Blue Bonds and the financing of Blue Economy in Africa

According to the Oceanic Institute, over 70 percent of the earth’s surface is ocean, and billions of people in the world depend on the oceans for their livelihoods. Among our communities, people living in the islands, those living in the coastal areas and those nearby lake shores and rivers derive most of their socio-economic activities and livelihoods on the waters – either by fishing, or irrigation, transport, or energy production, etc.

Maritime transport remains an essential part of international trade as over 90 percent is carried by the seas, according to the United Nation’s (UN) International Maritime Organization. So, it is fair that our political leaders’ emphasis about the need for our public and private sector to leverage on our geographical local in line with the current mega trend, as they also relate to global sustainability goals and sustainable finance.

The renewed attention on the ocean in recent years is reflected in the UN-Sustainable Development Goals, especially Goal Number 14 which aims to “conserve and sustainably use the ocean, seas and marine resources for sustainable development”.

The blue economy is of growing importance and gaining momentum amongst policymakers across the world. This is not surprising as the ocean and sea is a significant wealth generator for many economies that have made use of it, estimated at an annual value of US$ 1.5 trillion.

However, the effects of climate change, human activities and other burdens can be felt by the seas, as the world have lost nearly half of its coral reefs, largely due to human activity. Coral reefs are extremely important to the biodiversity of the oceans as they support a quarter of all marine species and hundreds of millions of people rely on them for their livelihoods, nutrition and socio-economic well-being. Given the immense size of the oceans, seas and marine — how can we unlock the potential of the ocean economy while also protecting its marine environment?

Innovative financing of the blue economy

Our 3rd Five Years Development Plan, the Financial Sector Development Masterplan and the recent Budget Speech by the Minister for Finance and Planning all indicate our desire to pursue innovative alternative financing source for our sustainable development. Some of the innovative financial products mentioned in these documents include blended finance, infrastructure bonds, municipal bonds, green bonds and blue bonds. Some of these instruments (green bonds, blue bonds and social-impact financial instruments) are aligned with the current global megatrend – which is a good and relevant direction we are taking as the economy, i.e., the movements towards sustainable finance model (considering environmental, social issues and governance).

As it relates to the blue economy, innovative financial solutions will be required to enhance ocean and coastal resilience. Blue finance, in particular blue bonds, have huge potential to help surmount these challenges. Blue bonds are an innovative ocean financing instrument whereby funds raised are earmarked exclusively for projects deemed ocean friendly. They are designed to support the blue economy such as sustainable fisheries projects, conservation of marine resources, protecting marine environment, etc.

The Republic of Seychelles was the first to launch the world’s sovereign blue bond back in 2018  raising a total of $15 million to advance the small island state’s blue economy. The World Bank helped design the bond.

Since then, Nordic Investment Bank, the international financial institution of the Nordic and Baltic countries, launched a “Nordic-Baltic Blue Bond” raising SEK2 billion for projects such as wastewater treatment, prevention of water pollution and water-related climate change adaptation.

Recently, Morgan Stanley, working with the World Bank sold $10 million worth of blue bonds with of the aim solving the challenge of plastic waste pollution in oceans.

The international not-for-profit group The Nature Conservancy (TNC) recently unveiled plans to mobilize $1.6 billion of funding for global ocean conservation efforts through blue bonds under a scheme dubbed “blue bonds for conservation”. An innovative finance model using philanthropy to save the world’s oceans by providing upfront capital.

Blue bonds offer an opportunity for private sector capital to be mobilized to support the blue economy. Capital markets have a key role to play in environmental stewardship and more specifically, the protection of the oceans and coasts. Therefore, it is anticipated to move from policy statements into actual implementation collaborations between public and private sector including the local capital markets will be a necessity – how: a bank may use its balance sheet to issue a blue bond via the stock market to finance a specific blue economy project (e.g. sustainable fishery, marine transport, etc) then the proceeds from such a project will be ring-fenced for bonds repayments, or a SOEs or a government may include blue bonds in its bonds issuance program to specifically finance identified marine project – infrastructure constructions, fishing equipment, transport and list those bonds into the stock exchange, etc.  

Enhancing our blue economy

Innovative blue financing tools such as blue bonds can provide the much-needed finance to help support Africa’s blue economy.

With a coastline of over 47,000km, the African continent has 38 coastal and island states. If we take the fisheries and aquaculture sector as an example, the sector employs more than 12.3 million people and was estimated to generate roughly $24 billion, according to the Food and Agriculture Organization. The sector is crucial in providing food security and nutrition to millions of Africans. Tanzania’s coastal line id over 1,400km with over 10 million of population whose lives benefits, in one way or the other, from the ocean. 

Food security is a pressing issue in Africa. Rising temperatures coupled with ocean acidification is altering the aquatic ecosystems. This in turn not only threatens the sustainability of fisheries and food security, but employment also. Communities that heavily dependent on the fisheries sector for their livelihood are under threat, according to AfDB.

Proceeds raised from Seychelles’ inaugural blue bond went towards supporting “sustainable and fisheries projects”. Innovative ocean financing tools can be used to invest in sectors of the blue economy such as fisheries to enhance food security, protect livelihoods and help drive sustain ecosystems.

Sustainable ocean development

The ocean is one of the top drivers of our economy and has great potential for innovation and growth.

If we are to harness the ocean’s vast potential and preserve its biodiversity, a multi-stakeholder approach is required and international cooperation between governments, not-for-profit organizations, multilateral development banks and the local financial sector – including banks and capital markets to harness the potential of accessing sustainable financial resources.

We need to recognize the value of the blue economy and provided the political willingness shown by our leaders, we – in the private and public sector actors – need to attract investment, while putting sustainability and preservation at the center of these pursuance.

Risks of Investing in Unregulated Financial Assets

In a bid to seek investment opportunities with high returns, some of our people have been taking investment risks on opportunities that expose them to high and unmitigated risks. In their pursuit of outsized returns some of these investment speculators seem to have forgotten the misery that befell investors who participate in ponzi and/or pyramid schemes which similarly promised returns that were clearly unsustainable (if they could be achieved at all), but still people fall into this trap – i.e., despite our political and financial sector leaders warning, cautioning, and advising against.

There are cases among us where pensioners’ pensions have been wiped out, low-income earners and public servants have lost their meagre resources by participating in these predatory schemes, or cases where unscrupulous investors intending to take advantage of unsuspecting individuals promised extraordinary returns which were all in vain and purely fraudulent in nature.

To this day, some of the speculative investors who lost money on some of such schemes are yet to recover their funds, hoping that they will get some form of recovery someday.  Which may be a challenge, considering that these entities and platforms were [are] not under supervision of regulators nor were [are] there any insurance covers to mitigating potential risks, which could have provided some form of relief to investors’ protection, in cases of loses.

As an extension to the traditional pyramid and ponzi schemes is the emergence of technological platforms. From the onset, technology by and large, have made financial transactions more efficient, less costly, and speedy [among many positive disruption attributes], but also has embedded exposures to risks i.e., where unregulated trading and investment activities are offered via online platforms. While there are debates which may result into the possibilities of introducing the legal and regulatory framework around virtual/crypto and other forms of digital financial assets such as currencies in various jurisdictions, but currently, people are quietly investing in such emerging investment platforms and products i.e., Initial Currency Offerings (ICOs) and other forms of unregulated online digital transactions, foreign currency trading, etc. — unfortunately to their own peril.

As it stands, most of the entities and platforms that offer these alternative investment opportunities are not licensed whatsoever, which expose speculative investors to both high and unmitigated risks. While some of the investment platforms and activities have caught the attention of regulators, but this has been to the extent of issuing cautionary statements and warnings for the public to beware of the fact that such trading and investment platforms are speculative in nature, are unregulated, and hence may be risky.

As we observe, in order to attract investors, most of these platforms and schemes promises outsized returns which are neither obtainable nor sustainable as there are not underlying economic activity and liquidity that supports sustainability of such schemes. Global trend in the unregulated digital assets demonstrate that crypto (and other digital) based assets market is uncertain, has experienced significant accelerated boom and burst cycles and expose investors to substantial losses.

At the global level, International Organization of Securities Commissions (IOSCO), the international body for securities regulators, has identified several statements on risks associated with Initial Currency Offerings (ICOs), as an example. These include: heightened potential for fraud as these products are mainly internet-based; cross-border distribution risks – i.e. difficulties in recovery of investors’ funds in the event of a collapse, particularly in cases  where the ICO is operating outside the investment jurisdiction; information asymmetry – where retail investors’ may not be able to understand the risks, costs and expected returns arising from investments; and also liquidity risk – where cases of insufficient underlying liquidity to support reliable trading and market-making activities may be hindered.

There are also unmitigated risks in online foreign exchange trading through platforms of unlicensed entities, where investors risks losing their investments and are not protected by the law. While in the near future regulators may consider putting the regulatory framework and mechanisms for protecting investors in these activities, in the meantime speculative investors are being cautioned, warned and advised to avoid participating in investment opportunities offered by unregulated and unlicensed entities and platforms, as there may be no recourse in the event of a collapse and/or loss of investments.

Speculating vs. Investing in Stock Markets: I will Chose Investing

Stockbrokers and dealers — collars unbuttoned, sleeves rolled up, yelling into several telephones at once, gesticulating as though their lives were on the line. The air crackles. Every now and again one of them slams a receiver down onto the table like he wants to break it. Then the traders start bawling at each other over their Bloomberg terminals, on which stock prices flash like carnival lights. This is how the media depicts the world of stock markets, relaying images from either the stock-market floor/gallery of major stock markets, or the trading floor of major investment banks.

On a different scene – there is a dull office on the fourteenth floor of an unassuming high-rise in a sleepy Omaha, Nebraska, a negligible state in the US where there are no Bloomberg or Refinitiv terminals, no nothing as impressive, just an old-fashioned desk and telephone, there he sits, day after day as he has done for over fifty years: Warren Buffett, the most successful investor of all time.

The contrast could not be starker, on the one hand: hyperactive, sweat drenched, testosterone-laden stockbrokers, on the other a quiet silver haired Warren. Once you grasp the difference between speculating and investing you will start seeing parallels everywhere and you will have a good mental tool to hand.

So, what exactly is the difference? stockbrokers and dealers trying to make a profit through frenetically buying and selling of listed securities. What’s behind it – it is neither the fundamental performances of a software firm based in California or in Seoul, nor is a copper mine in Peru or Zambia – these are irrelevant. What matters to these stockbrokers and dealers in the TV screen is that securities prices move temporarily in the right direction, up or down.

Value-investors however buy shares in only a handful of companies, which they know thoroughly. The opinion of the market reflected in the temporary ups and downs means nothing to them their commitment is long-term investment approach. To avoid transactions cost they buy and sell as infrequently as possible. Warren Buffet and his long-term investment partner Charlie Munger do not seek out new investment opportunities to come to them. From the horse’s mouth: “Charlie and I just sit around and wait for the phone to ring.” So says Warren.

Who is more successful — speculators or investors”? There are winners and losers on both sides, but the giants among the winners are to be found only on the side of the investors. Why is that? One major difference: investors take advantage of long timespans; stockbrokers are driven by short-termism. Our brains love short-term, spasmodic developments. We react exaggeratedly to highs and lows, to rapid changes and jarring news. As a result, we systematically overemphasize doing above not-doing, zeal above deliberation, and action above waiting.

Let’s consider this — what are the most purchased books of all time? not the ones on the current best seller lists or stacked highest on tables at the bookstores or airports, I mean the ones that have remained continuously in print for decades or hundreds of years—the bible, Mao’s Little Red Kook, the Koran, the Communist Manifesto, the Lord of Rings, the Little Prince. These are known as “long sellers”, and no major publisher can live without them. The same goes for Broadway shows, tourist attractions, music, and many other products.

Such long-term successes often have inconspicuous ingredients that function like baking powder, producing incremental progress that builds up over a long period of time. Take the example of investment; if you invest Tsh.10 million at ten percent return, after a year you will be Tsh.1 million richer. Piece of cake, right. But if you keep reinvesting these modest profits, after twenty years you will have seen an impressive growth of more than Tsh. 40 million. Your capital will accrue not linearly but exponentially, because our brains have no instinct for duration, they also have no feel for exponential growth.

This, then friends, is the secret of persistence investment; long-term successes are like making cakes with baking powder — slow, boring, long winded processes, but leads to the best results. The same goes for many aspects of our lives. Just reflect, make a careful observation around you, and you will see.

In our current environment we are meant to be convinced to embrace the idea that in modern times, disruptions, constant changes, etc. is the way to remain competitive and happy. This may be right and wrong, why? Because sometimes a peaceful and predictable life is what you need and is actually more productive –and what this tells us is that sometimes a less volatile, more enduring and perseverance, tenacity and long-term approach could be highly valuable, as Charlie Munger says: “only a little bit wiser than the other guy, on average, for a long, long-time”. This is how you become a value-based investor and not the one stressed with the temporal ups and downs of stock markets. After all you are not a broker, a speculator, or a gambler – you are an investor who looks into the future of yourself and your children, trying to lock into what is possible.

Personal Finance: Investing in Financial Assets

Few days ago, I was invited to share insights on personal finance to the members of staff of a public institution. These are some of my talking points. Apart from emphasized the necessity of Personal Financial Planning as an important activity in the process of earning, spending, saving and investment. I also shared the investable space for those with savings, among others, this include investing in financial assets:

What are Financial Assets? Financial assets are non-physical asset whose value is derived from a contractual claim; these are financial instruments such as cash, savings in banks, term/fixed deposits, Units in a Unit Trust/Mutual Fund, tradable bonds, and tradable shares. Financial assets are more liquid (i.e., can easily be converted into cash) than other tangible assets, i.e., precious metals/jewelry, cattle, commodities, or property.

Why Invest in Financial Assets? Because, among others: (i) Financial assets can be easily and quickly be converted into cash at the time of need, without losing value; (ii) they provide regular stream of income – i.e., if invested in selected liquid shares, Treasury bonds, Fixed deposits, distributable and redeemable unit in Unit trust schemes; (iii) Create a consistent cash flow to investors by paying steady returns to investors, and liquidity in times of need; (iv) Financial assets such as equity helps to preserve and build wealth as the asset invested multiply over time through the magic of compound interest; (v) It requires little capital to invest in financial assets relatively to physical assets; (vi) Financial assets provide for diversification opportunity and risk management — “don’t put all your eggs in one basket”; (vii) Financial assets are more transparent, overseen by regulating bodies, with rules and regulations guarantee smooth execution and transparency in operations; and (viii) In terms of their valuation, the up-to-date value of financial assets can also be checked and tracked on the daily basis from the stock market data and reports.

What are Shares? Shares are units that represent equity ownership in a company. They are financial assets owned by investors who exchange capital injection in a company in return for a portion of shareholding to the company. Shareholders enjoys ownership rights, including participation in the distribution of residual profits in the form of dividends; they also enjoy capital gains if the price and value of the company rises. Once shares have been issues via IPO, they are then listed in the stock exchange for trading by investors and traders.

What are some of the Strategy for Investing in Shares? In investing in shares, focus on: (a) Minimizing the odds of suffering irreversible losses; (b) Maximizing chances of achieving sustainable gains; (c) Controlling self-defeating behaviors that keeps investors from reaching their full potentials; and (iv) Do not lose money. How? (i) By being value-investors, not by speculating; (ii) By carrying thorough analysis of the company, and the soundness of its underlying business, before buying its shares; and (iii) By avoid investing in companies that do not have competent leaders and managers.

When carrying analysis prior to investing in shares, Benjamin Graham – known as the “father of value investing” (in his seminal book, the Intelligent Investor) recommend that you consider the following: The company should have a simple, easy to understand business; it should have some form of durable monopoly; It should be selling universal habit-forming products; Its products should be easy to make and cheap to sale; and it should commend significant profits margins while products raise its prices with inflation.  In my opinion companies operating in the Fast-moving consumer goods (FMCG), Health care, Banking, Construction, Utilities, Technology are some of the best to consider.

Another financial asset worth considering is bonds. What is a Bond? A bond is a type of fixed-income security issued by either the Government, Local Government, Government Agents or Private companies in exchange of funds lent to it by investors. A bondholder is the lender, and the bonds instrument state how much money is owed, interest rate, payments, bond’s maturity date, etc. There are various types of bonds – depends on the issuing entity or the use of the proceeds from the bond issuance. Bond instrument contains a contractual claim.

What are Some of the Key consideration on Investing in Bonds? Ask yourself some of these questions: (1) Should you buy taxable or tax-free bonds? (Corporate vs. Treasury bonds); (2) Should you buy shorter-or-longer term maturities? (secondary market liquidity, pricing); (3) What yield and benchmarks to use? (active vs. passive investment approach; (4) Do you want to assure yourself against decline in prices of bonds? (staggered investment, and different maturities); (5) Coupon [(2 Years 7.82%, 5 Years 9.18%, 7 Years 10.08%, 10 Years 11.44%, 15 Years 13.50%, 20 Years 15.49%)] vs. Yields?; and (6) Should you invest in bonds or bond fund? (Tsh. 1 million vs Tsh. 50,000 for monthly reinvestment)

Diversification: How Much Risks Should One Take? Can one diversify risks by Investing via investing in collective investment schemes using investment managers? Yes: One of the investment approaches for risk diversification is via putting money into a fund/investment manager by buying units. These units, if invested in an “open-end fund”, are redeemable on demand by the holder, at net asset value. The Unit Trust of Tanzania (UTT) operates several fund schemes. In choosing the funds: investigate the fund’s consistent performance (beware of erratic behaviors), avoid choosing the fund whose return are less than market average and chose a fund whose overhead expenses are not excessive.

On the Relevance of Personal Financial Planning

Few days ago, I was invited to share insights on personal finance to the members of staff of a public institution. These are some of my talking points.

For a start, I emphasized the necessity of Personal Financial Planning as an important activity in the process of earning, spending, saving and investment. I said, the importance of personal financial planning, among others, include: (i) helping the individual in managing the unplanned life situations and circumstances – such as accidents or job loss; (ii) it assists in the process of building wealth and catering for any special expenses; (iii) it is useful in saving for retirement; (iv) it helps in creating financial resources that may be used in the creations of other assets – both financial and physical assets; (v) it helps in the process of investing intelligently; and (vi) it assist in tax planning and minimize payments of taxes, by legal means.

I proposed the following as basic processes for the personal financial planning: (1) Evaluation of one’s financial health status (like a financial health check) – which entails carrying a review and analysis of one’s financial situation to determine one’s capacity to meet current financial obligations and the preparedness for unexpected adverse financial events; (2) Defining one’s financial goals – this includes setting clear objectives or milestone that one wants to achieve within a specific period. Financial goals may range from building up of an emergence fund, or towards becoming financially independent, or become debt free, or reserving funds for starting a business, or accumulating funds for children school, etc; (3) Developing a plan of action – this involves detailing the plan, outlining clear and conscious actions that has to be taken in order to reach the financial goals; (4) Implementation of the Personal Financial Plan -as it were, planning is one thing, implementation is another; therefore, there must be an identification of priorities, one’s accountability and specific mechanisms that will ensure whatever has been planned is being implemented on timely basis and that mitigation actions are also implemented in case plans and actions diverges; and (5) Reviewing progress, re-evaluating and revising of the plan (if need arises) – it is prudent that one has to review the progress of implementation of the financial plan, and then consider revisions based on changed circumstances of one’s life and be prepared to formulate a different plan to meet one’s financial goals.

I also shared the following, as the basic principles for the management personal financial matters: (a) Knowledge is the Best Protection – for one to protect him/herself against unnecessary personal finance risks and losses, seeking and understanding the basic knowledge of personal finance cannot be overemphasized. It is said: Knowledge is Power. Therefore, one need to be personally responsible for his/her lifetime financial plan and implementation; (b) Nothing Happens/Can be Achieved Without a Plan –it is easier to think about spending than to think about saving and investing. Therefore, it is prudent that savings and investments must be planned well in. Note: putting off a financial plan means goals will be harder to achieve; (c) The Time Value of Money – the profession of economics and finance has some basic principles on matters of money, spending, saving, and investing. One of which is: the time value of money, which basically means that money received today is worth more than money received in the future. Therefore, it is prudent that one must understand how savings and investments grow over time – and what are the relevance of “inflation rate” and “interest rate” on investment. The other key concept is “compound interest”. Compound interest is the act of reinvesting return on investment rather than liquidating or paying it out; (d) Consider the effect of Taxes on Personal Finance Decisions – It is important to understand the effect of taxes on the rate of return of investments and consider investment options on an after-tax basis. To the extent possible, it is advisable to educate on basic tax laws that has impact on personal finance; (e) Emergence Happens, hence liquidity is key– unplanned events such as injuries, accidents, terminal illness, job termination, long term diseases happen to people. It is prudent that one makes sound judgement to plans for such unexpected events; (f) Do not Waste Money on Unnecessary Wants – It is considered sensible for one to differentiate “wants” from “needs”. Wants are desires for goods, services, feelings, and other things that one may feel like having but do not necessarily need them. Needs are things (goods, services, feeling, etc) one must have to survive – such as foods, clothes, home, medical/health cover, education, etc. It is advisable for one to do homework before purchases; (g) Protect Yourself Against Major Catastrophise — prior to taking an insurance policy, it is prudent that one knows the insurance policy coverage and premium to be paid. It is also advised to focus your insurance policies on major catastrophes which can be financially devastating i.e., life assurance cover, health/medical insurance cover, home insurance cover, motor vehicle insurance cover, etc; (h) Risk and Return Go Hand in Hand –as it were, saving and investing grow money, thus it is expected that an investor should demand a minimum return above the anticipated inflation or an investment in risk free investment such as Government securities such as Treasury bonds;  (i) Be Mindful of you Financial Personality and its Impact — It is often the case that personal behavioural biases may lead to big financial mistakes. Furthermore, human mental accounting impacts their personal financial decisions. It is therefore advised for one to re-evaluate values and subjective criteria that he/she places on money and what money could accomplish. Whatever one does, as far as personal finance is concern should try to avoid pouring good money after bad money because of his/her personal biases.

Investing in Bonds

There is a relatively increase in appetite for retail investors to participate in investing on the bonds’ primary and secondary markets. There are many and various reasons for this trend, which started about three years ago, but one of which is that investors are trying as much as possible to put a financial cushion by investing in fixed income instruments (bonds) — given bonds’ contractual nature of paying fixed amounts in pre-agreed periods.

What is a bond? A bond is a type of fixed-income security issued by either the Government, (Central, Local, or Government Agents) or Private companies in exchange of funds lent to it by investors. A bondholder is the lender, while the government or a company is the borrower. The bonds instrument state how much money is owed, coupon/interest rate to be paid, payments periods and cycle, bond’s maturity date, etc. There are various types of bonds – it depends on the issuing entity or the use of the proceeds from the bond issuance.

Simply, when you buy a bond, you are basically making a loan to a government (if it is Treasury bonds), or a company (if it is Corporate bonds). As it is, financial markets love to make the idea of investing in bonds seem complex, but — it is pretty simple. Bonds are loans. When you buy a Treasury bonds, you lend money to the Government, or when you buy a Corporate bond, you lend money to a company. And when you lend money to a less dependable company and hence a high-risk company, it is called a high-yield bond or a junk bond.

What are some of the key considerations on investing in bonds? Well, you may need to ask yourself some of these questions: (i) Should you buy taxable or tax-free bonds? — Corporate bonds vs. Treasury bonds; (ii) Should you buy shorter-or-longer term maturities? Interest rate to be earned vs. liquidity needs; (iii) What yield and benchmarks should you use? – inflation, or return on other investment options; (iv) Do you want to assure yourself against decline in prices of bonds? (v) What about Coupon? (Currently bonds issued by the Government have: 2-Years bonds which pays a coupon of 7.82 percent, 5-Years 9.18 percent, 7-Years 10.08 percent, 10-Years 11.44 percent, 15-Years 13.50 percent, 20-Years 15.49 percent and 25-Year bond which pays a coupon of 15.95 percent); (vi) Should you invest in bonds or bond fund? (Tsh. 1 million for a bond vs. Tsh. 50,000 for monthly reinvestment on bonds units issued by Unit Trust?)

So, how much can you real earn as money lender (or a bond holder)? — despite the pre-determined coupon rates as indicated above, but it real depends as there is an element called yield, which depends on the pricing of the bonds both at the primary market and secondary market. But also, the above applies only to government bonds, what about corporate bonds? How much can you earn to lending to a company issuing a bond?

Under normal circumstances, by lending money to the Government you may earn less income compared to if you are lending money to a company — why? because there is little chance that the government may renege on its financial markets debt obligations— why? because it is a significant reputational matter when a government fails to honour its bonds obligation. It basically impacts the overall cost of funding in the economy. For this reason, the interest rates in governments bonds ought to be relatively lower because of the less risk related compared to corporate bonds. Whatever the case — these are matters of trade-offs between risk and reward.

The other critical factor for investments in bonds is the duration of the loan. As indicated above, our government bonds issuance programs cover the 2-25 years tenor, with lower coupon and yields on the short tenor compared to the longer tenor, for the reason that you receive a higher interest rate for lending the money over a longer period: because it is riskier.

Why do investors want to own bonds? For a start, they are much safer than shares. That’s because the borrower is legally required to repay you, and at the agreed rate and timeframe. If you hold a bond to maturity, you will receive all your original loan (called principal), plus the interest payments — unless the bond issuer goes bankrupt. As an asset class, statistics — globally, indicate that bonds deliver positive calendar-year returns approximately 85 per cent of the time.

Who can invest in bonds? Anyone. But, mostly preferred by retirees, or investors with a day job who cannot tolerate the volatility of shares, or who cannot invest in exotic and high adrenaline non-financial assets classes. The less conservative investors might also consider putting smaller portion of their assets in “high-quality bonds” to meet any financial needs especially in times of high liquid needs. But also, more aggressive investors may also put a portion of their money in the bonds to provide them with liquidity that they can use when the stock market goes on sale mode.

Now, this may as well sound complex to some of us, but as long as you have Tsh. 1 million (yes One Million Tanzania Shillings) you can happily start to invest in Treasury bonds. And you can buy a bond either in the primary market at the Bank of Tanzania or you can buy a bond in the secondary market at the Dar es Salaam Stock Exchange. What you need to do is place an order with your stockbroker or your banker – both of them have access to both the Bank of Tanzania and the Dar es Salaam Stock Exchange.

What Entrepreneurs Needs to Know in Preparation for an IPO

The Dar es Salaam Stock Exchange (DSE) has not had the Initial Public Offering (IPO) for quite some time. The DSE continue to have only 28 listed companies, six of which being companies cross-listed from other stock exchange, they are not domestic and did not raise capital in the local market prior to their listings. These were listed by introduction. And so, the question is: why do we have so few companies that have done IPOs and listed in the stock exchange? Why is it that the stock market has such a small percentage of companies? i.e., despite the fact that the DSE established the Enterprise Growth Market – EGM about six years to enable start-ups and small and medium enterprises (SMEs) to access capital from public markets for their growth and expansion. The EGM segment so far has six (6) listed entities.

Some of the entrepreneurs and business managers that we sometimes engage with indicates that the process of completing an IPO and listing into the stock exchange is tough, too long, expensive and complex. Most of them tend to cement their arguments by indicating that the sheer fact that the process involves many disciplines of accounting and financial reporting standards, capital markets and securities law, tax laws, etc means a small enterprise will struggle. They say the average entrepreneurs usually does not have expertise in all these areas. My advice has been — but you do not need to have all these competences and experiences to prepare and take your company public. The capital market regulator and the stock exchange has trained and licensed various categories of advisers and members for the purpose. Then comes another question– who is going to pay for these services? My response is — the entity raising capital will pay, however, most of these costs are not paid up-front, they get paid from the IPO proceed on success basis.

Therefore, it boils down not to the technical expertise or costs related to raising capital through IPO – rather the fundamental issue is there is no strong motive for raising capital by way of IPO. I also understand issues around transparency, disclosure requirements, family-owned businesses (and the emotions attached into it), tax liabilities, etc are some of the issues that run on top of entrepreneur’s mind as they contemplate the issue of going public. It however should be known that there are several benefits of considering raising sustainable capital by way of IPO vs the negative side – some of these benefits are: access to fairly priced long term source of capital, the potential for future capital raising from a diverse and wider investor base, a flexible capital repayments, the glamour and prestige and profiling of the company and its products, the positive sentiment to the company by its stakeholders – customers, suppliers, bankers, the government, etc.

And so, there are many sound reasons for going public. For instance, equity capital obtained from IPO is considered a permanent form of capital since there is no interest paid on equity, and this form of capital is not repayable like it is the case for debt financing. Therefore, from an entrepreneur point of view – funds generated by a public offering are considered to be relatively ‘safe’ form of capital for a business. It removes the entrepreneur from the pressure of periodical cash commitments, etc. This means capital obtained by way of IPO allows a company the freedom and flexibility to deploy and spend capital as it needs to finance growth and expansion of the company, while sitting on strong financial/capital base.

There are several cases where enterprises growth and development seems to be hindered by lack of capital, in some cases banks requires businesses to inject more equity capital into the business before they can provide more debt/loans. So, in a case where the business needs such capital in order to expand – it becomes a chicken and egg equation. In such cases, listed companies have advantages over unlisted companies – why? First of all, the company can utilize its investor base to obtain new equity capital (via rights shares issuance); second, if a bank needs more equity capital injection by the business as a condition for the bank to provide lending facilities to the company – such equity capital can efficiently be obtained via issuance of new shares to existing shareholders (rights shares issuance) whose base is wide and broad. This way the company have access to the capability to exploit opportunities while they are present – before the competitors (who are unlisted) can seize them.

Then there are many fiscal incentives that are provided to listed companies and its investors. There are tax incentives on corporate tax, withholding tax on dividends, no capital gain on transactions related to free float shares, no stamp duties, etc.

Having said the above, it is also true that in deciding whether going public is the right strategy for financing the company (or not), there are several issues to consider – i.e., there may be many legal considerations, etc. One among them is the consideration to convert the company from a private company to a public company in order to allow free transferability of shares. But, apart from legal concerned, probably the most important consideration is that the company should have an appeal to potential investors – this means that products and services produced by the company must be in relatively significant demand by consumers, customers and users. This way your company’s shares will have high demand from investors as it will indicate that there are potentials from upside growth, which will translate into good returns for investors.  

The other important fact that cannot be easily ignored is that your company will have to undergo some fundamental changes is preparation for going public. Matters of good corporate governance, the psychological change that is needed by both owners and employees — knowing that company’s management and directors shall henceforth have to answer questions from a diverse base of investors, some of them are sophisticated and pro-active; knowing that the company will be put under a microscope by investors, customers, competitors, the media, etc. 

Financing of Infrastructure Projects with Domestic Capital Markets

Improving infrastructure is not only critical for economic growth but essential for ensuring the improved wellbeing of the people. Easing and enhancing efficiency in which movement of goods, services, people, etc are conducted has significant impact in unlocking economic potentials. Empirical research shows that there is a strong link between infrastructure development and economic growth.

According to the African Development Bank (AfDB), road access in Africa is less than 35 percent, that just about 5 percent of agriculture in the Africa is under irrigation, that Africa’s average national electrification rate is about 45 percent, that the total electricity generated by Africa’s 54 countries (for its more than 1.2 billion people) is equivalent to electricity being produced and consumed by a single nation in Europe, such as Italy or France or the UK – but with about 60, 65 and 68 million people, respectively. There are also cases where the total electricity generated in an African nation, with 60 million people, is not enough to power a single airport in a developed country.

Will a continual dependence on foreign nations and/or financial institutions fill this funding gap for the infrastructure development? I guess, the answer will be no. We have been through this kind cycle and experience again and again. What Africa needs is to look into and develop its capital markets to facilitate mobilization of finances for its infrastructure development.

In these past few years, i.e., at least from 2015 today, our nation has been a good example (in my opinion) of how the capital markets could be used to mobilize domestic financial resources for strategic infrastructure projects – whether by issuance of Treasury bonds, or divesting part of the shareholding in a listed entity and placing the proceed on strategic investment projects or requiring payment of dividends to the Treasury to enable investment in such projects. On the Treasury bonds issuances and listing for example, the trend has been from TZS 595 billion in 2015 to TZS 1,225 billion in 2016, TZS 2,300 billion in 2017, TZS 1,895 billion in 2018 to TZS 2,395 billion in 2019 and TZS 3,500 billion in 2020, and a significant portion of these funds were directed to infrastructure project. Note that almost all of these funds a locally mobilized, as foreign investors are currently restricted to invest in such instruments (with the exception of East African). As a result, there has been also an increase of investor base (including retail investors) who invest to finance these projects, consequently a vibrant primary and secondary bonds markets, i.e., from turnover of TZS 305 billion in 2015 to more than TZS 2,100 billion in 2020.

What is the context? sourcing funds to finance a sizeable infrastructure project in Africa has always been fraught with difficulties. One major challenge is that the multilateral development finance institutions, which are dominated by the western developed countries, often impose stringent policy conditions to loans, and they are rightly so. But it also appears that the funding required to close the infrastructure gaps in a timely fashion is simply not easily in existence on these institutions’ balance sheets.

Another issue is that the major lenders, i.e., development banks, have historically been more active in financing social infrastructure such as health and education. Their approach to development in Africa has by and large been related to “poverty alleviation”. As it turns out, financing social infrastructure for poverty alleviation objectives isn’t the same as financing economic infrastructure which plays a critical role in spurring economic growth, which in this moment in time, has not been accorded serious attention in this region. While social infrastructure is important for economic development, however, economic infrastructure is even more urgent. Wealth creation and capital accumulation are facilitated more by investments in economic infrastructure.

The fact is the old approach of countries relying heavily on multilateral and development financial institutions to fund infrastructure has proved to be challenging. It is also incapable of closing the financing gap of such magnitude. In fact, neither the old nor the new institutions have the risk appetite for the kind of investments needed. If African countries continue to rely on these organizations and institutions, the pace for closing the infrastructure gap will be very slow.

The approach where geo-economic relationships are largely based on trade and investment as well as encouraging African countries towards looking inwardly for solutions related to financing our development, instead of the historical aid and assistance model, sounds like the better route to take. Furthermore, recent economic challenges in most nations have made traditional development finance institutions hesitate to provide resources for the significant but critical infrastructure investment required.

The truth is, our domestic markets are still relatively small, however needs to be developed slowly by introducing new infrastructure-based financial instruments by governments (i.e. infrastructure bonds, green bonds, retail-savings bonds, etc), municipals and local governments (municipal bonds), or even State-owned-entities and parastatals issuing bonds in local markets where both domestic and international players can access, then we can as well supplementing these efforts with pots to international markets issuances for Eurobonds or Diaspora bonds.

Traditionally, most African countries, have not consciously seen the capital markets as a critical source of finance for development. Yet raising debt financing in the capital market is one of the most potent sources of finance for rapid infrastructure development. This is because countries are able to raise funds for earmarked projects without policy conditionalities. And the cost of the funds, while relatively expensive compared with concessional loans from some International Institutions and multilateral sources, is often cheaper than loans from international banks.

It is on these bases, that countries have to be encouraged to pursue the development of domestic capital markets to raise funds for infrastructure projects. However, these funds should not be used to finance consumption or get misused and abused (like recent cases for some countries) but should be channeled directly into the financing of the much-needed economic infrastructure.

The railways, bridges, roads, canals etc in developed nations were largely financed with funds raised via issuance of bonds in the capital markets. This is because national budgets are often unable to support the required infrastructure expenditure. Country’s balance sheets in most cases lacks the fiscal space to accommodate the substantial financial outlays required for infrastructure development. That’s why nations should turn into tapping domestic market to raise finances for infrastructure development – that way also provide room for inclusive economic development, financial inclusion, etc.

Investing is shares — Understanding of sectors and companies

The need to carry research, analysis and/or investigation of the economy and sectors within the economy, when you are in the process of valuation of companies and shares one intends to invest into cannot be over emphasized. Such research and analysis, which then informs you whether you are about to pay the right price for a share you intend to buy, or not. In previous articles about similar topic, we indicated that one of the useful tools for analysing the outlook for an industry or sector is to use the Porter ‘five forces’ framework. We indicated that these forces identify the five underlying factors determining future profitability of the company you have invested into or are planning to invest into, these industry forces are:

  • Threat of new entrants
  • Threat of substitute products
  • Bargaining power of suppliers (buyers)
  • Rivalry among the existing competitors
  • Bargaining power of suppliers

Let’s look a little closer at the questions we need to ask when investigating an industry.

Suppose that you have to bet your entire nest egg on a football game. All you need to do is select a winning team. These are your choices: Young Africans, Simba, Azam, Biashara United, Tanzania Prison, KMC, Ruvu Shooting, or any of the 16 participating clubs in the Tanzania Premier League, probably the obvious choice for most of us would be either Yanga, or Simba, or Azam, given the odds.

Fortunately, this is where the comparison between football (or other) sports and investing in shares ends.

You don’t have to choose the absolute winner in investing in shares because there are lots of winning shares in second place, too. The basic point is that you can increase your odds of winning when you choose a winning industry or sector in the economy as part of your investment strategy. In the race to build wealth, all you need to do is to pick decent shares in a decent industry and do so on a long-term basis in a disciplined manner. Remember that investing in shares should be a long-term value investment as opposed to short-term speculative motives.

As mentioned above, a successful long-term investor (a value investor) looks at the sector just as carefully as he looks at the individual share of a listed company that s/he intends to invest in.

The important questions to ask yourself when you are choosing shares of a sector you intend to invest in, are:

  • Is the sector depicting the growing trend? – The saying “the trend is your friend” applies when choosing a sector in whose shares you intend to invest, as long as the trend is an upward one. If you look at three different shares that are equal in every significant way, but you find that share X is in a sector growing at 10 percent a year while the other two types of shares are in industries that have either little growth or are shrinking, which share would you choose? – Obviously the common wisdom, and other things being equal, will propel you to choose shares belonging to a growing sector.
  • Are the sector’s products or services in demand? – Look at the products and services that the sector provides. Do they look like items that the society will continue to want and demand for a foreseeable future? Are there any products and services that are on the horizon that could replace them? Does the sector face a danger of going out of fashion?
  • What does the sector’s growth rely on? – Does the sector rely on established historical trends, or on factors that are losing relevance?
  • Is this sector dependent on another sector? When one sector suffers, you may find it helpful to understand which sectors will subsequently suffer. The company or shares that you intend to invest into may be in the sectors that will be affected by side effects.
  • Who are the leading companies in the sector? – Once you have chosen the sector, you can choose from two basic companies, namely established leaders, which is a safe way to go or innovators, which have more potential.
  • Is the sector a target of government action? – Intervention by policy makers and politicians can have an impact on a sector’s economic situation.

Which category does the industry fall into? – Most sectors normally fall into two categories, namely cyclical category and defensive category. This translates into what the society wants and what it needs. Society buys what it needs in both good and bad times. It buys what it wants when times are good and holds off when times are bad.

Cyclical industries are those whose fortunes rise and fall with the economy’s rise and fall.

Defensive industries are those that produce goods and services that are needed no matter what’s happening in the economy i.e., food, housing, clothing, medical and health services, education, transportation, etc.

Once understood where the economy/market/sector is situated, based on the research and analysis — then comes the hard decision – which company’s shares should you buy from the stock exchange? Although every part of the investment decision-making process is important, this part is equally crucial and critical because it is your share-selection that will ultimately determine your investment performance relative to the rest of the market.

A very common question is, ‘how many different companies’ shares should I have in my portfolio?’ The answer is, ‘As many as you like’ – provided you have the capability to acquire them and are also capable of keeping track of all your shares by following on their corporate performance, corporate announcement i.e., dividend payments, appointment of people to fill in key positions in the company, rights issues, bonus issues, etc) market movement and other investors’ sentiment on the particular company.

Research indicates that if you own shares on only one or two listed companies, your portfolio is likely to experience a relatively high level of volatility (up and down share price movement) relative to the rest of the shares in the market. The volatility declines steadily, however, as the number of companies to which you hold shares increases. But be careful – if you spread your investments too widely, the performance of your portfolio will begin to simulate that of the market index, which you should be hoping to outperform.

Market Integrity and Good Governance: Trends and Changes within Exchanges

Market integrity is a cornerstone of fair and efficient markets, ensuring that participants enjoy equal access to markets, that price discovery and trading practices are fair, and that high standards of corporate governance are met. For this purpose, market integrity includes monitoring for market abuse and manipulative trading, fostering nondiscriminatory market access, price formation/transparency, strong disclosure standards, and investor protection. Stock exchanges play a pivotal role in supporting integrity: through overseeing listings, approving and supervising market participants, managing risk through settlement and custodian banks, reporting data, and enforcing rules as defined by regulators and by Stock exchanges themselves.

The 2007/8 global financial crisis prompted governments and regulators to develop and implement wide-ranging regulatory reforms. Throughout this period, Stock exchanges have demonstrated a high degree of resilience, reemphasizing their instrumental role in ensuring financial market effectiveness and systemic stability globally.

What has been the recent trend?

Regulators and Policymakers

In recent years, policymakers across the world have strengthened the regulatory framework with an emphasis on ensuring systemic stability and enhancing governance and good conduct in financial markets. Legislation has expanded the scope of instruments that must be transacted through stock exchanges, which are investing to meet this increased demand. The new regulatory demands span financial and non-financial risk management (including cyber risk): conduct of business, investor and data protection, prudential requirements, and fitness requirements for individual risk-takers and market participants.

The scope and complexity of these regulations has created an extraordinary challenge for stock exchanges, market participants, and regulators alike. Regulators broadly concur that ongoing dialogue between regulators, stock exchanges and market participants is desirable and that in some areas industry standards and codes of conduct may be preferable to a proliferation of legal rules.

Issuers

The appropriate supervision and oversight of the entities who use financial markets to raise capital and whose securities are publicly traded is a critical element of market integrity. For example, setting minimum listings standards and ensuring appropriate disclosure of information is integral to the protection of investors. However, the changing profile of issuers (including small- and medium-sized enterprises (SMEs) as well as state-owned enterprises) and how Stock exchanges are responding to ensure the continued preservation of market integrity is becoming vital.

(i) Small- and Medium-Sized Enterprises

Allowing companies to access external finance enables funding of new investments, innovation, economic growth and job creation. To accelerate economic and productivity growth, policymakers are looking to exchanges to address some of the funding gap for SMEs. This gap is partly the result of the regulatory constraints placed on bank-based intermediation imposed in the wake of the 2007/8 crisis. Many exchanges have responded by launching dedicated SME offerings aimed at reducing fixed regulatory costs associated with listing, while still ensuring appropriate levels of investor protection. At the end of 2020, among 70 WFE member exchanges, there were about 40 SME platforms, with over 7,000 listed companies and a combined market capitalization of US$1.5 trillion.

(ii) State-Owned Enterprises (SOEs)

The rapid growth of economies with state-directed developmental models has increased the relative influence of state actors in the global economy. State actors are consequently becoming more prominent participants in financial markets. While the listing of public equity in SOEs is not a new phenomenon, it has become more common. The Fortune Global 500 index of the largest listed companies by revenues included more than 100 state-owned enterprises in 2020, compared to about 30 in 2000. As SOEs raise capital or simply list on markets, exchanges and regulators seek to maintain rigorous standards of investor protection, while accounting for the idiosyncrasies of these institutions (such as golden-share voting rights for state owners, state-appointed directors, or politically determined objectives). About 45 percent of Exchanges indicate that they have tailored listing requirements for state-owned enterprises in their jurisdictions.

Investors

Facilitating orderly investor participation in markets, while maintaining a level playing field, are key elements of ensuring market integrity. Stock exchanges serve a diverse set of investors with differing priorities and requirements for disclosure, market access, and investor protection. As investor expectations and composition change, stock exchanges have responded through, for example, investing in education of retail investors, adjusting disclosure requirements to take cognizance of evolving investor needs, ensuring the fair dissemination of regulated news, and the design of technology underlying matching engines and best execution solutions. Increasingly prominent institutional investors have their focus on market structure considerations, the trend towards greater demand for environmental, social and governance (ESG) disclosures, and the preservation of market integrity in the context of cross-border investment.

(i) Institutional Investors and Market Structure Issues

Over the past 50 years, at least in more developed markets, ownership of public equity has become increasingly concentrated in the hands of institutional investors. One study estimates that as at 2020, institutional investors owned around 75% of the outstanding shares of the top 1000 US companies by market capitalization, compared with 80% retail holding in the 1970s. In accordance with their increased prominence, these investors are becoming more vocal about a range of market structure related issues and demands of stock exchanges. Given their size and importance, Exchanges and regulators must consider their views while still accommodating sometimes competing demands from other investor groups and market intermediaries.

(ii) Foreign Investment and the Role of the Exchange

Cross-border investment is an engine of economic development and a substantial source of capital in frontier and emerging markets. Cross-border investment and market participation brings benefits to markets in terms of enhanced liquidity and the development of the local buy-side and investment community; however, it also poses new considerations for market integrity (such as cross-border supervision, currency convertibility in trade settlement, and equitable treatment of foreign investors). Many frontier and emerging market governments have adopted economic strategies to encourage such foreign investment and look to their local exchange as a key partner in such intermediation. Stock exchanges have, for their part, introduced mechanisms and adjustments to market structure to facilitate foreign investment and market participation.

Enhancements to Corporate Governance and Disclosure

Investors, such as sovereign wealth funds, public-sector pension funds, global asset managers, millennial retail investors, are pushing for enhanced disclosure of financially material ESG information. These include climate risks, compensation practices, diversity and inclusion, labor relations, responsible sourcing, and supply-chain management. Furthermore, investors are starting to demand that large corporates articulate their stances on the diverse challenges facing society. These investor demands are expanding the conception of integrity in public markets.

Because exchanges are often responsible for determining disclosure requirements and monitoring compliance, they tend to be at the forefront of building consensus and setting standards. Exchanges have taken the lead by requiring enhanced disclosure in their listings requirements or through issuing ESG-disclosure guidance for listed issuers. Between 2015 and 2020, over 30 exchanges published ESG disclosure guidance for their listed issuers. Exchanges also provide ESG-related training and information services for their listed issuers.