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Stockbroking firm must not be allowed to fall

Tuesday February 09 2010

NGENYE KARIUKI STOCKB-rokers, which has just been put under statutory management by the authorities, must not be allowed to collapse. The dent to public confidence in a market that is yet to recover from protracted bearish conditions could be severe.

I was encouraged by what the Capital Markets Authority (CMA) said as it announced the decision to put Ngenye Kariuki under statutory management. The regulator made it clear that the mandate to the statutory manager was to revive the stockbrokerage.

After all, compared to the brokers which have recently collapsed, the net insolvency amount in Ngenye Kariuki is much lower.

That the company was facing difficulties was an open secret in the market. It has been surviving on the precarious benevolence of the CMA which has been willing to indulge its shareholders, giving them adequate time and space to put their house in order.

Early as April last year, there were reports that CMA had given the company the time and space to discuss the possibility of selling out to a consortium led by Tsavo Securities.

When that deal fell through, there were reports that the shareholders were negotiating to sell to Equatorial Investment Bank.

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It was not until November, and after the collapse of discussions with this second suitor, that CMA moved to suspend the stockbroker from trading in the Nairobi Stock Exchange.

On the face of it, one can argue that the regulator did not act fast enough on the broker. CMA should have moved the moment it saw the signs of distress, the argument goes.

But from the standpoint of the ordinary investors and account holders who had deposits with Ngenye Kariuki, the gradual approach the CMA has taken was appropriate.

It is this nuanced approach that provided the window to the small savers to move their accounts to other brokers before the statutory manager moved in.

We must remember that the principal purpose of regulating capital markets is to protect the interests of the small and unsophisticated investor.

These days, small savers start closing their accounts the moment they hear that the brokerage house has been given an extended licence by CMA.

Right now, there is a strong rumour in the market that another stockbroker is in trouble and may be suspended from trading.

THE LATEST I HAVE GATHERED, However, is that the said broker is in negotiation with a finance house with very deep pockets for a possible buy-out. How I hope this deal comes through! I shudder at the prospect of the collapse of another stockbroker.

I argued in this column that the government needs to come up with a new strategy of addressing the issue of widespread distress in stockbroking firms and investment banks.

The health of a capital market can only be as good as the health of its intermediaries. If you have too many sick intermediaries, you will not have an efficient market.

On paper, a good number of stockbrokers are well-capitalised. But where is the business to sustain them? Just take a look at the turnover numbers for 2007 and compare them with the present trends.

Brokers are earning peanuts in fees from equities, the bedrock of our capital markets. Why aren’t we debating about a government bail-out? In the US, the government responded to widespread distress among intermediaries by pouring in billions into Wall Street.

If we can bail out Uchumi and Pan Paper, why not respond in the same manner to cure widespread distress in capital market intermediaries?

It is not as if what I am talking about has not been done in this country before. Faced with widespread distress in the banking sector in 1989, the government moved in to stabilise the market and to restore public confidence by taking over the assets and liabilities of nine distressed commercial banks.

The nine banks were merged to create the Consolidated Bank of Kenya came.

Strengthening regulation by requiring owners to put in more capital and limiting the shares an individual can own is not a bad idea. But the type of intervention I propose is of a political nature, and therefore way beyond the mandate of the regulator.

If we don’t cure widespread distress in capital markets intermediaries, the bearish conditions on the Nairobi Stock Exchange will not end soon.

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