Contribution of privatization to capital market development: the case of companies privatized at the Nairobi stock exchange

Abstract

In 1954, the Nairobi Stock Exchange (NSE) was constituted as a voluntary association of stockbrokers registered under the Societies Act. The business of dealing in shares was then confined to the resident European community, since Africans and Asians were not permitted to trade in securities until after the attainment of independence. This marked an important milestone in the effort toward the development of a functioning capital market for the mobilization and allocation of long-term capital to the private sector. As at December 2002, 53 companies were listed at the NSE, nine of which were privatized through initial public offer by the government. The state of the capital markets will restrict both the pace of privatization, in terms of how many enterprises could be put up for sale, and the methods available for broadening ownership. This limitation has been of great concern to all governments, and a lot of effort is going into capital market development alongside financial sector reforms. The scope and pace for further divesting government-owned assets and shares in the large enterprises will depend on progress in capital market development. A synergy exists between privatization and capital markets development, because the sale of state assets provides a tremendous impetus to stock market activity. Quite apart from freeing government resources for re-deployment to the poor, privatization has positive overall welfare effects. This study sought to find out if the government privatization program through public floatation improved the pace of privatization, in terms of how many enterprises could be put up for sale. The study also sought to establish if the Privatization Implementation Unit and Parastatal Reform and Privatization Committee, should still pursue the objectives of the widening of participation by the people in the ownership and management of these parastatals as well as developing the local capital market, in their privatization programs and to what extent has the privatization programme contributed to the Nairobi Stock Exchange capitalization and the quantity of share Issues.