The volume of shares used as collateral for loans rose by 77.5 million units in the second quarter of the year, halting a decline that had been seen since the first quarter of 2022.
Latest statistics from the Capital Markets Authority (CMA) shows that stock market investors put up 6.35 billion shares in various listed firms under pledge for loans by the end of June, up from 6.28 billion units at the end of March.
The volume of pledged shares rose even as the actual number of investors committing them as collateral fell from 40,092 in March to 39,959 in June.
This signals that investors either increased the ticket size per loan or that lenders were demanding more units to cover risk in a market which has seen stock valuations fall and risk perception on borrowers go up due to a tough economy.
The Kenyan stock market has 1.76 million individual investors on its books, holding a total of 14.25 billion shares.
The remainder of the market’s total of 99.96 billion issued shares are held by institutional investors, both local and foreign individuals.
This means that investors at the bourse have committed about 6.4 percent of their stock as collateral for loans. The bulk of the pledges are however likely to come from individual investors.
Neither the CMA nor the Central Bank of Kenya (CBK) –the banking sector regulator— discloses the value of bank loans secured by the pledged shares, or the worth of the encumbered portfolio.
Pledging of shares is an avenue used by both individual investors and companies to secure loans to meet a variety of needs, including working capital requirements and ventures such as acquisitions.
Borrowing against shares helps investors to access funds without selling their stock at a loss or before reaping benefits, including through capital gains and dividends.
The owners of pledged shares retain the ownership of the securities, but cannot transact on them until the lender signs a pledge release form.
A borrower is also required to make up for the shortfall in collateral from fluctuations in share prices, although banks hedge against this eventuality by issuing loans at significant discounts to the prevailing price of shares, a move that also minimises losses in case of default.
In a bearish market like the one being experienced presently, banks are also likely to tighten the standards around pledges and demand stocks of large, liquid and fundamentally solid companies as collateral to protect themselves against the risks of price loss after pledges.
