Securitization Enhancing Liquidity in Kenya

Abstract

Purpose: This paper aims to explain the benefits of securitization in Kenya's economy that is to both the government, the private sector, and the Kenya capital market. The paper provides a road map on how the government and private sector can diversify their funding sources, lower borrowing costs, improve liquidity, and transfer risk.  It will help offer clear policy direction to government policymakers in efforts geared towards the introduction of asset securitization in the country which will increase liquidity, economic growth, and expansion of capital in the country. The regulator of the financial market Capital Market Authority (CMA) will therefore formulate guidelines and regulatory requirements that can enhance the performance of the securitization industry. The paper will also be useful to corporate strategists of companies as they seek to optimize return considerations in driving shareholder wealth margins. The paper is expected to motivate and be a key reference for future research work in the securitization industry in Kenya. Securitization is one of the innovative products that may be used by government and private firms and investors to increase wealth.

Methodology: The study adopted a desktop methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library

Findings: Securitization will bring benefits in terms of growth in the economy and expansion of capital markets and hence wealth creation. Securitization involves the conversion of a pool of assets with a regular and predictable cash income such as mortgage repayments receivables, and credit card receivables e,t,c  into a security or marketable instrument that allows the institution to transact a large number of its assets, which would otherwise not be attractive as individual. The originator who will be the financial institution or the government then creates a legal entity known as a Special Purpose Vehicle (SPV). The special purpose vehicle may be in the form of a Limited Liability Company, a trust, a partnership, or even a subsidiary of the Originator. These selected receivables are then transferred to the special purpose vehicle which then becomes the owner of these receivables. The securities to be issued by the special purpose vehicle are usually rated by a rating agency. This is due to the fact that such instruments are unsecured, which will require that investors are protected.

Unique Contribution to Theory, Practice and Policy: Profit maximising theory and theory of innovation can be used to anchor future studies on securitization enhancing liquidity. If the Government or the financial institution wants to issue 'AAA' rated asset-backed securities or mortgage-backed securities, collateralized mortgage securities, or collateralized debt obligations (CDOs)then they must choose first-class loans not prone to prepayment and default risk where originators conduct their own rating, they select all the best asset bundles for investment. In order to get a favorable rating, the special purpose vehicles can provide credit enhancement to the securities.