The PricewaterhouseCoopers (PwC) report into the collapse of Nyaga stockbrokers has been completed and leaked. From the details made available in the press, it appears that the rot started in the manner in which the Capital Markets Authority (CMA) and the Nairobi Stock Exchange (NSE) are structured and administered.
Apparently the CMA sat on the report because it was so embarrassed at the allegations against it contained within. What’s even more interesting, however, is that a previous report had warned the CMA of the potential for widespread misdeeds, yet the authority’s management had chosen to ignore it. The then-head of the CMA, Edward Ntalami, reportedly said at the time,
Just because the consultant has made recommendations does not mean we shall adopt them
Well, isn’t that just dandy? Serious flaws identified in the management of what is supposedly the most dynamic and exciting market in East Africa, but no action taken to address them.
I can almost understand why the CMA refused to do anything at the time. After all, the system had worked so well up until then, they probably didn’t see any pressing need for change. And restructuring management systems is hard! It’s nearly as bad as than calculus homework or, like, programming an unfamiliar mobile phone! No wonder Ntalami and the rest of the CMA executive preferred to do something easier, like deciding which investment bankers to have lunch with.
What’s apparent through this debacle is that self-regulation has demonstrably failed to work. The relationship between the management of the CMA and the NSE appears to be incestuous, wholly unsuited to the purpose of oversight, and beneficial primarily to those operating within the organisations rather than to investors. While it is unlikely to happen, what would be best for the stock exchange and for investors as a whole would be root-and-branch reform of both the CMA and the NSE, with tougher regulations for both. Sadly, it appears that corruption is so entrenched that those responsible for the various financial crimes (for that is what they are) wil escape any form of sanction.
The losers in all of this are not just the investors who have lost money, but the economy as a whole. In order for a stock market to thrive, investors need to have confidence that it is operating with propriety and that they are not being swindled. With the revelations that have come to light, it is unsurprising that those with the means would rather take the sure returns of government bonds rather than the uncertain risks of stockbrokers. With the prospect of a deep and long recession ahead of us, if the NSE hopes to end its bear run, it will have to take action to restore investor confidence, and quickly.
[Image by Watchsmart]