Power Play Between Treasury and CBK Delays EABX Launch

Power Play Between Treasury and CBK Delays EABX Launch

Kenya’s financial landscape is witnessing a fascinating tug-of-war between the Treasury and the Central Bank of Kenya (CBK) regarding the future of bond trading.

At the center of this dispute is the newly emerging East African Bond Exchange (EABX), which aims to introduce an “over-the-counter” (OTC) market for bond trading—potentially reshaping how bonds are bought and sold in Kenya.

What is an OTC Market?

An OTC market is essentially an alternative to traditional exchanges, such as the Nairobi Securities Exchange (NSE). Unlike centralized platforms where trades occur in a structured environment, OTC trading happens directly between buyers and sellers, allowing for more flexible, negotiated deals.

Despite the informal nature of the transactions, all trades are recorded electronically to maintain transparency. This model contrasts with the traditional exchange environment, where processes are more rigid and centralized.

Benefits of the OTC Market in Kenya

The introduction of an OTC market for bonds in Kenya holds several advantages, including:

Increased Accessibility

OTC markets can be more inclusive, allowing smaller investors who may find it difficult to meet the requirements of a formal exchange to participate. This opens up new opportunities for a wider range of participants.

Greater Flexibility

The negotiable nature of OTC trades allows for customized pricing and deal structuring that can better meet the needs of individual investors, providing more flexibility than traditional platforms.

Enhanced Liquidity

By introducing an alternative venue for trading bonds, the EABX could help improve market liquidity, making it easier for investors to buy and sell securities. This increased activity could boost confidence in the market.

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Market Development

A new OTC market can foster greater development of the Kenyan capital markets, contributing to a more diverse and sophisticated financial ecosystem. This could lead to a more resilient market in the long run.

The Role of EABX in Kenya’s Financial Future

Behind this exciting initiative is the EABX PLC, supported by the Kenya Bankers Association (KBA) and FSD Africa. The KBA, with its 47 member institutions, serves as the anchor shareholder, leveraging its deep knowledge of the Kenyan financial sector to guide the platform’s development.

The EABX is modeled after the successful model seen in Nigeria, where the Nigeria Stock Exchange operates alongside the FMDQ Group, an OTC bond trading platform. This dual structure has proven effective, offering investors more options and improving liquidity in the market.

Tensions Between Treasury and CBK

The EABX secured its operating license from the Capital Markets Authority in February 2023, marking a key milestone in the push to create an alternative for bond trading beyond the NSE.

The Treasury has strongly backed the EABX, citing a 2009 agreement that advocated for the creation of a self-regulating body for the fixed income market. This agreement, which aims for greater transparency and efficiency, signals the Treasury’s interest in modernizing the bond market.

However, the CBK has raised concerns about the potential risks of a dual-platform system. The central bank’s primary worry is that the existence of two competing platforms could lead to dual pricing, resulting in market confusion and instability.

The CBK also fears that such fragmentation could disrupt the yield curve, a critical indicator of market sentiment. As the regulator responsible for ensuring financial stability, the CBK’s caution in the face of this new market structure is understandable.

Structural Issues in Kenya’s Bond Market

This tension also points to deeper structural issues within Kenya’s bond market. Proposed legislative changes that would shift the responsibility for government securities issuance from the CBK to the Treasury’s Public Debt Management Office (PDMO) have only intensified the debate.

These proposed changes could shift the balance of power between the Treasury and the CBK, with far-reaching consequences for how the debt market is managed.

Promoters of the EABX, including commercial banks, believe that the new platform will inject much-needed liquidity into the bond market.

They envision a more dynamic trading environment, where traders have direct access to each other, facilitating more efficient price discovery.

These benefits are compelling, and many view the EABX as a crucial step in improving the Kenyan bond market.

But the CBK’s concerns remain valid. The risk of dual pricing and potential disruptions to the yield curve could harm smaller investors and erode market integrity.

As the key authority overseeing Kenya’s financial stability, the CBK is responsible for ensuring that these risks are carefully managed.

Bond Market Turnover and New Developments

Adding to the complexity is the recent fluctuation in bond market turnover. While bond turnover showed impressive year-on-year growth—doubling in the second quarter of 2023 to 323.6 billion shillings (about $2.51 billion)—it also experienced a 29% drop from the previous quarter.

This dip highlights the need for greater consistency in market activity, which the OTC platform aims to address.

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Moreover, in September 2023, President William Ruto launched the DhowCSD, a new online bond trading platform, as part of Kenya’s broader push to modernize the financial system.

This platform, together with the EABX’s OTC market, represents a powerful step toward stimulating bond trading in the country.

The Future of Kenya’s Bond Market: A Double-Edged Sword?

As the debate over the future of bond trading in Kenya continues, the central question remains: will the emergence of a parallel bond market benefit investors or create unforeseen risks?

Will it foster competition, lower prices, and provide greater access, or will it create a fragmented market, leading to volatility and undermining investor confidence?

The resolution of this power struggle will shape the future of Kenya’s bond market, and its impact on investors will likely depend on how well both the Treasury and CBK can balance innovation with stability.

Kenya’s bond market is at a pivotal juncture, with the introduction of new platforms like the EABX and DhowCSD offering exciting possibilities.

However, the ongoing tug-of-war between key players in the market highlights the challenges in balancing financial innovation with the need for stability and transparency. As this conflict plays out, the future of bond trading in Kenya will be one to watch closely.

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