Open Response to the Draft CIS Regulations… They simply don’t address our Capital Markets challenges.
Let’s call a spade a spade… The draft Collective Investments Schemes, CIS, regulations proposed by CMA Management are not good for the market. I am surprised they were even released for public comments because they are worse than the current regulations. And frankly, the drafts raise a fundamental issue around management competence and familiarity with how effective capital markets ought to be structured and regulated. The Cabinet Secretary for Treasury, the Chair of Finance and Planning Committee of Parliament, and the Board of CMA needs to put CMA management to task for such an embarrassing piece of work. Here are my 9 reasons why these drafts ought to be thrown out:
1. CMA management is attempting to bypass parliament to expand the scope of its mandate to include Chamas and savings clubs by bringing any investments by two or more people with over Kshs. 1 million under its governance. Parliament never gave CMA mandate over Chamas and saving clubs, if they want expanded mandate they should go back to parliament and seek that mandate
2. It is not clear how the proposed regulations would address the key issue in the regulated markets today, which is the loss of regulated investor funds, currently estimated at over Kshs. 200 billion. How would these regulations for example have protected the Chase Bond, Imperial Bond or Nakumatt Commercial Paper investors? …you can’t just dump on the public 120 pages of proposed regulations for comments without first telling people what you are trying to cure for
3. The regulations do not seem to speak, at all, to the Big Four agenda. The President’s Housing Agenda has totally been ignored, yet the key issue in Housing is lack of capital markets funding
4. The regulations do not deal with the critical issues of detailed disclosures of portfolio contents, investors ought to know exactly where their funds are invested to avoid situations where Money Market Fund investors discovered their funds were invested in Nakumatt Commercial Paper without their knowledge
5. Limiting Alternative Investments Funds such as an Infrastructure Fund to 20 individuals is just bizarre. Surely which roads, bridges or ports can be built by funding from 20 individuals?
6. In a country where the median household income is just Kshs. 50k how can you have a minimum investment of Kshs. 1 million for a sector fund? Minimums for sector funds range around Kshs. 40K to 110k in global markets. Unless the goal here is to exclude Kenyans from capital markets, why have such crazy minimums?
7. They want to regulate Private Equity Funds and outlaw private offers, what a crazy idea. Every developed capital market has private / exempt offers complementing regulated / public offers. Private markets are essential to well-functioning capital markets. Private markets have brought us great brands and experiences such as Goodlife, Kukito, Java, Equity Bank, Shell, Qwetu, Telkom, The Alma, etc. CMA should stop meddling in private markets but instead focus on developing the already struggling public markets, if they are not willing to work constructively with private markets
8. The regulations did not address how we shall improve capital markets funding for businesses. In well-functioning markets, businesses rely on banks for only 40% of their funding and the balance of 60% comes from capital markets. However, in Kenya banks account for 99% of business funding with only 1% from capital markets, that is why funding for entrepreneurs is hard to get and if accessed its expensive. It’s not clear how the regulations are remedying this market anomaly that is burdening Kenyans. We need vibrant capital markets competing with banking markets so that Kenyans have a choice
9. Requiring that all Commercial Paper has to be rated by a rating agency is too heavy handed for an emerging market. Unrated Commercial Paper has funded businesses such as Car and General, ASL Credit, KK Security, Nakumatt, Watu Credit, etc. Unless CMA management has a vested interest in rating agencies, they should not mandate rating, but rather require full and clear disclosure of portfolio contents and the rating status of each security and let investors decide. This requirement would burden small businesses with over USD. 20,000 per rating. AIG was rated Triple A, did that protect investors? Let investors decide how they want to invest.
In conclusion, these draft regulations are not good for our markets and should be tossed out and we start afresh, by first clearly defining the problem we are trying to address. It is time market players come up with a list of key issues and directly engage with the Finance and Planning Committee, the Board of CMA and the CS Treasury so that we can transform our capital markets to be responsive to investors and funding businesses.
Edwin H. Dande
Capital Markets Roundtable for Kenya, “CMR Kenya”
For comments or to join the conversation, email: