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Kenya’s retail investors use 54% of their shares as collateral for bank loans
Kenya’s latest quarterly Capital Markets Authority (CMA) report has shown that retail investors in the East African country used 54% of their total shareholdings (as listed on the Kenyan bourse) as collateral for bank loans in H1 2022.
Out of the 11.8 billion shares held by retail investors during the period, investors used 6.38 billion units as collateral for loans.
Although the CMA report did not disclose the shares’ value, Business Daily reported that it would run into billions of shillings.
Kenya’s stock market has a capitalisation of about $24.3 billion, and retail investors hold a significant portion of the shares traded in the market. However, out of about 1.7 million registered individual retail investors in the country, only 40,717 high net worth investors pledged their shares to secure bank loans during the period under review.
Do note that Kenyan retail investors prefer to use their shares as collateral for bank loans instead of selling them at a loss. That way, they can use the loans to meet their immediate financial needs whilst guaranteeing future dividend payouts on their shares.
The share-for-loan arrangement works in such a way that allows Kenyan banks to give loans at a significant discount to the prevailing share price. The rationale is to mitigate against the risks of potential losses just in case the borrower defaults or the stock market crashes.
After issuing the loans, the shares used as collateral are then frozen until their owners offset their loans. It’s a mutually beneficial arrangement, although there is a risk factor whereby the banks could lose if a borrower defaults or the value of a share declines drastically.
