Trading Bonds in East Africa
The bond markets in the EAC Partner States, Kenya, Tanzania, Uganda and Rwanda are small and thin. There are few listings in the primary market and the turnover in the secondary market is insignificant. There are several reasons behind this and many of the more significant ones are not related to the model for trading, clearing and settling of bonds, but instead related to lack of some fundamental business drivers which is the foundation of any market.
The following issues are considered to be preventing development of the bond markets:
- Highly liquid banks creating a disincentive to issue bonds
Banks in East Africa, bearing a dominant position in the financial market, have little or no incentive to encourage corporations to issue bonds. Neither do they see any need to develop a more widely distributed investor segments. Current business with deposits from the retail segment, building over-liquidity that can be lent directly to the corporate segment is profitable. Increased competition in this segment will most likely over time force the players to increase the service level towards both issuers and investors.
- Corporations not prepared to meet information disclosure requirements
The number of corporations with the financial and organisational procedures in place to disclose appropriate and required information to the market on a regular basis is limited. The situation is better in Kenya but coming from a barter economy, the steps to fulfil the requirements set up by professional investors and executed through legislation and rules by market organisers are many. The ease with which funding can be raised through bank borrowing does not create the incentives to go to the market.
- Investor concentration, lacking institutional inventors (pension funds/mutual funds)
The institutional investor segment needs to be developed in especially Tanzania and Uganda where there also is a potential to further develop the pension system. Without a diversified investor segment, with diverting risk and placement preferences, all participants in the market will apply a “follow the herd” behaviour. The prevailing investor behaviour among professional investors is to buy and hold the security which is creating a vicious circle for the secondary market of any security.
- Understanding of fixed income markets
The knowledge of fixed income instrument and markets are limited and fragmented among market participants, which is hampering the development. The banks, trading government securities have an advantage over the brokerage firms. However some brokers in Kenya have chosen to take a special interest in fixed income markets and by that achieved a position in the segment. Similar initiatives would be beneficial for the development of the bonds markets in Uganda and Tanzania as well.