The capital market in Kenya is expected to grow exponentially with the launch of a new funds settlement system for equities and corporate bonds, a model that is deemed ideal to help deepen the country’s financial system.
The new model, an initiative of the Central Bank of Kenya (CBK), Central Depository and Settlement Corporation (CDSC) and the Capital Markets Authority (CMA), will see all transactions concluded on the Nairobi Securities Exchange (NSE) be done through CBK’s Real Time Gross Settlement (RTGS) system, a funds transfer mechanism used to transfer money from one bank to another on ‘real time’ and ‘gross’ basis.
The move of the cash settlement of securities from commercial banks to central bank money is part of the strategy towards modernization of the capital markets infrastructure and moves Kenya towards full compliance to recommendations of the Committee on Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) in working together to enhance coordination of standards and policy development and implementation, regarding clearing, settlement, and reporting arrangements including financial market infrastructures (FMIs) worldwide.
“Our plan is to advance leadership in digital finance this year,” noted Central Bank Governor Prof Njuguna Ndung’u. “The new settlement model will improve efficiency in the capital markets and it’s a step towards meeting the international standards of the markets.”
RTGS has replaced the Electronic Funds Transfer (EFT) over the years due to clients crying foul of the delays caused by EFT. EFTs are processed through the Automated Clearing House where they are bundled and forwarded to RTGS for settlement at a particular point in time in a business day. EFT settlement takes place once a day during the clearing house session at noon and payment is done after two days. Any transaction initiated after a designated settlement time would have to wait until the next designated settlement time. This has caused delays with players in the capital markets advocating for a more efficient way to settle the transactions.
“With RTGS, transactions are processed continuously throughout the RTGS business hours between 8.45 am to 4.30 pm,” said Kenya Association of Stockbrokers and Investment Banks (KASIB) Chairman Jimnah Mbaru. “Going forward, we need to diversify and regionalise the capital markets for it is very small.”
Coming at a time when Fortune Magazine listed Kenya among the seven countries around the globe recommended as the most attractive destinations due to political stability and sound macro-economic management, the model is expected to boost investors’ confidence.
“Investors will be looking at clearing and settlement efficiency and integrity of the capital market before investing in the country. We believe this system is a step closer to our ambition to transform the country into a regional and international financial centre as espoused in the Capital Market Master Plan and the Vision 2030 economic blueprint. It also moves Kenya towards full delivery-versus-payment (DVP), to ensure minimal risk is associated with securities trading through real-time settlement as well as being a necessary pre-condition for integrating Government bond settlement,” remarked Central Depository and Settlement Corporation Limited Chief Executive Mrs Rose Mambo.
