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How technology can revive the stock market and end the IPO drought
Monday 24 October 2022
President William Ruto at a panel discussion during the launch of the Nairobi Securities Exchange (NSE) Marketplace on October 11, 2022. PHOTO | DIANA NGILA | NMG
President William Ruto has announced plans to privatize up to 10 semi-public companies over the next year to generate revenue through capital markets.
As he spoke, the President looked back at the drought in initial public offerings (IPOs) on the Nairobi Securities Exchange (NSE) in recent years and listed some policy interventions the state would take.
These included the creation of a government investment promotion department, the issuance of a dollar-denominated bond, and a review of privatization legislation. These and other interventions will be deployed on the basis of a digital investment which, according to the President, would aim to empower young people and give them access to global markets.
On the one hand, the government has identified key factors that have hampered the churn of successful IPOs at the NSE since the government divested 25 percent of its stake in Safaricom 15 years ago.
These include the low participation of retail investors in the stock market and the general apathy of several institutions in both the private and public sectors, despite ticking all the necessary boxes.
These challenges have been central to the Nairobi Stock Exchange’s underperformance relative to other stock exchanges in comparable economies and have been a moving target for previous governments.
The latest statistics from the Capital Markets Authority (CMA) show that the five largest companies account for more than 75 percent of the value on the NSE. Market concentration has steadily increased over the past two decades, further alienating retail investors and other companies seeking a public listing.
This is despite repeated campaigns and efforts by the CMA and NSE, such as the creation of the Growth and Enterprise Segments (GEMs) 10 years ago.
Recent government action to revitalize the NSE therefore requires a more focused and sustained approach to ensure buy-in from both retail and institutional investors.
One of the quick wins is ensuring that the current digital platforms created to support private sector service delivery are mobile. This will encourage more Kenyans to register and participate.
A good example is M-Akiba, the mobile investment platform launched by the National Treasury and Central Bank of Kenya (CBK) a few years ago.
M-Akiba could be tweaked to meet much of the needs outlined by President Ruto last week, such as demystifying capital markets products and encouraging retail investor participation.
Several major platforms and government websites are not mobile-friendly, which has deterred investors who would have decided to participate.
Platforms like eCitizen and iTax have massively reduced the previous burden on Kenyans when searching for public documents.
One report estimated that by digitizing public services, the Kenyan government could save up to 30 billion shillings in compliance costs over four years.
However, these platforms are plagued by routine system crashes, with some government websites showing little or no optimization for mobile users. This is despite the fact that the mobile phone is the main device most Kenyans use to access the internet.
Future interventions to improve investor participation in capital markets should primarily focus on simplifying the customer journey and removing as many bottlenecks as possible.
Developers can also gamify some of the features to appeal to an increasingly digital-native audience. One of the reasons sports betting is so popular, and addictive for some, is the use of gamification by the many apps and websites that offer the service.
There are a few lessons to be learned from the success of investment apps like Robinhood in the United States, which have attracted more retail investors to participate in the capital markets, regardless of their financial savvy.
Countries like Estonia, with which Kenya signed a memorandum of understanding last year, have also shown how direct and consistent efforts to digitize government services can be transformative when done well and supported by citizenship.
The author is the managing director of the Maudhui House. E-mail: [email protected]
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