Only 2.48 percent of Central Depository and Settlement Corporation (CDSC) stock accounts actively participated in trading last year. The rest remains frozen due to inactivity. These statistics are worrying because the inactivity of such a large percentage of accounts affects market liquidity.
This situation highlights the need for better engagement and activation strategies to increase investor participation in the market.
The large number of frozen accounts and decreased trading activity in recent years may also indicate a need for reforms or updates to account management practices to better support the market and its participants.
For example, a recent Deloitte report shows that private equity firms often avoid exiting through the Nairobi Stock Exchange due to the market’s illiquidity and complex listing process. Liquidity in the context of a stock exchange refers to the ease of buying and selling securities.
If market liquidity is low and the listing process is perceived as onerous, private equity firms will be less motivated to exit the stock market.
This explains the emergence of private capital markets in some emerging economies. Investors are increasingly attracted to private markets because of their potential for higher returns, reduced volatility, and the attractiveness of investing in companies with significant growth potential.
The discourse around NSE liquidity has taken the path of financial literacy and awareness. Some experts are of the opinion that before we consider listing companies on stock markets, players should redouble their efforts to make people understand the simple process of buying and selling stocks on the stock market.
This comprehensive understanding is crucial to understanding how each participant contributes to the overall market ecosystem.
This is crucial. We as a country cannot talk about capital market development without participating in the stock market, just as we cannot talk about participation when people are still unaware of the simplest, and even most important, process in stock market operations.
For example, Margaret, a 35-year-old retail investor, must first open a CDSC account, facilitated by a licensed broker (market participants). This account is necessary because it acts as a central repository where the investor’s shares are held electronically.
Once her CDSC account is activated, Margaret gets the opportunity to buy and sell stocks on the stock market. The multi-stage process involves distinct participants with very distinct roles (brokers who execute trades, CDSC manages transaction settlement, and NSE itself provides a platform for trading).
The efficiency and effectiveness of these roles directly affects market liquidity and influences investor decisions, such as the exit strategy of a private equity firm.
Henceforth, it is necessary to take a multifaceted and more comprehensive approach to increase the level of investor participation in the stock market.
Relying on the regulatory body, which has a dual role in regulation and development, is not enough. More efforts are needed by other stakeholders to address the issue of inactive CDSC accounts
Edwin Obonyo is a PhD student at Strathmore Business School
Noah Otinga, PhD student at Strathmore Business School
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