This archive report was first published on 21 October 2019.
Kenya has taken a bold step to revive its dormant stock market by allowing speculators to make quick gains from falling stock prices.
The move, which is part of the World Bank's recommendations to boost liquidity in the market, has seen the Nairobi Securities Exchange (NSE) cut the stock settlement cycle to within 24 hours from three days.
According to data from the NSE, the daily turnover on the bourse has declined by over 40% to Ksh361 million ($3.61 million) from Ksh608 million ($6.08 million) in the last 10 months.
"This is a very good move for the market. Investors have always made money when they buy shares and sell them off when their prices go up. However, we have now opened up an opportunity for investors to make money when prices of shares decline," said Paul Mwai, chief executive of AIB Capital Ltd.
Under the new trading arrangement, stockbrokers will borrow shares from clients and sell them under the prevailing prices, with hopes of buying them back from the market when prices fall and making a profit.
The profit on the shares an investor lends out to a stockbroker will either be cash or the shares lent out plus interest, after an agreed period.
The regulations for Securities Lending and Borrowing transactions were gazetted in January last year, and the NSE and Central Depository Settlement Corporation upgraded their systems to accommodate it.
According to the Capital Markets Authority, the introduction of Securities Lending and Borrowing will reduce the risk of settlement failure if an investor unexpectedly finds himself short of stock.
"The borrowed stock can be used to meet delivery obligations resulting from short selling," the CMA said.
