1. THE 4 TH GOVERNANCE, INTEGRITY AND INVESTMENTS CONFERENCE TRAVELLERS BEACH HOTEL, MOMBASA JUNE 24-26, 2015 “Investment Opportunities for Counties in the Capital Markets” Mr. Daniel Warutere Assistant Manager Regulatory Framework

2.  CMA a public agency responsible for regulating and promoting the development of an orderly fair and efficient capital Markets in Kenya.  Regulation of markets not an end in itself but a means to ensure proper functioning of markets to facilitate their development. 2

3. Vision “A proactive regulator of a competitive and robust capital markets” Mission “To promote the development of Kenya’s capital market to be an investment destination of choice through facilitative regulation and innovation”. 3

4.  Development of all aspects of the capital markets.  Facilitate existence of a nationwide system of securities market and brokerage services to enable wider participation of the public.  Creation, maintenance and regulation of an orderly, fair and efficient securities market.  Protection of investor interests.  Operation of compensation fund to protect investors from financial loss due to failure of a licensee.  Facilitate use of electronic commerce for capital markets.

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6. Economic activity concentration in Kenya

7.  Little CMA presence outside Nairobi.  Investor education initiatives targeting counties; ◦ Regional County visits; ◦ County Forums already covered Mombasa, Kwale, Meru Machakos, Nyeri, Taita Taveta, Trans Nzoia, Uasin Gishu, Nakuru, Kakamega, Kisumu, Nairobi, Embu, Murang’a ◦ Live vernacular radio campaigns covering the following eight regions: Nairobi, Western, Nyanza, Eastern, Central, Coast, Rift Valley and North Eastern. One Securities Exchange-Nairobi;  Investment Banking and Brokerage Services- Few branches in major towns;  Outsourcing Strategy with focus at the Counties  Stock agency services fragmented across the country.

8.  Fund raising: Devolved funds may not be sufficient in some counties -Taxes on agriculture, road use, water usage etc may still not be sufficient to stir economic activity -Counties have an opportunity to raise additional capital through the capital markets through (i) Vanilla Products (IPOs, County Bonds) ◦ IPO's are for county companies to allow county entities to grow to become national and regional powerhouses (ii) Structured Products (ABS, Project Finance etc) (iii) Other innovative products (PPPs)  Capital Markets Intermediation Services- Investment Banking, Stock broking, Asset Management Services, Investment Advisory Services, Securities Exchanges, Credit Rating, etc  Economic and social development – With devolution, it is anticipated that there will emerge new centers of growth, in which people would engage in investment leading to creation of employment opportunities.

9.  Financial Literacy: The growth of learning institutions expected with introduction of capital markets products and services -Introduction of capital markets in curricula in University and Institutions of Higher Learning devolution  Increased savings levels: Formalizing of pooled investments such as Chamas at county levels will increase savings and investment levels -will expedite achievement of savings levels necessary for achievement of growth levels required for attainment of middle-income economy (Vision 2030)  Foreign Portfolio Investments : Depending on returns on investment on capital markets products issued at county level (eg County securitized debts bonds and Private equity )

10. 10 County governments will be responsible for: agriculture, basic health services and facilities; air and noise pollution; county roads; water services; local tourism and county planning. County responsibilities unlikely to be met solely from share of 15% and county taxes giving rise to challenge of: - Growth within and amongst counties not being uniform - Heavy reliance on national revenue share Allocations of the 15% determined by: Commission on Revenue Allocation (CRA) Senate: will vote every five years on the sharing of resources among counties.

11. 11 What structures will be necessary in Counties to reduce their deficits and fund implementable sustainable budgets? What opportunities can the Capital markets provide to raise long term funds ? Restrictions on Traditional Funding: -Constitution 2010’s restricts counties taking on debt: National government assents and guarantee Approval of the county government assembly appears restrictive.

12. REITs Futures Exchange Traded Funds Islamic Capital Market Products Asset Backed Securities County Bonds Options Swaps and Swaptions 12

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14. 14 CAPITAL MARKETS VS. MONEY MARKET FINANCING

15. Commercial Paper Corporate Bonds Infrastructure bonds/ project bonds Syndicated and club loans Asset backed securities/ Securitization

16.  Raising cheap long term capital  Improves corporate governance  Succession planning & growth  Separation of ownership and management  Daily and Cheap publicity  Enjoy Public support and accessibility

17. Market awareness Brand recognition Sound structuring of instrument (if debt issue) Credit Rating and Guarantees / Collateral Timing of going to market / Pricing Choice of entity Strong balance sheet Promising future revenue projections Financial advisory team - disclosures and investor protection mechanisms

18.  Capital Markets Master Plan: Development of a Capital Markets Master Plan(CMMP) in 2014 that charts the future of Kenya’s capital markets for the next 10 years;  Demutualization and self-listing of NSE: Concluded, thereby successfully addressing substantial reform of its corporate governance, ownership and operational structures in line with global trends.  Corporate Governance: Corporate Governance Committee (CGC), comprising of market stakeholders, overhauled the corporate governance framework for listed companies in line with global trends to facilitate increased transparency and accountability to promote increased investment and domestic and international fund flows  Derivative Market: The legal and operational framework for the emergence of derivatives market activity in the country continued to be progressively implemented throughout the year.  Certification: CMA Signs MOU to Introduce Certification Standards for Capital Markets. 18

19.  Real Estate Investment Trusts (REITS):Following publication of The Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, L.N No. 116 of 2013 on June 18, 2013, capacity building and sensitization campaign on this product targeting both its internal and external stakeholders were initiated. Application for a REITs being processed currently  Risk Based Supervision: A Risk Based Supervision System (RBSS) was developed and launched in September 2013. The RBSS system facilitates submission of applications for licensing as well as meets all reporting obligations online by market intermediaries and listed companies.  Regional integration: As part of the ongoing initiatives within the EAC to harmonize capital markets regulatory and legislative frameworks and structures within the EAC, council directives were developed allowing for the adoption of regional convergence standards to support market integration.

20.  Settlement: Settlement of Securities Moves to Central Bank of Kenya  Islamic capital markets: High level stakeholder engagements were conducted - designed to increase awareness on the potential issuance of Sukuk products as a means of alternative financing for infrastructure development. In addition, the second Shariah compliant Collective Investment Scheme (Unit Trust) was approved in 2014.  Dematerialization: which is the process of converting paper certificates into an electronic format completed on December 1, 2013  New listing: GEMS now has four listings  Derivatives Market Development: Reviewing a second application for license to operate derivatives exchange by Bourse E ast Africa Limited

21.  Regulatory impact assessment: A comprehensive review of the capital markets regulatory framework has been accomplished in response to the changing needs of our capital markets as well as introduction of greater oversight of internal risk management.  Discount Securities: Roadmap for the closure of the compensation process for Discount Securities Ltd Investors.  Investor Education: Investor education, which is an action step under the “Support and Developmental and Economic Transformation “ pillar in the Capital Markets Master Plan, continues to be a key mandate towards the development of capital markets in our country. ◦ more robust national campaigns were conducted with high impact targeting the various constituents of the program in collaboration with industry stakeholders (e.g. Kabarak University challenge, Capital Markets Trivia, Capital Markets Open Day). ◦ Outsourcing Strategy

22. 22 1. Investor Education and Public Awareness Investor education and public awareness remains top of the Authority’s agenda for Counties - Investor Education and Public Awareness to be devolved targeting all 47 counties by 2017 Outsourcing Strategy Counties to consider introducing capital markets concept in curriculums in primary, secondary and tertiary learning institutions County Government to be fully involved in all capital markets IE&PA initiatives within the county

23.  Asset securitization has a focus on ring fenced assets and project performance rather than the balance sheet of any particular county government,  It allows for this funding to be unlocked  Clear restrictions under the Public Financial Management Laws and the Constitution on County government borrowing. 23

24. 24 2. Chronological approach to financing through capital markets County Governments to facilitate the identification of potential development projects over the next 10 Years and Budget (Infrastructure, Health, Energy, Recreational Facilities, Education) etc -Existing reports? - New studies?  Determine what component of total budget to be financed through capital markets (Bonds, equity etc)  Develop policy, institutional and regulatory framework to support capital raising through capital markets  County leadership to engage transaction advisors to package capital markets products

25.  The Capital Markets offer the cheapest form of finance for large infrastructure projects-particular through issuance of debt products;  Achievement of flagships under MTP2 will largely be determined by use of the capital markets by implementing agencies;  Door open to engage further with the Authority after consensus on approach to capital markets financing 25

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