The Central Bank of Kenya (CBK) will from next month stop paying a commission to stockbrokers, custodian banks and authorised securities dealers who help it sell Treasury bonds, cutting them off from revenue worth hundreds of millions of shillings annually.
The CBK has been paying the placing agents—who act as intermediaries between the central bank and buyers of bonds and Treasury bills— a commission of 0.15 percent of the value of the securities they sell on its behalf, net of five percent withholding tax.
Primary Treasury bills and bond auctions normally run into tens of billions of shillings, with institutional investors who are the majority buyers of these securities often using banks and stockbrokers to place their bids.
In the 2024/2025 fiscal year, the government is borrowing a net of Sh413 billion from the domestic market, which combined with estimated debt redemptions of rollovers of Sh570 billion will see it go to the market for nearly Sh1 trillion worth of security sales.
Such sales go through intermediaries with the potential to generate more than Sh1.5 billion in commissions for banks and stockbrokers, although not all purchases go through third parties.
“Licensed placing agents will not be paid commission from September 2, 2024,” the CBK said in the prospectus of the ongoing tap sale of a 17-year infrastructure bond, which is on sale until August 29 with a settlement date of September 2.
The CBK does not disclose the volume of offers originating from such intermediaries. The regulator did not respond to requests for comments.
This commission was introduced as an incentive to the stockbrokers, authorised securities dealers and custodian banks to market bonds to their clients, especially local high-net-worth investors and offshore buyers who faced hurdles accessing CBK offices.
Market players are linking the exclusion of agents from the commissions’ gravy train to the recent launch of the DhowCSD bonds trading platform, an electronic system for buying and selling of bonds that has made it easier to place bids online and on a centralised platform.
Before the platform was introduced, bond buyers or their agents needed to fill out manual bid forms and deposit them at CBK offices and branches, and payment was through cheques, bank transfers or over-the-counter at the CBK office.
Institutional buyers therefore found it easier to use third parties when buying bonds, while foreign investors had no alternative but to use a local agent to handle their deals.
Besides the Nairobi head office, the CBK has seven branches in towns like Kisumu, Mombasa, Kisii, Nyeri, Eldoret, Meru and Nakuru.
The Dhow CSD platform on the other hand allows one to place their bids online, with payment now limited to electronic payments through one’s bank.
Standard Chartered Bank Kenya has, for instance, opened an option for its customers to pay for bonds directly via their online banking platform.
“It was only a matter of time before they removed the commission as was hinted when launching DhowCSD, considering the improved efficiency that the platform brings,” said an executive at a top bank who asked not to be named.
“They (CBK) may, however, need to consider that market players do a lot of marketing and analysis for their clients to make the auctions successful, and should therefore be compensated for that.”
For smaller intermediaries such as stockbrokers, the fees earned by offering bond-buying services for clients have been supplementing the earnings from brokerage services, which have fallen significantly over the last few years due to reduced trading activity at the Nairobi Securities Exchange (NSE).
By acting as placing agents, they also get visibility among investors looking to sell on their bonds in the secondary market, which also gives the brokers an additional avenue to earn trading commissions.
The secondary bonds market transacts significantly higher volumes compared to equities, owing to the high value of bonds currently in issue. There are currently Sh4.6 trillion worth of outstanding Treasury bonds in issue in Kenya, making the securities the largest asset class in the country’s financial markets.
Investors traded Sh1 trillion worth of bonds at the NSE secondary market between January 1 and August 21, 2024, eclipsing the full-year total of Sh644 billion recorded in 2023.
Similarly, banks that offer bond-buying services can use that to attract institutional or high-net-worth clients looking for custodian services.