Stock exchange boosted from repeal of rate cap

By Steve Umidha

The removal of a cap on commercial lending rates is expected to spur stocks trading at Kenya’s Nairobi Securities Exchange (NSE), with the move further poised to lift valuations as well as new listings at the bourse.

The government removed the cap last November, fuelling a rally in bank shares that helped the market finish the year as one of the best performers on the continent.

“Banks are now free to lend at the rates they desire and so investors are likely to look at equity as an alternative to raise capital to run their businesses,” said NSE Chief Executive Geoffrey Odundo, adding that in an interview with Reuters that investors would potentially shift from fixed-income into stocks, boosting valuations and prospects for new listings.

Kenya’s President Uhuru Kenyatta signed into law the Finance Bill 2019 after the bid to remove a cap on commercial lending rates was passed in Parliament following a quorum hitch, potentially boosting the flow of credit to the economy and return of expensive credit.

The removal of the cap had at the time stoked fears that banks could return the lending rates that prevailed ahead of introduction of the law that restricted bank loan charges.

In the amendments to the rate cap legislation, legislators shielded existing loans from higher interest rates once the cap is repealed, meaning that only new loans will be affected by the high interest rates set to follow.

Valuations dropped to historically low levels, with price to earnings ratios falling below 10, but they have since recovered to just above 10 due to the rally in bank shares.

The exchange – an entry point for foreign investors seeking exposure to East Africa’s fast-growing economies, and the continent’s fifth biggest overall – has seen the number of companies it lists remain at about 65 for many years. Those companies are currently worth a combined 2.5 trillion shillings ($24.6 billion).

It launched an incubator programme in December 2018 to prepare young firms for eventual listing or bond issuance.

A derivatives market, which the NSE launched last July, was also off to a promising start, Odundo said, having traded 390 contracts worth more than 25 million shillings so far.

The NSE, which issued a profit warning for last year, expects an improved performance this year, mainly due to new products, including its first green bond, and an investment of 200 million shillings in trading infrastructure.