24 October 2018

Kenya’s financial market standing has improved two positions to third place in the continent largely driven by ease of foreign exchange access compared to a year ago, according to the second edition of the Absa Africa Financial Markets Index (AFMI). For a second year running, South Africa, with a score of 93%, was declared the most advanced market in Africa followed by Botswana and Kenya with a joint score of 65%. 

The index shows Kenya tops the continent in terms of openness of its exchange rate policy with the relaxation of capital controls boosting its performance (up from 6th last year), as did improvement of the country’s net portfolio flows to reserves ratio.

Kenya has also demonstrated its maturity as a market through the ability to enforce financial agreements, clarity on property rights and compatibility with international standards, which have all boosted its ranking. According to the report, areas of improvement for Kenya include limited product diversity, relatively low pension assets per capita and declining export market share.

The survey by the Official Monetary and Financial Institutions Forum (OMFIF) was commissioned by Absa Group in the course of last year and examined 20 African markets, up from 17 the previous year, extending coverage to three additional countries – Angola, Cameroon and Senegal. The report assesses progress and potential across six key areas namely: market depth; access to foreign exchange; market transparency, tax and regulatory environment; macroeconomic opportunity; and the legality and enforceability of standard financial markets master agreements.

“Deep and liquid capital markets are instrumental to supporting economic growth, creating domestic investment opportunities and attracting foreign and local capital. A vibrant, well-functioning, sound, efficient and stable financial system is a catalyst for broad-based sustainable economic growth and development,” said Barclays Bank of Kenya Managing Director Jeremy Awori.

“Financial market development offers additional growth and funding opportunities for local firms.  It also offers opportunities for international and domestic investors to access the markets of fast-growing African countries. It further mobilizes savings and investors to support a country’s development aspirations,” he added. 

This year’s edition pays special attention to policies that enhance market growth, including financial inclusion and investor education. The greatest area for improvement for the continent remains the ‘capacity of local investors’ with the report indicating that excluding South Africa, Morocco, Nigeria, Botswana and Namibia, the remaining 15 countries average a score of just 22 in that pillar. Survey respondents highlighted that the lack of knowledge and expertise of pension fund trustees and other asset owners hinders the development of new financial products, by reducing their demand for more sophisticated assets and strategies to diversify returns.

While presenting the report, Absa Group Head of Markets ex SA, George Asante said improvements in market infrastructure and regulatory frameworks could boost the performance of countries in the middle of the index over coming years. “The index provides a toolkit for countries seeking to strengthen their financial markets infrastructure,” he said. “It tracks progress on financial market developments annually across a range of countries and indicators.”

In the East African region, Uganda, at 10th position, ranks as the second-most progressive market after Kenya with a score of 50%, due to its stable performance with good foreign exchange access but low local investor capacity. It is followed by Rwanda, with a score of 49% which dropped three positions to position 11 due to discrepancies between strong official rules on transparency and reality of implementation. Tanzania (43%) also dropped four positions to 15th due to lack of capacity of local investors.

Overall, out of the 20 economies, Kenya, Morocco and the Seychelles have improved their scores most over the last year, particularly in terms of openness to foreign exchange. Nigeria’s score has also strengthened, thanks to policies augmenting market depth and enhancing the capacity of local investors. Mauritius and Namibia, while still among the top performers, have seen their scores deteriorate across most pillars. And just like last year, out of the 20 economies, Ethiopia has the most underdeveloped financial system because it lacks a security exchange and has no corporate bond market.