Serrari Group

In a significant development, the Capital Markets Authority (CMA) has approved the application for an Over-the-Counter (OTC) trading license by the East African Bond Exchange (EABX), setting the stage for increased competition in Kenya’s bond market. The approval, granted on Tuesday, positions EABX to vie with the Nairobi Securities Exchange (NSE) for bond market dominance, with an annual turnover averaging Sh734.0 billion between 2020 and 2023.

An OTC market facilitates direct trader interactions without the need for a formal securities exchange. All transactions are electronically captured and conducted bilaterally between engaged parties, without intervention from established securities exchanges.

This move follows closely on the heels of the International Monetary Fund’s (IMF) Staff Report, which, after the January 17, 2024, sixth review of Kenya’s $4.43 billion (Sh717.3 billion) program, revealed the government’s commitment to establishing an OTC automated exchange to complement NSE operations.

The government pledged to the IMF, stating, “We will further enhance the market infrastructure through policy support to market participants to operationalize an over-the-counter automated exchange to complement the broker-intermediated Nairobi Securities Exchange.”

EABX’s OTC market marks its third milestone, following a no-objection approval for setup in 2020 and capital-raising approval in 2023. The introduction of an OTC market for bond trading aligns Kenya’s fixed-income activity with Nigeria, where the Nigeria Stock Exchange and FMDQ Group operate side by side, the latter focusing on OT bond trading since 2012.

Despite Kenya’s initial lead in bond market reforms a decade ago, the CMA has acknowledged Nigeria’s leapfrogging success due to its well-established OTC bond trading market. Luke Ombara, CMA’s Director for Policy and Market Development, highlighted the potential of OTC trading, emphasizing its less onerous requirements compared to centralized exchanges.

The NSE, which garnered an average of Sh73.2 million per annum in bond levies over the last two years, may face revenue loss if bond market activity shifts toward EABX. Bond dealers in brokerage entities also stand to be affected should the OTC market gain traction and foster direct engagement between traders.

This development comes amidst the NSE grappling with subdued activity in the equities market and represents the second major change in Kenya’s bond market in under six months, following the launch of the online bond trading platform, DhowCSD, on September 11, 2023, by President William Ruto.

By Delino Gayweh
Serrari Financial Analyst
February 1, 2023

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