The Nairobi Securities Exchange (NSE) has begun piloting the lending and borrowing of shares in a move to boost investor activity.
The pilot which runs to the start of October is expected to test the market to allow for securities lending and borrowing among market participants in a view to bolster trading volumes and size of market markers.
The initiative will see players lend and borrow from the pool top-20 shares represented in the NSE-20 Index with the aim of broadening the availability of securities at the exchange.
“The success of this pilot will increase liquidity in the secondary market and will act as a lubricant to the market. There are economic benefits including additional income to lenders of securities in addition to fees earned by intermediaries,” said the Central Depository and Settlement Corporation (CDSC) CEO Nkuregamba Mwebesa.
The plan will be mainly targeted to long term holders of shares at the NSE among them pension funds who at present barely engage in transactions in spite of their large holdings of securities denying the NSE of pivotal turnovers.
“This will bring on more market players. A lot of pension fund investors hold long positions. These entities can now lend out their shares and arrive at greater gains,” added NSE CEO Geoffrey Odundo.
On success, the pilot is set to deepen the local financial markets by boosting initiatives such as the derivatives and futures markets.
For instance, a short-seller; an investor who speculates on the market by selling shares high and buying them back low, can borrow shares of a particular company today at Ksh.30 and predict their value will shrink to Ksh.20 a piece over a period of three months
The investor can then sell the shares today and buy them again three months later at Ksh.20 and return them to their original owner making a Ksh.10 margin as profit.
The CDSC is expected to manage the lending and borrowing transactions including the management of collateral and settlement.
Faida Investment and Dyer & Blair Investment banks have been appointed as agencies enabling the lending and borrowing transactions.
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