Stella Kilonzo – Setting the reform agenda in Kenya’s capital markets

Stella Kilonzo, the Chief Executive Officer of the Capital Markets Authority, tells CAROLE KIMUTAI how the demutualisation of the Nairobi Stock Exchange will transform Kenya’s capital markets.
In July 2011, Stella Kilonzo will mark three years since her appointment as the chief executive of the Capital Markets Authority (CMA). She stands out as the first female CEO of CMA in Kenya’s male dominated capital markets sector. In her role as CEO, Stella plays a vital position; she is charged with the Herculean task of keeping an eye on Kenya’s capital markets and providing a robust legal and regulatory framework for the sector.
After an early morning board meeting, Stella ushers me and my photographer, Emmanuel Jambo, into her office located at the heart of the Nairobi Central Business District. Stella has an extremely busy schedule and we begin the interview by looking at CMA during the 36 months she has been at its helm. But before she gets deep into the conversation, I politely interrupt her. “So, who is Stella?” I ask. After a short pause, she sums herself up as a mother, wife, professional, and a leader.
Stella has extensive experience in the financial and capital markets, having previously worked in securities market regulation at Financial Industry Regulatory Authority in USA and PwC Kenya in corporate finance advisory services.
In her capacity as CEO of the CMA, she is also a member of the National Economic and Social Council of Kenya (NESC) – an advisory body of eminent persons charged with the responsibility of advising the President and the Cabinet on economic and social policy matters.
In December 2010, President Mwai Kibaki awarded Stella the Moran of the Order of the Burning Spear (MBS) for her outstanding contribution towards national development, specifically expanding the capital market in Kenya through Initial Public Offers (IPOs), rights issues, investor protection for retail and foreign investors, and transforming the ownership structure of the Nairobi Stock Exchange (NSE) through the demutualisation process.
“My role as the CEO of the CMA is important because of the pivotal role of the capital markets in realising the Vision 2030 objectives. I have to really understand what is expected, what is the bigger picture of Vision 2030, what is expected of government institutions that are supposed to implement Vision 2030, and most important, how CMA is supposed to ensure projects are adequately financed through the capital markets,” she explains.
This, Stella admits, is a tough job that requires her to remain focused at all times. Kenya has had a booming stock market that has earned investors more than US$ 5 billion (KSh 433 billion) since a bullish run that started in January 2003 soon after the then NARC government came to power.
Reforms at CMA
In the three years Stella has been at the helm of CMA, one of the things she is most proud of is restoring investor confidence in the stock market. “When I joined CMA, investor confidence was at its lowest but through government support, we (CMA) have been able to implement reforms that have borne fruits, and are aligned to the Vision 2030 economic blueprint.”
In 2008 – the same year President Kibaki appointed her as CEO, Francis Thuo and Partners was put under statutory management, while Nyaga Stockbrokers was put under statutory management the following year; posing serious concerns about the stability of the capital market among stakeholders.
Indeed, investor confidence is an important aspect of a country’s economic stability. It is so important that President Kibaki promised to weed out villain stockbrokers and dishonest players in the financial sector. “My government will not tolerate any wayward stockbrokers and other players in the wider financial sector that are bent on exploiting Kenyans’ savings. I am emphasising the need for discipline in our capital markets because it is crucial to attracting and maintaining the confidence of investors,” he said, during the opening of the Safaricom IPO at the NSE in 2008.
In cracking the whip, the CMA has set up an investigation unit. “Fraud was prevalent in the capital market and we responded by setting up the Capital Markets Fraud Investigation Unit in 2009, which has been instrumental in deterring fraud,” Stella explains. This move has been well received by stockbrokers and investment banks.
These, amongst other reforms, Stella says, have restored investor confidence in the NSE. “Investor confidence is important so that people continue investing their money in the capital markets. Because of what we have put in place, you can see how 2010 was a great year with the Share Index going up by 37 per cent, making the Nairobi Stock Exchange the second best performing exchange in Africa. This is commendable considering where we were in 2008.”
In another bid to boost investor confidence, the CMA is positioning itself as a world-class regulator by benchmarking with international best practice and is a member of the International Organisation of Securities Commissions (IOSCO) – an international forum for securities regulators. CMA has been a full member of IOSCO since April 2009 after signing a Multilateral Memorandum of Understanding (MMOU) concerning consultation, cooperation and the exchange of information, in recognition of compliance with cooperation and enforcement requirements.
For a regulatory authority to qualify to sign the MMOU, it must demonstrate capacity, legally and practically, to meet specific MMOU provisions which are essential for mutual assistance and the exchange of information in order to successfully enforce securities and derivatives laws. By signing the MMOU in 2009, CMA was the 52nd country globally and the fourth in Africa to do so.
Risk-Based Supervision Model
A major milestone for CMA is the process of adopting the risk-based supervision model. “Risk-based supervision is really a way of changing how we supervise our market to focus on areas of greatest risk. One of our core values is to be responsive; as a regulator, we identified risk gaps in all our activities and the CMA board gave us a go ahead to adopt the risk-based supervision model,” says Stella.
She adds that implementing the model involved conducting a risk assessment audit. After identifying the gaps, the next step was risk profiling. “We looked at our operations and categorised all the risks; current and potential.” The risk-based supervision model has seen CMA train its supervision staff extensively and also involved its stakeholders, especially the market intermediaries.
As a further step in the adoption of the risk-based supervision model, CMA has recently published Internal Control and Risk Management Guidelines for a 30-day public exposure period, expiring on June 23 2011, giving stakeholders and members of the public an opportunity to give their comments.
The guidelines are geared towards empowering the compliance function of respective firms, safeguarding clients’ as well as licensees’ own assets, ultimately ensuring that market players operate in an orderly and efficient manner and are proactive about mitigating their envisaged risks. CMA expects that once the guidelines are implemented, there will be a higher level of compliance.
Championing demutualisation
Close to Stella’s heart is the demutualisation of the NSE that she is championing. Demutualisation refers to the separation of ownership from the trading rights of an exchange; it will see the separation of ownership and management at the NSE. “Already there is a Demutualisation Steering Committee (DSC) with representation from all stakeholders which is steering the process,” says Stella.
A demutualised exchange clearly segregates the three functions of ownership, management, and trading. The current system in Kenya is a mutual exchange, where brokers and investment banks, who are members of the exchange, are both the owners and the traders on the exchange.
The stock exchange in Mauritius was the first bourse to demutualise in Africa. South Africa and Dubai have already undergone demutualisation and Nigeria has announced plans to demutualise.
Demutualisation, says Stella, is part of the broader ongoing legal, institutional, and regulatory reforms aimed at broadening and deepening capital markets in Kenya by increasing competitiveness, encouraging development of new financial products, enhancing the governance structures, and ultimately bolstering investor confidence.
Views from industry
Michael Musau, the CEO of Emerging Africa Capital Ltd, says: “The idea is already long overdue. The fact that the NSE was operating as a ‘members-only club’ perpetuated a strong control by brokers which has not been healthy. Demutualising the NSE will pave way for the NSE to match up to its global counterparts- operating it like other developed markets,” says Musau. He adds that demutualization will remove any bottlenecks that hinder growth and will increase transparency. “Transparency will help increase market liquidity through increased participation by traders and more up take by foreign investors,” he says.
Danny Mucira, the retail director of Old Mutual Kenya, also welcomes the demutualisation of the NSE. “The main motives of and expected benefit from demutualisation include tapping new sources of capital through IPOs needed to modernise exchange trading systems. Such capital cannot be obtained through a mutualised status.
In fact, stockbrokers and governments cannot enable a commercial entity to raise such capital from shareholders, as do corporations. In the African context where the market size is limited this could be a serious challenge,” he says.
However, high costs associated with an exchange IPO, conflict of interests, low liquidity, market size, and  underdeveloped infrastructure are some of the challenges the demutualisation process will have to grapple with. “In respect of if we are ready, I would say the arguments in favour of demutualisation are the ability to raise new capital, pursue business interests without being constrained by the diverse interests of mutual fund members, increased flexibility, reduced operational costs, improved efficiency, and competitiveness and improved governance structure would outweigh the cons that talk to not demutualising”, adds Mucira.
Stella Kilonzo the leader
Advice to retail investors
Do a lot of research from websites and seek opinion from investment experts before making investments. Secondly, decide a percentage of your disposal income that you want to invest. Third, diversify your investments. The CMA has a lot of information that the public can access this will help in making informed decisions.
What has contributed to my success…
A lot of hard work from when I was a kid I was always focused and determined. I wanted to be successful and my parents played an important role in encouraging me and ensuring I had a good education. As a leader, it is important to surround yourself with good leaders; identify them and let them mentor you.
Sacrifice and discipline about…
Making choices about where you want to go. It is about delaying your wants; which is a challenge to many people. If you want to succeed, you must learn how to delay your wants and look at the end game.
Leading an organisation involves…
Making sure there is a connection; everyone should know where you are going especially senior management because they are the ones who will be driving the organisation’s vision. This means there has to be a lot of communication in the organisation. Secondly, have monitors to ensure everything is going on as planned. At this point you are also able to know if and when to change.
Leading a team requires…
Finding out what motivates them; employees are different what motivates one is not what motivates the other. It requires engaging them and letting them know excellence is a continuous process. You have to engage a lot of things like team building or ways of interacting formally. Most important is letting everyone know their contribution in the organisation and what the organisation has accomplished.
How I manage my time…
I always ask myself if it is something I have to do or if it can be done by someone else. If I delegate, it is about agreeing on a framework of certain things that should be done, my expectation, so that everyone is clear on the outcome. I always plan my day and week in advance so that I work according to my plan. There are important family occasions that I include in my diary so that do not miss out on them.
The need for demutualisation
In a paper titled: Corporatisation & Demutualisation of Stock Exchanges in India, Mayank Jain argues that demutualisation is driven by the good intentions of proper governance. This, he argues, has taken a new turn after the collapse of many large corporations in 2002.
Jain highlights four main advantages of demutualisation:

1. Stock exchanges owned by members tend to work towards the interest of members alone, which could on occasion be detrimental to rights of other stakeholders. Division of ownership between members and outsiders can lead to a balanced approach, remove conflicts of interest, create greater management accountability, and take into consideration the interest of other players.
2. To cope with competition, stock exchanges require funds. While member-owned stock exchanges have limitations in raising funds, publicly owned stock exchanges can tap capital markets.
3. Publicly owned stock exchanges can be more professional when compared to member- owned organisations. Further, as a result of the role played by shareholders, strengthening of the management and the organisation, there is greater transparency in dealings, accountability and market discipline.
4. Demutualisation will enhance management flexibility. A publicly held company is better equipped to respond to changes when compared to a closely held mutually owned organisation. Further, a company can spin-off its subsidiaries, get into mergers and acquisitions, raise funds, etc.