Discussion Paper No. 27 of 2003 on Development of the Nairobi Stock Exchange: A Historical Perspective

Abstract

This paper explores the evolutionary process of the stock market in Kenya and identifies the institutional and policy changes that have shaped the development pattern of the Nairobi Stock Exchange (NSE). A historical perspective approach is used to trace developments in the regulatory system, trading system, market membership, composition of market investors and taxation policy. Three phases in the development process of the stock market are identified and distinguished by their unique institutional and policy environment characteristics. These phases are the initiation stage, the formalization stage and the revitalization/ restructuring stage. The initial stage is mainly characterized by dominations of foreign investors in share trading and spontaneous growth. The formalization stage saw the adoption of a self-regulatory framework with efforts to increase the participation of local citizens in share trading especially in the postindependence period. This is also the period when the Government adopted a controlled policy regime and implemented tax policies that penalized share returns more than returns from other financial assets. Further, the Nairobi Stock Exchange which had served as a regional market among the East African states lost its market share with the break-up of the East African Community. Partially because of these developments, the stock market was characterized by a state of dormancy during this phase. This gave way to the revitalization stage where efforts were made to strengthen the institutional infrastructure and also to enhance the policy environment in order to facilitate growth of the stock market...