September 30, 2021

FINANCIAL MARKETS Financial markets A Financial Market is an institution or arrangement that facilitates the exchange of financial assets. They are mechanisms in our society for converting public savings into investments such as buildings, machinery, infrastructure and inventories of goods and raw materials. This enables the economy to grow, new jobs to be created and living standards to rise. Financial markets therefore perform the essential economic function of channelling funds from economic units which have surplus funds (net savers) to economic units with a net deficit of funds (investors). There are several basic methods of classifying financial markets as follows: 1. A classification of the markets based on the type of instrument or service as follows: i. Debt Markets ii. Equity Markets iii. Financial services Markets 2. A broad classification that distinguishes between i. Primary & ii. Secondary Markets 3. A classification of markets based on the term to maturity and liquidity of the instrument. This method categorizes financial markets into i. Money Markets & ii. Capital Markets 4. A classification of markets according to when the financial instruments being traded will be delivered. This classification categorizes markets into: i. Spot markets ii. Futures or forward markets iii. Option markets 5. A classification of markets into open and negotiated markets. i. Auction market ii. Bourse iii. Over-the-counter market 6. Financial markets can also be classified in terms of the extent of financial intermediation involved in the sale of the financial instruments as follows: i. Direct finance markets ii. Semi-direct finance markets iii. Indirect finance markets Money markets and Capital markets  Money Markets Money markets are financial markets that are used for the trading of short-term debt instruments, generally those with original maturity of less than one year. The money market is the place where individuals and institutions with temporary surpluses of funds meet the needs of borrowers who have temporary fund shortages. Thus, the money markets enable economic units to manage their liquidity positions. For example, a security or loan with a maturity period of less than one year is considered a money market instrument. One of the principle functions of the money market is to finance the working capital needs of corporations and to provide governments with short-term funds in lieu of tax collections. The money market also supplies funds for speculative buying of securities and commodities. Capital Markets The capital market is designed to finance long-term investments by businesses, governments and households. Capital market instruments are mainly longer term debt securities (generally those with original maturities of more than one year) and equities. Examples include bonds and shares traded on the stock exchange. 2.1.3 Money market and Capital market financial instruments A financial instrument is defined as, a claim against the income or wealth of a business firm, house hold or unit of government, normally represented by a certificate, receipt or other legal document, and which is usually created by the lending of money. Financial Assets are by therefore nature intangible assets e.g i. Treasury Bills ii. Bonds iii. Shares Financial assets have played the following roles: 1. Transfer funds from surplus units to deficit units to invest in intangible assets. 2. Transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds.

Existing financial sector regulatory framework in Kenya Existing financial sector regulatory framework in Kenya The existing regulatory framework for the financial sector in Kenya consists of a number of independent regulators each charged with the supervision of their particular sub sectors. The creation of the Insurance Regulatory Authority completed the shift from having departments under the Ministry of Finance to having independent regulators for each sub-sector. The current regulatory structure is characterized by regulatory gaps, regulatory overlaps, multiplicity of regulators, inconsistency of regulations and differences in operational standards. For example, some of the regulators have at least partial exemption from the State Corporations Act while others do not, some have tax exemption, and others do not. Some regulators have powers to issue regulations while in other cases the power is retained by the Minister for Finance. This regulatory framework is clearly captured by the figure below. Regulatory gaps Some of the existing cases of regulation gaps are: The Kenya Post Office Savings Bank (KPOSB) The Kenya Post Office Savings Bank (KPOSB) was incorporated in 1978 underthe KPOSB Act(Cap 493B). The mission of the bank is to sustainably provide savings and other financial services to customers, through a countrywide branch network, by use of modern technology in delivery of efficient and effective customer service, and to the satisfaction of all stakeholders. Section 8(1) KPOSB Act that provided for the Government guarantee over the deposits placed with the savings bank was repealed via the Finance Bill 2001. The repeal of the section implies that new avenues should be found for deposit  protection. It also implies that the bank should be adequately capitalized as a first step to protect deposits against possible losses. Companies Act (CAP 486) The Companies Act, which is a holdover of pre-colonial British Law, is creating problems for private sector activities in Kenya and indeed the financial services sector. This law currently in use, is complicated, cumbersome, inconsistent and at odd with modern enabling regulation of corporations. Another layer of complexity and compliance is added to an already burdensome structure leading to multiple disclosures requirements, overlap and expensive duplication. The regulation of companies is currently under the Registrar of Companies in the Office of the Attorney General but could be brought under the financial sector regulatory framework for more responsiveness to market dynamism. Development Finance Institutions (DFIs) DFIs have always provided the impetus for economic development be it in the developed or developing countries. In Kenya, DFIs were specifically established to spearhead the development process by: Availing credit funds to those venturing into commerce, tourism and industry. Assisting those wishing to venture into small-scale manufacturing enterprises. Assisting in the initiation and expansion of small, medium and largescale industrial and tourist undertakings. Provide long-term lending (Project financing) to sustain economic development Provide Technical Assistance/Co-operation extension services  Provision of special Financing and Support services to stimulate Private Sector to live up to its potential and create jobs and wealth, develop and expand indigenous skills The existing framework has potential for disharmony as they fall under different regulators. For example ICDC/KIE are under the Ministry of Trade and Industry, IDB is under the Central Bank of Kenya and AFC the Ministry of Agriculture.