The Central Bank of Kenya‘s DhowCSD, a digital government bond trading platform, has reached a milestone of 80,000 investors, according to a report in Business Daily today (25 June). DhowCSD went live on 31 July 2023 and is designed to boost efficiency of investing in Treasury Bills and Treasury Bonds. It is an upgrade of the CBK’s Central Securities Depository (CSD) platform.

CBK Governor, Dr. Kamau Thugge told Business Daily: “When we went live with DhowCSD, we had 40,000 accounts. Today, that number is somewhere between 80,000 and 90,000. In less than a year, the number of accounts has doubled. DhowCSD has brought convenience; previously, it would have been intimidating to go to the CBK for someone who doesn’t know where to start.”

DhowCSD allows investors to open CSD accounts and buy and sell government bonds online and via mobile phones. It allows investors to see the results of government bond auctions and to online and via mobile phones. President William Ruto launched it in September 2023. It builds on collaboration between the NSE and CBK including the M-Akiba digital bond platform launched in 2017 and discontinued in 2019. 

EABX – East Africa’s OTC bond exchange

Meanwhile news is awaited of progress on a new bond exchange which aims to boost trading in East African fixed-income securities such as bonds, treasury bills and other debt instruments. On 30 January 2024, Kenya’s Capital Markets Authority granted approval for the East African Bond Exchange (EABX PLC) to set up and operate an “over-the-counter” (OTC) exchange and to act as a self-regulatory organization.

According to the CMA Kenya press release: “An OTC is a market where traders interact to negotiate their transactions as opposed to what happens in a formal securities exchange. It involves bilateral negotiations and trading through dealer networks. Modern OTC markets do not have physical location but all trades occur electronically and directly between two parties in a decentralized market.”

The anchor shareholder of the new exchange is the Kenya Bankers Association, with 47 member banks. Technical support comes from FSD Africa, a Kenya-based development agency which is funded by the UK Government and is making a big difference to the pace of development in Africa’s financial markets and. Together KBA and FSDA own 52% of the new exchange.

Evans Osano, FSD Africa’s Director, Capital Markets, said in a press release on 1 February: “This is the most significant capital market infrastructure development in Kenya and the wider East African region in decades. It promises to uplift the regional fixed income markets to world class status and will be instrumental in mobilizing at scale long-term local currency financing for the East African economies”.

A Bloomberg report on the new exchange in February quoted EABX CEO Terrence Adembesa, formerly at the Nairobi Securities Exchange, saying the new exchange was finalizing a capital raise and had received bids for Ksh2.6bn ($19m), after seeking to raise Ksh2bn.

The EABX aims to start operating in coming months and will be a significant competitor for the Nairobi Securities Exchange (NSE). The OTC operations will threaten revenues for stockbrokers and for the NSE. Adembesa said the exchange is testing its systems.

It will trade different fixed-income products, such as repurchase agreements (REPOs), treasury securities, commercial paper, corporate bonds and alternative assets. The new exchange aims to reduce trading fees and boost liquidity and encourage transparent pricing of bonds.

Government bond trading in 2023 was Ksh644bn, down from Ksh741bn in 2022 and Ksh956bn in 2021. Adembesa says that a much higher proportion of the Kenyan Government Ksh5 trillion ($36bn) in bonds on the domestic markets could be traded. The value of corporate debt issued in Kenya is only 0.2% of the economy, measured by gross domestic product (GDP), compared to 20%-30% of in Asian markets. However, a series of defaults by bond issuers have dented confidence.

In 2009 Kenya’s Bond Market Association, a lobby group of fund managers, investment bankers and stockbrokers, decided to establish a self-regulatory organization for the fixed-income market.

According to the Treasury, the EABX will “promote trading transparency and settlement efficiency and attract more capital in the economy, eventually leading to reduction of yields and cost of new public debt issues”.

NSE adds hybrid OTC and onscreen trading

The Nairobi Securities Exchange meanwhile is operationalizing a hybrid fixed income market following approval of amendments to its Fixed Income Trading Rules by the CMA. The approval, highlighted in a press release on 7 February 2024, enables a secondary market that combines both onscreen and Over-the-Counter (OTC) trading of fixed-income securities. According to the press release “The operationalization of the hybrid fixed income market is line with NSE’s commitment to revolutionize Kenya’s bond market by enhancing its efficiency and vibrancy”. The press release is not on the NSE website, but is available on X (formerly Twitter) and in the news media.

“The hybrid model will improve pre-trade transparency through the introduction of a Quotations Board, which will provide investors with increased visibility into market quotes, thereby supporting more informed trading. The NSE also plans to launch a real-time daily yield curve that factors in the activities of the Quotations Board as well as the trades executed in the market.

“Equally, the decision to combine onscreen and OTC trading will provide market participants with a multifaceted approach for execution of trades on the bond market, further increasing liquidity and depth in the market.”

Trading from other East African countries

The EABX will eventually offer trading of fixed income securities from other member States of the East African Community, according to Bloomberg. In March 2024, the CMA published rules under which Kenyan companies could issue bonds in different East African countries.

Other changes are afoot in the bond market as the National Treasury seeks to reform public debt management and deepen the market for domestic securities. According to a January report in Business Daily, four firms – Standard Chartered Bank, SBM, Kingdom Securities and investment advisory firm Private Wealth Management – had previously been approved for OTC bond trading, but the only clearing and settlement mechanism was via the NSE. The NSE also has an Unquoted Securities Platform which can be used for OTC trading of bonds.

Nigeria’s FMDQ

Nigeria’s FMDQ was set up in 2012 to offer OTC trading in fixed income securities, in competition to the Nigerian Exchange. FMDQ value traded in January to April 2024 was NGN 138 trillion ($90.5bn), dominated by foreign exchange, repurchase agreements (repos) and buybacks, foreign exchange derivatives, Treasury bills, OMO bills and FGN (Government) bonds.