The-Accountant-Mar-Apr-2018

Finance and investment
Notwithstanding the expansion in
global derivative market, the development
of derivatives market in many African
economies remains a challenge. Majority of
the African countries with the exception of
South Africa have no organized exchange
for derivatives. The Financial Stability
Board (FSB) Peer Review of South Africa
disclose that the South African Over the
counter market estimated worth was
R27.7 trillion ($3.3 trillion) as
at June 2012. The bulk (59%)
of these transactions was
estimated to be carried out
in the inter-bank market.
In Kenya, there
is presently no
structured exchange
for financial
derivatives. The
foremost barrier
towards the
development of
the derivative
markets in
Kenya has
been the
regulatory
and policy
environment.
As at the
end of 2012,
the records
obtained from
the commercial
banks’ financials
reveals that the total
volume of derivatives
stood at approximately
$1.96 billion (Kshs.
168.8 billion). This data
reveals lower amount of
over the counter derivatives in
comparison with South Africa’s $
3.3 trillion (FSB, 2012).
In 2002, the NSE sought to build up the
institutional arrangement by undertaking
senior management and board study
tours to gain exposure on the operations
and regulation of financial products such
as futures and options. Moreover, the
CMA planned that a futures and options
market would be established once the
establishment of an electronic depository
trading and settlement was concluded.
The CMA sought to expand the market
horizon by carrying out a study on the
feasibility of setting up a futures and
options market section (CMA Annual
Report, 2002). Whereas the Automated
Trading System (ATS) was established in
2006, it was anticipated that the derivatives
segment would take off sooner. To date,
the derivatives exchange is yet to be fully
operational.
Despite the absence of a derivatives
exchange in Kenya, most derivatives
are traded over the counter with the
commercial banks playing a lead role. The
most utilized derivatives instruments in
Kenya are the forwards and swaps. Most
Kenyan corporations use forward contracts
to mitigate risk that may arise while
importing or exporting goods by using
swaps in making the necessary measures to
swap currency resources over the stipulated
time period. The capacity of commercial
banks to facilitate derivative trading is
premised on the following factors.
1. Size of bank
The size of the bank is often examined
based on the value of assets. According to
most scholars, bigger banks have a higher
likelihood of using derivatives than smaller
banks for a number of reasons;
Firstly, derivatives are very intricate tools
and need cautious administering and
scrutiny. Most large banks are in a position
to administer the derivative contracts as
opposed to small banks.
Secondly, banks that are large in size
have adequate resources to which they can
deploy unlike banks that are small in size
which may have insufficient resources to
which they can utilize towards the use of
these instruments.
Thirdly, large banks have the capacity to
engage in derivative trading in large volumes.
Consequently, large banks find themselves
enjoying economies of scale as transaction
fees involved in trading derivatives decrease
with increased derivatives transactions.
Finally, banks that are large in size are
more vulnerable to market risk for the
reason that their sources of borrowing do
have differences. The major reason for this is
that banks that are big in size do have quite
a number of foreign exchange transactions
and trading positions.
2. Type of bank
As observed from the countries that
have a well developed derivatives market,
particularly in Europe, banks having a
bigger component of global activities are
more likely to encounter and administer
their currency exposure. As a result they are
more likely to engage in derivative trading
not just to hedge against financial risks
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