Kenya’s nascent mutual fund industry is becoming an important component in the country’s financial landscape. With increasing international focus on frontier economies, the country is slowly emerging as an investment destination for foreign investment funds seeking exposure in East Africa.
Moreover, the emergence of a thriving middle class is also creating capital flows for local asset managers. The industry, which is regulated by the Capital Markets Authority (CMA), now commands $430 million in assets under management, having grown at a compound annual growth rate (CAGR) of 21.2% since 2010, according to PricewaterhouseCoopers’ (PwC) Africa Asset Management 2020 report.
For a long time, growth in Kenya’s mutual fund industry was subdued due to an underdeveloped capital market. Until 2006, equity transactions were still being done through the floor-based open outcry system, share certificates still served as proof of ownership, trading hours were limited to two hours, trade settlements took four days and less than 50 entities were listed at the Nairobi Securities Exchange (NSE). As a consequence, by the close of 2005, only five investment funds operated and total market capitalization accounted for less than a third of its gross domestic product (GDP). This state of affairs seriously hampered Kenya’s capital markets as an important investment destination.
However, since 2006, all this changed drastically with the number of listed companies increasing to 63 and the total market capitalization rising to nearly 41% of GDP by the end of last year. Between 2006 and 2014, equity turnover doubled to $2.15 billion, Kenya managed to successfully issue its first sovereign bond which raised a total of $2 billion, the number of operating investment funds grew to 71 and the NSE received approval to demutualize and self list on the exchange. In April, the top foreign investment funds investing in Kenya had at least 25% of their funds allocated in the country, according to PwC research.
Despite this growth, the fund industry has a long way to go as it still accounts for an extremely small share of GDP at 0.7% and 0.8% of total financial sector assets. Among other reasons, a poor savings culture in the country has been blamed for the small size of the industry. The World Bank puts Kenya’s saving rate at around 12 to 13% of GDP which is half the average for all low-income countries (at 26% of GDP) and slightly lower than Africa’s rate which stands at around 17%. Furthermore, with wealth distribution highly unequal, the fund market has relied almost entirely on institutional investors. The young industry also has to deal with rising competition from other alternative investment vehicles such as the real estate sector and private equity.
Nonetheless, a combination of certain fundamental factors are likely to drive the mutual fund industry’s speedy growth in the coming years. These factors are stable economic growth, strong market performance, widespread adoption of mobile technology which makes delivery of new products cheaper, introduction of new asset classes, cross listings, loosening of regulations, political stability, investor education and the emergence of the middle class. The latter, which now stands at 44.9% of Kenya’s total population, is projected to grow at an average of 5% every year. The expansion of this group will be instrumental in driving demand for mutual fund products such as equity and fixed-income funds.
In addition, government’s agenda to grow the financial sector as stated through the Vision 2030 development program will also boost the mutual fund industry. Through the recently launched Kenya Diaspora Policy, funds can expect to tap into the ever increasing diaspora remittances. Since the CMA has been keen to market Kenya’s financial markets through diaspora conferences, mutual funds can expect to be a major beneficiary. According to the CMA, remittances inflows have risen from $408 million in 2006 to $1.43 billion in 2014, or the equivalent of a CAGR of 15%. Average monthly remittances now stand at over $100 million. Kenya’s government estimates that 15% of the remittances are used in productive investments.
The future is indeed bright and there is little doubt that Kenya’s mutual fund industry will grow to become a strong player within the finance sector and the economy at large.