Harvest the Gold in CIS
East African Collective Investment Schemes just like in other parts of the world, are a manifestation of the growing reliance on capital markets and institutional investors, as opposed to on-balance sheet lending by banks, in financial intermediation. This reality has now sucked in traditional financial intermediaries, such as banks and insurances companies to adopt to the changing customer investment strategies, into offering collective investment schemes services.
Simply put, Collective Investment Schemes are a form of institutional investment through which individuals pool their funds and hire professionals to manage their investments, with each investor entitled to a proportional share of the net benefits of ownership of the underlying assets.
Institutional, Corporate and Individual investors all over the world, pre-occupy themselves with finding investment vehicles within the financial markets that, offer, cost-effective, professionally managed diversification of risk to investors,
The growth of CIS worldwide is an undeniable because of their ability to accommodate even small investors with little or irregular savings though currently the institutional and corporate investors have a better understanding of the hidden treasures therein.
Forecasts show that Collective Investment Schemes by whatever type will be the region’s most attractive investment vehicle that threatens to surpass banks, micro-finance institutions, saccos and even insurance companies, because of the ability to invest and pull-out with virtually no major restrictions.
The Variable Structures of East African CIS
In its legal form, a Collective Investment Scheme CIS consists of first, a pooling of resources to gain sufficient size for portfolio diversification and cost-efficient operation and secondly professional portfolio management to execute an investment strategy. CIS structures are all regulated by Capital Markets Authorities in each respective jurisdiction and relevant security laws.The East African Regulators include: Capital Markets Authority Uganda, Capital Markets Authority Kenya, Capital Markets and Securities Authority of Tanzania, Rwanda Capital Market Authority.
In Uganda the Law only provides for the Trust and Corporate models, while in Kenya a CIS can take the legal form of a mutual fund, unit trust or investment company. In the case of an investment company, there will be a board of directors whereas unit trust or mutual fund appoints a trustee. Tanzania recognizes mainly a Trust and Open Ended Investment Companies OEIC, while Rwanda offers both contractual and trust model.
The most popular and common CIS are open ended in nature, this means that the shares of an open-ended scheme must be redeemable on an on-going and continuous basis or periodically, as provided for in the Authority’s regulations. This is the right of an investor to exit the pool as and when they deem fit, at the net asset value (NAV), in other words the market value of all assets in the CIS, but net of the expenses divided by the number of units in the CIS.
However of concern here is, while giving investors ability to redeem their funds at anytime, whether both the Unit Trust and Mutual funds offer the same flexibility as Open Ended Investment Companies OEICs namely; the ability to make many more charges directly to the fund, to issue units with different charging structures and the ability of creating a fund with sub funds underneath it thus creating different portfolios.
Authorised Collective Investment Schemes in East Africa
- Xeno Investment Management Limited
- UAP Financial Services Ltd
- STANLIB Uganda Limited
- Standard Chartered Bank Uganda Limited
- KCB Bank Uganda Limited
- ICEA Asset Management (U) Limited
- African Alliance Kenya Unit Trust Scheme
- British-American Unit Trust Scheme
- Stanbic Unit Trust Scheme
- Commercial Bank of Africa Unit Trust Scheme
- Zimele Unit Trust Scheme
- ICEA Unit Trust Scheme
- Standard Investment Trust Funds
- CIC Unit Trust Scheme
- Madison Asset Unit Trust Funds
- Dyer and Blair Unit Trust Scheme
- Amana Unit Trust Funds Scheme
- Diaspora Unit Trust Scheme
- First Ethical Opportunities Fund
- Genghis Unit Trust Funds
- Sanlam Unit Trust Scheme
- Nabo Africa Funds
- Old Mutual Unit Trust Scheme
- Equity Investment Bank Collective Investment Scheme
- Dry Associates Unit Trust Scheme
- Co-op Trust Fund
- Apollo Unit Trust Scheme
- Watu Money Market Fund
- Seriani Unit Trust Scheme
Burundi, Democratic Republic of Congo, and South Sudan all have 0.
Burundi is set to join the capital markets business in November 2018 and become a new member of East African Securities Regulatory Authority (EASRA), and is currently represented by the Central Bank of Burundi.
Regional CIS Fund Types (Investment Products)
The fund types of all the East Africa countries are still limited to money markets and securities funds; the region is yet to grow into the offering of other kinds of fund such as property funds, mortgage bond scheme, this will only materialize with greater penetration and understanding of the operations of CIS by the general population.
Nevertheless the general type of collective investment schemes allowed in the region include; Unit Trusts (Kenya, Uganda, Tanzania and Rwanda), Open Ended Investment Companies (Kenya, Uganda, Tanzania,) Investment Company (Kenya), Mutual Funds (Kenya), Employee Shares Ownership Plan Unit Trust (Kenya), Special Interest Collective Investment Schemes (Kenya)
Regulatory Control over CIS
All collective Investments schemes within East Africa are regulated by the same institutions that control and regulate stock exchanges and public companies. The East African regulatory framework is harmonized in making it illegal to offer CIS unless the operators; the management company, trustees, depository or custodian are authorised or licensed.
The main regulatory emphasis as per the best practices for all regulatory bodies ought to be investor protection, an area of concern with East Africa, with little harmonization on investor protection regulations. This could be partly explained by the fact that, unlike Uganda that has a separate Collective Investment Schemes legal framework, the Tanzania and Kenyan CIS are managed under their respective Capital Markets laws and regulations.
The comparative analysis of the investor protection strength of all the East African countries by looking at the regulatory controls, puts Uganda far above the sister countries in conforming to international standards for CIS regulation, as noted by Cadogan Financial in its commentary on Ugandan, Kenyan and Tanzanian regulatory frameworks for collective investment schemes in 2009 . Perhaps the regulatory regimes stance is attributable to the fact that the East Africa Capital Markets are still less mature markets.
Further, although all East African countries seem to derive their legal framework from the UK, they don’t have harmonized rules namely; on the authorization and operation of CIS, secondly rules on the authorization and conduct of the business of a fund management company and lastly rules on the authorization and conduct of the business of a trustee, depository or custodian. These are direly important rules for the regulation of the major players in the CIS market on behalf of the investor namely; Manager, Custodian and Trustees.
This however doesn’t explain the prominence and high performance of the Kenyan Collective Investment Scheme sector compared to the Uganda CIS sector, despite rating the Uganda CIS legal regime as conforming to international standards and as being more protective to investors than the rest of the East African countries.
Foreign CIS Entry and Cross Board Investment.
The prevailing argument is that greater investor protection in any given country must go hand in hand with the freedom in allowing collective investment scheme operators to invest in offshore markets to better leverage on returns and the easiness of foreign collective investment schemes entry into another jurisdiction. Foreign CIS entry or cross boarder investments by domiciled CIS, greatly impacts on, the performance and profitability of any fund type.
That said however, the easiness of entry by foreign collective investment schemes in any market is clearly indicative of the regulators comfort levels for investor protection and also the level of the market development.
This would require among others, the regulators’ ability to have in place good regulations on foreign CIS, bilateral agreements with regulatory authorities where the foreign CIS are domiciled, enhancing investor education on foreign CIS, as is with the regional educational campaign on capital markets, and then putting in place professional regulatory teams, restriction of fund types
The world trend for CIS markets shows a growing demand by domestic investors for foreign CIS, with the compelling argument of relative success of foreign financial institutions entering the East African market for instance and their good performance under good regulation by the respective Central Banks of Uganda, Kenya, Tanzania and Rwanda.
Since it can’t be said that the East African capital markets or the CIS are mature markets, there is little evidence of a foreign CIS outside the sister countries of East Africa having been established in the region despite existence of legislative provision in the Ugandan, Kenyan and Tanzanian laws allowing this to happen.
In 2009 in its publication titled “Report on the Development and Distribution of Foreign Collective Investment Schemes in Emerging Markets” The International Organization of Securities Commissions (IOSCO) an international body that brings together the world’s securities regulators and a recognized global standard setter for the securities sector including Collective Investments Schemes, noted that a global impact of introducing foreign CIS on domestics CIS has created positive result in three major areas of; product innovation of domestic CIS Industry, competitiveness of domestic CIS companies and R&D capability of domestic CIS industry.
As regards cross board investments, the regulators within East Africa clearly have extensive powers to determine what are eligible foreign securities in which a domestic CIS, may invest in and the percentage amounts that can be invested outside the country of domicile. The Ugandan and Kenyan legalization however seem to have more favourable legal permissions than Tanzania, in allowing foreign CIS entry and cross boarder investment.
Foreign Collective Investment Schemes are usually established in investment hubs like the Netherlands, Mauritius, Luxembourg, Cayman Islands and Singapore due to carefully crafted legislation, favorable tax and investment conditions including stable legal environments and political regimes. CIS Managers and investors realize the potential of using these International Financial Centers since they offer various types of structuring vehicles, have large and favorable network of Double Taxation Treaties and Investment Promotion and Protection Agreements for example between Mauritius and Uganda with . Furthermore, CIS Managers may outsource fund administration services to fund administrator specialists domiciled in these jurisdictions for CIS launching, due diligence, regulatory compliance, company secretarial, administration and transfer agency, accounting and NAV calculation, investor reporting, investor distributions etc. which may be time consuming and costly for them.
Fintech and CIS
In the February 2017, the International Organization of Securities Commissions (IOSCO) further published a report called IOSCO Research on Financial Technologies (Fintech), they were determined to find out how Fintech can to transform the financial services industry including the collective Investment scheme.
The IOSCO defines Financial Technologies or “Fintech” as variety of innovative business models and emerging technologies that have the potential to transform the financial services industry.
Not so long ago the on boarding of CIS investors was manually done, meaning a CIS with fixed location say in Nairobi was limited in service delivery. Today however several Collective Investment Scheme entities like Xeno in Uganda, have embraced Fintech to deliver automated investment advice, registration and the ability to track investment performance by an automated fashion through the use of the internet.
The increased accessibility to internet and internet use across East Africa is set to grow and popularize the campaign on Collective Investment Scheme and as better alternative to the tradition financial intermediaries such as banks by presenting a newer choice for saving and investment besides capital market.
The IOSCO maps the global Fintech landscape into 8 broad categories of;
Payments; this has been fully embraced in East Africa, through Mobile money payments, agency banking, online banking, international money transfer platform by banks, telephone companies and Forex bureaus among others, the CIS entities are comfortably adopting and integrating mobile money for deposits by investors. Planning; this category will increasingly be crucial for investors in tracking the performance of their savings, and the ability to easily change investments goals on the CIS platform. The use of Planning according to the IOSCO has been used in personal finance, retirement planning, enterprise resource, tax and budgeting, compliance and KYC among others. Trading & Investment; this has facilitated trade pricing and advisory, investment management, which is being embraced. Block chain; for digital currency, smart contracts, payments and settlements via block chain. Insurance; for broking, underwriting, claims among others. Lending/Crowdfunding; for peer to peer lending … Data Analytics; for big data solutions Security; for digital identity, authentication and fraud management
Thought the benefits of embracing Fintech in CIS are in line with the demographic and regional growth trends. On the regulatory point of view, questions remains as to whether the East African regulators are able to effectively protect investors.
This seems to be great area of concern even for the IOSCO that said “The rising use of technology in the delivery of financial services may increase the complexity of supervision, surveillance and enforcement. Regulators may face challenges addressing Fintech development while fulfilling their regulatory mandate, such as promoting investor protection, market fairness and financial stability”.
Corporate Governance of CIS in East Africa
The strengthening of corporate governance structures is a critical issue for the sustainable growth in market based financing and particularly in East Africa where Collective Investment Schemes can’t be said be in the mature stage.
This is a majorly regulatory issue also aimed at investor protection, since capital markets regulators have to manage, on a regular basis, the practical implementation of corporate governance principles and standards, in order to have effective governance structures.
To this the IOSCO recommends that the key areas of regulatory focus for corporate governance of any CIS as being; Board composition, attributes, accountability and responsibility; Remuneration and incentive structures; and lastly Risk management and internal controls.
To this, while providing a general guide of best practices, the Organisation for Economic Cooperation and Development (OECD) the main global standard-setters as regards corporate governance says that the desirable corporate governance framework in any country is a mix of legislation, regulation, self-regulation and voluntary standards based on the country’s specific circumstances, history and tradition. Further that this should be the key priority on the agenda of capital market regulators.
The absence of good and regularly followed corporate governance principles is a recipe for poor/ low market integrity, efficiency and sustainability. The management and working force of any CIS may require continuous assessment by the regulators regarding the fit and proper person standards to ensure that CIS activities are conducted with high standards of market practice and integrity.
Cadogan Financial in its commentary on Ugandan, Kenyan and Tanzanian regulatory frameworks for collective investment schemes 2009 said ….. expect Tanzania that allows self management of CIS, Ugandan regime is more extensive in its regulation both of CIS and of their operators and trustees and depositories than either the Tanzanian or the Kenyan frameworks”.
Adding that “Tanzania is unusual in that it envisages self managed OEICs, which are not, envisaged under either the Kenyan or Ugandan regimes. In our view, allowing self management of an open ended fund is dangerous, since the value of the fund can vary both with the value of the assets of the fund and the number of shares in issue due to constant issue and redemption. This is inadvisable, since it is the people within the management company and the trustee or depository who operate the fund, and who, therefore, have the greatest potential to do harm”.
They however noted that “….all three regimes focus more on the regulation of the CIS than they do on the regulation of the operators and trustees/depositories or custodians of these schemes”.
With all demographics in East Africa embracing internet use across the region, the adoption of a regional policy by the region’s capital markets regulators on education and awareness and the increased status of East Africa as a trade and investment hub, together with the liberal legal and regulatory framework have certainly set a wonderful playing field of the growth of Collective Investment Scheme business for both domestic and foreign players.