Kenya’s Treasury and the Central Bank of Kenya (CBK) are locked in a dispute over the establishment of the East African Bond Exchange (EABX), a new bond trading platform that received regulatory approval from the Capital Markets Authority (CMA) in February 2023. While the Treasury strongly backs the initiative, the CBK has blocked its launch by denying it electronic access to the central securities depository, citing concerns over potential market distortions.
The Treasury’s support for EABX is based on a 2009 industry agreement to create a self-regulating organization for the fixed-income market. The goal is to improve transparency, efficiency, and liquidity in bond trading, providing an alternative to the Nairobi Securities Exchange (NSE). However, the CBK remains opposed, arguing that having two platforms could lead to dual pricing of government securities, complicating the yield curve and destabilizing the financial market.
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EABX has gained backing from commercial banks and other market participants who believe it could introduce more liquidity and enable direct trading among investors. On the other hand, the CBK insists that the existing framework under the NSE ensures stability and a unified pricing mechanism. The standoff extends beyond the trading platform itself, as the Treasury is also proposing legal amendments that would shift the issuance of government securities from the CBK to its own Public Debt Management Office (PDMO), further intensifying the power struggle.
How EABX and NSE Differ
- Type of Securities Traded
- EABX: Primarily focuses on government bonds, aiming to enhance regional trading across East African countries.
- NSE: Trades a variety of financial instruments, including stocks, bonds, derivatives, and Exchange-Traded Funds (ETFs).
- Geographical Scope
- EABX: Designed to facilitate cross-border trading, targeting markets in Kenya, Uganda, Tanzania, Rwanda, Burundi, and South Sudan.
- NSE: Primarily serves the Kenyan market, though it has some international participation.
- Market Focus
- EABX: Concentrates on improving liquidity and accessibility in the bond market.
- NSE: Caters to both retail and institutional investors, offering a diverse range of assets.
- Regulatory Framework
- EABX: May operate under a regional regulatory structure, coordinating with multiple national authorities.
- NSE: Falls under the oversight of Kenya’s CMA, following domestic market regulations.
Potential Impact on Kenya’s Financial Landscape
If successful, EABX could improve liquidity in the bond market, making government securities more accessible to investors. Additionally, it could support regional economic integration by creating a unified bond trading platform for East Africa. However, the CBK’s concerns over market fragmentation remain valid. A split trading system could lead to pricing discrepancies, complicating monetary policy implementation.