Recently the Kenyan Government began a drive to transform Nairobi County into a regional and potentially continental financial hub. This would mean that the city would be at par status with notable hubs such as London, Hong Kong, Dubai and New York. Although this initiative is ambitious and achievable, the journey to transform the city will not be easy because it requires a combination of factors to be at play. So what really must Kenya do in order to achieve such status?
In 1836, New York become America’s financial epicenter overtaking Philadelphia, which had the privilege of hosting the first charter bank and an established stock exchange. New York’s recognition as a major pipeline for commerce and trade propelled it to set up adequate and modern infrastructure, legislate and pass favorable international business policies and establish frameworks that support creativity and innovation to market the region as a global financial hub. Since then, New York’s towering global financial hub status has provided convenience and scalability to investors and multinational organizations. Picture this, a start-up interested in expanding operations in emerging markets can get research, advisory and clearing services, explore several financing and risk management options, consult on possible mergers and acquisitions and enjoy quick, effective and efficient cash transfer services all in one center. Liquidity, a critical factor in business, is a major selling point to investors and international financial hubs strive to assure potential investors that their markets have sufficient cash flows to meet their liquidity demands.
Whereas New York has captured the financial hub status in North America, other continents have established financial and leadership centers of excellence. Notably, London is considered the financial juggernaut of Europe while Hong Kong and Dubai represent Asia and Middle East respectively. Interestingly, these cities have managed to interlink their systems hence providing seamless services at affordable rates. For instance, an investor can easily transfer cash from Dubai to London within minutes or procure an asset in Hong Kong while in London without going through bureaucracies that are often present in some regions or countries.
Nairobi, in retrospect, has already established itself as a regional center for trade, technology and commerce. Its competitive edge lies in having a diverse and modern finance ecosystem, tech infrastructure and rich culture, which sets the pace for this development. In addition, with the presence of trading platforms, above-average banking systems, impressive infrastructure developments and a befitting geographical location, Nairobi has the foundation necessary to establish itself as a global financial hub. Through collaborative efforts between the Central Bank of Kenya, the Capital Markets Authority and other relevant regulatory bodies, the green city in the sun will undergo transformation through formulation and adoption of agreed and inclusive policies.
The Capital Markets Master plan, a document that outlines key performance indicators for the Capital Markets Authority (CMA), is currently under review after falling short of delivering key results. The document envisions a developed structure with emphasis on three pillars considered as the building blocks of the Capital Markets. These include: the support for developmental and economic transformation, the infrastructure of the market and the legal and environmental environment. With regard to supporting the developmental and economic transformation, the capital market regulator had the desire for Kenya to attain the Morgan Stanley Capital International (MSCI) Emerging market status hence attracting investors and international issuers seeking to invest in the region. This indicator would portray Kenya as having consistently improved its ease of doing business over the years, supported by higher ranking in World Bank ease of doing business report and thus stood to gain tremendously in both foreign and domestic investments being channeled and propelled into the market.
It is salient for the Capital Markets Authority to achieve its targets, failure to which will be detrimental to investor confidence in the region and daunting to transform the city into an international financial center. For instance, it was expected that the ratio of outstanding corporate bonds to GDP could reach 40% by 2023 from less than 1% in 2014. It was also anticipated that the ratio of equity market capitalization to GDP would attain the 70% mark in 2023 from 50% in 2014. Furthermore, the projected scaling of the Growth Enterprise Market segment to ensure at least 3 to 4 listings annually did not materialize. This was attributed to negative impacts from the Covid 19 pandemic both at the national and corporate level. This regrettably means is that potential investors have limited investment choices at the Nairobi Securities Exchange while existing investors have starved capital gains hence depicting a pessimistic picture regarding the worthiness of the market.
Through the flagship initiative under the blueprint Vision 2030, the Nairobi International Financial Centre Act 2017 was enacted to help address these challenges. The NIFA act envisions the following: the development and recommendation of strategies and incentive structures to attract firms to register as Nairobi International Financial Centre firms and to review and recommend developments of the legal and regulatory framework for the development of Nairobi as a financial center. These objectives will enable both domestic and foreign investors satisfy their need and demand for capital and liquidity.
On the other hand, the Central Bank of Kenya is seeking opportunities by establishing memoranda of understanding (MOU) that will forge deeper collaborations and partnerships with other central banks. The purpose of this is to create additional foreign currency reserves that will support trade and commerce. Foreign investors will have a pool of capital market instruments to invest in as a result of this collaborative efforts thereby creating an additional capital flow into the economy. The Central Bank of Kenya is also seeking opportunities for financial institutions and fintechs to offer new products that tackle global challenges such as climate changes and healthcare. The bank regulator is championing systems from financial institutions, which promote sophisticated yet simple products that are beneficial to the welfare of the society. Green financing for instance, is an initiative that involves the investment, banking (through lending) and insurance sectors in Kenya. Promotion of renewable energy causes by non-governmental organizations have also been supported by the CBK, making capital accessibility by such institutions easier. The efforts of these initiatives are aimed at promoting a healthier environment for Nairobi and this has a multiplier effect on the savings and investment patterns in the country.
As Nairobi strives to connect its systems to the global economy, the probability of certain emerging risks occurring increases exponentially. Money laundering has grown over the years as nations pursue economic prosperity and wealth generation. Resources obtained through illegal activities such as human and drug trafficking and corruption have been injected back to the economy through financing projects such as construction of real estate or purchase of equity/shares in companies listed in the securities exchange thereby concealing their origin. In addition, terrorism financing has captured the world’s attention as sporadic attacks in different cities around the world using sophisticated weapons raised questions as to who was sponsoring the illegal activity. Baring these risks in mind, the Government through its instruments and partnership with the private sector has upgraded its intelligence systems to capture irregular and suspicious financial flows. This initiative is part of Kenya’s commitment to the global call to stop and prevent money laundering and terror financing through sharing of information.
In conclusion, the discussion on the development of the Nairobi International Financial Centre have proved insightful and feasible. It is also commendable that the relevant regulatory authorities have expanded frameworks that will act as a guide towards this cause. Nevertheless, the abandonment of the special economic zones that were initially intended to encourage and spur economic growth make the idea of NIFC abstract. If these zones were developed earlier enough as planned, the materialization of the Nairobi International Financial Center would have been feasible however, the Kenyan government is stubbornly pushing for infrastructure development as legacy projects for the outgoing administration. What do you reckon on this? Do you suppose the government is truly committed to the NIFA agenda or will the idea just fade away when other pursuits and interests are found?
Very very informative
Very detailed article. Easy to tell that you enjoy writing about finance.