NSE's new plan to woo middle class

The Nairobi Securities Exchange is targeting a growing middle class in Kenya with a new investment vehicle to be introduced in the fourth quarter of this year.

Plans to launch the Exchange Traded Funds (ETFs) segment are at an advanced stage in a bid to deepen the capital markets, where less than 4 per cent of Kenyans are active participants.

An ETF is a collective investment scheme (CIS), which is managed on behalf of investors by professional fund managers. These managers purchase a wide range of assets such as shares, bonds, commodities, derivatives or a combination of real assets whose price movement is in harmony with the price movement of underlying securities or commodities. They are traded on a securities exchange and may track an index, a commodity or a sector.

PERFORMANCE
“An ETF represents investment in a portfolio of securities. Hence, the performance of the ETF will be directly affected by the performance of its constituent securities.

In other words, an ETF tracking an index would be affected by the performance of the index,” said Mr Geoffrey Odundo, the Nairobi Securities Exchange (NSE) chief executive officer.

The value of ETF securities rise and fall according the market changes, just like the existing market where company shares, government and corporate bonds are traded.
As with most investment vehicles, the investor’s capital is not protected in an ETF. Depending on market movements or performance during the investment period, an investor is not guaranteed to get back their initial capital upon the sale of the ETF, Mr Odundo noted.

“The ETFs will trade as a segment within the NSE and will not require a separate exchange. Prior to approving NSE to list ETFs, it is a requirement, under the Policy Guidance Note, that it develops both listing and trading ETFs specific rules,” Capital Markets Authority said.
TRADING RULES

The markets regulator said the NSE has already submitted ETFs trading rules for review. The Central Depository and Settlement Corporation (CDSC) is also expected to submit for review ETFs clearing rules any time from now.

Mr Odundo said the growth in collective investment schemes and particularly ETFs is pegged on the growing middle class, increasing incomes and savings, growing number of new listings (equities and bonds) on the bourse and active issuance of ETFs by local financial market players.

Its success is also dependent on allowing foreign issuers of ETFs locally (based on assets unavailable to the Kenyan investors such as soft commodities — for instance coffee, sugar, corn, wheat and fruit — indices on major markets) and investor education.

Last week, the CMA released guidelines for the roll-out of ETFs in Kenya. The rules, which are now open to the public for scrutiny prior to the establishment of the exchange, precede the crafting of regulations to oversee this investment platform.

“Introduction of an ETF market in Kenya will offer investors an alternative option to invest in a pool of securities or other assets in a formal securities exchange environment.

“Additionally, ETFs offer a mechanism for reducing exposure to significant price fluctuations that sometimes characterise arbitrary buying and selling of securities,” acting CMA chief executive Paul Muthaura said.