The East African region has a relatively shallow and illiquid capital market compared to some markets in both the Northern and Southern parts of Africa. Kenya has by far, the largest and most developed market in the region. The Nairobi Securities Exchange, also being the oldest in the region, being established in 1954 commands almost 70 percent of all capital markets activities in the region, as measured in: number of companies listed in the stock markets, depth of the market, number of investors and the level of market liquidity. Other stock markets, i.e. Dar es salaam Stock Exchange, Uganda Securities Exchange and Rwanda Stock Exchange are relatively smaller and newer, all being established from late 1990s in response to economic reforms that included privatisation of state-owned entities, and the encouraging of private sector to play a focal role in economic activities within these economies, among other objectives.
Before we proceed further, let us take an inventory of where we are: The four markets (Kenya, Tanzania, Uganda and Rwanda) has a total Gross Domestic Product (GDP) of about US$ 140 billion, its stock markets total equity market capitalisation is US$ 40 billion, about 105 total listed companies in the whole region (90 — if we exclude the cross/dual listings effect), bonds listed in the four markets are worth about US$ 6.5 billion. Liquidity (turnover) in the equity listings is at the level of US$ 2 billion per annum (5 percent of market capitalization), liquidity on bonds trading is about US$ 0.7 billion. Our total population is estimated at 140 million people, out of these only about 3 million people have investment accounts with the stock exchanges and central banks (for government bonds investments).
The above data are meant to tell us much about our region and its state of long term finance sources. The data tells us about how little have we made use of the capital markets to finance our enterprises and development projects. How are we currently financing these long term economic activities then? it is via FDIs and Private equities, International Development Financial Institutions, Donor funds, taxes and in a very minimal level, capital markets. As for the short and medium term economic activities and projects, commercial banks have been effective — both in the mobilisation of domestic savings and in intermediating them to finance such activities. We have been not as keen to intermediate our domestic savings to finance our long term enterprises and projects via capital markets.
For emphasis, I will repeat some of the key data here: GDP of US$ 140 billion, total market capitalisation of US$ 40 billion, 90 listed companies, a population of about 140 million people and about 3 million with securities investment accounts. A careful look in what these data tell us is that our corporate enterprises, our local governments, our social and economic infrastructure projects, our people are yet to make better use of stock (capital) markets to finance our enterprises growth or projects. It says that we need to adjust our policies, strategies and plans in this space so that we can properly match the region economic condition with its sustainable sources of finance while at the same we propel financial literacy, financial and economic inclusion as well as the need for sustainability.
We may argue that in most measures — number of listings, number of retail and institutional investors, the size of markets capitalization as well as liquidity, our stock markets are still relatively small, the whole region records less than 5 listings per annum; only Kenya has infrastructure bonds, the whole regional do not have a single municipal bonds; shares and bonds are rarely traded and in some cases gaps between buy and sell orders are large. Usually, trading occurs in few stocks, particularly those representing the majority of market capitalization — majority being — banks, brewery and cement companies. Turnover ratios are still very thin, less than 5 per cent in many markets. As it is, low liquidity implies more difficulty in supporting a local market own trading systems, market analysis, and brokers because business volume is too low. Our share of the Africa’s listings and equity turnover is less than 5 per cent.
Where should we be? how should we understand it? — deep, transparent, and accessible financial markets are vital to supporting economic growth, rising consumer demand, and supporting productive innovation. Vibrant financial markets play a critical role in channelling financial resources (savings) into productive investment and fostering growth of enterprises and the economy. And, to be able to sustainably achieve the level of deep, diversified and liquid markets, a good combination of both banks (providing short-to-medium term capital) and capital markets that provide long term and specialized funds, is critical. Robust financial markets allows countries to move beyond short term, volatile capital flows by attracting longer-term investments that strengthen a country’s economic stability by providing more resilient foundation of capital flows.
However, given the newness of most of our stock markets, coupled with lack of awareness and financial literacy as well as the fragmented nature of of our financial markets, entrepreneurs access to long term capital and the investment capacity of institutional investors participation in the financial markets remains limited among stringent capital allocation decision process and financial markets are therefore small, narrow and illiquid.
Our stock markets suffer from both structural and infrastructural bottlenecks. Privatisation via stock exchanges has been lower than anticipated; the level of awareness is still relatively low; a culture of embracing transparency is still a challenges to many family owned businesses; listing requirements for some markets restricts many businesses from raising capital and listing into these exchanges; trading, clearing, and settlement systems are sometimes slower that usual. Similarly, some markets restrict foreign participation. Such bottlenecks induce inactivity in markets.
Despite these fundamental challenges, returns on our markets have generally been relatively high, even in dollar terms (except for last year, 2015). Therefore these markets represent unexploited opportunities for international investors. There are diversification opportunities that are minimally correlated with global financial systems and its risks. They also represent opportunities for system vendors, global stockbrokers, custodians and financial investment advisers.
The attractiveness of African equity markets can also be attributed to the continent’s fast-paced economic growth and development, buttressed by political stability, stabilizing and growth-oriented policies and initiatives, liberalized business environments, increasing regional collaboration, and positive engagement with multilateral agencies.
But much more needs to be done to improve liquidity and attract more company listings. Key steps include promoting transparent and accountable institutions, providing adequate shareholder protection and investor education, strengthening regional collaboration, and encouraging financial innovation. Governments continuance to support exchanges by way of privatizing public enterprises via exchanges, and by providing an enabled environment, including tax incentives to encourage listing of multinationals, foreign companies and small and medium-size enterprises, is critical to the growth of our stock markets.
On the positive note, however — despite the newness, narrow and illiquid level of our markets, we may need to note that we have undergone substantial changes in past two and a half decades, i.e. in early 1990s there was a single stock market, with less than 30 listings, with the current situation where we have four exchanges and closer to 100 listings is something worth noting; however, we know that we can do better than this.
As a conclusion, as region promotes commercial agriculture, as it promotes industrialisation, as it promotes further infrastructure developments; as region intends to look inward in terms of how we finance our development. Let us remind ourselves that for dynamic and more inclusive economies, we need to improve both the fiscal space (i.e more tax revenues, better management of our public spending, etc) in as much as we closely pay attention and consciously developing our local capital markets so that they become vital sources of long term financial resources mobilisation for our sustainable growth and development.
notesfrommoremi 