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06 - 13 September 2006 
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Finance and Banking


East Africa C.M.As: How Effective Are They?

Most investors in the East Africa stock exchanges know that the Capital Market Authority in their country will protect them and provide a level field for every player in the stock market. What is not apparent to them is that there exist fundamental flaws and loop hole in the market rules. These rules don’t conform to the International stocks market standards and the investors stand a risk of losing their investment through unscrupulous market players who can easily use these loopholes to their advantage.

The metroic rise of the East African cables company share price from Ksh. 13.65 in January to an all-time high of Ksh. 614 has raised many questions to the effectiveness of the Kenya’s Capital Market Authority (CMA) in regulating the stock market. Inspite of the ongoing probe, a proposed share split has been approved and the shares in question are scheduled to split at a ratio of 1:10. This is seen as rather not approving but simply rubberstamping of the original proposal by the cables company.

According to the current rules, stock price manipulation is not a criminal offence. As much as the price may have been over-valued by investors who expect the share price to rise after the split and thus increased demand, there is still a large window of speculation that there could have been manipulation by the principle actors. According to the consultant, Mr. Richard Pratt, the Nairobi Stock Exchange (NSE) rules do not empower the bourse to conduct investigations into players’ malpractices and they could easily influence stock prices. There is therefore need to amend these rules to reprimand such vices. 

Consequently, the risk of malpractice is eminent in Tanzania and Uganda as it is in Kenya. Although characterized by low levels of operation with less than ten companies listed in both, proper stock market regulations and investor protection cannot be disregarded. Further more, with the increased possibility of stock markets integration, the East Africans countries stock markets need to be in harmony in their rules and regulations. 

In addition, the capital market regulators in East Africa – Capital Market Authority (Kenya), Capital Market Authority (Uganda) and Tanzania Capital Market and Securities Authority - have applied to join the International Organization of Securities Commissions (Iosco) by 2010. Iosco is an international commission that brings together regulators with the objective of enforcing capital market laws and regulations as well as stamping out cross border financial crimes.  

For the East Africa’s CMAs to qualify as members of Iosco they will have to review their regulations and ensure that market players do not engage in illegal trading practices such as price manipulation. The CMAs have thus initiated a comprehensive review of the market rules as they warm up to join the commission.

As much as the regulators seek to improve the stock market operations to avoid investors losing their stockpile, the investors should as well protect themselves first. Evidently, many investors have little information about a number of key issues about the operations of the stock market. They come in during bull markets and then don't know what to do when things go sour later on. 

However, investors need not to worry as simple understanding of how the East African markets operate will quickly transform anyone into a stocks veteran. One should not make any investment decision based solely upon what they read and hear in the local media or from grape vines. There are no guarantees that the information is accurate or the advice is sound. A proper analysis from an investment analyst or a professional such as personal banker will improve an investors familiarity in the company he’s about to invest in. Also understanding basic stock market information such as the share price, traded volume, price-earning ratio and the dividend yield will be quite helpful.

As we wait for the market regulators to review their regulations and register with Iosco in 2010, let’s take precaution early enough to avoid burning our fingers in the end. Knowing what to do when the market, a particular stock, or the relationship with a broker goes bad is essential for investors’ survival in the stock market. There is no "insurance" for stock market losses and only understanding how the markets operate will be our indemnity against foul play in the stock market.

An appropriate legal framework is therefore an absolute necessity for East African capital markets to be attractive to investors. Tenable rules and regulations are at the very root of efficient, orderly operation of our capital markets as they foster investors’ confidence and help mobilise unproductive savings. The application of these rules needs to be monitored by market regulators that have sufficient authority and resources.

By Kevin Mwanza
Mr. Mwanza is an African Executive Staff Writer

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