Why Kenya is yet to attain global financial hub status

Kenya’s quest to become an international financial hub has suffered a setback after the Capital Markets Authority (CMA) failed to achieve key performance indicators.

The authority cited the Covid-19 pandemic, waning investor confidence in the capital markets and low uptake of investment products and limited listings on the Nairobi Securities Exchange for the failure.

Attaining an international financial hub status would have increased the country’s capacity to attract multi-million dollar foreign inflows by 2023.

Last week, the market regulator said it has engaged the services of a consultant with the support of Financial Sector Deepening (FSD) Africa to review the 10-year Capital Market Master Plan (2014-2023), after it emerged that 46 per cent of key performance targets will not be achieved within the next two years.

“Covid-19 related effects are likely to affect related targets such as market capitalisation to gross domestic product, target savings rate, and bond and equities turnovers to GDP. This could require rebasing,” CMA’s chief executive Wycliffe Shamiah told The EastAfrican in an interview last week.

The project seeks to establish Nairobi as a well-functioning financial hub by accelerating economic growth, and consolidate Kenya as a leading financial centre in East and Central Africa.

CMA had hoped to achieve an MSCI Emerging Market status for Kenya by 2020, and by 2023 to transform the country into the choice market for domestic, regional and international issuers and investors looking to invest in and realise their investments in the region and across central Africa.

Failure to achieve key capital markets growth indicators makes the transformation into a financial centre by the year 2023 an uphill task. The failed targets include growing the ratio of equity market capitalisation to GDP to 70 per cent in 2023 from 50 per cent in 2014, increasing equity market capitalisation to $84 billion, and reforming the Growth Enterprise Markets Segment (GEMS) to ensure at least three to four listings annually.

CMA had also hoped that the ratio of outstanding corporate bonds to GDP could reach 40 percent by 2023 from the current less than one per cent, and that the value of outstanding exchange-traded derivative contracts would get to $200 billion by 2023.

The percentage of infrastructure investment financed through capital markets was also expected to increase to 80 per cent from 18 per cent in 2014.

Mr Shamiah noted that although a 54 per cent completion rate of the master plan deliverables has been achieved over the past six years, significant challenges have been experienced including disruptions by the Covid-19 pandemic.

Key achievements during this period include setting up a Financial Law Review Panel, admission of Nairobi to the Global Financial Centre Index ranking of financial centres published by the Z/Yen Group, a new Central Depository System with the capability of inter-depository linkages.

In addition, Kenya was dropped from the Financial Action Task Force grey list based on substantial progress on legislative and institutional structures to combat anti-money laundering and counter terrorism financing.

To become an International Financial Centre, Kenya needs an attractive business environment with access to experienced and qualified staff, a legal and regulatory regime that gives confidence to investors, a critical mass of financial and professional services firms and a network of connections with other financial centres.

In December 2016, the Cabinet approved the Nairobi International Financial Centre Bill, which seeks to provide a framework to facilitate and support the development of an efficient and globally competitive financial services sector through the establishment of the Nairobi International Financial Centre and the Nairobi International Financial Centre Authority.

The Nairobi International Financial Centre Bill, 2016 which was signed into law by President Uhuru Kenyatta in 2017 provides the functions and roles of the Authority that will manage the centre.

The Tax Justice Network Africa through a 2016 report says that financial centres do not operate in isolation and therefore require relative political stability, robust investments in infrastructure, predictable and fair tax systems, or efficient dispute resolution mechanisms.