Sterling Capital faces hurdles in push for Sh1bn stocks loans

What you need to know:

  • Sterling Capital targets margin trading, which the NSE says is not allowed in absence of specific rules.
  • The brokerage house expects to lend up to Sh1 billion by year end for trade, even in the absence of clear guidelines.
  • The Capital Markets Authority is yet to finalise facilitating regulations for margin trading, which it said in Masterplan 2014-23 would have a positive effect on liquidity.

An investment bank backed by deep-pocketed New York-based equity fund Kuramo Capital is headed on a collision course with the regulators after inviting clients short of cash to apply for loans to buy more shares on the Nairobi bourse.

Sterling Capital says it targets to lend clients Sh1 billion to buy stocks on blue-chip counters in a transaction known as margin trading, which the Nairobi Securities Exchange says is not allowed in absence of rules.

The brokerage house expects to lend up to Sh1 billion by year end for trade, even in the absence of clear rules.

Other Kenyan brokers said while the CMA has released the broad regulations, specific guidelines were yet to be put out.

“No, they are not allowed,” said NSE in response to our queries.

Not finalised

The Capital Markets Authority, the regulator, is yet to finalise facilitating regulations for margin trading, which it said in Masterplan 2014-23 would have a positive effect on liquidity.

“Rules and regulations have to be put in place so that the loan has adequate security (usually using collateral of other shares already owned),” the regulator says in the blueprint.

“The CMA already has a policy framework which it needs to implement.”

The CMA was yet to respond to questions sent three weeks ago.

Sterling, however, says it notified clients about the launch of a margin trading desk mid-February—enabling them to borrow cash to invest in equities—after it communicated the decision to the CMA.

Kuramo bought a 45 per cent stake in the firm early this year and immediately injected Sh200 million.

Under margin trading, investors buy more shares than they would buy with own cash, leveraging on a top-up from their stockbroker in form of credit.

The investors open a margin account, at a minimum fee, into which the broker deposits cash to enable them buy more shares.

The practice is entrenched in the advanced markets and the broker uses the shares as security for the loan.

Sterling, however, insisted its investment banking licence allows it to do margin lending.

“Margin lending is a type of lending so automatically allowed as per CMA regulations for investment banks. The Only requirement is to formally notify CMA which we have done. CMA are, therefore, aware of our offering,” David Ngaine, the Sterling Capital executive director, said.  “The difference between (commercial) banks and investment banks is we do not lend third party money.”

Under the CMA regulations and market practice guidelines, investment banks are allowed to engage in business of a stockbroker, dealer, and fund manager of collective investment schemes as well as contractual portfolio management services.

This is besides advising the public on offers, corporate financial restructuring as well as takeovers, mergers, privatisation of companies and underwriting of securities.

Mr Ngaine said Sterling clients are, however, only allowed to borrow to buy shares in NSE’s listed firms that have credentials for good performance in terms of generating returns.

“There’s no limit as to how much we can lend to a single investor right now. If you meet our criteria, we will provide the credit on the strength that you have the capacity to absorb,” Mr Ngaine said on phone.

The firm’s associate director Mark Gitau said the margin trading book was likely to grow by between Sh500 million and Sh1 billion, citing increased interest from clients since the launch.

“The equities market on the NSE has active traders who would be keen to enhance their returns off margin trading,” Mr Gitau said in a statement.

Brokers earn 1.76 per cent fee on the value of transaction following a downward review from 1.78 per cent previously.

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