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The Central Bank of Kenya (CBK) is spearheading a pivotal reform in the country’s bond market by designating top-tier local banks as market makers, aiming to boost liquidity, enhance price transparency, and streamline the trading of government securities.
Backed by the International Monetary Fund (IMF) and the World Bank, the initiative targets well-capitalised commercial banks regulated by the CBK to provide continuous buy-and-sell price quotations for treasury bonds. This move aligns with global best practices and is expected to deepen the secondary market for government securities, support resource mobilisation, and attract foreign investment.
According to draft guidelines seen by The EastAfrican, participating banks will be required to offer two-way quotes with a minimum size of Ksh20 million (approx. $155,038), with subsequent trades allowed in increments of Ksh50,000 (approx. $387.59). These market makers will actively quote prices for benchmark government bonds during trading hours from 9:30 a.m. to 2:30 p.m., thereby facilitating continuous market access.
“The purpose of the Pilot Market Makers Program is to establish a wholesale secondary market for benchmark Government of Kenya securities,” the CBK notes in the guidelines. “This will enhance efficiency in the government bond market, reduce the cost of borrowing for the Treasury, and encourage broader investor participation.”
Currently, banks hold over 45% of Kenya’s domestic government debt—equivalent to Ksh2.83 trillion ($21.93 billion)—followed by pension funds (28.82%), insurance firms (7.25%), and parastatals (6%).
Market makers, or liquidity providers, play a crucial role in ensuring continuous availability of securities in the market. By quoting both buy and sell prices, they facilitate rapid and fair trading, with profits derived from the bid-ask spread.
Under the new rules, only institutions licensed under Kenya’s Banking Act or those designated by the CBK will qualify as market makers. These entities must demonstrate adequate financial strength, maintain robust internal controls, and employ qualified personnel. Additionally, market makers must hold an Authorised Securities Dealer licence from the Capital Markets Authority (CMA) to participate in the over-the-counter (OTC) market.
To promote transparency and ensure reliable settlement, the guidelines also require market participants to guarantee transaction finality. In cases of failed trades due to insufficient securities or funds, the aggrieved party will be entitled to claim interest compensation.
These reforms complement the recent launch of the DhowCSD trading portal in August 2023, which broadened access to treasury bonds for retail investors via mobile platforms, previously dominated by institutional investors.
As the government’s fiscal agent, the CBK facilitates bond issuance on behalf of the National Treasury, earning a commission of 1.5% on funds raised. While the CBK manages the registry for government securities, corporate bond records are maintained by the Central Depository and Settlement Corporation (CDSC) for trades executed on the Nairobi Securities Exchange (NSE).
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