Factors Influencing the Development Of Nairobi Securities Exchange

Abstract

The securities market is an important market for economic growth in the sense that it facilitates resource mobilization, pools quality investments from local and international markets, provides capital to companies for investments, aides in risk diversification thus encouraging investment and aides in poverty alleviation. A well-developed securities market has various benefits ranging from financial intermediation, promoting economic growth especially because it enhances access to savings as well as diversification of risk. There however remain challenges to operation of capital markets despite the developments put in by the government. Performance indicators show that Nairobi Securities Exchange has not yet achieved its performance potential. Various challenges ranging from low turnover and market capitalization as well as low stock values have been established. Kenya’s stock market is termed as shallow and narrow. There was a need for the securities market to develop. These therefore called for a need to find out the factors that influence the development of this capital market in order to provide policy recommendations. This study sought to find out the factors influencing the development of Nairobi Securities Exchange. The general objective of this study was to determine the factors that influence the development of Nairobi Securities Exchange. The specific objectives were to determine the effect of market information; transaction processing cost; regulatory framework on the development of the NSE. The study adopted an explanatory research design. The study was hinged on the Behavioral Theory, Signaling Theory, Efficient Market Theory (EMT) and Arbitrage Pricing Theory (APT) in explaining the concept of Nairobi Securities Exchange and the factors that influence it. An explanatory research design was adopted. The target population was 21 brokerage firms and 65 listed firms. Using Yamane formula, a total of 46 firms were sampled. Risk and investment managers were targeted by the study. Primary data was used to achieve the study objectives. A structured data collection questionnaire was used to collect primary data. After data collection, descriptive and inferential analysis methods were adopted. The descriptive statistics such as means and standard deviations were used to describe the data. Inferential analysis (correlation and regression) on the other hand were used to establish relationship between the variables. The tool for analysis was Statistical Package for Social Sciences (SPSS) version 24. The study findings were presented in form of tables and figures. The results of the study established that market information has a positive and significant effect on the development of the NSE market (B = 0.279; t = 3.716, > 1.96, = P-Value = 0.000, < 0.05) ; transaction processing costs has a negative and not significant effect on the development of the NSE market (B = - 0.095; t = 1.25, < 1.96, = P-Value = 0.217, > 0.05) while regulatory framework has a positive and significant effect on the development of the NSE market (B = 0.235; t = 2.539, < 1.96, = P-Value = 0.014, < 0.05). It was also determined that up to 70.9% of the variation in development of Nairobi Securities Exchange is explained by the three factors (Market Information, Transaction Processing and Regulatory Framework) (R2 = 0.709). The study recommends that the Capital Markets Authority should come up with initiatives to ensure that the information on securities is efficient and reflects the true picture of the market. The regulator, CMA, should also manage the costs so that the market can improve in its development efforts. There is a need for the regulator to ensure that costs are manageable. The regulator, CMA, should also come up with favorable policies which can encourage more subscriptions and listing on the course.