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Commodities Exchange and Risk Mitigation: Options for Raising Capital

This presentation by Mr. Jimnah Mbaru, Chairman of the Nairobi Stock Exchange and Dyer & Blair Investment Bank, explores the structure of the Nairobi Stock Exchange, its performance drivers, and the role of a commodities exchange in raising capital. It also discusses the options available for raising capital and concludes with a Q&A session.

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Commodities Exchange and Risk Mitigation: Options for Raising Capital

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  1. Commodities Exchange and Risk Mitigation: Options for Raising Capital A presentation by Mr. Jimnah Mbaru Chairman, Nairobi Stock Exchange Chairman, Dyer & Blair Investment Bank 17 October 2007

  2. STRUCTURE OF PRESENTATION • Introduction • Structure of Nairobi Stock Exchange (NSE) • NSE Performance • Drivers of NSE • Role of Commodities Exchange • Options for Raising Capital • Conclusion • Q&A

  3. STRUCTURE OF THE NAIROBI STOCK EXCHANGE (NSE) • Established in 1954 as an overseas stock exchange through the London Stock Exchange • NSE 20-share index established in 1966 & was managed by Dyer and Blair Ltd. • Regulated by the Capital Markets Authority (CMA), which was established in 1989 • Primary (IPOS) & Secondary (Trading) markets • Part of the African Securities Exchange Association (ASEA), which aims to: • Establish systematic corporation, • Enhance sharing of information • Development of harmonized market standards.

  4. STRUCTURE OF THE NSE Cont’d • 74 government bonds • 53 listed companies • 6 corporate bonds • 7 Licensed Investment Banks • 11 Licensed Stockbrokers • Market trading done through: • 1954 – 1991: Callover System • 1991 – Aug 2006: Open Outcry System • Since Sept 2006 : Automated Trading System • Shares are traded in lots of 100

  5. NSE Market Performance(A) Equities Primary Market (Kshs Million)

  6. NSE Market Performance B) Equities Secondary Market

  7. NSE Index Movement (2000-2007)

  8. NSE Performance   (C) Bonds Primary/Secondary Market

  9. (A) Drivers of NSE: The Economy • Vision 2030 geared towards growth

  10. (B) Drivers of NSE: Economic Monetary Cycle

  11. (C) Drivers of NSE - Technology Effects ATS Set-Up Open Outcry 1991- Switch from Callover CDS Activation

  12. (D) Drivers of NSE – Low Interest Rates • Low stable interest rates • Low cost of funding hence high corporate profitability

  13. Explanation to the low interest rates • Deficit financing through privatization

  14. (E) Other Factors influencing NSE Performance • Increased corporate profitability • Increased foreign exchange earnings – FDI • Diaspora remittances estimated at Kshs 75Bn per annum ($1.2Bn) • Increase in amounts held by institutions e.g. pension funds assets of Kshs 224Bn • Increase in investment vehicles – unit trusts, mutual funds assets of 20Bn • Increase in market participants to over 750,000 investors • KENGEN

  15. Role of Commodities Exchange Facilitates offsetting commodity transactions without impacting on physical goods until the expiry of a contract • Offers • Price transparency • Effective price discovery • Efficient risk management • Types • Commodities Futures Exchange • Spot Exchange • Market players • Producers, processors, warehouses • Buyers, speculators • Government, marketing agencies, banks

  16. Benefits to; • Farmers • Price discovery • Warehousing services • Warehouse receipts as collateral for loans • Traders • Access to bigger markets • Elimination of counterparty risks through guarantees • Better pricing because of high number of participants • Exporters • Quality products through a secured platform • Elimination of physical market procurement problems • Elimination of procurement agents fees

  17. Benefits to; • End Users • Ability to buy direct at competitive prices • Operational comfort - easy to access information • The exchange I s a single window system for procurement of various materials • The Exchange • Fair transparent prices for settlement of contracts • Arbitrage opportunities for investors • Long-term investors can buy physical commodities stored at warehouses and take advantage of off-season price rises

  18. Challenges for Multiple Commodities Exchange in Kenya (MCE) • Commodities controlled by Boards - heavily regulated • Many small-scale producers- challenge on stability of client base • In an environment of struggling institutions – cooperatives • Inefficiencies and mismanagement • Internal bureaucracies on elective posts and decision making process • Conservative approach • Partial liberalization of some commodities sectors (coffee)

  19. Options for Raising Capital (Players) • Private Equity/Capital • Private equity fund • Syndicated • Initial public offer - IPO • Demutualized commodities exchange • Nairobi Stock Exchange (NSE) • Over The Counter (OTC) • Listing Requirements • Corporate bonds • Plain vanilla bonds

  20. Options for Raising Capital (Players) • Securitization • Commodities receipts backed bonds • Fees receivables backed bonds • Syndicated loans • backed by physical commodities (Coffee exchange practice)

  21. Role Of Government In Setting Up The Exchange • One-off grant to start (Kshs 1 billion) • Reforms in the producer sector • Exchange income tax exempt until demutualized • Provide warehousing (Subsidized) • Plan a regulatory body for commodities

  22. Conclusion • Possible to raise funds through NSE • Reforms essential for successful MCE in Kenya • MCE way forward • Government cooperation and support essential

  23. Q & A THANK YOU

  24. 10th Floor, Loita House, Loita Street P.O. Box 45396-00100 Nairobi, Kenya Tel: +254-2-3240000 Fax: +254-20-3240114 Website: www.dyerandblair.com

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