Start-up leverages on tech to disrupt securities investment

The founders of Ndovu, an online investment platform [File]

Last year, Wall Street was rattled by a market craze as retail investors banded together to drive up meme stocks in what came to be seen as a geeks’ revolution against hedge fund billionaires. 

Overnight, GameStop, a retail chain store selling computer games that had been written off as a dying breed, came back to life. 

Between January 1 and 28, 2021, GameStop’s share price soared 2,700 per cent from Sh1,949 to Sh54,579 in a frenzy driven largely by retail investors. 

Fans of GameStop and online traders rallied on messaging boards and trading apps such as Robinhood to drive up the price and at some point, the app was forced to restrict purchases to steady the markets. 

The GameStop bubble served to illustrate the disruptive effects of online trading platforms that are increasingly becoming popular among novice investors with little time, resources or financial literacy to engage brokers and investment planners.     

Solution for retail investors

Earlier this month Ndovu, an online investment platform, was launched in Nairobi as a solution targeting retail investors looking to invest in both local and foreign securities. Minimum investments start at Sh5,000.  

Ndovu is available on both Google Play and Apple App stores and uses blockchain technology and artificial intelligence to create investment profiles unique to each user based on their goals and preferences.  

The start-up was co-founded by Radhika Bhachu, Gianpaolo De Biase and Ro Nyangeri, a former head of strategy at the Nairobi Securities Exchange (NSE).   

“At Ndovu, we are playing a key role in financial inclusion by opening up the previously gated financial markets to all. We are also demystifying investments by breaking down financial jargon with an easy-to-use platform,” said De Biase, Ndovu’s chief technology officer.

Once users download the app and create an account, they are prompted to answer a series of questions about their financial goals. On their dashboard, they are provided with investment options ranging from government bonds, unit trusts, equity and commodity exchange-traded funds (ETFs).  

“Our vision is to provide every African, regardless of income level or financial knowledge, with the right tools to grow their wealth,” said Ms Bhachu, Ndovu’s chief operating officer, who has previously worked for BlackRock, the world’s largest asset manager. 

“We believe educating our people on how to make their money work for them will bring us one step closer to reducing poverty on the continent,” she said.

Ndovu is regulated by the Capital Markets Authority (CMA) and is the latest in a flurry from startups that are exploring innovative ways to leverage technologies such as blockchain and artificial intelligence to disrupt securities trading. 

Low numbers of local investors

Last year, the Central Depository and Settlement Corporation (CDSC) completed a successful pilot on a securities lending and borrowing (SLB) platform that will allow investors more trading options at the NSE.  

Investors agree to temporarily loan each other securities under a written agreement to return them either on-demand or at a future date. The lender generates earnings from charging fees while the borrower pockets gains made on the securities while in their custody. 

“The lender contacts an SLB agent and issues securities to the agent to either lend or borrow securities on their behalf,” explains the CDSC.

“The agent then captures the information on the CDSC system and this allows borrowers and lenders to have a central platform to borrow and lend for ease for transactions.” 

CMA and the CDSC say the platform could have a stimulating effect on the market by encouraging domestic institutional and retail investors to increase their participation at the bourse. 

According to data from the CMA, local investors account for 81 per cent of total shares held in the equity market but the average value of investment and activity among them is much lower than that of foreign investors. 

“While the proportion of local investors is higher than foreign investors, the share quantity held by each investor on a per capita basis remains low,” says CMA in its latest industry report. 

“The authority is targeting investor education aimed at growing the stock of shares held by domestic investors to minimise the effects of external shocks on the market as foreign investor holdings change the market.”

There have also been concerns that regulators do not yet have a full picture of the risks and opportunities inherent in investment solutions anchored on technology such as blockchain and artificial intelligence that are still in nascent stages of development. 

Digital currency

Last year, the Capital Markets Authority cautioned that several investment products — including fintech and mobile currently in various stages of testing for the Kenyan bourse — require oversight from multiple regulatory agencies due to their scale in the financial sector.  

“Some of the applications we have received for admission into the Regulatory Sandbox are cross-cutting and have aspects where different regulators need to be engaged,” stated the CMA in its report.

Meanwhile, Central Bank of Kenya (CBK) is collecting views on plans to launch a  Central Bank Digital Currency (CBDC), a virtual currency that will be backed by the regulator. 

“A CBDC could enhance financial stability in a jurisdiction by contributing to resilience in payments,” says CBK in the policy document.

“By providing a new method of making payments, a CBDC could diversify the range of payments options.”

CBK further says introducing cryptocurrency backed by the regulator could improve stability in the financial system by allowing individuals and institutions to settle directly in central bank money as opposed to bank deposits.

“This would significantly reduce the concentration of liquidity and credit risk in payment systems, in turn reducing systemic importance of large banks and payment service providers,” said the regulator.