Questions have been raised on Capital Markets Authority (CMA) role as an independent regulator of as it is emerging that some executives and board members are using their position at the regulator to strangle entities competing with their interests.
Since 2015, the authority has been under James Ndegwa as the chairman. Unknown to many, James Ndegwa is the chairman of the former NIC Bank, which recently merged with CBA to form the NCBA Bank, meaning he is a market player with products competing with those of other entities he is supposed to regulate.
In fact, some stakeholders have intimated to KahawaTungu that the authority, as currently instituted, is nothing more than a gate-keeper for the banking sector, more like a Banking Markets Authority.
James Ndegwa is affiliated to three money markets funds – ICEA money market fund, NCBA money market fund, and Stanlib money market fund so questions are being asked how is to help regulate the sector when he is issuing directives which are meant to favour his associates.
“So banks control both the board of CMA and the trusteeships of CMA, leaving management as merely puppets to protect banking interests,” says a source who sought anonymity.
Currently, CIC Money Market Fund is the largest in the country valued at Ksh23.4 billion assets under management.
CMA rules require that only a bank can be a trustee but has gone ahead and selected five banks as trustees which include KCB, Cooperative Bank, Stanbic, National Bank and HF Bank. What this means is that fund managers have to get approval from these trustees as to how their funds are managed, and it is likely that some rogue trustees favour investments back into the banking sector.
Experts argue that once these money markets funds go back to the banks, it has two dire consequences to the economy.
First, the businesses must rely on banks for all their funding needs.
According to World Bank data, in a developed economy, businesses rely on banks for only 40 per cent of their funding, the balance of 60 per cent comes from the capital markets sector. However, in Kenya, businesses have to rely on banks for 95 per cent of their funding because banks have constrained the capital markets function.
Secondly, savers have to depend primarily on bank controlled products for their interest savings, which is usually lower compared to if they had open access to capital markets products.
On Friday, November 20, 2019, CMA top officials held a meeting and wrote letters to some players just before Christmas asking them to change trustees by the New Year or cease trading in unit trusts; fully knowing that the period between Christmas and New Years was impossible to onboard a new trustee.
“The plot to was to edge some players out the market,” reveals a source at the Capital Markets Authority.
Among those targeted included Cytonn Asset Managers, which had been barred from onboarding of new clients starting this month if the firm is unable to secure a new trustee to manage the fund.
Cytonn Asset Managers had appointed Co-operative Bank as the trustee but the bank resigned in August 2019, barely a year into the deal.
Co-operative Bank has its own money market fund, Co-op Investment Ltd, but it is thought that CMA could have pressurised the lender to bolt out. At that time, Cytonn bore the highest return to investors.
The directive was however overturned by the High Court on New Year’s eve.
As if the bank’s capture of CMA is not enough, CMA is now extending its ambit by asking private equity and private debt players, which are not under CMA by any statute, that they must register with the CMA.
In the Kenyan market, there is an intense and serious conflict of interests in our capital markets; CMA regulations restrict the eligibility of a Trustee as a bank and indeed only five banks are authorised as Trustees.
This is despite the fact that banks are competitors in the money markets through Fixed Deposit products they issue and or Money Market Funds managed by Fund Managers affiliated to the bank.
In the current arrangement, an aggrieved money market fund has nowhere to go for redress.
The authority is said to be sitting on a proposal that would open up eligibility for a capital markets referee to other institutions, not just banks.