Commercial Banks in Stockbrokerage


Contributed by Njoroge Regeru & Company
August 25 2009

As stock markets in East Africa expand, new legal challenges in the regulation of securities exchange are emerging related to the players which are entitled to underwrite or trade in securities. Traditionally, stockbrokerage firms have had the mandate to deal in listed shares at the bourse. However, a new trend is emerging whereby commercial banks, which previously participated only in underwriting, are taking over stockbrokerage firms.(1) The question has arisen as to whether such takeovers are grounded in law or whether they represent an exploitation of loopholes in capital markets legislation.

Kenyan commercial banks seem to be taking up larger shares of stockbrokerage firms, promising the public sounder management and greater accountability than that exhibited by conventional stock brokers. The pertinent legal questions that have arisen are:

whether the intertwining of banking and securities activities will compromise the neutral role of commercial banks as underwriters in initial public offers and rights issues;
whether there is a violation of the Capital Markets Act when a commercial bank buys into, acquires or affiliates itself with another company that either wholly or partially engages in securities underwriting and distribution activities;
if there is no violation of the legislation, whether these loopholes are desirable; and
whether the public is susceptible to exploitation when these same banks give investment advice, retain shares as securities for loans and undertake underwriting responsibilities during initial public offers.

Since many brokerage firms have collapsed in recent months and under all forms of receivership, there seems to be an obvious warming in attitudes towards these moves by commercial banks. It is being forgotten all too quickly that banks offer loans on securities such as shares which the brokerage firms trade in. What is to prevent these commercial banks from showing preference to certain securities when issuing loans? Such activity may in turn jeopardize the liquidity of banks that offer loans on securities which subsequently turn out to be unstable. It might be argued that such risks are remote, but nevertheless they are real.

Another issue that raises concern is the likelihood that commercial banks that venture into stockbrokerage already have listed shares on the stock exchange or are planning to list their shares on the stock exchange. Without legislation, commercial banks with listed shares may unjustly benefit at the expense of other corporations which cannot affiliate themselves to stockbrokers.

However, banks are subject to a special kind of government regulation known as 'safety and soundness' regulations. These regulations are necessary due to the banks' combination of assets and liabilities, with illiquid assets being loans and highly liquid liabilities being deposits. Therefore, the activities of commercial banks will require monitoring by the Central Bank of Kenya and the Capital Markets Authority. Whether these standards are enough to prevent illegal or unethical activities taking place as banks pursue stock market business ventures remains to be seen.

Legislation must be passed in order to keep pace with the changing times. While awaiting the introduction of such legislation, the Capital Markets Authority in its mandate should provide specific guidelines on how commercial banks ought to direct their business within the stock exchange.(2)

For further information on this topic please contact John Mbaluto at Njoroge Regeru & Company by telephone (+254 20 271 8482), fax (+254 20 271 8485) or email (

(1) See The Daily Nation, July 1 2009, "Banks Set to Shake up Stock Market" on the acquisition of Bob Mathews by Cooperative Bank (now Kingdoms Securities Ltd).
(2) The Capital Markets Act, Section 12(1)(d) CAP 488 Laws of Kenya.

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