Capital markets play an important role in promoting economic activity by facilitating and diversifying enterprises’ access to capital. At the macro level, deepening capital markets, which have ample liquidity and development of secondary markets have the opportunity to reshape developing world’s access to development finance, facilitate driving wealth creation and anchor the emergence of powerful regional trading blocs.

In emerging and frontier economies, benefits that accrue to national economies as a result of capital markets growth and the subsequent deepening of these markets are potentially greater, but such developments are also particularly sensitive to a host of institutional variables, including competition, protection of minority investors and the overall business productivity. Because of this, supporting development of capital markets requires a broad and ambitious program of reform which can better be championed from the policy making level filtered downward to enhancement of key institutions and the regulatory framework.

Nonetheless these issues are not unique to emerging or frontier capital markets, they are rather the general “rules of the game” interpreted from the point of view of each economy and markets. However, there are also specific issues that are much more significant in emerging markets and merit some consideration – all of them related to how policy makers can jump start a vicious cycle of market depth, liquidity, confidence and contribution to economic growth. Some of the key issues in the development of capital markets in a country include: the role of foreign capital in market development; the role of privatisation of state enterprises as a tool of market growth; as well as the potential for tapping into growing pool of pension funds in facilitating growth of domestic capital markets. These three factors informs our discussion today — read on:

The first key issue – Foreign investments: owing to the crucial role of liquidity in the development of capital markets, foreign capital is a development worth welcoming. Encouraged by the strong growth prospects of emerging economies, foreign investors have in recent decades sought out both short and long-term opportunities in emerging economies capital markets, often making investments that are relatively substantial compared with the market capitalisation of individual firms and indeed the market as a whole. Actually, this is self-evident even in our local market where foreign investors hold more than 50 percent of total market value and over 70 percent of trading liquidity at the DSE.

Inspite of the potential side effects of over-dependence on foreign investment (i.e their temporal nature), a great deal of foreign capital flow contribute significantly in the development of capital markets in terms of its depth, breadth and liquidity. Whether foreign direct investment (FDI)/strategic ownerships or foreign portfolio ownership (where foreign owners do not exercise any control on the investable company) they both play a crucial role in facilitating sources of development finance in a country — what would be key for to our consideration is how do we utilise such foreign capital?

The second key issue – Privatisation: in many emerging economies, the creation of capital markets, especially stock exchanges, has gone hand-in-hand with programs for the privatisation of state-owned-entities (SOEs), this has its origin in the history of these economies; as a result the development of capital markets in developing countries has been driven to a great extent by such offering, with large-scale privatisation programmes typically being followed by substantial increases in market capitalisation and trading volumes as well as strengthening of regulatory and corporate governance frameworks. Studies indicate that as at the end of the 20th century, 30 out of 35 largest share offerings has been by way of privatisations (Megginson and Netter 2001). This has been the case even here at home, almost all domestic large market cap companies that are listed in the DSE are a result of privatisation, you name them: TBL, TCC, NMB, Twiga Cement, Tanga Cement, Swissport, TOL — one could only wish that many more of such would have been privatised via the stock market, we probably could have Mutex, Mwatex, Mbeya Cement, Tanelec, Morogoro Shoes Co. Ltd, etc successfully listed in our stock exchange while making quality garments, shoes, etc for our domestic consumption, for exporting while at the same time provide an efficient and ready market for our cotton farmers and cattle keepers.

To reinforce this point, the 2009 World Bank Report, revealed that between 2000 and 2008, developing countries used equity markets to raise about US$ 193 billion by selling stakes in SOEs. According to this report, the largest such transaction were China’s sale of shares in the Industrial and Commercial Bank of China (ICBC) and the Bank of China, as well as the floating of Russia’s Rosneft — in total between them China and Russia accounted for about 83 percent of total value of equity-market-led privatisations over the 2000-8 period.

The third key issue – Pension Funds as Investors: pension funds are a key tool of injecting liquidity into capital markets. In essence pension funds sources helps countries to avoid the over-dependence in temporary model-based (“hot money”) foreign capital. Pension funds sources are somehow consistence with most domestic policy objectives in developing countries, where pension funds encourages or at least allow retail investors to invest, albeit, indirectly into securities listed in the local market. For pension funds to play an envisaged role in the development of domestic capital markets, reform becomes a necessity, and if well executed it have the opportunity to positively impact the development of capital markets. In our country, this is not yet the case, pension funds contributes less than 5 percent of the total market capitalisation of the DSE listed companies.

As I elaborated in my previous articles, the country of Chile chose a few decades ago to use the pension funds route to facilitate growth of their capital markets and finance various enterprises in their economy, they have done this with success. And according to a study by Niggerman and Rocholl (2010), pension funds reforms have contributed to the building of larger, though not necessarily deeper, capital markets (because in most cases pension funds pursue a conservative investment philosophy, hence their activity in most cases are confined in the primary market, during IPOs). However, despite this, still the effect of pension funds investment activities is significant and incremental to the benefits from other pro-market reforms, i.e. markets in less financially developed markets have benefited the most, as have less developed markets at the country level.

I wish to stress that it is the quality, not the relative size, of pension funds’ activities that is associated with the capital markets growth. In most cases, the growth of pension funds’ assets tends to promote capital markets development only in countries with otherwise high level of financial development. Elsewhere, restrictions on the type of assets funds are allowed to invest in, small pension sizes, political interference and efforts to enlist funds in financing government decifits make it difficult for markets to build on pension fund activity. Furthermore, the problem of investment restrictions is ubiquitous because pension funds are often either state-owned or at least strongly regulated and are investing money that, as a rule, beneficiaries cannot afford to lose. Hence, the funds’ soundness and performance are highly political and hence in many developing economies the rapid liberalisation may be undesirable.

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Why Capital Markets Matters in our Current State

In my last week’s article I articulated the case for companies to consider going public by selling shares via the Initial Public Offering (IPO) and subsequently list their shares into the stock exchange. I said that some of the functions and roles of a stock exchange include: facilitating the capital formation within the economy, facilitate company growth financing by long term source of capital, mobilisation of funds within the economy, providing a ready market and liquidity for shares and other listed financial instruments, encouraging implementation of good corporate governance and safeguarding activities of investors and, in case where sizeable companies with sectors are listed in the stock exchange, acting as a barometer of the economy — a reflective of the investors sentiments about the goings of some sectors of the economy, the economy at large and its future outlook.

As is, the stock exchange is a segment within the large capital markets framework which is also part of a financial system concerned with raising capital by issuance and later dealing in shares, bonds, and other long-term investment vehicles. The significance of such a system within the economy can not, under normal circumstances, be underestimated or underrated by either the good-intentioned and economically knowledgeable economic policy making bodies, or well-meaning policy makers, or informed politicians and/or those within a society who are entrusted into looking after the best common good of a society. I guess this is why, for instance, institutions and agencies such as the United Nations have come up with initiatives such as the United Nations Sustainable Stock Exchange Initiatives, which apart from encouraging goth and development of stock markets in a sustainable manners, its also provides a multi-stakeholders platform for stock exchanges, investors, regulators, and companies to adopt best practices in promoting stock markets and listed companies corporate sustainability.

Furthermore, goal 8 of the UN-Sustainable Development Goals, states: “Decent Work and Economic Growth – promoting sustained, inclusive and sustainable economic growth full and productive employment and decent work for all”; while goal 9 states: “Industry, Innovation and Infrastructure – building resilient infrastructure promote inclusive and sustainable industrialisation and foster innovation”. The details under these two goals appreciates the significant role of the capital markets and therefore the need of developing domestic capital markets within countries with the objectives of providing sustainable and long term sources of finance that will be channeled into the real productive sectors of the economy such as industry and infrastructure. That is the United Nations and how it view the issue of capital markets in financing human activities relevant for social-economic sustainable development.

The African Union (AU), Agenda 2063, has also prioritised the development of capital markets on the African continent, according to the AU, this is in order to strengthen domestic resource mobilisation and double the capital markets contribution to development financing. Similar appreciative policy statement can be found in several national vision, strategies and plans including those of Tanzania: Vision 2025 as well as in the Five Year Development Plan-II; Kenya, in their Vision 2030; Rwanda, in their Vision 2020; Uganda, in their Vision 2040; Zambia, in their Vision 2030; Nigeria, in their Financial Sector Strategy  (FSS2020); etc. Some countries such as Kenya and Rwanda have come up with specific policy documents, Capital Markets Master Plan, which are comprehensive strategic plan documents, formulated in collaboration with all key stakeholders to chart the development of the capital market for their countries. Such plans have been prepared on the back of the knowledge that as the pressure on the traditional sources of government revenue increases, there comes at a time when the need for clear strategies to position countries’ capital market to take up a central role in the next stage of financing their economic development.

So, why does the capital market matter?, why now? and why in our societies?

It is widely understood that stronger and deeper capital markets can help to mobilize domestic savings and support the efficient allocation of resources, increasing investment and growth. Moreover, greater availability of domestic capital, at longer maturities and denominated in local currency, makes economies like ours less vulnerable to external financial shocks. In a broader sense the availability of such capital helps in financing the infrastructure financing gap which keeps on widening as days goes by and as populations keeps on being urbanising.

Over a cumulative period of time, Tanzania, like many other countries in the continent face a huge long-term financing gap for the real productive sectors of economic, being in building industries, in putting up infrastructure networks both real and social; in housing, in agriculture and agro-businesses, etc. According to recent data estimates from the World Bank report, Africa’s infrastructure deficit reduce our Gross Domestic Product (GDP) growth by 2 percent, i.e. our current state of infrastructure reduces our GDP growth to the equivalence of about US$ 50 billion per annum — not a small amount given our current GDP of US$ 2.6 trillion for the whole of Africa. If you translate this figure into our country,  This is about US$ 2.5 billion of lost GDP per annum. As is local capital markets can significantly contribute to narrowing this financing gap across the above mentioned sectors. However, it doesn’t end into real infrastructure only, even social infrastructure such as in health sector and education can also make use of the local capital by issuance so called social-bonds, infrastructure bonds, social-REITs, etc.

The other major reason why capital markets matters is that, in our local environment, the financial sector is highly tilted towards banks. As a result there has been significant advances in the banking sector over the past three decades with increased access to banking services by the previously excluded members of our populations. We currently have over 50 banks, with innovative alternative channels such as mobile banking, agency banking, internet banking, etc. However, despite such developments in the banking sector, still less 15 per cent of our population have access to the banking services and the banking sector remains characterised by relatively high interest rates. This, in ay implies that the sector is not playing its fundamental intermediation role efficiently and effectively. Thus, by developing domestic capital markets, we can facilitate the diversification of financial services, either by providing a viable complementary financing tools to the banking sector or by competing with the banking sector in providing enterprises and projects with alternative long-term sources of capital in the form of debt and/or equity — all in all providing the public and private sector with diverse access to financial instruments.

Furthermore, development of the capital markets can help create new kinds of institutions through equity investments, such as private equity funds and venture capital funds, that eventually help broadening the sources of supply of finance to various financing needs of the economy and the society. The multiplier effect and extended benefits from these efforts are: the growth of companies, emerging of new enterprises, efficient financing of public private projects, jobs creation and an economically empowered society, which is beneficial to political leaders, policy markers and government bureaucrats.

How do you help development of the capital markets in a country? 1. by making it a priority development financing tool; 2. by creating policies, laws, strategies and plans that propels its development — including liberalizing the investment rules of pension funds 3. by having solid institutional framework that protects the rights of investors; 4. by creating an enabling environment for the capital markets to flourish — including rules and regulations that will enable liquidity enhancements in the market; 5. by strengthening institutions around the capital markets — to able to manage and absorb risks; 6. by having the right leadership whose main objective is in the attaining of fully functional, deep and stable local capital markets in the country; etc.

The case for Companies Going Public

We have all seen the smiling faces of company owners and executives as they ring the opening bell to officiate the listing of the company in the Stock Exchange, which is also a mark of the start of public trading of their shares on the stock market. In often cases these are some of the happy moments for company owners and management, indicating the ultimate goal of smart and dreamer entrepreneurs and business owners — namely, to conquer markets and go beyond the horizon.

As is, upon listing and start of trading of the shares in the public platform, the outcome may be either way — the continued increase of share price and hence the enhancement of wealth for entrepreneurs, anchor shareholders and other shareholders or the decline in share prices and hence the erosion of wealth for shareholders. However, even if the fundamental and sentimental situation will require that the companies shares has to have a downward trend, still the argument for benefit for companies to choose to pursue an Initial Public Offering (IPO) rather than stay private rather are stronger as I will shortly explain. Much as some people who start businesses would want to enjoy the freedom that comes with entrepreneurship and private ownership but the urge to grow further, the need to profile the company and many other sufficient motivations and incentives encourages companies and company owners to opt for IPO and listing into public trading platform as compared to these companies remaining privately closely held.

I will now try to respond to a question: why would companies want to go public via listing into the stock exchange? what is a stock exchange? what are its major functions? how do they relate with listed companies?

So, what is a Stock Exchange?

A stock exchange is an organised market where shares, bonds (for government, municipals and corporates), units (for collective investment schemes) and derivatives are listed and regularly transacted. Once a company is listed in the stock exchange, from then on the exchange provides a platform or a place where buyers and sellers of the shares and other securities can trade on prices that are determined by the power of the market (demand and supply). Stock exchanges are also regarded as barometers of the economy and its performance as it reflects the good or the bad health of economy — investors sentiments and outlook about the economy and sectors within the economy are reflected in the prices of securities traded in the stock exchange. For example if share prices are increasing it is an indication that the country is running on the path of development and prosperity, the vice versa is also true.

So, what are the major functions of stock exchange?

Promotion of capital formation

The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. Besides the borrowing platform provided to individuals or firms by the banking system, in the form of credit, but there are other forms of capital raising that can be used by companies and entrepreneurs to finance their businesses and enterprises growth. Some of these available forms or options for capital raising might be achieved, directly or indirectly, via the stock exchange — i.e. by issuance of shares or bonds or other such financial instruments. Thus, the stock exchange plays an important role in capital formation in the country.

Mobilising savings for investment

When people draw their savings and invest in shares (sold during an IPO or on the issuance of new company shares of an already listed company), it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in some form of deposits within banks (especially in the short term nature), are mobilized and redirected to help companies finance companies that are performing real productive functions within the economy — functions that leads to creation of employment of factors of production such as people, land, entrepreneurship skills, etc. This may then promote business activity with benefits for several economic sectors, resulting in stronger economic growth and higher productivity levels of firms.

Facilitating company growth

Companies may grow organically or inorganically via acquisition of other companies. In some cases companies view acquisitions as an opportunity to expand to new products and services, to increase their distribution channels, to hedge hedge against volatility, to increase their market share, or to acquire other necessary business assets— all for the growth and expansion of their enterprises. A takeover bid or a merger agreement that can be financed through the stock market is one of the simplest and most common ways for a company to grow. Apart from the merger and acquisition model of growth, even in organic growth model, companies use the stock exchange to raise capital through IPOs and listing of the same.

Increasing Government Funds for development projects

The government can undertake projects of national importance and social value by raising funds through sale of its securities on stock exchange. At various levels the Government may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates or building bridges, roads, health facilities, education facilities, etc via selling government bonds or other forms of state guaranteed bonds.These bonds can then be listed in the Stock Exchange whereby members of the public who buy them, thus lending money to the government can be able to liquidate these financial instruments in the public platform/stock markets on prices that are determined by the markets force of demand and supply.

Providing a ready market

The organization of stock exchange provides a ready market to investors (and speculators) in industrial enterprises. It thus, enables the public to buy and sell securities already in issue. It also makes possible the determination of prices using the forces of supply and demand. The pricing mechanism at the stock exchange and the constant quoting of market price allows investors to always be aware of their investment values, which is basically

Profit sharing and capital gain to Investors

Both casual and professional investors, as large as institutional investors or as small as an ordinary middle-class family, through dividends and stock exchange increases do share in the capital markets, and hence participate in the sharing of the wealth of profitable businesses.

Maintenance of liquidity

The pension funds and insurance companies purchase large number of securities from the stock exchanges. These securities are marketable and can be turned into cash at any moment. Therefore fund managers and institutional investors prefer to keep securities instead of cash in their reserve, this facilitates these institutions to maintain liquidity which may be needed at any time whenever demand arises.

Promotion of the habit of saving and investment for small savers

Stock exchange provides a place for savings and investments to the general public. Thus it creates the habit of saving and investment among members of the public. This habit leads to investment of funds in corporates or government securities. The funds placed at the disposal of companies are used for productive purposes. As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small investors because persons are allowed to buy the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors do.

Corporate governance and safeguarding activities for investors

The stock exchange renders safeguarding activities for investors, which enable them to make fair judgments of their investments. Thus, directors in listed companies are required to disclose all material facts to their respective shareholders. Thus innocent investors may be safeguarded from clever stock brokers.

By having a wide and varied scope of owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders, and compliance to the rules for public companies imposed by the stock exchange and the capital markets regulator enhances this perspectives further. Consequently, public companies tend to have better management records than private held companies.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on economics forces and investors perspective about the current and future outlook of the economy. Share prices tend to rise or remain stable when companies and the economy in general indicate signs of stability and growth. An economic recession depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the country’s economy.

Affirmative Actions for Economic empowerment

There are various mechanisms and tools that a society can use to encourage the government and private sector institutions within the economy to enhance economic empowerment among its citizens. These tools can range from policies and legislative actions to voluntary good corporate citizenship efforts pursued by corporate entities. In some countries corporate entities are encouraged to play a more pro-active role in local communities economic empowerment via incentives that includes the recognition of those entities whose activities empower individuals by way of financial inclusion and business empowerment initiatives, technology and learning transfer, etc.

For instance, companies in the agricultural sector may pursue their economic empowerment objective via the supporting efforts that aims at improving and speeding up local capabilities of agricultural methods and food processing techniques.Or corporates in the financial sector, may starting the initiative that fosters economic growth by providing women entrepreneurs within societies with business and management education, mentoring, networking, and easy access to capital. Or, a corporate entity may voluntarily aim in making investments in trade-based initiatives for women in underrepresented communities, where through such initiatives women’s lives eventually improve at both the community and household levels. And so the list goes on. Before I dwell into our today’s topic, I thought I should, in the next few paragraphs summarise a case of economic empowerment by one of the largest global retailer, Walmart just to indicate how corporates can voluntarily pursue programs and strategies to support economic empowerment in local communities out of their own initiatives, for their own sustainability and being perceived as good corporate citizenship, the agenda which has become relevant in the current global business world where discontents emanating from income disparity are on the rise and somehow affects political economy decisions, impacting almost the whole humanity.

In recent days economic empowerment programs global-wise have repositioned, the focus has been more into women’s economic empowerment. According to some sources, women’s economic empowerment is essential to the alleviation of poverty and kick-starting economic growth, this is especially the case because out of more than one billion people who live in poverty worldwide, 70 percent are women. Other statistics indicates that out of nearly 800 million people who can not read and write in the World today, two-thirds are women. It also been argued that, for women, access to capital is rare. As of 2016, statistics indicates that less than 7 percent of venture capital funds goes to companies started by women.

There are evidences indicating that traditional development assistance programs for women in often cases lack the necessary market link that would result in sustainable development initiatives and long-term employment. Those programs that do succeed in finding a market often struggle to meet the scale that is required by most multinational entities.

To partly address these challenges Walmart developed an online platform to help women business owners around the world drive income and sustainable growth. The Program, “Empowering Women Together,” is a five-year program aiming at sourcing US$ 20 billion from women-owned businesses while gives shoppers who want to buy unique and interesting products the opportunity to do so while supporting small women-owned businesses around the world.

The program’s goal is two-fold: to help women worldwide create better lives for themselves and their families through economic empowerment, and to develop a sustainable business model for sourcing from underserved and underrepresented women-owned suppliers. It leverages Walmart’s size and scale to offer market access to women who otherwise might be unable to attain it.

The initial launch of Empowering Women Together included 19 suppliers from nine countries including Cambodia, Canada, Ethiopia, Haiti, Kenya, Peru, Nepal, Rwanda, and the United States. This is case of Walmart.

Few months ago, the Ivanhoe Mines, the company based in South Africa announced its achievement in a broad-based back economic empowerment (B-BBEE) structure in which 20 host communities, plus employee and local entrepreneurs owns a combined 26 percent of the Company’s Platreef Project in Makopane, Limpopo.

The Ivanhoe Mines case was a conformance with South African’s Broad-Black Economic Empowerment policy, the mining laws and in fulfilment of the company’s Mining Rights application. The South Africa’s Broad-Based Black Economic Empowerment is an initiative in response to criticism against a Narrow Based Empowerment instituted in the country in 2003/04. The policy aims to ensure that the economy is structured and transformed to enable the meaningful participation on the majority of citizens and to further create capacity within the broader economic landscape at all levels through skills development, employment equity, socio economic development, preferential procurement, enterprise development, especially small and medium enterprises, promoting the entry of black entrepreneurs into the mainstream of economic activities, and the advancement of cooperatives.

This policy and its supporting legislatures’ goal is to enable distribution of wealth across as broad spectrum of previously disadvantaged society as possible. This is in contract to the narrow based empowerment that used to measure only equity ownership and management representation.

The policy and the legislation now caters for a broad and wide range…including issues ownership and management, preferential employment elements, preferential procurement elements, socio economic development, skills development, developing micro small and medium enterprises and entrepreneurship within the economy through the B-BBEE program – in all these there are mechanisms in place to ensure there compliance though measurement, controls, monitoring and evaluations with key performance indicators for each.

Of course, such affirmative action is not new or limited to the case of South Africa – these policies whose intent is proving special opportunities, preference and favors to some members or a groups of people in the society is wide spread across the global. In some countries they use a quota system to give access to jobs, skills development and training, development of local entrepreneurship, procurement preference, ownership to companies operating in the local economy, etc.

Affirmative action is not an issue of poor countries or developing countries in need of assistance from multinational corporates and assistance agencies, no — developed countries have been practicing this, through out history: from South Africa; to China, Israel, India, Sri Lanks, Japan, Finland, France, German, Canada, South Korea, Malaysia, Germany, the U.K, Sweden, Norway, Brazil, etc have been implementing affirmative action policies, some with high success, some with moderate.

In our case, the Electronic and Postal Communication Act, the Mining Act, Privatisation policy, local empowerment policy and such other policies and legislative actions, if wisely and intelligently pursued, while maintaining the spirit behind such policies and legislature, would assist in economically empowering our communities. Generally, it does not matter, whether economic empowerment programs are a result of compliance with local laws, or doing something of greater necessity for the local community, or it is pursuance of a sensible business case or its a company strategy, or implementing an affirmative action, or a moral case or complex mix of all – there is experimental, economic and moral argument for corporates to play a more pro-economic role to empower local communities. Understandably, this may mean sometimes corporates have to go out of their way to accomplish this — but to me, this is the necessary hindrance worth of pursuance.