Latest Products

Building a sound regulatory framework in Kenya

Tuesday 18 April 2017

Recently, GRC Professional caught up with Paul Muthaura CEO of the Capital Markets Authority (CMA) who has held various roles in the CMA over the last 12 years, and has been CEO of the Kenyan Regulatory body for the last five years. Kenya is home to one of the first successful fintech solutions to effectively leverage mobile money platforms.  The most visible of these is M-Pesa—with the ‘M’ standing for ‘mobile’ and Pesa being Swahili for ‘money’. The platform allows anyone with even the most rudimentary cell phone to pay for goods and services, to deposit or transfer money and to access credit, savings and investment opportunities.

In many emerging economies, the issue of being ‘unbanked’ is a very real one. Perhaps for this reason alone, the growth of fintech in emerging economies is beginning to out-pace the developed world by creating opportunities for these economies to leapfrog conventional financial market evolution stages.

Advantages and disadvantages of the sectoral regulatory models
The regulatory environment in Kenya is somewhat different in that it has a sectoral approach to regulation with distinct regulators for the Capital Markets, Insurance, Pensions, Banking and Savings- and cooperative societies sectors. According to Muthaura, however, there are ongoing deliberations on the implementation of a ‘twin peaks’   model of regulation.

“At one level, because regulators in Kenya have a dual mandate of both development and regulation, I think there has been a view that it is important to have sector-specific regulation to allow for the focus of resources on the necessary policy-per-sector and related market development issues,” Muthaura said. “There is the concern that if you put everyone together, then something will slip on the sector development side.”
“When you look at it from the regulatory side, however, I think there is a lot of value that can be achieved, particularly with regards to the management of potential arbitrage through closing gaps where you have consolidated oversight. So, there is ongoing discussion in Kenya around the building of a ‘twin peaks’ regulatory model with distinct prudential and market conduct authorities.”

The introduction of a market conduct framework is expected to help in addressing the continuous review of the perimeter of regulation by ensuring that all products being brought to market are subjected to an ‘appropriate’ level of oversight to support overall consumer protection.

What is the regulatory perspective on M-Pesa?
“Ultimately, M-Pesa, and the other mobile money platforms operating in the country, are part of the national payment system, and are a facilitator for small-scale payments and single transactions of less than USD$700 maximum, with an individual transaction limit of USD$1400 a day,” Muthaura said. “It is a facilitation system. So, from our perspective, it means understanding how the market can leverage that payment platform to address issues around inclusion and market efficiency—around the effectiveness of finance, and making sure finance is getting to where it most needs to reach.”

He added that, as a regulator, noting their dual mandate of both market development and market regulation, they have constructive engagement with industry on:

  • Thinking around new directions for the market, new products,
  • The kind of policy environment required to support that kind of market deepening.

“Actually, the Kenyan capital markets industry as a whole are just a little over two years into the implementation of a 10 year Capital Markets’ Master Plan,” he said.

“This masterplan seeks to address the different key market fundamentals that will support Kenya’s evolution into what we hope will be a highly-competitive international financial centre, positioning capital markets in Kenya at the heart of capital markets’ financing on the continent.”

This is built around three key pillars:

  • The first pillar focuses on the relevance of capital markets to the national and regional economy. Ensuring the markets are able to play their role in unlocking economic activity, supporting both dissemination of wealth as well as wealth creation;
  • The next pillar looks at the operations of the market: the scope of products, the quality of market infrastructure, and the institutional environment of the markets.
  • Finally, the third pillar addresses the legal and regulatory environment. Most important there is making sure the law is sufficiently robust, as well as sufficiently flexible to support market growth and development. This also has regard to the overall governance, transparency and accountability environment.

“One thing we do recognise is that, not matter how diversified the product availability, if we are unable to address the issues around investor confidence, or transparency and accountability in the environment, then we can only go so far,” Muthaura said.

The Authority has taken steps to address this issue by building a certification program for the Kenyan capital markets intermediaries, in collaboration with the UK’s Chartered Institute for Securities and Investments (CISI).

“In addition, on 4 March of this year, a whole new Code of Corporate Governance for Public Issuers of Securities came into full force,” Muthaura said. “It is  an ‘apply and explain’ framework, however, looking at the environment in Kenya and the journey on which we need to go, quite a large percentage of its provisions have been replicated in regulations to make them mandatory so we can set the right tone to push things in the direction which will support the market to deepen.”

There is also a stewardship code to be imminently brought into law that will look at how the regulator can empower institutional investors in Kenya to play a more proactive role in setting the tone of governance and transparency.


Were there any concerns about the tightening of the market as a consequence of additional rules?
“Between 2007 and 2009, a number of our market intermediaries went into financial distress,” Muthaura explained. “So, when we introduced rules regarding the conduct of business and corporate governance of licensed intermediaries in 2011 and 2012, it was broadly taken very positively.”

He added that it was also at that point the sector recognized the issues with the governance oversight of public issuers that triggered the development of the new Code. This included assessment and enforcement in respect of how proactively boards were overseeing issues around risk, internal controls and transparency.

“The market feels the new rules are timely as there was consensus that something needed to be done, and so they’re glad to see the regulator doing it,” Muthaura said. “What has been interesting is the Code imposes an obligation for a public issuer to conduct a financial, a governance audit, as well as a general legal and compliance audit. This has therefore triggered engagement on how the industry is to manage these costs. So, the Authority is working actively with the Law Society of Kenya, who would be the ones to carry out the legal and compliance audit, as well as with the Institute of Certified Public Secretaries of Kenya, to see how we can build an implementation framework for the governance audits as well. Hopefully, some degree of consideration around the costs should be associated with that.”

Muthaura added that there is a feeling that, as Kenya moves to a more robust regulatory environment, it will attract more domestic and international investment.

Reporting guidance to industry
“We have issued reporting templates to help industry understand what we will be expecting to see, and also to ensure that, when they are publishing their governance reports, those reports are actually comparable across different companies,” Muthaura said. “That way, they will actually add value to the investors, rather than just being the sort of ‘swish marketing’ that doesn’t really get to the heart of the problem.”

Muthaura noted they have been working with the International Financial Corporation (IFC), a member of the World Bank Group, to develop the necessary tools for reviewing the quality of reports so that a level of consistency can be achieved across the market.


Paul Muthaura, Chief Executive, Capital Markets Authority in Kenya

Mr Paul Murithi Muthaura has led the Capital Markets Authority, Kenya since July 2012.

Mr. Muthaura is a member of the Board of the International Organization of Securities Commissions (IOSCO) and the Vice Chairman of the Africa and Middle East Regional Committee (AMERC) of IOSCO. He is also a member of the Financial Stability Board (FSB) Regional Consultative Group for Sub-Saharan Africa and the Consultative Committee of the East African Securities Regulatory Authorities (EASRA). At the national level he sits on the boards of the Insurance and Pensions regulator as well as the Vision 2030 Delivery Board.