I would like to begin by congratulating Kenya on passing the draft constitution through the referendum held on the 4th of August. It’s a landmark moment for the country and everyone associated with Kenya. I hope it heralds an era of prosperity to the country, I did a piece a long time ago about my thoughts on the draft, but I decided not to comment this year on the draft. The reason being, there was a great deal being said about the likely economic repercussions of passing the draft, I did not want to add to the confusion. Secondly, most people making predictions did not have any quantitative backing to their predictions, to me this was just guesswork and haphazard akin to saying that lightning causes thunder.
As the heading says, this piece will focus on financial reform and ways to improve our financial sector. Through the passing of the constitution as well as some geopolitical changes that are happening  around us, Kenya is at the epicentre of immense change. The change is so severe and maybe Kenyans haven’t taken the time to think about it. The new constitution will change our governance structures from the grassroots all the way to the top. Uganda discovered oil and are now about to realize its economic potential, Sudan will hold a referendum regarding the independence of the South and we are now part of the East African common market. 

So much is happening and nobody has bothered to communicate this to Kenyans. You may ask what the significance of Uganda exploiting the new oil reserves will mean for Kenya. Well for starters, Uganda accounts for roughly 21.4% of our exports, the bulk of which is oil. For them pumping their own oil will mean that our exports will suffer. South Sudan achieving independence will mean that they will need access to the Sea, this means that Kenya has to open up the North Eastern transport corridor as well as the port in Lamu. The devolved governance structures will bring in a whole set of complications in terms of each county having the mandate to finance its own projects, this will usher in a new wave of changes in our financial systems and our banks will be only so eager. In a nutshell, the next few years will see a very huge change in our economic structure and it will be worthwhile for our policy makers to share with us their plans on achieving the vision 2030 given the dynamics of the next few years.

            Having said this, I need to get to the crux of the issue; Financial reform. In this year's budget speech, the Finance Minister Hon. Uhuru Kenyatta mentioned financial reform with the usual mention of Demutualisation of the Bourse. Past that, the rest was just talk about our medium term goals, I guess this is why some times economic lingo makes economists look funny. Looking into the middle distance is never a sign of strategic direction, it's more of a sign of being dazed and confused.

However, getting back to the matter at hand, given the changes that are happening there is more to be done to convert this country into a genuine financial hub. The subsequent surge in commodity demand that will result from our neighbours improved economic fortunes would be well taken advantage of by having a robust commodities exchange platform. This will only happen through a stronger and better coordinated regulatory mechanism from the East African Community. Allied to this, there will need to be coordination in terms of building warehousing facilities for the commodities exchange. Well how would a commodities exchange platform work. In simple terms, a commodities exchange is just like a stock market but instead of trading shares, people trade commodities i.e. Steel, grain, iron and oil. This would improve price discovery and also stabilise prices. This should be augmented by a futures trading platform from which people would trade in commodity futures. Again, how does this work. Well a futures contract just gives the bearer of the contract the right but not the obligation to buy or sell an agreed upon quantity of a commodity at a given future date for an agreed upon price. 

I had posted about price controls, well for me this could be the only feasible long term solution to erratic food prices. Having a commodity exchange and by extension a futures trading platform would ease our inflationary pressures arising from food.  There would be opposition to this from misinformed middle men and politicians and they may say that a few smart individuals running our financial capitals may distort food prices. However, it wouldn't make sense as this distortions would not last too long, in finance and economics stuff generally reverts to its average. The futures exchange should also be extended for currency futures as a great deal of trade would happen with western nations and to hedge against currency risk, a local currency futures trading platform would be helpful. 

To deal with the effect that the devolved governance structures, there will be a great deal of work to be done in regards to strengthening the regulation of our investment banks and stock brokers. In the near future, Kenya may well be treated to the novelty of Municipal bonds, these are bonds sold by local municipalities to finance local projects, drainage, education and the likes. Investment banks and Stock brokers will have to undertake the fiduciary responsibility via regulation of informing their investors as to the risks associated with each of these bonds. I foresee situations of borrowed money being siphoned by corrupt officials thus weakening the abilities of the municipalities to repay the coupons on time. There will need to be stronger regulation from the local government ministry, the treasury as well as the Capital Markets Authority on local borrowing from the counties. 

I feel that Kenya has the human capital to furnish this new demand for skilled officials, it is worth noting that Kenya is well known for producing exceptional econometricians and mathematicians as well. In fact the current Central Bank governor Prof Njuguna is a well know econometrics professor. The government should focus part of the Vision 2030 program into turning Kenya into a financial hub and this will only happen through real reform.