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Kenya: Broader Approach Needed in Tackling Nyaga Debacle
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Business Daily (Nairobi)
EDITORIAL
6 July 2008
Posted to the web 7 July 2008
It was expected to be a massive meltdown, but reports that investor claims against collapsed Nyaga Stockbrokers have hit Sh950 million has, to say the least, passed all expectations.
Besides revealing the extent of exposure of investors at the Nairobi Stock Exchange, this level of claims is historic in many aspects.
It is a stark reminder of just how recent surge in stock market enthusiasm has happened without the necessary legal and regulatory reforms needed to cushion investors against players with own agenda.
With the six month statutory period coming to an end on September 9, attention is naturally expected to shift to paying the claims made by the 70,000 investors.
The challenge here is that this latest collapse is threatening to disapprove the long held pride in the capital markets circles that no investor has ever suffered loss in the past as a result of improprieties by stockbrokers.
First, there is the challenge of raising the money to compensate investors. And then there is the challenge of dealing with perpetrators of this heinous crime that rolls down to regulators themselves.
While there is no legal obligation for statutory managers to compensate investors in full upon the collapse of a broker, failing to do so would be a big jolt on investor confidence in the market. The Capital Markets Act states that such persons shall be entitled to compensation of up to Sh50,000.
Higher stakes
Yet clearly, the stakes here are higher than the legal provisions.
It is a question of preserving investor confidence in a sector that for over four decades had stagnated with just an estimated 80,000 investors - a number that has since soared to over 1.5 million in the last five years.
The banking sector had its own epoch too. In the mid 1990s, thousands of banking clients suffered loss of their deposits in the hands of fraudulent and negligent managers, leading to collapse of a number of banks and the stepping in of depositors protection funds to sort out the mess.
The result was a general loss of confidence in the banking system and customer flight to the "bigger" banks that were considered better managed and less likely to go under.
Big knock
Banking as a concept also suffered a big knock, with most Kenyans shunning the players and opting to keep their money elsewhere - including under their mattresses.
As statutory managers rap their brains to figure out how and where to raise money to compensate the investors, they must not lose sight of the fact that investor confidence is the biggest pre-requisite for any capital market to thrive.
They must not be tempted to follow the letter of the law and pay out only the statutory limits, but must stretch further to ensure that no investor suffers loss from a crisis that is not of their own making.
Though CMA has, to its credit, instituted legal proceeding against Nyaga Stockbrokers management, our position is that interrogating the supervisory mandates of both the Nairobi Stock Exchange and the Capital Markets Authority must be part of this process.
Besides, we would urge caution in any decision made to raise the money to settle the claims. Already, a number of options such as approaching Treasury for a bailout are being floated.
While such a solution would go a long way to relieving investors of the pain of losing their hard earned money, this newspaper holds the position that it should not arise at all.
This is because it will set a precedent and set the stage for a moral hazard among brokers.
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The feeling that the State will always move in with big money to settle claims for a collapsed broker.
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