The Nairobi Securities Exchange is in the process of demutualization. In fact, efforts to demutualize have been going on since 2005. A study carried out by the Financial Services Advisory arm of KPMG titled “NSE Demutualization Study” lists demutualization as a trend in the world and that demutualization would solve many of the problems that the NSE faces.
First things first, what is demutualization? This is the process whereby our privately owned NSE, owned by stock brokers and dealers and other suited men and women, will itself convert into a public limited company and itself be listed on the stock exchange. Why? To separate the ownership and the management of the Nairobi Securities Exchange. Is there a need to separate the management and the ownership of the Nairobi Securities Exchange? Well, yes. The brokers who conduct trading on the exchange on behalf of you and I are the very same people who currently own the exchange. A conflict of interest can arise very easily in such a system. The NSE is not mandated to publish information on its corporate governance the study continues. They do not have to tell us who runs the stock exchange; how do we know that they are running the exchange prudently and in line with the world’s best practices? We don’t. That is precisely why demutualization seems like a good idea.
The study correctly outlines the perception of low standards of corporate governance, lack of competitiveness in the NSE’s offerings and conflict of interest as a few challenges that the NSE currently faces. As we have mentioned above, the NSE currently does not have to publish information on its corporate governance. We’re pretty much in the dark concerning who owns and runs the NSE, though they do try to be open, with directors’ information available on their website. As it is, the NSE is not in a position to offer more complex financial products such as derivatives. A derivative is a financial asset that derives its value from another asset. Say, for example, that the Kenya shilling weakens (you need more Kenya shillings to get one dollar), the derivative may cushion you from the weakened shilling in the event that you had previously agreed to buy dollars at that future date (after the shilling had weakened). The conflict of interest between the ownership and the management of the NSE has already been addressed above.
Will demutualisation really make that much of a difference and herald an era of change and innovation and expanded services? Stay tuned to Pesatalk for more insights!