The Nairobi Stock Exchange and New Equity Capital: 1998 to 2004

INTRODUCTION The objectives of any stock exchange include two interlinked concepts. Their primary market role is to facilitate the movement of capital from savers to investors. In process of the primary market activities they will often aggregate the resources of small individual savers into sufficiently large capital sums that they can be successfully invested by commercial companies. In their secondary market role, by facilitating transactions between willing buyers and sellers they establish fair market prices for existing shares (the efficient markets hypothesis). In turn, this secondary market role of share pricing enables (primary market) new share issues to be priced at, or close to, fair market prices, thus militating against disadvantaging the issuers or the buyers of those new shares. The two roles are, therefore, interdependent. The nature of the stock markets of developed countries need no rehearsal here: suffice it to say that the stock exchanges of New York, London, Tokyo and so on have been material positive factors in the burgeoning economies of the USA, Europe and certain parts of Asia for many years past. Some parts of the developing world have also used stock exchanges as vehicles of development, with perhaps China and India being the most obvious recent examples. The Shanghai Stock Exchange (SSE) was founded on 26th November 1990 (Devonshire-Ellis, 2007). At the end of 2005, the SSE boasted 1069 listed securities and 834 listed companies, with a combined market capitalization of RMB 2,310 billion (SSE, 2005). In 2005, listed companies raised RMB 3 billion on the SSE through Initial Public Offerings (IPO) and share placements (SSE, 2005). There were a total of 131 new listings between 2003 and 2005 (SSE, 2005) Stock exchanges in Africa appear to have missed out on many of the opportunities seized elsewhere. Although there is a long history of stock exchanges in African nations, some going as far back as colonial times, their growth rates have generally been slow, or even stagnant, and their role in capital mobilization appears, in many cases, to have been negligible. Quoting data from the World Bank's Financial Structure database, Honahan and Beck list fifteen stock exchanges active in sub-Saharan Africa (i.e. ignoring the substantial and active stock exchanges in Mediterranean Africa, such as those in Morocco, Tunisia and Egypt). The NSE was established in 1954: only South Africa (1887) and Zimbabwe (1896) are older. The remaining exchanges were all established in the last 25 years of the 20th century. Of those fifteen stock exchanges South Africa is clearly an outlier, while Kenya is typical of the other fourteen. These all share the following features: a limited number of stocks is listed, market capitalization is a small percentage of GPD, value traded is a small percentage of GDP, turnover is low, the concentration of firms is low and few bonds are listed. Parkinson (1984) examined the NSE in the context of development in Kenya. He reported that the NSE failed to make enough issues to satisfy savers' demands. Earlier Yacout (1980) had noted the heavy oversubscription of new issues in Nigeria and concluded that; there too, available savings were greater than new stock market issues. In this article we will focus on the Nairobi Stock Exchange (NSE). The method is to examine the capital structure of all the companies listed on the NSE. We will attempt to differentiate between those companies that needed capital for expansion and those that did not. In respect of expanding companies we will attempt to identify how they financed their expansion. We will focus on three main categories of sources of finance: primary market transactions (that is, new share issues); organic growth (through the ploughing back of profits); and lastly, borrowing. In this way we will make an informed judgment of the way the NSE has contributed to the raising of capital and the development of the economy. …