Kenya’s central bank will stop paying commission to stockbrokers, custodian banks and authorised securities dealers that help it sell treasury bonds from next month, cutting off hundreds of millions of shillings in revenue each year.
The central bank paid selling agents – who act as intermediaries between the central bank and buyers of bonds and treasury bills – a commission of 0.15% of the value of the securities they sold on its behalf, after deducting a 5% withholding tax.
Auctions of primary treasury bills and bonds are typically worth tens of billions of shillings, with institutional investors who make up the majority of buyers of these securities using banks and stockbrokers to place their bids.
In the 2024/25 financial year, the government will borrow a net Sh413 billion from the domestic market, which coupled with the repayment of debt estimated at Sh570 billion, will see it go to the market to buy close to Sh1 trillion from securities sales.
Such sales are made through brokers who have the potential to generate more than Sh1.5 billion in commissions for banks and stockbrokers, although not all purchases are made through third parties.
“No commission will be paid to licensed selling agents as of September 2, 2024,” the central bank said in the prospectus for the sale of 17-year infrastructure bonds, which will be on sale until August 29 with a settlement date of September 2.
The Central Bank of Kuwait did not disclose the size of the offers submitted by these brokers, and the bank did not respond to requests for comment.
This committee was introduced as an incentive for stockbrokers, authorized securities dealers and custodian banks to market bonds to their clients, especially high-net-worth local investors and external buyers who faced obstacles in accessing the CBK offices.
Market players link the removal of agents from the premium commission train to the recent launch of the DhowCSD bond trading platform, an electronic system for buying and selling bonds that has made it easier to place bids online and on a central platform.
Prior to the launch of the platform, bond buyers or their agents needed to manually fill out bid forms and deposit them at the offices and branches of the Central Bank of Kuwait, and payment was made via checks, bank transfers or through the Central Bank office.
Consequently, institutional buyers found it easier to use third parties when purchasing bonds, while foreign investors had no alternative but to use a local agent to handle their deals.
In addition to the head office in Nairobi, the Central Bank of Kenya has seven branches in cities such as Kisumu, Mombasa, Kisii, Nyeri, Eldoret, Meru and Nakuru.
On the other hand, the Dhow CSD platform allows one to submit their bids online, as payment is now limited to electronic payments through the bank.
For example, Standard Chartered Bank Kenya has opened up an option for its customers to pay for bonds directly via its online banking platform.
“It was only a matter of time before they removed the commission as hinted at when DhowCSD was launched, given the improved efficiency the platform offers,” said an executive at a major bank who asked not to be named.
“However, they (the CBK) may have to take into account that market players do a lot of marketing and analysis for their clients to make the auctions successful, and therefore they should be compensated for that.”
For smaller intermediaries such as stockbrokers, fees earned by offering bond buying services to clients have been supplementing earnings from brokerage services, which have declined significantly over the past few years due to reduced trading activity on the Nairobi Securities Exchange (NSE).
By acting as trading agents, they also gain visibility among investors looking to sell their bonds in the secondary market, which also gives brokers an additional means of earning trading commissions.
The secondary bond market sees much higher trading volumes than equities, due to the high value of currently issued bonds. The total value of treasury bonds currently in circulation in Kenya is Sh4.6 trillion, making the securities the largest asset class in the country’s financial markets.
Investors traded bonds worth Sh1 trillion on the secondary market of the Nigerian Stock Exchange between January 1 and August 21, 2024, exceeding the full-year total of Sh644 billion recorded in 2023.
Similarly, banks that offer bond purchasing services can use this to attract institutional or high-net-worth clients looking for custody services.