Raising Finance in the Kenyan Bond Market (A Case of Listed Companies on the Nairobi Stock Exchange)

Abstract

This study sought to establish the potential of the bond market in raising corporate finance in Kenya. The study was guided by the following specific objectives: to evaluate the benefits derived from raising corporate finance in the bond market in Kenya; to analyze challenges faced in raising corporate finances in the bond market in Kenya; and to examine the possible interventions that can be used to address the challenges faced in raising finances in the bond market and enhance performance of the bond market in Kenya. The study focused on all the firms listed on the Nairobi Stock Exchange, whose number stood at 48 was obtained from the Nairobi Stock Exchange report (March 2011). Stratified random sampling was used to arrive at the sample size. From each stratum, 50% of the companies listed on the Nairobi Stock Exchange were selected at random, making a sample of 25 companies. Each of the organizations was represented by five respondents: the Head of the Finance function, and four employees from the treasury and shares/bonds departments. Primary data was collected using a semi-structured questionnaire, which was self-administered. A sampling frame is a list from where the population is drawn. A list of Further, a listing of the Heads of Finance of each of the listed firms that have issued corporate bonds was obtained from the respective human resource departments. Out of the 125 questionnaires that were sent out, 95 of them were returned completed (76%) response rate.  The high response rate could be attributed to the personal efforts of the researcher, who made a follow up of every questionnaire sent out. The data pertaining to the profile of respondents was analyzed by employing content analysis while descriptive statistics were used to analyze data pertaining to the objectives of the study. Computation of frequencies and percentages, standard deviations and were used in data presentation. The possible interventions include: undertaking corporate sector and banking reforms; ensuring effective information disclosure; formulation and implementation of policies to strengthen market infrastructure; making regulations favorable to both bond issuance and to the operations of local and foreign investors; development of the money market maybe in terms of the system; diversification of investor base; enhancing taxation policies for both issuers and investors; ensuring a secure and efficient custodial system; and undertaking education. In view of the findings and conclusions of the study, the following recommendations are made for policy and practice: For a bonds market to contribute significantly to the development process, it requires that the market caters for a diverse risk preference, is liquid, efficient and has minimal volatility. To achieve this, there must be a sound fiscal and monetary policy, effective legal and regulatory framework, secure and efficient settlement and custodial system, effective information disclosure system, a diversified investor base, and favorable tax policies. For treasury bonds especially, there is need for an effective financial system, a sound and prudent debt management and credible and stable government. In addition, the development of a well-functioning money market is essential in enhancing liquidity of the market. An active money market is the precursor to an active secondary bond market.

Keywords: Bond Market, Listed Companies, Nairobi Stock Exchange, Corporate Bonds, Stock Market