Commodities Exchange and Risk Mitigation:
Options for Raising Capital
A presentation by
Mr. Jimnah Mbaru
Chairman, Nairobi Stock Exchange
Chairman, Dyer & Blair Investment Bank
17 October 2007
STRUCTURE OF PRESENTATION
1. Introduction
2. Structure of Nairobi Stock Exchange
3. NSE Performance
4. Drivers of NSE
5. Role of Commodities Exchange
6. Options for Raising Capital
7. Conclusion
8. Q&A
(NSE)
STRUCTURE OF THE NAIROBI STOCK EXCHANGE
(NSE)
•
•
•
•
•
Established in 1954 as an overseas stock
exchange through the London Stock Exchange
NSE 20-share index established in 1966 & was
managed by Dyer and Blair Ltd.
Regulated by the Capital Markets Authority
(CMA), which was established in 1989
Primary (IPOS) & Secondary (Trading) markets
Part of the African Securities Exchange
Association (ASEA), which aims to:
 Establish systematic corporation,
 Enhance sharing of information
 Development of harmonized market standards.
STRUCTURE OF THE NSE Cont’d
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•
•
•
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•
74 government bonds
53 listed companies
6 corporate bonds
7 Licensed Investment Banks
11 Licensed Stockbrokers
Market trading done through:
 1954 – 1991:
 1991 – Aug 2006:
 Since Sept 2006 :
Callover System
Open Outcry System
Automated Trading System
• Shares are traded in lots of 100
NSE Market Performance
(A) Equities Primary Market (Kshs Million)
Year
Amount
Raised
Rights Issue
Private Sector
Privatization/IP
O
1992
496.10
-
358.00
1993
62.48
-
62.48
1994
2,600.04
61.90
2,138.14
400.00
1995
124.00
-
102.00
22.00
1996
5,108.00
1,200.00
66.00
3,842.00
1997
1,944.60
1,500.00
276.6
168.00
1998
1,800.00
-
1,800.00
1999
-
-
-
2000
997.63
619.63
378.00
2001
1,155.00
30.00
1,125.00
2002
331.21
-
331.21
2003
-
-
-
2004
2,450.00
2,450.00
-
2005
2,011.00
2,011.00
-
2006
15,225.00
776.00
Sept 2007
3,080
1,319.55
13,129.45
800.00
2,280.00
NSE Market Performance
B) Equities Secondary Market
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Turnover
(Kshs Bn)
3.08
3.33
3.9
6.15
4.58
5.15
3.63
3.09
2.92
15.25
22.3
36.5
95
57.6
Volume
(Mn)
43
62
114
144
112
101
142
115
149
381
625
847
1,455
1,139
Market Cap.
(Kshs Bn)
137
105.5
98.9
114.3
129
107
101.4
86.1
112
318
306
463
792
739
NSE Index
4,559
3,468
3,114
3,115
2,962
2,303
1,913
1,355
1,363
2,738
2,95
3,97
5,646
5,069
Liquidity (%)
2.76
3.43
3.85
5.73
3.74
5.12
3.71
2.9
3.6
8.52
7.3
7.9
12
13
20
00
20
01
20
02
20
03
20
04
20
05
20
0
M 6
ar
-0
Ap 7
r-0
M 7
ay
-0
Ju 7
n0
Ju 7
l-0
Au 7
gSe 07
p07
NSE Index Movement (2000-2007)
NSE Index 2000-2007
6000
5000
4000
3000
2000
1000
0
NSE Performance
(C) Bonds Primary/Secondary Market
Bonds Issued/Trades (Kshs Bn)
Primary
Secondary
1996
0.86
0.86
1997
38.6
11.5
1998
47.3
8.22
1999
47.4
6.92
2000
25.1
5.88
2001
72.5
14.1
2002
71.2
33.6
2003
76.4
42.0
2004
91.4
34.1
2005
74.4
13.6
2006
76.7
48.6
2007
66.3
68.0
(A) Drivers of NSE: The Economy
 Vision 2030 geared towards growth
GDP Growth
1st Qtr
2007
Expected
Growth
2006
2005
2004
2003
2002
2001
2000
1999
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
(B) Drivers of NSE: Economic Monetary Cycle
(C) Drivers of NSE - Technology Effects
800.0000
600.0000
400.0000
200.0000
Open Outcry
1991- Switch from
Callover
ATS SetUp
CDS Activation
0.0000
Year
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
% Liquidity
1,000.0000
De
c
De -91
cDe 9 2
c
De -93
cDe 9 4
c
De -95
c
De -96
c
De -97
c
De -98
c
De -99
c
De -00
c
De -01
c
De -02
c
De -03
c
De -04
c
De -05
c
Au -06
g07
Capitalization
(KES Billion)
Market Capitalization and liquidity 1991-2007
(D) Drivers of NSE – Low Interest Rates
•Low stable interest rates
•Low cost of funding hence high corporate profitability
n-
0
Ju 1
l-0
Ja 1
n0
Ju 2
l-0
Ja 2
n0
Ju 3
l-0
Ja 3
n0
Ju 4
l-0
Ja 4
n0
Ju 5
l-0
Ja 5
n0
Ju 6
l-0
Ja 6
n0
Ju 7
l-0
7
18.000
16.000
14.000
12.000
10.000
8.000
6.000
4.000
2.000
-
Ja
% Interest Rates
Interest Rates 2001 -2007
Explanation to the low interest rates
Kshs Billion
Government Revenue and Deficit 2001-2006
800
700
600
500
400
300
200
100
0
1999
2000
2001
Domestic Debt Kshs
2002
2003
2004
GOVT REVENUE
•Deficit financing through privatization
2005
Deficit
2006
(E) Other Factors influencing NSE Performance
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Increased corporate profitability
Increased foreign exchange earnings – FDI
Diaspora remittances estimated at Kshs
75Bn per annum ($1.2Bn)
Increase in amounts held by institutions e.g.
pension funds assets of Kshs 224Bn
Increase in investment vehicles – unit
trusts, mutual funds assets of 20Bn
Increase in market participants to over
750,000 investors
– KENGEN
Role of Commodities Exchange
Facilitates offsetting commodity transactions without
impacting on physical goods until the expiry of a
contract
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Offers
– Price transparency
– Effective price discovery
– Efficient risk management
•
Types
– Commodities Futures Exchange
– Spot Exchange
•
Market players
– Producers, processors, warehouses
– Buyers, speculators
– Government, marketing agencies, banks
Benefits to;
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Farmers
– Price discovery
– Warehousing services
– Warehouse receipts as collateral for loans
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Traders
– Access to bigger markets
– Elimination of counterparty risks through guarantees
– Better pricing because of high number of participants
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Exporters
– Quality products through a secured platform
– Elimination of physical market procurement problems
– Elimination of procurement agents fees
Benefits to;
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End Users
– Ability to buy direct at competitive prices
– Operational comfort - easy to access information
– The exchange I s a single window system for
procurement of various materials
•
The Exchange
– Fair transparent prices for settlement of contracts
– Arbitrage opportunities for investors
– Long-term investors can buy physical commodities
stored at warehouses and take advantage of offseason price rises
Challenges for Multiple Commodities Exchange in
Kenya (MCE)
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Commodities controlled by Boards - heavily
regulated
Many small-scale producers- challenge on
stability of client base
In an environment of struggling institutions –
cooperatives
– Inefficiencies and mismanagement
– Internal bureaucracies on elective posts and
decision making process
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Conservative approach
Partial liberalization of some commodities
sectors (coffee)
Options for Raising Capital (Players)
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Private Equity/Capital
– Private equity fund
– Syndicated
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Initial public offer - IPO
• Demutualized commodities exchange
– Nairobi Stock Exchange (NSE)
– Over The Counter (OTC)
• Listing Requirements
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Corporate bonds
– Plain vanilla bonds
Options for Raising Capital (Players)
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Securitization
– Commodities receipts backed bonds
– Fees receivables backed bonds
Syndicated loans
– backed by physical commodities (Coffee
exchange practice)
Role Of Government In Setting Up The Exchange
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One-off grant to start (Kshs 1 billion)
Reforms in the producer sector
Exchange income tax exempt until
demutualized
Provide warehousing (Subsidized)
Plan a regulatory body for commodities
Conclusion
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Possible to raise funds through NSE
Reforms essential for successful MCE in
Kenya
MCE way forward
Government cooperation and support
essential
Q&A
THANK YOU
10th Floor, Loita House, Loita Street
P.O. Box 45396-00100 Nairobi, Kenya
Tel: +254-2-3240000
Fax: +254-20-3240114
Website: www.dyerandblair.com