Hidden gem in the securities lending and borrowing market

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Hidden gem in the securities lending and borrowing market


Since we rely on the short seller to expose mismanagement and fraud, long-term investors can increase their total returns through the lending side. PICTURES | SHUTTER

I was happy when I read this: “Short sellers are reaping huge profits this year on the Nairobi Stock Exchange as the brutal market bloodbath fuels their bearish bets – the NASI stock index is in down 20.3% since the start of the year and continues to decline. The poor longs are beaten while the cohort of short sellers make money.

The only problem with the statement is that I read it in a dream. When I woke up, someone bothered to explain my reality and this is what they said: “This stuff is non-existent. You also know that it is sometimes unpleasant to take advantage of someone else’s failures. Moreover, markets are supposed to help companies create value. I disagreed. There is real value in practice.

Let’s take an example of a failed business that most readers are familiar with: Uchumi supermarkets.

He was sitting on a mountain of debt and there was the fraud side. Imagine if a savvy investor analyzed their financial statements and realized there must be some shenanigans. He then bypasses the company and leads a campaign to expose the truth. Let’s say he succeeds and makes a lot of money. But then there’s the obvious benefit to the investing public – Uchumi’s scheme would have been exposed.

His mismanagement would have been stopped. Investors would have moved their money to companies with legitimate earning potential. Everyone would have been better off.

But there is a flip side that is not well understood by skeptics and especially long-term institutional investors. This is the lending side.

Take KCB, for example, which holds a conservative dividend payout ratio (28%) and spotted a dividend yield of 7.7% at the start of this year. Assuming an investor owns 100,000 KCB shares and decides to loan the shares out for a year at 9% lending fee – a decent ask. At the current price of 42 shillings, the total loaned share will be 4.2 million shillings, which gives 378,000 shillings.

By removing the 16% lending fee charged, the long-term investor can retain net lending fees of approximately Sh317,520, which equates to an annual return of 7.56%. Adding this to the dividend yield brings the investor’s total return to 15.26% – this beats inflation at 9.2%, 364 Treasuries at 9.9% and even a large chunk of income securities long-term fixed. This is the lucrative and invisible “passive income” side.

It is worth noting that the Retirement Benefits Authority has no objection to pension schemes participating in the securities lending and borrowing market.

In short, longs and shorts have an equal chance of making money using the Securities Lending and Borrowing (SLB) platform operated by the Central Depositary and Settlement Corporation. More importantly, one cannot exist without the other. Since we rely on the short seller to expose mismanagement and fraud, long-term investors can increase their total returns through the lending side.

Mwanyasi is MD, Canaan Capital.

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