Managing Investment Risks by using Collective Investment Schemes

Collective Investment Scheme (CIS), also known as unit trusts or participatory interests are investments in which many different investors put their money together into a portfolio, and then these pooled monies are managed by professional investment managers. These professional investment managers invest the pooled money in different asset classes ranging from shares of listed companies to bonds, money market instruments, to property, etc. This way risks that retail/individual investors cannot manage or mitigate given their limited skills in securities analysis, gets managed by professional investors on their behalf.

The total value of the pool of invested money is split into equal portions called participatory interests or units. When you invest your money in a CIS portfolio, you buy a portion of the participatory interests in the total CIS portfolio. The assets of a CIS portfolio are held by the trustees. A closer example of this structure is the Unit Trust of Tanzania.

The unit price of the CIS depends on the market value of the underlying investments in which the pool of money is invested. This unit price rises and falls (fluctuates) according to the value of the underlying investments based on daily calculations.

What are some of the advantages of CIS over direct investment? CIS provides an ability to:
• hire professional investment managers, which may potentially be able to offer better returns and more adequate risk management;
• benefit from economies of scale i.e., lower transaction costs; and
• increase the asset diversification to reduce some unsystemic risk.

There are two types of CIS, namely CIS in Securities and CIS in Property, also known as Real Estate Investment Trusts (REITs). I will focus on CIS in Securities – what are benefits of investing in CIS in Securities?

• They are affordable and easy – these collective investments are affordable as an investor can invest small amounts of money. This makes it possible for more people to easily invest in underlying assets that they normally would not be able to afford.
• Diversification of risk – as collective investments may be invested in a range of underlying assets, it means that your eggs are not all in one basket. The risk associated with your investment is therefore spread amongst the different underlying assets. If any of these assets perform poorly, your total investment will not necessarily perform poorly as there are other assets that may have done very well. The more diversified your capital, the lower the capital risk. This investment principle is often referred to as spreading risk.
• Good returns — the longer you leave your money invested, the greater the opportunity for your investment to grow. An investment in a CIS in Securities can be repurchased at any time, however, it is advisable that you invest the money for at least 3 – 5 years. The reason for this is that the value of the units of a CIS in Securities can go up or down. If invested for a longer period, one can expect to see the benefit of the long-term growth in the market.
• Professional investment management — an investment manager manages your investments for a fee. However, an investment manager must be registered with the Capital Markets regulator as a financial services provider.
• Your money is accessible — CIS in Securities are easy to sell which means that you can sell all or part of your investment at any time.
• Different investment options — CIS in Securities offer flexible investment options as you can make: (i) lump sum investments – these can be made at any time once you have opened your collective investment account; (ii) debit order investments – you can make regular payments, e.g. monthly, into your account; and (iii) switching – as there are many different collective investment portfolios, you can switch between different portfolios at little or no cost.
• Reduced dealing costs – If one investor had to buy a large number of direct investments, the amount this person would be able to invest in each holding is likely to be small. Dealing costs are normally based on the number and size of each transaction, therefore the overall dealing costs would take a large part out of the capital (affecting future profits).

A choice of where to invest: It is important that, before you select a portfolio in which to invest, you first understand what you are investing in, and that you carefully consider the amount you commit to invest. A licensed financial advisor should assess the amount of risk that you are prepared to take and advise you accordingly. Factors such as your age, health, income, alternative liquid assets, financial knowledge, appetite to risk, whether or not you have dependents and what your investment goals are will all influence the choice of investment.

Types of CIS in Securities: There are two types of CIS in Securities: Open-end fund: this is equitably divided into units which vary in price in direct proportion to the variation in value of the fund’s NAV. Each time money is invested, new units are created to match the prevailing unit price and each time units are redeemed, the assets sold to enable redemption matches the prevailing price. In this way there is no supply or demand created for units and they remain a direct reflection of the underlying assets.

Closed-end fund: this type of CIS issues a limited number of units in an Initial Public Offering (IPO). These units are then traded on a stock exchange. If demand for the units is high, they may trade at a premium to net asset value. If demand is low, they may trade at a discount to net asset value.

In many markets the less sophisticated investors who want to participate in the stock markets are protected from the swings of the markets and their implications by investing using CIS. Our experience is that this is the one area that needs to be developed, currently, other than UTT, private sector is yet to actively participate in this key space of the capital markets ecosystem.

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Stock Exchanges for Sustainable Development Goals

As part of the global community Stock Exchanges across the global are required to step up and engage stakeholders in the capital markets eco-system (i.e. regulators, investors, financiers and businesses, etc) on their role towards creating better communities. In evaluating the 20-Sustainable Development Goals (SDGs), one will clearly find that four (4) SDGs are relevant to stock exchanges, and that exchanges are best positioned to support these goals. The four goals are Goal 5 – Gender Equality; Goals 12 – Sustainability Information; Goals 13 – Climate Change; and Goal 17 – Global Partnerships.
And so, to start contributing to the achievement of the SDGs, exchanges can make a difference with these 5 steps:
1. ESG Reporting Guidance – Exchanges are required to assist companies by providing guidance in making sustainability information public.
2. Dialogue – where Exchanges can engage fellow exchanges and investors and issuers as well as other stakeholders, in sensitization and voluntary compliances
3. Sustainability Products – Exchanges are expected to help incentivize and mobilize finance for SDG areas through products such as Environmental protection, Social Responsibility and Good Governance (ESG) indices and green bond listings.
4. Listing Requirements – where Exchanges are required to strengthen their listing requirements to encourage the disclosure and use of sustainability information – especial ESG related information.
5. Join a Global Partnership: Exchanges are encouraged to join the UN-Sustainable Stock Exchange (UN-SSE) Initiative as partner exchanges and participate in its workgroups to share best practices and promote sustainable markets.In mid-2016 the Dar es Salaam Stock Exchange made a conscious decision to join the UN-SSE Initiative. And, for the past two and a half years we have focused on engaging our members to raise awareness and sensitizing them to appreciate their role in creating a better world in course of their investments, capital raising, running businesses, etc. Our engagements have been to extent of Capacity building workshops, enhancing follow ups on continuous listing and membership obligations – especially in the area of transparency and good governance.
The other initiative towards these ongoing engagements has been the launching of DSE Members Award, which is annual event involving collection of data and information and our members about their practices and whether in their undertaking, among others, the aspects of environment protection, corporate social responsibility, gender equality, and good governance are clearly considered, monitored and reported. These activities culminate into a final event, of recognizing, and awarding members that have performed better than others in these specific criteria. To our estimate, this initiative has sharpened awareness of ESG, Sustainability reporting and Responsible investing.
Why does this matter? the global interest in sustainable investment is a catalyst for change and some DSE-listed companies, especially those which subsidiaries to multinational entities have made some positive strides in the area of ESG practices and disclosures. As we move towards integrating sustainability reporting as part of our continuous listing obligation and making these part of the listed companies annual reports, which we intend to achieve by 2020 — sustainability thinking into business strategy should be embraced, not only by listed members of the DSE, but other categories of members as well – i.e. stockbrokers, nominated advisers, custodian banks, etc.
As mentioned above, in 2016 the DSE signed into the United Nations (UN)-Sustainable Stock Exchange (SSE) Initiative — a project of the United Nations co-organized by the United Nations Conference on Trade and Development (UNCTAD), the UN-Global Compact, and the UN-supported Principle for Responsible Investment (PRI); partnering with other key stakeholders including the World Federation of Exchanges (WFE) – to which the DSE is an Affiliate member, and the International Organization of Securities Commissions (IOSCO) – for the objective of providing a multi-stakeholders learning platform for stock exchanges, investors, regulators, and companies to adopt best practices in promoting corporate sustainability. In collaboration with investors, regulators, and companies, they strive to encourage sustainable investment.
Being a partner exchange to the UN-SSE Initiative, among other requirements is for the exchange to promote sustainability thinking and strategies as well as to consider ESG factors more explicitly in their practices and disclosures/reporting, in line with international best practices. Our purpose real is about trying to get the market to think more holistically about what is important, then disclose this thinking to our stakeholders, and embedding these factors, and hopefully change their behavior on matters of environmental sustainability, becoming more inclusive and socially responsible, becoming gender sensitive in their choices, as well as pursue and practice best standards of good corporate governance – including become more transparency in their disclosures, not only in relation to the past, but also the future of their businesses.
Some of the exchanges, even in our continent, have already included sustainability and ESG reporting in their listing (membership) and continuous listing (membership) obligations rules. Stock exchanges in South Africa, Egypt, Morocco, etc are in this stage already; other exchanges have creating rules for listing green bonds – South Africa, Egypt, Mauritius, Kenya, etc stock exchanges have green bonds listing rules already, while others such as Nigeria have created Responsible Investment Indices – aiming at sharpening the awareness of responsible investing. For the DSE, as I indicated above, we are at the sensitization and awareness creation stage as well as encouraging voluntary disclosures. However, the intent is to have these issues embedded in our rules by year 2020 – later this year we intend to share with our members the Model Guidance on Reporting ESG Information.

Investors’ Risks for Investing on Unregulated Financial Markets

In a bid to diversify their investment portfolio or seek investment opportunities with high returns, some Tanzanians’, especially the youth, have been taking investment risk on investment opportunities that have the potential of exposing them to high and unmitigated risks. In their pursuit of outsized returns some of these investors temporarily seems to have forgotten the misery that befell investors who participated in various forms of Ponzi and/or Pyramids schemes which similarly promised returns that were clearly unsustainable (if could be achieved at all), but still people fell into them.

To this day, part of these investors who lost funds in those schemes are still hoping that they will get some form of compensation someday, which may be a challenge, considering the fact that these entities were not under the supervision of any regulator, neither the Capital Markets and Securities Authority, nor the Bank of Tanzania, but these investments were also not insured in any way, which could have provided a form of relief to investors’ protection, in cases of such loses.

What is at stake? the onset of technology, which by and large have made financial transactions more efficient among other positive disruption attributes, has also come with the exposure to unregulated investment opportunities offered mainly through online platforms. While there are still discussions around the regulation of virtual/crypto and other form digital currencies and digital assets in various jurisdictions around the World, probably including Tanzania, but so far Tanzanians are quietly investing in such emerging investment areas such as Initial Currency Offerings (ICOs) and other forms of unregulated online foreign exchange and currency trading, unfortunately to their own peril.

As it stands, most of the entities offering such alternative investment opportunities may not be licensed whatsoever, which exposes investors to both high and unmitigated risks. While some of the investment platforms and activities have caught the attention of our regulators, but it has been only to the extent of issuing cautionary notices and warnings to the public, for the public to beware of the fact that such financial products and services are unregulated and may be risky. So far there is not action that has been taken to protect investors, and there may be many Tanzanians out there who are potentially exposed to such instruments which promises greater investment returns as it goes with some greater excitement for individuals with quick returns’ investment approach.

As we observe, to attract investors, most of the entities involved in these programs seem to promise outsized returns which may not be sustainable in the long run. Global trend in the unregulated digital currencies demonstrate that crypto (and other digital) based assets market is uncertain and has experienced accelerated boom and burst cycles which may expose investors to substantial losses.

At the global level, International Organization of Securities Commissions (IOSCO), the international body that brings together the world’s securities regulators, to which our capital markets regulator is a member, has identified several risks associated with Initial Currency Offerings (ICOs), for instance. 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 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 may not be protected by the law. While in the near future regulators (such as the BOT and CMSA) may consider coming up with tools and mechanisms for protecting investors in these global financial and capital market activities, local investors are meanwhile cautioned and advised to avoid participating in investment opportunities offered by unregulated and unlicensed entities, as there may be no recourse in the event of a collapse and/or loss of their investments.

The case for embracing the culture of paying taxes

According to recent reports by the Tanzania Revenue Authority (TRA), tax revenue collections reached Tsh. 7.99 trillion in the first half of the financial year 2018/19 i.e. from July to December 2018, a growth of 2.01 per cent compared to Tsh. 7.83trillion collected during the corresponding period previous year 2017. The Tsh.8trillion collection is about 89 percent of the expected revenue collection for the six-months period. One of the many reasons for such performance in which collections are about 11 percent behind the budget is the case of a narrow tax base (with Tanzania having a low domestic revenue to GDP ratio (less than 15 percent) compared with the Sub-Saharan African countries average of 17 percent.
To increase the tax base TRA have in the recent past embarked in a nationwide campaign for Taxpayer Identification Number (TIN) registration targeting new tax payers and locations of their businesses aimed at expanding the tax net base. The other recent initiative of widening the base has been on property tax whose rates of Tsh.10,000/- for ordinary houses, Tsh. 50,000/- for every floor of a storey building is meant to increase the outreach and bring more citizens in the taxpayers’ net.
Furthermore, H.E. President Dr. John Magufuli has recently issued a raft of new tax administration measures rallying on all of us to participate even more in the process of raising revenues and expand our country’s tax base. The President directed the tax administration officers to adopt a more accommodative tone towards the business community instead of being overly aggressive which makes it difficult for tax collections, in some cases.
What is at stake? the wide gap between the actual tax paying population and the total population has been a worrying trend in most countries over the years. Studies across board indicates that in most countries, especially in Africa, only a small portion of a given country’s population pay taxes.

In 2018, for instance, BusinessTech reported that only about 30 percent of the 56 million population paid taxes in South Africa. The BusinessTech further reported that although the remaining part of the population was contributing through Value Added Taxes (VAT), but that portion of the population was not contributing anything more in the form of tax revenues to the nation coffers. In Botswana the ratio is 32 percent; Namibia 24 percent; Mozambique 19 percent; etc. Now, the case for these countries in the Southern part of the continent is far much better in relative terms. For instance, in Kenya, part of their 46 million population that pays taxes is 3.9 million, i.e. about 8.4 percent. Data by the Tanzania Revenue Authority (TRA) last year indicates that the number of taxpayers who paid taxes in 2018 was about 2.27 million. Working with a population of 55 million Tanzanians, the number of those who filled for tax returns or actually paid taxes represented less than 4.5 per cent of our population.

In the case of other key parameter measuring tax payments i.e. Revenue to GDP, our revenue collections to Gross Domestic Product (GDP), at about Tsh.15trillion per annum, is just 12.8 per cent. We expect collections to reach Tsh.18 trillion in this financial year 2018/19 – however, if we manage to collect Tsh. 18million, this will still be about 15 percent of GDP. When compared to some countries in the Southern part, again, Botswana, Mozambique, South Africa – there tax revenue to GDP ratios are: 14 percent; 18 percent; and 26 percent respectively.

This trend can only point to one thing; the country’s economy is being driven (at least from the tax revenue resource mobilization perspective) by a very small portion of the country’s total population. This points to the dire need for us as citizens to do more. The recently introduced presumptive tax for small scale and medium-sized enterprises and hawkers and small traders’ Identity Cards, for instance, are without doubt an apt platform to give Tanzanians outside the current tax brackets an opportunity to participate in the contribution to the national coffers.

A tax, charged at a moderate rate, say 10 or 15 percent of the business permit or trade license fees, or indicated above the Tsh. 10,000 or Tsh. 50,000 paid as property tax, are good strategies towards expanding the country’s tax base. Despite its implementation challenges and eliciting mixed reactions, but such measures, are some of the easiest taxes to comply with, and to administer. What is important is that the targeted market should fully embrace these taxes and take it as an opportunity to play the civic duty for each citizen on tax payments, especially now that there are vivid cases of better use of tax payers’ money in supporting our socio-economic development, underlying the necessity of social contract.

With these efforts, and others targeting monetary policies and investment attractiveness, from the economic perspective, we have a significant potential to largely sustain ourselves and emancipate from the burden of foreign aid and assistances which sometimes carries a lot of conditionalities, to the detriment of compromising our freedom, our cultural set-ups and our political processes. The Ministry and the Revenue Authority, should keep up the spirit of exploring more tax base expansion strategies, without necessarily imposing additional taxes to the already taxed sectors and segment of the economy and/or society. That way a substantial size of the population will have an opportunity to contribute to the national coffers.

Attracting Foreign Investments for Growth of Capital Market

Towards the end of September this year FTSE Russell, one of the leading global providers of stock market indices and associated data service, including markets/countries’ classification, reached out to the Dar es Salaam Stock Exchange (DSE), informing us that as part of the FTSE Country Classification Annual Review, the FTSE Russell Country Classification Advisory Committee and the FTSE Russell Policy Advisory Board have approved the addition of Tanzania to the “FTSE Watch List” for possible Classification into Frontier Market Status, from the current status of being Unclassified.
What does this mean, it means that by being in the Watch List, the wider global market is being alerted that there is a depth engagement taking place by the FTSE Russell with the DSE which is being considered for a classification, and therefore invites an opportunity for investors to share their experience of operating in the DSE, with regard to market and regulatory environment; Custody and Settlement of Securities; the dealing landscape and derivative markets. Thus, it means, Tanzania via the DSE is being considered for possible classification, into a Frontier Market status by September 2019. What role does country classification play in enhancing investment flows?
Often misunderstood or underestimated, country classification (into either Developed, or Emerging or Frontier Markets) has been identified as one of the leading factors that contribute to the amount of investment, particularly, passive investment funds that a country receives. Gaining a status automatically provides an opportunity for a country to access vast pools of global investment funds. It means that if the country is unclassified, as we currently are, does not have access to the pool of these global passive investment funds.
Let us get a feel of how relevant and significant this is – according to LSEG Africa Advisory Group it is estimated that, globally, more than US$1.3trillion is benchmarked to the FTSE Global Equity Index Series alone, which covers securities in 48 different countries based on Developed, Advanced Emerging and Secondary Emerging status. So, US$265billion tracks FTSE Developed Indexes; and US$130billion AUB (Assets Under Benchmarking) tracks FTSE Emerging Markets Indexes. There is also a relatively significant amount of funds tracking the Frontier markets, to which we currently do not feature into that space.
One may question, we notice that about 70 to 80 percent of trading volumes and turnover in the DSE emanates from foreign investments, so what difference does this potential classification make relative to what we have achieved already? A good question — it is well and good that we have an annual average of US$150million of foreign portfolio funds invested in the DSE listed securities, it is good in the sense that we are increasingly able to attract foreign funds to supplement and compliment the domestic mobilized funds that finances our development and enterprise activities. However, the funds we have so far been able to attract are largely “active” investment funds managed by small to medium sized fund management houses, where individual fund managers perform their own scouting, researches, analysis, scoping, recommendations and investments, given the limited volumes of research and coverage available for active investing on our economies. This makes passive investing argument much more feasible and practical – such activities are costly for individual fund managers, given the economies of scale and the significant amount of management fees involved, i.e. passive fund management strategies require a fraction of the management fees compared to those required for active investing, leading to higher net returns for passive investors. It makes sense therefore to actively attract global passive investment funds into our market, and country classification is fundamental to this process.
Thus, upon classification the DSE, and the country, will be in the investment map of global passive investment funds who allocates their investment funds only to countries that have achieved classification by global rating agencies, (and fund sizes invested in these identified particular markets depends on the market’s classification status, whether frontier, emerging, or developed market status).
So, what this means is that a country’s classification status signals confidence in a market and points to a level of sophistication through adherence to certain objective criteria required to achieve a given status. As alluded above, it also reduces costs of investing in a market, hence higher investment return.
We know that for us to continue our sustained growth, our stock market must develop in line, enabling greater employment and wealth creation within the economy. Our ability to attract global investment funds, now that passive funds have been identified as a key form of capital, providing support to economies by providing access to investors worldwide, is fundamental.
At present, only 10 countries in Africa are classified by FTSE Russell, with two Emerging (Egypt and South Africa) and eight Frontier Markets (Morocco, Mauritius, Kenya, Botswana, Cote d’Ivoire, Tunisia, Nigeria and Ghana). Looking at the entire continent, 44 countries are left unclassified which means that over 80 percent of Africa’s countries are not included in any of the global passive flows tracking Frontier/Emerging Markets. Hence, for the DSE and Tanzania to achieve a classification status will be a significant step, hopeful this will come to pass in the next few months, i.e. if some of us will continuously and consistently live into the criteria that brought us into this stage in the first place.

The Role of capital markets in empowering SMEs

Small and medium-sized enterprises (SMEs) comprise the backbone of our economy, according to some estimates, SMEs account for 90 percent of all companies (and businesses), providing over 80 percent of employment.
SMEs continues to be fundamental to the future economic success of our country, with the potential to facilitate establish a new middle class and boost the demand for goods and services. SMEs role in driving innovation, creating employment opportunities and therefore contributing to domestic wealth creation routes is critical for sustained economic development.
Despite their crucial role in driving the country’s economic development, evidences suggest that SMEs experience a severe shortfall in financing which hinders their growth. With all fairness, the challenge of SMEs financing is wide and large, a study conducted by Investisseurs & Partenaires found that 40 percent of SMEs in Africa identified the primary factor constraining their growth as accessing finance, and according to a recent report by the London Stock Exchange Group (LSEG) Africa Advisory Group, the current funding gap for SMEs in Africa is estimated to be about US$140 billion.
Ultimately, the lack of funding results in thousands of SMEs being forced out of business within a few months of beginning operations and significantly inhibits their ability to reach their full growth potential and become the future ‘blue chips’.
The lack of funding for SMEs calls into question how well our domestic capital market is serving the needs of these companies, who form the bulk of our business universe. In general, the purpose of capital markets is to promote growth in the economy by providing capital for enterprises to innovate, expand and create jobs — for an economy to efficiently work, capital must flow from investors to businesses, ranging from the largest companies to SMEs and entrepreneurs, instead of being concentrated on the large and well-established firms.
According to the research conducted by the LSEG Africa Advisory Group to the continent, there is a significant lack awareness by potential as well as entrepreneurs of the variety of financing options available to SMEs to support their growth trajectory. These options range from microfinance and angel investing to venture capital, banks, private equity and potentially listing on local exchanges. This unfamiliarity has resulted in low levels of domestic participation in the capital markets, leaving local equity markets underdeveloped. This contributes to the lack of depth and liquidity within domestic capital markets, which eventually results in a smaller Initial Public Offering (IPO) pipeline for local exchanges.
As a result, SMEs seeking to raise capital have traditionally relied on bank loans. The result is excessive dependence on the banking sector – specifically, on bank loans. As such, the financial sector has continued to grow around this common notion, with banks and other stakeholders focusing their operations on bank loans and debt financing.
As it were, the type of financing (equity or debt) that would best suit a company’s needs is heavily dependent on a company’s stage of development. For instance, debt is form of capital raising that would suit a well-established company. That said, the same would not apply to a high-growth SME where funding is required in order to finance expansion. As such bank loan financing leave a small company prioritizing loan repayments or face risking default.
In our context, the business environment poses some obstacles to debt-financed SMEs. My experience, based on personal observation, experience and engagements with various stakeholders, and supported by other studies; the following issues, as far as the matter of SMEs financing (by banks) is concern, concerns SMEs: (i) some banks constrain SMEs participation in their line of business due to the use of sophisticated scoring models when assessing creditworthiness for SMEs, it is well known that SMEs often lack the track record and meaningful data inputs required by banks; (ii) some banks do not use credit scoring for SMEs and prefer to focus on relationship-based lending — a consequence of this is that some of our banks experience higher rates of non-performing loans; (iii) credit bureaus, as good the concept as is, but have predominantly served as a negative reinforcement tool as a result of the harsh measures that some banks ends up taking in the case of delayed payments by SMEs – SMEs run the risk of being ‘blacklisted’ if a single loan repayment is delayed (caveat: this matter is somehow complicated because of regulatory and compliance); and (iv) some lenders seek prohibitive high collaterals to mitigate the high, and often unquantifiable, credit risk associated with lending to SMEs, again – this is a regulatory requirement.
As such, it is crucial for us to unleash the potential of equity capital to support SMEs that are so vital to the future of our economy. With the right combination of advice and support, SMEs can navigate the challenges, identify the right forms of equity capital raising and drive growth to support the economic development as envisaged. While the launch of EGM segment within the DSE was supposed to be far beneficial, but without the right training and a supporting advisory community, as has been the case thus far, the EGM segment is likely to be left untapped. In the these past 5-years since introduction of EGM only five companies have accessed the segment raising just over Tsh. 50 billion – definitely a relatively small amount, given the potential.

As indicated, limited capacity among SMEs in the successful and sustainable running of businesses has led to diminishing trust among stakeholders who could potentially provide much needed equity capital, leading to such stakeholders rejecting financing options for SMEs. Some of the key capacity gaps that SMEs face, which hinders their access to financing, especially equity finance, include:
Fear of control loss: one major concern that SMEs have regarding equity financing is the loss of control. Many SMEs are unwilling to accept external investment and bring in new partners, as they fear relinquishing control of their company. What we normally hear from SMEs owners, is that entrepreneurs would rather own 100 percent of one than 10 percent of a hundred. Additional observations, recent times, show that this culture is starting to change, albeit slowly, as SMEs are becoming exposed to the success stories of peer companies that have benefited from external financing, both at the regional and international level.
Good governance for growth: many SMEs are unaware of the importance of strong governance for business sustainability and growth, and hence their lack of access to expertise that could improve their management structures and practices. In many cases, company board of directors are lacking altogether, with no substitute structures in place to provide sound input, hold management accountable, oversee independent audit or remuneration decisions, or perform other traditional board functions. However, institutions such the DSE, CMSA, Institute of Directors in Tanzania Government-sponsored bodies and development financial institutions, i.e. the International Finance Corporation (IFC), sometimes help train and advise SMEs on the importance of following best governance practice.
Lack of transparency: many SMEs do not have mechanisms that safeguards operating and financing processes and preserve the integrity and transparency of their operations in order to ensure that deserving SMEs receive their fair share of financing. The preference by many enterprises to pay a lesser share of their tax obligations could be one of the reasons for lesser embrace of transparency.
Financial reporting: some SMEs do not have credible audited financial information to provide to potential investors. Entrepreneurs often lack the resources to prepare accurate records, or access to an external service provider that can produce better records on their behalf. As a result, many SMEs continue to struggle to produce accurate, useful financial information without increased access to financial education and awareness of the value of this information.
Sustaining growth: lacking a strategic vision and strategic plans for how to grow the business in a sustainable manner is also preventing many small companies from scaling up. Even when a temporary revenue boost presents itself, it is almost never sustainable. A growth strategy plan is often not present, restricting long-term success.
Retaining talent: growth SMEs often underestimate the importance of managing talent by seeking to attract, develop and retain individuals who are valuable to the company. This ultimately restricts the company’s performance.
Initial Public Offering (IPO): there is a general lack of familiarity with the IPO process, from access to finance, to listing requirements, to the benefits of being a public company in term of easy access of future financing from a broader base of existing and potential investors. Many SMEs regard IPO process as unachievable or too complicated, to the extent that many SMEs would not seriously consider accessing public money and list into the stock exchange. Becoming a public company is, however, a significant contributor not only to the development of a company, but to the further robustness of the local capital markets.
Despite the existence of capacity-building and scale-up programmes, such as incubations, but according to assessments based on publicly available information there are just few incubators in existence, and have limited capacity, i.e. most incubators can only support around 20 SMEs per year on average, which is only a small fraction of the SMEs that could benefit from such services. Moreover, that ecosystem has focused on more ICT-related sectors rather than agriculture or healthcare or energy, where more patient capital is needed. Moreover, there is a general lack of trust between SMEs and support providers, and so although business support providers are emerging, a lot of SMEs aren’t using them because of a lack of knowledge and trust between the service provider and the SMEs.
Lastly, angel investors and venture capital funds, which would normally provide equity finances to SMEs are almost not in existence, currently less than a percent of start-ups are being financed by formal angel investors and venture capital funds. There is a positive trend, however, with the number of visible angel investor groups, networks and initiatives having recently grown. For instance, the establishment of the World Business Angels Investment Forum – WBAIF Tanzania Chapter may add an impetus. However, capital remains scarce and the industry-specific knowledge and mentorship of these angels is limited.
To conclude, the existence of this profound financing gap preventing efficient deployment of private capital can be largely attributed to a lack of visibility of these companies to early-stage investment. Many investors do not feel comfortable investing in SMEs on the grounds of unestablished credibility and lack of trust, as a result entrepreneurs are forced to finance the growth of their businesses independently.

On the Financing of our Infrastructure

During these past 20 years, many African economies have tried to develop domestic capital markets hoping to enhance local capacities to mobilize domestic resources for funding development projects and enterprises. And so, during these two decades number of stock exchanges in the continent has almost doubled, to the current 29 stock exchanges representing 38 countries, including two regional exchanges.

These exchanges though have a lot of disparity in terms of size, depth, liquidity, trading volumes, etc. The fact is the continent is characterized by a handful of prominent exchanges and then many new small exchanges. Yes, efforts are being made to boost exchanges by improving investor education and confidence, access to funds and make the procedures more transparent and standardized, however the outcome hasn’t been satisfactory. Almost all African exchanges lack a significant local investor base, as well as financial products such as those which can finance infrastructure projects, i.e. Infrastructure bonds. While, many countries have embarked in different infrastructure projects – for roads, railways, airports, ports, bridges, energy, irrigation, etc but only three out of 29 exchanges have infrastructure bonds issued and listed in their stock markets.

According to the African Development Bank (AfDB), road access in Africa is only about 35 percent as compared to 50 percent in other developing regions. In agriculture, just about 5 percent of agriculture in the Africa is under irrigation, compare to almost 40 in Asia or 15 percent in Latin America.

Africa’s average national electrification rate of 45 percent, is poorly compared to over 85 percent in developing countries in Asia and 98 percent in Latin America. According to AfDB, the amount of capital required to close the infrastructure gap in Africa is estimated to be in the region of over US$90 billion annually. So, we know we face a significant infrastructure deficit and its financing means.

In these three decades China has stepped in funding many infrastructure projects in the continent. Of course, with other countries, international development agencies and other development partners have continued to play the role in this space as well. But the question is, for how much long should Africa continue to highly depend on foreign countries and institutions to fill its infrastructure funding gap? Is there a possibility of enhancing its efforts to facilitate domestic mobilization of resources? Can these efforts be aligned to financial inclusion, economic empowerment and financial sector development policies and programs?

As we now know, sourcing funds to finance infrastructure project in Africa has always been fraught with difficulties. One major challenge is that development finance institutions often impose stringent policy conditions to finances, rightly so. But the fact also is that the funding required to close the infrastructure gaps is simply not easily in existence on these institutions’ balance sheets; hence a combination of both significant domestic resources mobilization and external funding is worth pursuance, at least in the short to medium term.

The other factor is that western lenders have historically been more active in financing social infrastructure such as health and education, their approach to development in Africa has by 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 the attention it deserves. While social infrastructure is important for socio-economic development, but, economic infrastructure is more urgent. Wealth creation and capital accumulation are better facilitated by investments in economic infrastructure.

The other fact is, the old approach of countries relying heavily on multilateral and regional development finance institutions to fund infrastructure has proved less effective, somehow incapable of closing the financing gap of the magnitude and size we face. 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, then the pace for closing the infrastructure gap will be relatively slow.
Given such context, the game-changing infrastructure projects that can make a dent in the infrastructure deficit and move economies to a higher growth path need to come from Africans’ own resources, and in some cases be supplemented by what we can be accessed from international financial markets. And, the place to start would be the debt (bonds) market where domestic savings will be intermediated and be able finance our significant economic infrastructure projects.

It is on such basis, that countries have to be encouraged to facilitate enhancement of capacities of domestic capital markets to raise funds for infrastructure projects. The good news about this is that ways can be found where external financiers and investors can use our domestic capital markets to finance local projects and enterprises, somehow enhancing our investor/financier base.

Railways and canals in America, and Europe, were/are largely financed with capital raised through issuance of products such as infrastructure bonds. From records of history, big infrastructure projects have been financed with funds from the capital market, why? because national budgets are often unable to support the required infrastructure expenditure. Country’s balance sheets in many cases lacks the fiscal space to accommodate the substantial financial outlays required for infrastructure development.

Challenges and Opportunities for Regulating Commodities Trading

As it is — ambiguity, uncertainty, and lack of clarity regarding policy and regulations around commodities trading impacts the efforts to harness the potential and prospects in commodity markets; this fact applies across, at the local, regional and global levels. The possibility of integrating and harmonising the legal/regulatory framework and embedded institutions could unlock the potential and empower the commodity trading ecosystem to grow and mature in a manner similar to that of securities markets.
In the case here, integration and harmonization of legal/regulatory frameworks around storage, warehousing, marketing, trading, pricing and other supporting infrastructure around this space could be a matter of necessity. And so, the legal/regulatory environment relating to Warehouse and Warehousing Receipts Systems; the Mercantile Exchange, Cooperative Unions/Societies, Agricultural Produce Marketing Boards, Capital Markets and Securities, etc will have to harmonised to enhance the coordination for efficiencies.
Commodity markets are critical — studies point out high correlation of commodity prices with domestic economic growth, inflation and the pace of exports in developing countries. To bring this perspective into context – let us consider our case: as data indicates – we are a commodity dependent country, agriculture is still one of the most important economic sectors contributing about 25 percent of the National GDP and over 75 percent of the rural household income. The Sector provides almost 95 percent of the National Food requirement and livelihood to more than 70 percent of the population. The Sector contributes about 30 percent of total exports and almost 65 percent of the raw material requirements for industries. These, and others, are clear indications that the sector has a strong influence in the national economy.
However, for the realization of expected sectoral growth level of not less than 8 percent (it has been at about 7 percent according to recent data), it is important to ensure that formal commodity marketing and trading systems are effective and efficiently working, capable of guaranteeing social and economic benefits to producers, traders and consumers. As it stands, the current commodity marketing and trading system is yet to attain such desired outcome. The marketing and trading systems and its embedded institutions are fragmented, uncoordinated and unpredictable. There are sentiments that for most agricultural produce, farmers are receiving the low end of the bargain while consumers’ prices are high with no relationship to the transaction costs. Likewise, the regulatory systems, marketing institutions and enforcement mechanism are somehow inefficient to the expense of farmers and sometimes consumers.
The development of organised commodity market(s), exchange platforms and related market infrastructure and ecosystem has of recent assumed significant interventions in the financial development policy of many countries. As stock markets assumed importance as instruments to enhance allocative efficiency of financial resources, commodity trading /exchanges emerge as a powerful instrument in managing price risk management, so vital for sustained economic growth.
The Regulatory Agenda
This being the case, what should be the regulatory agenda of commodities regulations? We underscore that we are at an early stage, but as we strive to become sophisticated, let’s consider where the global regulatory agenda is as far as commodity trading is concern. These are some global trends: (a) Paper trading value for commodity far outstrips physical trading; (b) There is prevalence of a complex range of trading strategies and technologies; (c) Trading houses are emerging as major players, in some counties, replacing banks; (d) There is financialisaton of commodity trading with more of fund management, investment products and diverse categories of investors participating in trading.
Other global trends include: (e) Consolidation of the commodity exchange industry that extends to other market segments; (f) the growing power of commodity producers; (g) growing linkages between commodities markets across the world and a wide range of investment and trading products; (h) volatility in commodities markets quite often turning into issues of public unrest leading to ad hoc policy interventions and measures; (i) and the issue of managing the interests of various stakeholders engaged in the value chain of commodities trading, and so on.
Influencing factors
These trends and developments could surely have a bearing on the regulatory framework that needs to be built up, going forward, our commodity trading system will have to make way for a complex market structure with more players, products, instruments and innovations that could call for a proactive and agile regulatory framework. At present, the scope of merchantile exchange is quite narrow and limited to just few envisaged products. Some brokers have been identified, trained and licenced, but as it has been the case for our stock exchange — the strategic and operational roles of banks, market makers, liquidity providers and institutional investors as far as trading in commodities exchange is concerned is yet to be clearly determined, this could limit appetite and liquidity in the exchange.
Historically, at the global level, the development of regulation of commodities trading has evolved under these six key areas: (a) price stabilisation and liquidity enhancement instruments; (b) transparency and reporting; (c) regulation of Over the Counter (OTC) trading and dealing activities; (d) banning certain trading strategies and actors; and (e) strengthening regulatory and supervisory authorities and international cooperation.
The background for an integrated framework for commodities regulation at the global level was initiated by the G20, followed by several other global and regional regulatory initiatives that, among others, include: the Dodd Frank Act, IOSCO (Principles for the Regulation and Supervision of Commodity Derivatives Markets), Markets in Financial Instruments Directive (MiFID), European Markets Infrastructure Regulation (EMIR), Markets in Financial Instruments Regulation (MiFIR), and Market Abuse Regulation (MAR). By the way MiFID II has further strengthened the scope of monitoring trading activities.
Regulatory issues
In conclusion, with respect to regulation enhancement and better coordination, the key issues to consider include: (a) bringing commodity firms, venues and products under the merchantile exchange regulatory scope; (b) greater regulatory oversight by transaction reporting for commodity trading; and (c) commodity benchmarks used in financial contracts to be brought under regulation.

Unlocking the Potential of Unclaimed or Abandoned Assets

Almost daily, for the past ten years, on my way to the office and back — I pass a property (a beautiful two-floor house) which seem to have been abandoned by its owner(s), or to the best of my guess – the owner may be a deceased fellow whose next of kin does not know there is beautiful property in that Ununio Street left unattended by their “passed-away relative”, outside the house there is a car nearly destroyed by the constant rainy and sunny weather plus the effect of a house built in the swamp area. During these past 10 years, as I pass this house, I (albeit unconsciously nowadays) have always said to myself — how many such properties, monies, shares, bonds, dividends and interests, etc, that remains idle, abandoned and unclaimed in this country? which could better be converted into investable productive assets? I know the answer to my “how many?’ question calls for improbable responses – but the spirit to it is that there is need for raising consciousness, development of a policy, creating the necessary legislative framework/environment as well as ensuring there are instruments and the infrastructure to enable us unlock the potential buried in such unclaimed assets or abandoned properties.
As we contemplate this, we may wish to appreciate the extent of such unclaimed assets or abandoned properties may be significant – I have recently read the situation in Kenya. In Kenya, where there is already a legal framework (i.e. Unclaimed Financial Assets Act) as well the Institutional infrastructure (i.e. the Unclaimed Financial Assets Authority (UFAA)) to address this issue. The UFAA has recently published its past financial statements ending June 2017, as at that date, the Authority held Kshs.8.5 billion (equivalent to Tshs.170 billion) in unclaimed assets mainly received from banks, SACCOS, and Insurance Companies; while the amount held in trust for listed shares was valued at Kshs.16.4 billion (equivalent to Tshs.330 billion), these being shares held in trust pending the transfer of title to the UFAA. This is a whopping total of Tshs.500 billion of unclaimed financial assets, excluding other assets classes such as properties. I have not come across statistics here at home that gives us a glimpse of the size of unclaimed financial and other assets or abandoned properties – probably there might be the need for commissioning a survey to work on this revelation.
By the way, I seem to be moving a bit too fast — what is the meaning of unclaimed assets in the first place? Unclaimed assets include, but not limited to: savings or checking accounts with banks, uncashed cheques, payroll and wages, matured certificates of deposit, shares, bonds or mutual funds (also known as unit trusts), travelers’ cheques or money orders, contents in the safe deposits, gift certificates, insurance company demutualization proceeds, death benefits from life insurance policies, etc.
Let us make some more sense by considering the case for assets in banks — in a bank, accounts may be at risk of becoming unclaimed assets when there is no demonstrable owner activity, such as depositing or withdrawing money from an account, or logging in to an account or communicating with the bank. In practice, an account is considered inactive when the customer has not shown any interest in the account/asset for a considerable amount of time. In such cases, the practice of many banks, when the account has been inactive for a certain amount of time, will be to close it; which begs the question, when the account is closed where are these assets remitted? Similar cases apply for dividends on listed companies, or interests on investment in bonds, or insurance claims, etc.
What is the argument? – the argument is, each year billions of Shillings in dormant or lost bank and investment accounts (either with banks, or the stock exchanges’ brokers, or insurance companies or listed companies, etc) go unclaimed, renders them not effectively used as productive assets within the economy. In other places, such unclaimed financial assets or abandoned property will put be under the Government’s Authority, either a division within Treasury/Ministry of Finance or a separate Regulatory Agency responsible for holding in custody and safeguarding those assets until the rightful or until claimants come forward or are located. While under the Government custodian, and as efforts are being made (with no cost to the owner), to reunite rightful owners or heirs with their unclaimed assets, which is remitted to the Government Authority by some of the above mentioned entities after the business loses contact with a rightful owner, for a period of a prescribed number of years – such assets could be legally and formally used as investments in productive activities within the economy, and in the process creating jobs, earnings the Government more revenues, enhancing liquidity within the economy, increasing the country’s gross domestic products, etc.
Who could potentially be holding unclaimed assets? As alluded above, unclaimed assets or abandoned property holders include banks, savings and credit unions, insurance companies, stock brokerage firms, utility companies, businesses, listed companies, etc.
In conclusion, there is another argument to this – by developing policies and enactment of the unclaimed assets and/or abandoned property legal framework, the Government will be executing one its duties and commitments, as per the social contract, the duty of protecting the citizens and their properties, i.e. by returned millions of shillings to current and/or former owners of such assets.

How to achieve financial inclusion via capital markets

In recent times, financial inclusion have caught our diverse understanding, and we may fairly question: is registering for mobile accounts (wallets) or the practice of money transfer via mobile phone a significant achievement for “true” financial inclusion? If not, what could be the ideal measure of financial inclusion? According to the Alliance for Financial Inclusion (AFI), the first dimension to measure financial inclusion is access to the financial services and products that formal institutions offer. To achieve meaningful access, we have to consider other aspects of the financial market’s ecosystem – i.e. deposits, borrowing, investing, insurance, retirement funds, trading electronic funds, etc. I will dwell on how “true” financial inclusion can be achieved via capital markets products and services using this idea of electronic funds.
Although the economy has made significant strides in recent years along with higher savings and investment rates, inclusive growth continues to be a challenge. We are, not only lagging many emerging economies, but also, we have a comparatively lesser degree of “true” financial inclusion as compared to some countries in frontier markets. By financial inclusion here we mean ease of access, convenience and low-cost availability of financial products and services to all sections of the population. Meaning, faster and more inclusive growth prompts inclusion of diverse economic activities and geographical regions in the financial system.
The role of capital markets is vital for inclusive growth in wealth distribution and making capital available to investors. Capital markets can create greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ enterprise needs and risk appetite. Innovation, investment advisory, financial education and proper segmentation of financial users constitute the possible strategies to achieve this. A well-developed capital market creates a sustainable low-cost distribution mechanism for distributing multiple financial products and services across the country.
With a long-term growth trajectory, considerable financial deepening, increasing foreign cash-flows and increase in credit, deposits and bank assets as a percentage of GDP, rapid financial inclusion appears a reality if it can be coordinated by various financial institutions and with the application of technology. Lack of institutional co-ordination, competition, technology and financial literacy are cause of lower market penetration. Alongside these, the capital markets also have challenges of excessive concentration of trading at member level, company level and also geographically. The market also needs fair amount of development work on the bond market (especially micro-savings bonds, municipal bonds), interest rate futures, SME segment in the stock market and in the cash market.
Financial deepening also implies a larger focus on the debt and equity markets than physical assets and as a country we lag behind on this front. We, in the capital markets need to cast off the conventional notion that financial inclusion is a part of social responsibility and should realize that it can foster profitable business. We need to see into it that we facilitate domestic and international investments, not only into money transfers, for the people without a bank account. We can enhance savings by households or can encourage our society to be that among highest savers in the region, which currently is a challenge given that less than 1 per cent of the population participates in capital markets. Given a savings rate of about 30 per cent and the fact that more than 50 per cent of household savings continue to be in relatively unproductive assets, prospects lie in driving these savings into the financial system (especially the capital markets) and channelizing them into productive investments. Through financial inclusion, capital markets can generate productive investments.
True financial inclusion would need financial literacy and matching technology to enhance accessibility besides adequate competition to cause more substantial marketing. The agency model can be replicated for increasing financial literacy and thereby increasing direct participation of masses in the financial system.
Capital markets entities and intermediaries could adopt innovative practices and work with banks and non-banking bodies (agents) like post offices, etc., that can provide distribution outlets for these products. Financial service providers in the capital markets can foster financial literacy on the lines of initiative such as brokers creating association with public entities such as the Post Office to provide price information and investment based-inputs to savers who could potentially be converted to investors. The postal network can also be used for distribution of financial products and services.
Financial inclusion also demands greater integration of network of banks, the exchange, insurance companies, and other financial bodies to facilitate and benefit from cross selling. Banks have a larger role to play given that over 10 million account holders and over 500 branches with about 40 per cent and 25 per cent branches in semi-urban and rural areas respectively. Nearly 50 per cent of the country’s total savings go into bank fixed deposits which could easily be converted to capital markets products. Banks can, thus, play a key role in fostering financial inclusion using capital markets products and services.
The regulator has permitted banks to enter into agreements with stock brokers and mutual funds for marketing and distributing of capital markets securities and mutual fund products. Some stock brokers are also permitted to offer discretionary portfolio management and investment advisory services. This aspect of business has the great potential to constitute more of the financial market sector products in relation to financial inclusion but has not yet been fully explored. Capital markets products, such as mutual funds play an important role in mobilizing the household savings and bringing them to capital markets.
Going forward, the regulator may consider approval of online distribution of capital markets products and services through the stock exchanges and pursue efforts to encourage retail investors to invest in such financial products. The network of brokering companies spread is only in Dar es Salaam, they are yet to outreach other urban centers or semi-urban areas, such online access could increase brokers’ focus on retail investors. Such cross-selling facilities creates enough products and services for each intermediary to have economies of scale and also promotes financial inclusion.
Mobile and internet are likely to trigger faster growth in our capital markets. Internet stock trading is popular among retailers in other parts of the World. In Tanzania, where there are about 20 million internet users, such internet penetration rate is about 35 per cent of the population, this signifies the great potential for internet trading of capital markets products. Currently, mobile telephony serves the people’s need for information access. The penetration of mobiles is more than internet, with over 40 million subscribers. In the near future, a mobile trading revolution is likely to generate financial inclusion faster.
Greater financial inclusion is required for growth and development of SMEs, which contribute heavily to our GDP and in generating large scale employment opportunities. Special focus should be given to the Enterprise Growth Market (EGM) segment of the DSE which targets to empower SME to access funds from capital markets, helping the SME sector grow by assisting them in raising risk capital and, thereby, contributing to diversification of their sources of finance. The EGM is also meant to provide an exit route by building bridge between SMEs and the private equity and venture capital. Capital markets can play a significant role in creating financial inclusion by making available multiple financial products and services to the masses. This requires conscious efforts to identify the respective target segments and enhance the penetration through financial education, product innovation, diversification, customization and simplification. The experience of mobile money informed us that we have the sophistication and professionals with vast business potential and what is needed is proper financial integration and efforts by capital market players to tap into this potential and assume new roles and responsibilities.