A Summary of the Corporate Bond Market Development in Kenya
CORPORATE BOND MARKET DEVELOPMENT IN KENYA
There are several good reasons for developing bond market. The most fundamental reason is to make financial and capital market more complete by generating market interest rates that reflect the opportunity cost of funds at each maturity. This is essential for efficient investment and financing decisions. Moreover the existence of tradable instruments helps risk management. Further the use of financial guarantees and other types of underwriting is becoming increasingly common in corporate debt market as financing deals become more complex. If borrowers have available to them only a narrow range of instruments (e.g. in terms of maturity, currency etc) then they can be exposed to significant mismatches between their assets and their liabilities.
The risks entailed by such mismatches have to be managed and the ability to do so will often depend on whether certain exposures can be adequately hedged. Liquid markets help capital market participants to hedge their exposures. If bond market is not well developed for instance firms may have to finance the acquisition of long-term assets by incurring short-term debts. As a result their investment policies may be biased in favour of short-term projects and a way from entrepreneurial ventures.
The relationship between intermediation through banks and disintermediation through capital markets is controversial. Even in developed economies this two rather distinct systems have grown up one where capital markets are very important and one where banks dominate. A question that arises concerns the role commercial banks can play in developing our bond markets. The view that increased corporate bond issuance just takes away profitable business from commercial banks is oversimplified.
One implication often drawn from developed market experience is that a key prerequisite for the development of a corporate bond market is the existence of some form of independent credit risk
There are several good reasons for developing bond market. The most fundamental reason is to make financial and capital market more complete by generating market interest rates that reflect the opportunity cost of funds at each maturity. This is essential for efficient investment and financing decisions. Moreover the existence of tradable instruments helps risk management. Further the use of financial guarantees and other types of underwriting is becoming increasingly common in corporate debt market as financing deals become more complex. If borrowers have available to them only a narrow range of instruments (e.g. in terms of maturity, currency etc) then they can be exposed to significant mismatches between their assets and their liabilities.
The risks entailed by such mismatches have to be managed and the ability to do so will often depend on whether certain exposures can be adequately hedged. Liquid markets help capital market participants to hedge their exposures. If bond market is not well developed for instance firms may have to finance the acquisition of long-term assets by incurring short-term debts. As a result their investment policies may be biased in favour of short-term projects and a way from entrepreneurial ventures.
The relationship between intermediation through banks and disintermediation through capital markets is controversial. Even in developed economies this two rather distinct systems have grown up one where capital markets are very important and one where banks dominate. A question that arises concerns the role commercial banks can play in developing our bond markets. The view that increased corporate bond issuance just takes away profitable business from commercial banks is oversimplified.
One implication often drawn from developed market experience is that a key prerequisite for the development of a corporate bond market is the existence of some form of independent credit risk