NAIROBI SECURITIES EXCHANGE CHAIRMAN’S 2011 YEAR REVIEW NAIROBI SECURITIES EXCHANGE CHAIRMAN’S 2011 YEAR REVIEW

NAIROBI SECURITIES EXCHANGE

CHAIRMAN’S 2011 YEAR REVIEW

On behalf of the Board of the Nairobi Securities Exchange (NSE), I would like to highlight the reasons why we remain optimistic that the market will rebound in the medium term despite the economic turbulence experienced last year. It is true that the domestic and global financial markets are experiencing a general downturn caused by the high international oil prices, fluctuations in the exchange rate, inadequate rainfall and rising global food prices. Here in Kenya the inflation hit a high of 19.72% in November 2011 and the real GDP growth slowed to an estimated 3.6% from a projected figure of 5.3%.

REVIEW OF MARKET PERFORMANCE IN 2011

The Capital Markets registered a decline in performance in 2011 in comparison to 2010 characterized by decreased activity in the secondary markets. Reduced economic growth resulted to lower turnovers in the equity market caused by; the rising inflation in the second half of the year, higher and volatile interest rates, depreciation (and volatility) of the shilling against major currencies and Kenya’s incursion in Somalia. We also witnessed a shift of investors from equities to fixed deposits, treasury bills and bonds which are considered lower risk assets. The NSE 20 Share Index reported a 27.7% decline, closing at 3205.02 points at the end of 2011, down from 4,433 points reported at the end of December 2010. The All Share

Index (NASI) reported a 30.6% decline closing at 68.03 points at the end of 2011 down from 98 points at the end of December 2010

POSITIVE MACROECONOMIC OUTLOOK

We however maintain a positive outlook for the medium term. According to the World

Bank, the real GDP growth is expected to rebound to 5.9% in 2012, as the economy recovers from the drought in 2011. The World Bank forecasts that growth will be in the 5-5.6% range in 2013-16. After surging to a high of 19.72% in 2011, inflation is forecast to retreat to 6.7% in 2012 and to remain in the 5-6% range in 2013-16, helped by prudent monetary policies and more stable global commodity prices. Additionally, after rising to 8.1% of GDP in 2011, underpinned by costlier oil, the current account deficit is expected to narrow gradually, helped by steady growth in earnings from exports, tourism and remittances.

STRUCTURAL REFORMS

On January 31 2011, the Executive Board of the International Monetary Fund (IM F) approved a three-year arrangement under the Extended Credit Facility for Kenya in an amount equivalent to SDR 325.68 million (about US$508.7 million). The program aims to protect Kenya’s external position, while allowing a gradual fiscal adjustment. In December 2011, following the completion of the second review of Kenya’s economic performance the IMF Board approved an augmentation of access equal to 60 percent of quota, leading to a total access of 180 percent of quota, an amount equivalent to SDR 488.52 million (about US$760.63 million). The government further aims to quicken the pace of structural reforms in 2011-12, including deregulation and trade liberalization (especially within the EAC). It also plans to dispose of full or partial stakes in some state enterprises in a range of sectors, either by selling shares to strategic partners or through flotations on the Nairobi Securities Exchange. In 2011, we witnessed the beginning of an overhaul of company law, insolvency law and capital markets regulations. Although the 2012 elections may distract policymakers, the elections are unlikely to trigger any major policy shifts, as all key parties support a free market system which supports the Economic pillar of Kenya’s Vision 2030. Foreign policy will continue to be driven by economic interests, including the maintenance of close relations with key donors and the advance of regional integration, especially within the East African Community (EAC).

In the medium term, the expectations about Kenya’s economic projections continue to be optimistic, with economic recovery projected to accelerate largely due to improved performance of key sectors and domestic demand. Indeed, in anticipation of an improved economic environment going forward, and in order to improve our reach, we continue to innovate and benchmark against best practices.

THE NSE MILESTONES

As part of our Vision “To be a leading securities exchange in Africa, with a global reach.”, last year saw us accomplishing the following major milestones;

1. NAME CHANGE

The Nairobi Stock Exchange changed her name to the Nairobi Securities Exchange Limited. It reflects the fact that besides stocks, the Nairobi Securities Exchange (NSE) offers a platform for the issuance and trading of debt securities. The NSE is also growing its portfolio of information products and services. This name change is in line with the 2010 – 2014 strategic plan of the Nairobi Securities Exchange to evolve into a full service securities exchange which supports trading, clearing and settlement of equities, debt, derivatives and other associated instruments.

2. RE-REGISTRATION OF THE COMPANY

The Nairobi Stock Exchange converted from a company limited by guarantee to a company limited by shareholding; a function that was also marked by the re-registration from the Nairobi Stock Exchange to the Nairobi Securities Exchange Limited.

3. REDUCTION OF THE SETTLEMENT CYCLE

The equity settlement cycle moved from the previous T+4 settlement cycle to the T+3 settlement cycle. This market milestone is in line with international best practice.

Trading in debt securities was already on a T+3 settlement cycle. We expect that the efficiency gains from this shorter settlement cycle will improve liquidity in the market for listed equity securities thus making our market more attractive to domestic and foreign investors.

4. NSE BROKER BACK OFFICE SYSTEM

The Broker Back Office (BBO) went live and is now undergoing the test phase to optimize system customization. The BBO system automates the entire process of transacting in shares with minimal manual intervention and is interfaced with the Automated Trading System (ATS) and Central Depository System (CDS). This system will reduce the risk of trading in securities listed on the NSE, boost investor confidence and facilitate greater access by enabling internet trading. The Broker Back Office will improve the integrity of the Exchange trading systems and facilitate greater access to our securities market.

5. COMPANY RECLASSIFICATION

We reclassified the industry sectors under which our listed companies are placed.

Equities are now classified under ten (10) industry sectors. Debt securities including preference shares are classified under three (3) categories. This reclassification brings us closer to international best practise and will enable domestic and international investors to more easily compare company and sector performance. We are convinced that the reclassification will provide a more accurate reflection of the diversity of the companies listed at the NSE and by extension reflect the increasing diversification of our economy.

6. FTSE NSE KENYA INDEX SERIES

On November 8, 2011 we successfully launched the FTSE NSE Kenya 15 and FTSE NSE Kenya 25 Indices. The launch of the indices is the result of an extensive market consultation process with local asset owners and fund managers and reflects the growing interest in new domestic investment and diversification opportunities in the East African region. Designed to enhance and capture the depth of information available on the Kenyan market, the indices are also suitable as the foundation for ETFs and other index-linked products which can also be utilized by global investors wishing to access this frontier market. These indices are running concurrently with the NSE 20 Share and NSE All Share indices. The branded indices give the NSE the opportunity to use FTSE’s expertise to design, manage and distribute branded indices and index related products, domestically and internationally. Overall, the indices should improve capital flows into the domestic market and enhance liquidity and market capitalization.

7. NEW LISTINGS

2011 was a year of listings at the NSE. We welcomed three (3) new companies and saw the reinstatement of one. CFC Insurance Holdings listed on the Main Investment Market segment (MIMS) under the Insurance subsector joining three (3) other insurance companies. Transcentury Ltd listed by way of introduction joining seven (7) other companies listed on the Alternative Investment Market Segment (AIMS), British American Investments Company Ltd. (Britak) was the third company to list joining four (4) other insurance companies on the Main Investment Market Segment (MIMS). In 2011, we witnessed the re-listing of Uchumi Supermarkets Ltd on the Main Investment Market after a five (5) year suspension from trading. On the Debt market, we also witnessed the listing of the first Tranche of the Shelter Afrique Kshs 3 Billion Medium Term Note (MTN) Issue. This illustrates the confidence our corporates have placed in our market’s ability to meet their ongoing needs.

The Board and Management will continue to support innovations that will aid in the growth of the market. In 2012, we will prioritize the following initiatives:-

2012 OUTLOOK

1. TREASURY BOND INDEX

Together with FTSE International, we are working on introducing a Treasury Bond Index, which we believe will enable our investors to accurately measure the performance of their bond portfolios.

2. GROWTH ENTERPRISE MARKET SEGMENT (GEMS)

We are in the process of setting up the Growth Enterprise Market Segment (GEMS), a Mid Cap Market Segment. This market segment will facilitate the listing of Small and Medium Sized Enterprises (SMEs). The establishment of the Mid Cap market segment is not only expected to diversify the avenues of long term capital for SMEs, but also raise the level of savings and investments within the capital markets through additional listings. The introduction of the Mid Cap Market is in line with the Government focus on the SME sector as one of the key drivers of Vision 2030, destined to play an effective role as an engine for economic growth, poverty eradication, and employment creation. The Board of the Capital Markets Authority approved the rules and regulations for GEMS. The regulations will now be forwarded to the Minister for Finance for gazettement and the market is expected to be operational in the second half of 2012.

3. NEW LISTINGS

This year, we anticipate an estimated five (5) companies will be coming to the market to raise capital. When a Company is listed, it makes a statement of its commitment to transparency and good corporate governance. The shareholders have an opportunity to scrutinize and question the Board and Management on the performance of the company. Through its share price, the company will also get a market viewpoint on its performance. We shall continue to support such transactions that provide value to the shareholders, employees and our economy.

4. DEMUTUALIZATION

February 3, 2012 marked the end of a five (5) months legal process after Justice Cecilia Githua ruled in favour of the NSE in a matter against Francis Thuo & Partners that had halted the demutualization process. In her ruling, she held that the Nairobi Securities Exchange is a Limited Liability Company and that therefore the NSE is not amenable to judicial review. I am happy to note that this ruling marks a significant step towards the completion of the Demutualization process. The NSE remains committed to settling any outstanding issues with Francis Thuo & Partners Ltd. As I have repeatedly stated, demutualization of the NSE is a statement of our commitment to transparency and good corporate governance and that this improved governance is critical in attracting investors and increasing opportunities to raise debt and equity through the capital markets, which resonates with the NSE’s vision, To be the leading securities exchange in Africa with a global reach.

APPRECIATION

On behalf of the Board of the Directors of the NSE, I wish to express our unreserved appreciation to all investors– domestic and foreign, our listed companies and our market intermediaries for their continued support. I wish to appreciate the Government of Kenya for showing commitment to the capital markets, and to the President, His Excellency Honorable Mwai Kibaki for honoring us with his distinguished presence twice in 2011 during our listing ceremonies. Indeed, I wish to reiterate that the NSE remains committed to facilitating the Government’s efforts to tap private capital to support investment in Vision 2030 projects.

EDDY NJOROGE

CHAIRMAN

http://www.nse.co.ke/