound mindful of the local retail investor. Vodafone, a London-based foreign company, already holds (together, and probably corruptly, with the mysterious Mobitelea) 40% of Safaricom. So why reserve another 8.75% to foreign investors! This is not the path to the kind of popular capitalism which Thatcher herself championed (for British nationals) two or so decades ago, and which makes so much sense even in a globalizing world.

I am pleased, however, that Kenyan retail investors voted with their wallets (and common sense) in favour of participation in the IPO and against the call by some misguided politicians who sought to discourage them -- and even threaten them with some vaguely-hinted-at administrative retribution in the future.

We were warned that oversubscription, such as appears to have come to pass, would be dealt with on a pro-rata basis -- with each subscriber in the oversubscribed investor category assured only the first 100 shares. But our opinion was not sought -- and not heard. Many in Nairobi's brokerage and regulatory community have argued, with little or no guilt-conscience, the merits of the pro-rata approach -- and the perceived demerits of the KenGen approach. The truth of the matter is that pro-rata is a code word for favouring the rich; for putting the ordinary investor in his/her place away from the high table. And yet it is the millions of ordinary, pre-paid, bamba/sambaza customers who have made Safaricom what it has become [I understand that 99% of Safaricom's subscribers are pre-paid].

Since the minimum number of shares an investor was allowed to apply for was 2000, common sense suggests that the pro-rata mechanism should be effected only after the minimum number of 2000 shares has been allocated across the board -- even if that initial allocation exhausts the 10 billion shares available. If it is not possible initially to allocate 2000 shares to each applicant due to the oversubscription, then a smaller number will do -- even if nothing remains for the pro-rata phase.

ICDCI Share Split

Kenya's ICDCI (Industrial and Commercial Development Corporation Investments) recently issued a share split in the ratio of 10 new ordinary shares for each ordinary share held. The additional shares have now been posted in shareholders' CDS accounts. The issuance of share certificates to those without CDS accounts will certainly take a while longer.

A 10:1 share split means that the number of shares that one holds is multiplied by the number of times the share is split. So, if a shareholder had 1 share, now he/she has 10. This is different from a bonus situation. In a 10:1 bonus, a shareholder with 1 share would end up with 11.

January Blues at the NSE

We are probably just now beginning to see a glimmer of hope that the January blues at the NSE are coming to an end. The bear-hug is at last loosening.

Two main explanations have been given for the dramatic decline in the NSE index in the last few weeks. One, that this is the usual January down-slide, following the extravagance of the end-of-year holidays and compounded by January's school-fees obligations. Two, that, besides, investors are holding on to their money in readiness for the expected series of IPOs in 2007. This second explanation is not all that persuasive.

A more persuasive second explanation seems to be the "Stanbic-Bank-Uganda-Effect." Clearly, the Stanbic Bank Uganda IPO swept a lot of liquid cash off the table. Most retail investors did not receive a refund -- having been fully allotted the number of shares they had applied for -- and so did not have the wherewithal to invest in other counters in January. Even more money was 'vacuumed" away by Mumias Sugar and Diamond Trust. Moreover, the continued low price of Stanbic bank Uganda (low in terms of Kshs) probably lured substantial cash to USE in January, to the chagrin of NSE mandarins. Who ever heard of the shares of the largest bank in a country selling at Kshs. 7.00 or less -- and that after a rise in market value of nearly 300% immediately following the IPO!

There are indications that savvy investors, with deep pockets, have continued to buy on the cheap, quietly, as the market has slid. These perhaps include the very same mandarins. And it has recently been noted that many of those who were allotted the full 109,500 shares of Stanbic -- and there seems to have been many more of these than first appeared -- went back to the market in January for more (for their corporate entities, if not for themselves individually, or both).

With time, all this mopping up of cheap supply has had the effect of slowing the index slide. And as end-of-January salaries and other income have become available to the retail investor, the makings of a new bull-run can begin to be discerned.

Milestone: First Day of Trading in Stanbic Bank Uganda Shares.

Reports indicate that the recently floated Stanbic Bank Uganda performed basically as expected on 25th January 2007, the first day of trading at the Uganda Securities Exchange (USE). The stock opened at Ushs 140 and closed at Ushs 205 (or Kshs 7.00) per share. That's not too far from three times the price at which it had been offered during the recent IPO, namely Ushs 70.00 (or Kshs 2.85). The likely future trend may be discerned when trading continues at the USE next week on Monday, Wednesday and Thursday.

In the meantime, you should visit your broker this coming week to pick your Stanbic certificate. If you had applied for more that 109,500 shares, a refund cheque is also waiting for you. CFC's Stockbroking Division in Nairobi is a case in point where certificates and cheques were already being released as of Friday 26th.

The Stanbic Bank Uganda IPO and the Lessons to be Learnt From It

By Mauri Yambo

Stanbic Bank Uganda has announced the results of its recent IPO, which ran from Friday, November 24th to Friday, December 22nd 2006. The IPO was part of the larger move by the bank to list all of its 5,118,866,970 issued shares on the Main Investment Market Segment of the Uganda Securities Exchange (USE) in Kampala.

A total of 37,449 investors applied for the equivalent of 3 billion shares. However, only 1,023,773,394 shares, representing 20% of the issued share capital, were involved in the IPO. These were offered at 70 Uganda Shillings (UShs) per share, the equivalent of Kenya Shillings (KShs) 2.85 or 4 US cents. The IPO thus attracted a 200% over-subscription. Out of the 37,449 applicants, there were 15,488 Ugandan individuals and 407 Ugandan institutions. There were, in addition, 20,091 non-Ugandan individual investors and 1,463 non-Ugandan institutions.

The prospectus had indicated that the objective of the Stanbic listing was, broadly, “the economic empowerment of the Ugandan public,” and more specifically the promotion of “share ownership particularly among the people of Uganda.” Preference was clearly going to be given to individual Ugandan investors. Not surprisingly, each Ugandan individual (some 15,452 individuals in total) who had applied for up to 2,150,000 shares has been allotted all the shares applied for. The remaining 36 individuals, who had applied for more, have also be allotted 2,150,000 shares each.

The other three categories of investors have been lumped together and each applicant has been allotted the shares applied for, up to a maximum of 109,500 shares. It seems that employees of Stanbic Bank Uganda have been treated along the same lines, even though the prospectus had reserved for them 1% of the offered shares – some 51,118,670 shares in all.

While Ugandan individuals bid for shares worth UShs 41.1 billion, non-Ugandan individuals applied for shares worth UShs 56.1 billion. And while Ugandan institutions applied for shares valued at UShs 30.7 billion, their non-Ugandan counterparts applied for shares worth a total of UShs 82.3 billion.

The allotment formula has ensured that the 10% shareholding which the Ugandan government was disposing of through the IPO has shifted into the hands of individual Ugandans. That did not happen by chance but by government design; but was ultimately made possible by the fact that enough individual Ugandans applied for the requisite number of shares. Thus, only the 10% offered by the Standard Bank Group of South Africa has been allowed to pass into the hands of the other three categories of applicants, including Ugandan institutions.

It is a distinct possibility that Ugandan institutions would have been used to keep “within Uganda” any portion of the 10% offloaded by the government which individuals might have failed to mop up. As it turned out, however, their participation has kept even more of the entire 20% on offer within Uganda – at least for now. Secondary market dynamics might significantly change this initial picture, and should not be interfered with by any authority. In any case, such interference cannot go on for long with impunity.

Available evidence suggests that most individual investors in Kenya had applied for between 1,000 and 10,000 shares. This means that each will receive all the shares applied for. For the first time since the KenGen IPO last year, there will be no refund cheque for such investors to queue for. They will still have to queue, though – for their share certificates. It is not clear how many Kenyan individuals applied for 109,500 shares or more, but the number is probably significantly greater than the 36 reported for Uganda. One suspects that most individual Ugandan applicants were also in the category of 1,000 to 10,000 shares. However, the next such offer might witness many hitherto small but determined investors bidding for up to a 30,000- to 50,000-share ceiling. This is how the East African securities market is going to grow – one interesting step at a time.

Stanbic Bank Uganda is refunding some UShs 140bn – the equivalent of KShs 5.7bn or US$ 81.5 million – to big institutional and individual applicants within and outside Uganda. That refund happens to be larger than the amount which the Kenyan government has just received from its disposal of 91,999,220 shares in Mumias Sugar Company, at KShs 49.50 per share. A large chunk of the Stanbic refund most likely is on its way back to Kenya, there to await the next IPO or to be endorsed to investment banks and brokers for the purchase of more Stanbic shares when Stanbic’s admission to the Official List of the USE takes effect on Thursday, 25th January, 2007 – the very same date when secondary market trading in the shares is scheduled to commences at the USE.

Those shares are likely to be trading at UShs 210 (KShs 9/-) or higher within a few days or weeks. And if that happens, at least 36 individual Ugandans will be “instantly” richer by US$ 184,550. But the other investors will not be doing badly themselves – in terms of their initial investments, if not relatively speaking.

A number of lessons will be learnt from, or reinforced by, the Stanbic IPO, which (incidentally inspired by the KenGen IPO) has emphatically set a new regional standard for offloading state-owned assets to the investing public. This is a standard very likely to be replicated in future Ugandan and Tanzanian IPOs – perhaps even more stringently in Tanzania.

The first lesson is that while the rich do get richer, the poor and the not so rich can also get richer! They can be visibly enabled to grow their own liquid assets even from very humble beginnings, and to be materially better off. When the ship sets sail, they can be on the ship – not forlornly waving at the water’s edge. Consequently, it must be government policy that the benefits of price discovery at the stock market quite deliberately accrue to individual investors in general – and to the small investor in particular and in full. Governments should not be in the business of making companies rich at the expense of the people. In large IPOs, therefore, an allocation formula which reserves a portion to institutional or big investors and thus necessitates refunds to small investors should be classified as an intentional economic crime.

Second, and related to the first, state-owned assets being disposed of through IPOs should in the first instance be offered to individual citizens. This does not lock out other investors. They should be at liberty to buy the shares when post-IPO trading begins at the stock exchange; and thus to be active, but not the only, participants in price discovery. In any case, IPOs are hardly large enough to satisfy the volume needs of institutional investors, and yet are small enough for them collectively, if permitted, to lock out small investors – long-term! This is true considering that while small investors do not typically hold on to their shares for long – unrelenting pressures on the household economy do not allow them to do so – large and institutional investors do!

Third, private sector firms should nevertheless have a free hand in designing their IPOs in order to protect their interests. Clearly, however, common sense must prevail here – as has happened in the Stanbic IPO, and in the Scangroup, Equity and Eveready IPOs before that. The interests of their various stakeholders, and the stock market as a whole, must also be taken into account.

Fourth, the book-building approach, successfully resisted by public opinion during the KenGen IPO, should never be allowed.

Fifth, in stock-market investing, there are many rules-of-thumb we should know, but these five are worth stating here: (a) the early bird catches the worm, (b) the long-term investor tends to recoup his/her short-term losses or costs, and to thrive, (c) your gains are in proportion to the risks you are willing and able to take, (d) the long-term security of investments comes not from owning shares in one or two companies, however solid, but in wide diversification; that is, in building a progressively larger portfolio, and (e) treat your portfolio with the same care and attention as the ardent pastoralist treats his or her livestock, and you will realize the same compounding effect.

Sixth, while we say, “THREE CHEERS TO UGANDA!”, it has not escaped attention that the biggest beneficiaries of IPOs continue to be the initial shareholders who remain with the largest chunk of a company after small investors and others have made it possible to discover its true value per share. In the Stanbic case, the IPO involved only 20% of all issued shares; but the market value of the other 80% will now be known, though it remains squarely in the hands of Stanbic Africa Holdings Limited, a subsidiary of Standard Bank Group based in South Africa. From this angle, the 20% offer looks pretty miserly – even usurious. Future IPOs should be placed at the 30% to 40% range.

Finally, the ordinary Kenyan investor in Stanbic will now have to learn to track his/her investment not simply in terms of market price, trading volume and P/E but also in terms of the foreign exchange implications of investing abroad. In a globalizing world, this is an aspect of learning that will come none-too-soon, and will be of great benefit in the long run. Indeed, Ugandan and Tanzanian investors, not to mention Somalis and Ethiopians and perhaps Rwandese and Congolese, already involved in the Nairobi Stock Exchange are generally farther up the learning curve than Kenyans in this respect. However, catching up should not be hard to do for Kenyans at home – who have hitherto been more insular.

NSE: Listed Company Announcements, 2007

Announcements From 1st January 2007 to 31st March 2007:

1. REA VIPINGO: First and Final Dividend of KShs 0.80 per ordinary share, announced on 8th January 2007. Closure of members’ register on 26th March 2007. Payment on 15th June 2007.

2. CMC: First and Final Dividend of KShs 2.30 per ordinary share, announced on 12th January 2007. Closure of members’ register on 31st January 2007. Payment on or about 5th March 2007.

3. CMC: Share Split in the ratio of 10 ordinary shares for every 1 ordinary share held, announced on 12th January 2007. Closure of members’ register on 26th February 2007. Posting date not yet announced.

4. UNGA GROUP: Half-year results for the period July to December 2006 announced on 26th January 2007. No interim dividend recommended despite an improved half-year. Profit per share – after tax and minority interests (held by Seaboard Corporation and Nampak Holdings Limited), but before appropriations – stood at Kshs 1.08 during the period, a 21.3% improvement compared to the Kshs 0.89 profit per share recorded for the same period the previous year. There were total of 63,090,728 issued ordinary shares (with a par value of Kshs 5.00 each) during the period.

5. KENOL: First and Final Dividend of KShs 2.25 per ordinary share, announced on 29th January 2007. Closure of members’ register, from 4.30 p.m. on 30th March to 13th April 2007. Payment of dividend on or about 23rd April 2007. Net profit after tax for the year ended 30th September 2006 was 6.6% lower than for the previous year.

6. CAR & GENERAL: Final Dividend of KShs 0.67 per ordinary share, announced on 31st January 2007. Books close on 23rd February 2007. Payment date, 28th March 2007.

7. MUMIAS SUGAR COMPANY: Interim Dividend of KShs 0.50 per ordinary share, representing 25% of the par value of an ordinary share, announced on 9th February 2007. For the same period the previous year, the Interim Dividend stood at KShs 0.75 per ordinary share. Books close at 4.30 p.m. on 9th March 2007 and remain closed up to and including 16th March 2007. Payment date, 9th April 2007.

8. EQUITY BANK: First and Final Dividend of KShs 2.00 per ordinary share for the year 2006, announced on 13th February 2007. Books close on 5th April 2007. Payment date, 20th April 2007. Year 2006 saw Equity Bank welcome its 1 millionth customer, compared to 155,000 customers in the year 2002. Customer deposits stood at KShs 16,337 million in 2006 (approximately US$235.2 million), compared to KShs 1,581 million in 2002. Profit before tax stood at KShs 1,103 million (approximately US$15.9 million) in 2006, compared to KShs 111 million in 2002. Shareholders’ funds rose from KShs 334 million in 2002 to KShs 2,201 million in 2006.

9. EQUITY BANK: Bonus Issue of 2 ordinary shares for each ordinary share held, announced on 13th February 2007. This will raise the number of issued ordinary shares from the current 90,564,550 to 271,693,650, each with a par value of KShs 5.00. Just last year, before its IPO, Equity Bank had a 10:1 share split. Book closure date related to the Bonus Issue is subject to CMA approval. The Bonus Shares do not qualify recipients for the First and Final Dividends just declared for the year 2006. In any case, CMA is likely to approve the Bonus Issue only after 5th April 2007, following, as expected, members’ approval of the Board’s recommendation at the bank’s Annual General Meeting (AGM). The AGM, only the third in the bank’s history, will be held at Kenyatta International Conference Centre, Nairobi, on 30th March 2007, starting at 10.00 a.m.

10. BAMBURI CEMENT LIMITED: Final Dividend for year 2006 of KShs 1.50 per ordinary share, representing 30% of the par value of one ordinary share, announced on 13th February 2007. Books close at 4.30 p.m. on 30th May and remain closed on 31st May 2007. Payment date for this Final Dividend, on or about 14th June 2007. The company’s 56th Annual General Meeting will be held at Nyali Beach Hotel in Mombasa on Wednesday 30th May 2007, starting at 3.00 p.m. The annual report will have been dispatched to shareholders from 30th April 2007. [Note: A First Interim Dividend of KShs 2.00 per ordinary share (40% of par value) was paid on 13th April 2006. A Second Interim Dividend, also of KShs 2.00 per ordinary share, was paid on 20th September 2006]. Total dividend payout for year 2006 thus adds up to 110% of par value (compared to 106% in 2005). In cash terms, total dividend payout in 2006 amounts to KShs 1,997 million, or approximately US$28,9000,000.00 (compared to KShs 1,923 million in 2005).

11. BAMBURI CEMENT LIMITED: First Interim Dividend for year 2007 of KShs 2.00 per ordinary share, representing 40% of the par value of one ordinary share, announced on 13th February 2007. Books close at 4.30 p.m. on 14th March and remain closed on 15th March 2007. Payment date for this First Interim Dividend, on or about 28th March 2007.

12. STANDARD GROUP LIMITED: Following CMA and NSE approval, Standard Group’s 65 million ordinary shares (par value KShs 5.00, or US$0.07) migrated at the opening bell on 13th February 2007 to the Main Investment Market Segment of the Nairobi Stock Exchange (MIMS), from the Alternative Investment Market Segment (AIMS). The company, owner of The Standard newspaper and Kenya Television Network (KTN), had been relegated to AIMS in 2002 after the introduction of new eligibility criteria for MIMS listing. These criteria are: (a) net assets worth a minimum of KShs 100 million (US$1.44 million); (b) share capital of at least KShs 50 million (US$720,000); (c) public shareholding accounting for at least 25% of issued ordinary shares; (d) at least 1,000 shareholders; and (e) profit recorded in at least three of the preceding five years. Standard Group is now among the companies listed in the Commercial and Services Sector of MIMS. This sector includes: Car & General, CMC Holdings, Hutchings Biemer (which is reportedly preparing to delist from the NSE), Kenya Airways, Marshalls (E.A), Nation Media Group, Scangroup (which had an IPO in the latter half of 2006), TPS Eastern Africa and Uchumi Supermarkets (in suspension since early June 2006).

13. SAMEER AFRICA LIMITED (Formerly FIRESTONE EAST AFRICA): Audited results for the year ended 31st December 2006 released on 15th February 2007. The report blames an “increasingly unfriendly business environment for manufacturing in Kenya” for its poor performance. Right-sizing and restructuring, following the termination of association with Firestone, led to non-recurrent expenses of over KShs 200 million in 2006. As a consequence, turnover fell from KShs 3.36 billion in 2005 to KShs 3.17 million in 2006. In stead of a profit after tax of KShs 204.7 million in 2005, there was a loss of KShs 22.3 million in 2006. Basic and diluted earnings per share fell from KShs 0.74 in 2005 to KShs -0.08 in 2006. The Board of Directors does not recommend the payment of a dividend for the year 2006. The company’s 38th AGM will be held at the company’s premises, off Mombasa Road in Nairobi, on Thursday, 29th March 2007, from 11.00 a.m. The notice for the AGM will be dispatched together with the Annual Report and Financial Statements around 5th March 2007.

NSE: Listed Company Announcements, 2006

Announcements From 27th September 2006 to 28th December 2006:

1. KENGEN: Final Dividend of KShs 0.55 per ordinary share, announced on 27th September 2006. Closure of members’ register on 17th November 2006. Payment on 1st February 2007.

2. KENYA POWER AND LIGHTING: Final Dividend of KShs1.50 per ordinary share, announced on 29th September 2006. Closure of members’ register on 2nd November 2006. Payment date not yet announced.

3. ICDC Investments: Final Dividend of KShs 4.00 per ordinary share, announced on 19th October 2006. Closure of members’ register on 4th January 2007. Payment on 22nd January 2007.

4. ICDC Investments: Share Split in the ratio of 10 ordinary shares for each share held, announced on 19th October 2006. Closure of members’ register on 4th January 2007. Posting date: 19th January 2007.

5. STANDARD GROUP: Bonus Issue in the ratio of one ordinary share for every 8 held, announced on 31st October 2006. Closure of members’ register: date not yet announced. CMA approval still awaited.

6. BOC KENYA: Final Dividend of KShs 4.25 per ordinary share, announced on 2nd November 2006. Closure of members’ register on 19th January 2007. Payment on 9th February 2007.

7. CITY TRUST: Final Dividend of KShs 3.10 per ordinary share, announced on 6th November 2006. Closure of members’ register on 5th December 2006. Payment on 12th January 2007.

8. DIAMOND TRUST BANK KENYA: Rights Issue in the ratio of one new ordinary share for every 8 held, at KShs 50.00 per share, announced on 20th November 2006. Commencement of trading in rights at the NSE: 27th November 2006. Last date for renunciation of rights by way of private transfer: 4th December 2006. Last date for trading in rights: 7th December 2006. Last date for acceptance and payment for the new shares: 19th December 2006. Announcement of Rights Issue results, update of members’ register and electronic crediting of CDS accounts with the new shares: 27th December 2006. Commencement of trading of the newly issued shares at the NSE: 29th December 2006. Printing of share certificates and notification of CDS account holders of acceptance/allotment: 3rd January 2007. Dispatch of share certificates for the new shares, where there are no CDS accounts, and printing of refund cheques: 4th January 2007. Dispatch of refund cheques, where applicable: 10th January 2007.

9. MUMIAS SUGAR: Offer for sale of 91,999,220 existing ordinary shares of par value Kshs 2.00 each held by the Government of Kenya at KShs 49.50 per share, announced on around 20th November 2006.Opening date of offer: Monday, 4th December 2006. Closing date of offer: Monday, 18th December 2006. This was subsequently extended by a week. Announcement date: Friday, 19th January 2007. Refund processing, electronic crediting of CDS accounts, dispatch of share certificates where there are no CDS accounts: beginning Friday, 19th January 2007. Commencement of trading of Offer Shares at the NSE: 10.00 a.m. on Tuesday, 30th January 2007.

10. SASINI TEA & COFFEE: Bonus Issue in the ratio of one ordinary share for every 5 held, announced on 18th December 2006. Closure of members’ register on 14th February 2007. Posting date not yet announced.

11. SASINI TEA & COFFEE: Share Split in the ratio of 5 ordinary shares for every 1 held, announced on 18th December 2006. Closure of members’ register on 14th February 2007. Posting date not yet announced.

12. EVEREADY EAST AFRICA: Final Dividend of KShs 0.60 per ordinary share, announced on 21st December 2006. Closure of members’ register on 11th February 2007. Payment on 30th March 2007.

13. NATION MEDIA GROUP: Special Interim Dividend of KShs 5.00 per ordinary share, which is equivalent to the par value of one ordinary share, announced on 28th December 2006. Closure of members’ register 5th January 2007. Payment on 31st January 2007.

Commentary: IPOs and Kenyan Politicians

Kenyan politicians must root for the small investor. It is in their best interest. There are now over 500,000 such investors. By election time later this year, their number will probably have reached 750,000, particularly with the expected Safaricom IPO. Most of these are young Kenyans, and there is a growing number of women among them -- who refuse to be left behind. Their recent involvement in the stock market will be one potent reason for them to vote one way or another at the next general elections. They will at last have something very tangible to protect, something directly and personally beneficial to them. That’s a lot of votes to lose, for those who rub them the wrong way!

The small investor is a very determined and perceptive lot. Determined because the poverty line gives them nightmares, and they are driven to stay above it – well above. Perceptive in that they have discovered two things. First, that a well managed stock market offers them the most promising opportunity for asset-building, on a scale which no politician has offered them since the heyday (some decades ago now) of land-buying groups; and for staying above the poverty line despite neglect by politicians. And they know that group land-buying, part of the old ethnicity, was essentially a kitchen cabinet project which politicians in many parts of the country did not have the motivation to emulate or counter -- and no discernible inclination to match for the benefit of their own constituents, as opposed to their own personal gain!

Second, that there is real “magic of compounding” in the stock market which politicians, themselves a perceptive lot, have all along known about and quietly enjoyed but which, left to their own devices, would rather not share with wananchi. We say: Keep this gate open! Share the planet!

It is one thing to fault the 2006 IPOs on the grounds that, starting with the “book building”scam attempted during the KenGen IPO, efforts were made to favour institutional investors (and some efforts succeeded, particularly in subsequent IPOs); or to query the mystery and illegal 5% holding by a third party in Safaricom; or to take measures to ensure that CMA and NSE do not “even think about it” in 2007 and beyond. But it is quite another and dangerous thing to make blanket statements of intention to repossess for the state, presumably by executive order or through a parliamentary vote, the shares which investors bought in 2006. Repossess and then do what? This would clearly be a case of repossess and dispossess. Dispossess for whose benefit?

In an election year, in which the margin of victory is unlikely to be larger than that witnessed during the 2005 referendum, it is highly risky and probably political suicide to make 750,000 individual investors highly nervous about the future of their hard-won, and now compounded, assets; or about the future of IPOs in general. Individual (or “small-holder”) shareholding is beginning to acquire the characteristics and passions of a new ethnicity, politician beware. It is a passion, indeed, that is sweeping the whole world – including the ex-communist states of China and Russia.

NSE Chairman's Statement on the Growth of Kenya's Stock Market

By Mr. Jimnah Mbaru

In the recent past, there have been political statements reported in the media questioning the source of the phenomenal growth of the Nairobi Stock Exchange (NSE) in the past three years.

These statements are misleading and do not reflect the economic and other dynamics that underpin the growth of the Nairobi stock market and the rest of the Kenyan economy.

The stock market and its index are the mirror of what is happening in the rest of the economy. In the past three years, Kenya has achieved substantial economic recovery, recording a growth rate of 5.8 percent and the growth rate this year is expected to be much higher. During the same period, share prices have appreciated to the extent that the NSE market index has increased from around 2,000 to over 5,500 points.

The factors driving the economy include renewed business confidence by domestic and regional investors, resulting from improvements in the domestic and regional environment. The international investors have also been attracted by the good rating of Kenya by Standard and Poor’s, the internationally acclaimed rating agency. Standard and Poor’s has rated Kenya’s foreign debt as investment grade B+, and domestic debt as BB-, which means that foreign pension funds can confidently invest in Kenyan equities and bonds.

The funds being invested in the stock market are a product of improved surplus incomes and prospects of economic recovery and rehabilitation of infrastructure such as roads, airports, water and railways to facilitate intra and regional trade.

Specifically, the main sources of funds for investment in shares and stocks include:

1) Increased individual domestic savings arising from increased incomes from the milk sector, sugar, maize and horticulture, among others. We must also bear in mind that many parents are no longer paying school fees for primary school education since the government implemented Free Primary Education, hence, their disposable incomes are higher.

2) Expansion in the size of funds held by pension funds following reforms that have been carried out by the Retirement Benefits Authority (RBA) since 1998. Previously, most pension funds were overweight in property investments and underweight in equities. Many of these pension funds are rebalancing their portfolios in line with RBA’s regulations, hence, their push into equities market. It should be noted that the size of the pension funds in now in excess of KShs 200 billion and continues to grow annually.

3) Increased in investments in securities by the National Social Security Fund (NSSF) as it tries to balance its portfolio as per the RBA guidelines. NSSF holds over KShs 50 billion mostly in real estate and Treasury bonds

4) Increased insurance premiums as the sector has become more aggressive in marketing innovative life assurance products such as funeral policies, travel insurance, education plans and mortgage protection policies among others. Insurance companies have also expanded with the neighbouring countries and continue to tap new premiums.

5) Increased retained earnings by the corporate sector following improved profitability. This is evident from the many companies that have achieved substantial recovery after years of depressed growth including Kenya Airways, Kenya Commercial Bank, Barclays Bank of Kenya, East African Cables and Mumias Sugar Company, just to mention a few.

6) Increased profitability of small and micro enterprises due to improved market conditions including competition and greater transparency in the award of government tenders.

7) Rapid growth in mutual funds and unit trusts, giving small investors an opportunity to invest their small savings in large, profitable firms. Some of these mutual funds include Old Mutual and British American unit trusts. Currently, these unit trusts hold over KShs 10 billion.

8) Substantial remittances by Kenyans in the Diaspora, who are remitting back to Kenya an estimated US$ 750 million – US$ 1 billion (KShs 50-75 billion) annually through Western Union and commercial banks. Most of these funds find their way into the stock market and the real estate, among others.

9) Increased inflows from international investors, including speculators, dedicated emerging market funds and hedge funds. Presently, international investors contribute about 15 percent of the stock market turnover. Most of these funds are remitted to Kenya through commercial banks who act as custodians for these investors. The Central Bank of Kenya keeps track of where these funds are coming from.

10) Availability of low interest rate and unsecured personal loans to individual investors and similar business loans to small and medium enterprises. The impact of this lending was demonstrated during the recent KenGen primary share issue.

11) First time investors in the stock market. The KenGen issue, for example, attracted 240,000 investors, of which majority were first time participants in the equities market. These new investors include the youth and students who are at home with financial assets, as well as trading on the internet.

These sources of funds have not just developed by accident. They have expanded because of the attractiveness of the Kenyan economy due to economic recovery arising from better macro-economic management, which is demonstrated by low fiscal budget deficit, low inflation, low interest rates and a competitive exchange rate. The Kenya Revenue Authority has also increased its tax collections from about KShs 200 billion in 2003 to KShs 375 billion in 2006. This increased tax revenue has contributed to less borrowing by Government from the money market, hence, the low interest rate environment.

Investors have also been attracted by the substantial profit growth of the companies listed on the Stock Exchange, which have benefited from the improved economic environment, expansion of regional markets and better business prospects in new markets such Rwanda, Eastern DR Congo and Southern Sudan. Indeed, the substantial price rise of shares of firms such as Kenya Airways, East African Breweries, Kenya Commercial Bank, East African Cables, Mumias Sugar Company and Bamburi Cement Company, among others, has been as a result of increased domestic and regional business growth.

The growth of the stock market has also benefited from a considerable shift in the business strategy of individual and institutional investors. There is a shift from less liquid assets like plots and land to more liquid investments such as equities, Treasury bills and bonds, both Treasury and Corporate.

The NSE has made its contribution in increasing investor confidence by modernizing its infrastructure. In 2004, it launched the Central Depository and Settlement Corporation (CDSC), which has significantly improved the settlement cycle. In 2006, the NSE installed the Automated Trading System (ATS), which was recently launched by H.E. President Mwai Kibaki. The ATS has eliminated inefficiencies in allocation of shares and delays in transfer of shares, hence, better price discovery on the stock market.

The dynamics being experienced by the NSE are not unique to the Kenyan economy. Other sectors of the economy including tourism, housing, agriculture and exports have experienced higher growth and future prospects remain high. Assets in these sectors have seen tremendous increase in prices and values.

As the economy continues to expand, and as the Government continues to privatize its parastatals through the NSE, the new investors both from Kenya and the Diaspora continue to patronize our market. This will lead to a deeper capital market which will enable profitable companies and Government to raise funds cheaply. Investors will also have a good opportunity to diversify their portfolios.

The NSE will continue to play its role to assist Kenya achieve its Vision 2030. I call upon all well wishers to join us and be partners on this journey to greater prosperity.





JIMNAH MBARU
CHAIRMAN
NAIROBI STOCK EXCHANGE
21st November, 2006