DSE and the Efforts to Engage Family Businesses

Family firms dominate the business landscape across economies – developing and developed. They are major contributors to both employment, availability of goods and services as well as to the economic growth, measured by gross domestic product (GDP). According to some estimates, family businesses account for over 50 percent of GDP in many markets, ranging from micro-enterprises to some of the largest listed companies. In our case, here at home – some reports indicates that 10 families-run businesses’ control a relatively substantial part of our GDP. In the process of pursuing their enterprising motives these businesses generate wealth to owners while providing the much-needed jobs, facilitating the availability of goods and services, supporting large businesses supply chain, paying taxes to the government, etc. A recent survey by the World Federation of Exchanges (WFE) supports the same.

While family businesses share many of the same qualities as those of more traditional companies (some of which are listed in stock markets), they also have unique attributes and specific characteristics that impact the way they approach management, governance, and growth of their business. In a family firm, for instance — professional life, work relations and business decisions co-exist with emotional attachment where informal bonds and personal choices are all intertwined.

Under such circumstances, the integration of family and business can be both a source of strategic advantage, especially in cases where well-run family firms outperform other businesses, but also family-run businesses can potentially be the source of inertia and governance-related challenges, where in some extreme cases may create significant socio-economic challenges to communities and societies in which they operate.

While the peculiar characteristics of family businesses are likely to influence how the family think about raising more capital i.e., via issuance of shares or bonds and listing into the exchange. However, these companies are also be influenced by economic, financial and managerial considerations that have little or nothing to do with being owned and managed by a family. Thus, one may find cases where a founder-owned and managed firm, characterized by a strong paternalistic outlook and distrust of outsiders, would be reluctant to list on a stock exchange — we face this challenge in our society today.

Since the DSE established the alternative window for capital raising by Small and Medium Enterprises (SMEs) — Enterprise Growth Market— there has not been any of the family-owned businesses that have used the platform to raise capital and list. We, however, remain patiently optimistic that probably future generations would consider going public, i.e., for sustainability and growth of their companies.

Now, given the prevalence of family firms across markets and the importance of their economic contribution there is value, particularly for stock markets and the supporting eco-system (stockbrokers, financial/investment transactions advisers, nominated advisers, regulators, etc) to understand the impact of ‘family-ness’ on the public capital raising and listing decisions and therefore engage in identifying possible mechanisms to enhance the attractiveness of equity and debt markets for these firms.

For example, it is important to understand that family firms are a discrete category of businesses with specific characteristics that impact the way they take decisions, perceive their activity and relate to stakeholders. We need to live with the reality that for the family owners/managers the company is not simply an investment, but also a source of income and professional realization for the current and future family generations. We need to appreciate the fact that family owners/managers extract a significant amount of non-financial benefits from owning and administering a family firm, benefits such as the pleasure of owning and controlling a company that has their own name, or the benefit of influencing public opinion through their businesses, etc. Because of these, family owners/managers place a premium on maintaining control over the company and having family members involved with the firm.

That way there is clear need to strike a balance between meeting family related business uniqueness while encouraging these businesses to pursue the attractiveness of accessing public capital and listing, for efficiency and sustainability of their businesses. 

That’s why the DSE, learning from the EGM segment, have established two programs, one of which (DSE Enterprises Acceleration Program) aim at building capacity to owners-managers on diverse mechanisms of operating businesses sustainably while creating opportunities and potentials to attract the less costly, patient, and efficient capital which is also long term in nature. The other program (DSE SMEs Acceleration Segment – “ENDELEZA”) aims at enhancing governance, profiling, and visibility of privately-held businesses with needs for patient capital (from private equity, venture capital funds, angel investors and development finance institutions). The “ENDELEZA” program provides a linkage platform between those with need for long-term capital needs and potential suppliers of such capital.  In future, companies in this program may consider accessing public capital via Initial Public Offering (IPO). For details on these program – one may kindly visit the DSE website.   

Infrastructure bonds for infrastructure development

The infrastructure gap challenges remain significant daunting; however, there has been commendable progress over the years in bridging the gap, this has been due to prioritization and focus. Indeed, prioritization resulted into enhanced financial resources allocations and the efficient and optimally to which resources have been utilized. However, financing remains a key constraint; and there seem to be no single solution into our infrastructure financing gap. Thus, one of the most effective approach in addressing the existing infrastructure financing gap lies in creating a series of initiatives which help to catalyze a response from a broad spectrum of players in the financial markets.

As we know it, infrastructure projects are high-cost investments; however, they are vital to a country’s economic development and prosperity. Infrastructure projects cuts across the entire economy and is a key enabler of all other initiatives such as industry, trade, agriculture, etc. We also know that infrastructure development has a ripple effect in employment creation, the domestic business environment, increasing our national competitiveness, attracting foreign capital and investments, etc., and it therefore has a direct impact on the nation’s GDP growth. The interdependence and synergetic relationships between ports, roads, air travel and railway infrastructures, if well planned and executed, can be a significant factor in trade competitiveness, jobs creation and economic growth.

We largely agree that building a 21^st century infrastructure is a critical component of the country’s efforts to accelerate our socio-economic growth, expand opportunity, create jobs and improve competitiveness of our economy. We also agree that investment in infrastructure is vital for sustainability of our economic growth.  We further agree that infrastructure financing gap cannot be tackled by the public or private sectors in isolation. What is needed is an effective collaboration of the public and private markets. As we stand, energy, transport, water, information technology, etc. remain well below expectations, and this creates bottlenecks as we try to achieve the transformational growth.  The need is particularly stark in the light of rising populations, and rapid urbanization. 

It is therefore necessary for all of us to work jointly in finding many more options of financing the increased investment in ports, airports, roads, bridges, communication networks, water and sewer systems as well as other projects by facilitating partnerships between the government and private sector investors.

Traditional approaches of financing infrastructure need to be supplemented by other alternatives i.e., issuance of savings bonds or the use of special vehicles such as financial instruments like infrastructure bonds, green bonds, social impact bonds, etc. Such options will make infrastructure financing more accessible to a wider range of institutions and individuals, provide more flexibility for the government, and offer more opportunities for the private sector to take an active role in financing public infrastructure assets. The good news is that the CCM Election Manifesto, our FYDP III, the Financial Sector Development Masterplan and the 2021/22 Budget Speech by the Minister of Finance all points to the direction towards the need for the financial system and markets actors becoming innovative to address the pointed challenges in mobilizing new sources of funding our infrastructure development.  As is, our capital markets segment of the financial sector has been hampered by the lack of liquidity, vibrancy and long-term investment instruments. 

Given the nature of infrastructure projects that normally require large-scale and long-term financing, attention could be paid to the “infrastructure development bonds”.  Infrastructure bonds can be a more efficient form of financing as they reflect the long-term nature of infrastructure financing, which is often not available from the banking system. They also bring more transparency to the transaction, and the financial markets. 

What are infrastructure bonds? – these are financial instruments issued either by governments, government authorities and agencies or by private entities for the purpose of raising funds for financing specific infrastructure projects. The Government may issue infrastructure bonds, as part of its issuance program, but in this case – proceed are ring-fenced to finance specific identified projects.

Infrastructure Development Bonds need meet the following conditions: (i) they are issued to raise capital for specific stand-alone projects; (ii) they are repaid from cash generated by the project; (iii) they assume, and their performance is subject to, certain project specific risk; and (iv) for liquidity purpose – they are listed in the stock market.

Infrastructure Bonds are designed to let the wider society take a more active role in financing public infrastructure assets via attracting new types of investors into the infrastructure market, particularly banks, pension funds, insurance companies, and private individuals. There are many other benefits for using this approach in financing our infrastructure: i.e., deepening the local debt capital markets, broadening the base of potential investors and financiers of our infrastructure, increased transparency and accountability, reduction in the cost of funding, etc.

Stock Exchanges and Sustainable Financing

There may be reasons why organizations in the current financial system struggle to support a sustainable economy (as identified in the UN Sustainable Development Goals), as well as the opportunities for that to change, i.e., despite the pressures and trends which arise in our volatile, uncertain, complex and ambiguous world, and how these affect the financial system. Unfortunately, the current financial capital flows and the incentives that drive them are largely not supportive of the ESG/sustainability trends. However, in the mix, stock markets (being key infrastructure/institutions within the financial markets) and their stakeholders are expected to thorough consider some of these questions: how/where do we see sustainability fit within the financial system? what role do we play in the system to ensure sustainability is embedded in the future of financing? do we recognize the barriers that are being presented to us as ways in which the financial system does not currently work for sustainability? and, do we recognize some of the opportunities for that to change?

With this thinking, stock exchanges are required to step up and engage their key stakeholders (i.e., regulators, investors, issuers, standard setters, stockbrokers, etc) about their role in creating better communities and ensuring there are tools and mechanisms to address sustainability/ESG (environment, social and governance) issues. In evaluating the 17 UN-Sustainable Development Goals (SDGs), one could clearly identify at least four (4) goals relevant to stock exchanges, where exchanges are best positioned to support implementation of these goals. These are goals number 5 – Gender Equality; Goals 12 – Sustainability Information; Goals 13 – Climate Change; and Goal 17 – Global Partnerships.

And so, to start contributing towards implementing these SDGs, exchanges could:

In mid-2016 the DSE made a conscious decision to join the UN-SSE Initiative. For the past five years DSE has focused on engaging its members advocating for more awareness and the appreciation of their potential role in creating sustainable communities within their business practices and mandates. These engagements have been to extent of capacity building, as well as enhancing adherence on continuous listing and membership obligations – especially in the aspect of transparency and good governance.

The other initiative has been the DSE Members Award, an annual event involving collection of data and information from DSE members on their practices and conscious undertakings on matters related to global temperature rise, resources depletion, waste pollution and deforestation; on issues of human rights, employment parity, child labour, and workplace safety; and/or bribery and corruption, board diversity and structure, tax strategy and business.

Why does this matter? the interest in sustainable finance an investment is a catalyst for change and some listed companies, especially subsidiaries of multinational entities have made some progress in the area of ESG practices and disclosures; some of them are voluntarily preparing sustainability reports covering not the financial part of their annual reports, but the work they are doing on environmental protection, good work environment, gender parity, good corporate citizenship and governance. As we move towards integrating sustainability reporting as part of continuous listing obligation rules, we are seeing some good progress already.

DSE, being a partner exchange to the UN-SSE Initiative, among others, is expected to promote sustainability thinking, strategies and practices as well as to consider ESG factors more explicitly in its members’ disclosures/reporting, in line with international best sustainability reporting frameworks — either by the Task Force on Climate-Related Financial Disclosures (TCFD) or the Global Reporting Initiative (GRI).

Our purpose real is trying to get the market to think more holistically about the relevance of sustainability in the future of financing and investment – we see mega-trends that points towards this direction. Thus practices, disclosure, and reporting on ESG/Sustainability issues could be seen as an opportunity, rather than a negative challenge or hindrance. In recognition of the sustainability opportunity, and related risks, the DSE has been actively engaging its members to integrate sustainability into their mainstream practices. DSE has upended into disclosure requirements and has revising its Rules (DSE Rules 2020) to require mandatory reporting of ESG activities by listed members, guided by basic reporting standards/framework. DSE considers itself uniquely positioned at the intersection between investors, companies, regulators, and the government to primarily drive ESG disclosures in the market where ESG/sustainability is not as pronounced or required. As such the DSE play a key role in promoting responsible investing and sustainable development.

Some of the neighbor exchanges, have already included sustainability/ESG reporting in their listing (membership) and continuous listing (membership) obligations rules. Stock exchanges in South Africa, Egypt, Morocco have achieved this already; other exchanges have creating rules for listing green bonds – South Africa, Egypt, Mauritius, and Kenya stock exchanges have green and impact labelled products i.e., green bonds, while others such as Nigeria have created Responsible Investment Indices – aiming at sharpening the awareness of responsible investing.

Investing in the Era of Sustainability Consciousness

While the pandemic has shrunken global economic activity, it has also highlighted the need for a green recovery, social parity, good corporate governance, corporate citizenship. The momentum is slowly growing and gaining by the day – evident from the increase in the demand for sustainable financial products such as green bonds, social bonds, social impact funding, blue bonds etc. is one evident as to how the future of finance and investing would look like aligned to the UN-sustainable development goals (SDGs).

Interestingly, the COVID-19 pandemic also brought changes to consumer lifestyle and purchasing decisions, favoring sustainable choices. With the US making an official return to the Paris climate accord and the resumption of COP26 in November 2021, the climate crisis will again be at the center of conversations around the world, and it is no surprise that investors are increasingly interested in the impact of their investments on global temperature rise, resources depletion, waste pollution and deforestation. At the same time investors and financiers are concern with issues of human rights, employment parity, child labor, and workplace safety. Corporates, investors, and financiers are now factoring governance matters such as bribery and corruption, board diversity and structure, tax strategy and business ethics in their valuation and pricing of financial instruments and products as well as in investment decisions. And so, these developments should encourage financial organizations, companies, and individual actors to educate themselves on the relationship between Environment, Social and Governance (ESG) management and their strategies, operations, and financial performance.

The trend towards incorporating climate evaluation, social impact, corporate citizenship, and good corporate governance in investment decisions will only rise, driven largely by global fund managers and especially a younger generation of investors who want their money invested with sustainability in mind. Alongside investor’s desire to align their portfolios with their values, it is also in the best interests of the investment management industry and the financial systems in general to build resilience to climate, social and governance risks and stop further unsustainable practices and tendencies.

What does investors and financiers look for?

Investors and financiers are asking questions and demands to know: “Are my investment holdings helping or harming the stability of the climate, social equity and good governance?” They also need the answer to these kinds of questions communicated in way that is comparable and easily understood and supported by scientific robust and transparent methodology and not by “green washing” reports and statements in their annual reports. It turns out that such simple question as above is currently being answered in a variety of ways. There are several reports showing how current attempts to disclose the climate performance of funds vary across asset managers, assessment of assets’ exposure to climate risks has different meanings and interpretations, social performance indices lacking consistence, extent of losses resulting from climate change and ecosystem disruptions with assigned different values – the lack of consistent standards and guidelines for disclosures and reporting on ESG/Sustainability issues. While each and various method has their uses, the diversity makes comparison difficult and not all measurements give investors a clear picture of their impact on issues such as the climate, social impact, and good governance.

Why ESG/Sustainability should be part of basic reporting?

The World Federation of Exchange (WFE) and the UN-Sustainable Stock Exchange (UN-SSE) Initiative, to which the Dar es Salaam Stock Exchange (DSE) is a member and partner exchange respectively, classifies stock exchange sustainability efforts into three primary categories: (i) promotion of ESG disclosures; (ii) promote issuance and investment on green and social labelled products; and (iii) creation of ESG indices. Now, for the DSE, given its low level of development, has predominantly focused on the disclosures – from 2016 it has been approaching sustainability matters via capacity building and encouraging voluntary disclosures but soon these efforts will be migrated towards compulsory disclosures as part of continuing listing obligations.

Additionally, the inclusion of green and social labelled products into key national policy documents such as the Financial Sector Development Masterplan (2020-2030) and the Five-Year Development Plan III (2020/21-2025/26) tells us as the country, we are moving towards the relevant direction, in the sustainable finance context – but then, the challenge will be on the implementation.

In recognition of the sustainability opportunity, and related risks, the DSE has been actively engaging its members to integrate sustainability into their mainstream practices. As said, initially the focus was on creating stakeholders dialogue, voluntary disclosures, and capacity building. However, DSE has upended into disclosure requirements and has revising its Rules (DSE Rules 2020) to require mandatory reporting of ESG activities by listed members, guided by the GRI Standard as the reporting instrument. DSE considers itself uniquely positioned at the intersection between investors, companies, regulators, and the government to primarily drive ESG disclosures in the market where ESG/sustainability is not as pronounced or required. As such the DSE play a key role in promoting responsible investing and sustainable development.

For Tanzania, where ESG and sustainability issues have not yet gained much traction (given our other immediate socio-economic demands), it requires that the systems thinking as core competence for purpose-driven leaders should be adopted in order to wield the necessary influence and effect positive change on company’s strategy and/or national policies to incorporate environmental, social sustainability and governance issues in aligning ourselves to the SDGs as far as our finance and financial system is concern.

Lastly, it is well understood that companies in every industry and sector are contending with conflicting demands for social and environmental change and its urgency. This being the case, it therefore requires — tenacity, resilience, diplomacy, ability to engage as key competences and values needed by leaders in all aspects in order to influence changes towards sustainable finance and ESG/sustainability. Moves to address societal and environmental concerns need to be made constructively and methodically. If they have to be undertaken hastily and without inclusivity, they can bring considerable costs that may end up hurting, instead of helping, us as a society.

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.