The Impact of Reclassification to “Frontier Market” Status of the DSE/Tanzania

Last week, Financial Times Stock Exchange — FTSE Russell, a leading multi-asset global index, analytics and data provider published the results of its Annual Country Classification Review for countries monitored by its global equity and fixed income indexes. According to FTSE Russell’s Press Release dated 26th September 2019, Tanzania was upgraded from unclassified to Frontier Market status.
FTSE Russell went ahead to acknowledge Tanzania on meeting the requirements for attaining Frontier market status, congratulated us for market improvements implemented.
In this article, I would like to inform and help our stakeholders understand the impact of the reclassification (Upgrade) from “Unclassified” status to “Frontier Market” status of DSE/Tanzania Market.
To start with, this reclassification is a vote of confidence by FTSE that the capital markets of the Tanzania have made good progress.
But what does this all real mean?
Equity Markets Enhancement and International Standards
Earlier in January 2019 the Dar es Salaam Stock Exchange (DSE) achieved the Full Membership of the Word Federation of Exchanges (WFE) from being an Affiliate member for a two-year period. WFE being the global industry association for stock exchanges and clearing houses, headquartered in London. DSE’s graduation from an affiliate member to a full members was a measure of confidence by this global industry group which by itself was s follow up to efforts by the DSE to adhere into international set of standards and criteria, including: the recognized legal/regulatory framework; providing equal opportunity to market access by all types of investors; put in place efficiency mechanisms to admit and list securities and members in the Exchange; an adequate disclosures and market transparency tools; possessing an efficient securities trading, delivery and settlement infrastructures; good corporate governance framework and practices, independence of trading infrastructure and structures from that of settlements, these are among other factors.
And of course, there are other aspects of the market that are also scrutinized i.e. size of the market, rate of growth over time, types of listed instruments, market liquidity, size of investor base, number and quality of market participants – stockbrokers/dealers, custodian banks, settlement banks, etc.
Therefore, having achieved WFE membership, and other factors DSE was in a better position to achieve the Frontier Market status, admission and classifications criteria are relatively similar by both WFE and FTSE. FTSE Russell has 21 qualification criteria for its four-classifications ranging from: market and regulatory environment; to custody and settlement; into the dealing landscape; and lastly the state of derivatives markets. DSE met 11 out 21 criteria. In order to achieve a Developed Market status, one must meet all 21 criteria and for achieving Emerging Market status should pass at least 15 criteria.
Why Does Reclassification Matter?
The immediate expected benefit of reclassification will result from an anticipated increase in portfolio investment flows with the entry of foreign/global institutional investors and passive or index-tracking investors that will have to rebalance their portfolios to include Tanzania.
Typically, institutional investors are restricted to investing in developed, emerging and frontier markets, so the reclassification highlights the entry of a new class of investors into our domestic market, who previously were not there because DSE did not have visibility and profile to fit their investment criteria.
The increased exposure to international investment might also lead to an increase in initial public offerings (IPOs) – particularly if we all could see this as an opportunity, thus potentially leading to a much-needed deepening of the equity market in the country.
Improve Corporate Governance
The reclassification is likely to raise the bar in terms of corporate governance in the DSE. Foreign institutional investors will not be as complacent or inactive as domestic retail (and sometimes institution) investors.
Corporate governance rules need stronger enforcement and the timeliness and content of management and financial reporting needs a major overhaul to now include matters such as sustainability reporting and ESG (environmental, social and governance) reporting.
Reclassification is an opportunity for DSE listed companies to improve their corporate governance and investor relations in accordance with international standards, improve disclosure and transparency and comply with international reporting standards.
Build an Institutional Investor Base
Sound, well-functioning capital markets require a broad base of institutional investors to anchor markets. While this reclassification will attract foreign investors, they are not a substitute for domestic institutional investors such as pension funds and insurance companies, which typically operate as the backbone of a market. In recent days pension funds have remained dormant and passive in our domestic equity and debt market to the extent that only 4 per cent of their Assets Under Management is on listed shares, relative to their 20 percent benchmark.
As a country, we will need to consciously encourage and probably develop the regulatory framework that will facilitate building a domestic resilience on the backbone of our pension system and its assets as well as for the insurance sector. Why? Because, as it were – the role of both domestic institutional investors such as pension funds and that of Foreign Institutional Investors are simultaneously key to the success of the capital markets system. They both pump mobilized savings into the market, as they channel investments to the most rewarding sectors of the economy. But we need to understand that Foreign Institutional Investors trading behavior is so much influenced by the investment behavior of domestic institutional investors i.e. pension funds.

Currently, DSE’s market size, liquidity, price volatility and price discovery are heavily dependent on the flow of investment portfolio from foreign investors, meanwhile, the role of domestic pension funds in the market has been on a declining trend. So, much as this classification is envisaged to enhance the level of foreign investors participation in our market. However, in the medium to long run, as pension funds remain in other asset classes, foreign investors may also start staying away from the market, with significant impact in the market performance i.e. low demand for new issuances, and inactive local exchange.

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The Effective Dispersal of Ownership of Capital

The history of financial capitalism is to a large extent a history of deliberate government policies to disperse financial interests among the majority many in its economy, that is to disperse ownership across a wider segment of the population as the process of economic and financial inclusion as well as wealth creation. Such policies have helped democratize finance to many developed economies and emerging economies. Most developing economies are still in the nascent stage of this process.
People seldom realize to what extent that we live in a society that is structured by financial design to become better and better over time, and so the role of finance in creating a good society cannot be overemphasized.
In spite of the above, it also true that modern market economies seems to many observers increasingly to be run by a relatively small number of business, financial and investment leaders who are, by virtue of their financial and general business savvy, hold excessively influence on how matters of finance and its role in promoting economic growth and development is being pursued.
For us, with our history of socialism/communism, which similarly sought to equalize ownership of economic assets and interest, despite the change we made in pursuing our development via market based approaches; that previous system had control over property/factors of production, if not the actual ownership of rewards of factors, which are centralized in the government. But, as we knew it this centralize model has been falling out of favor around most parts of the world (except the recent trend), since such centralization of control does not allow people to use their diverse information, enterprise skills and innovations to actively direct the use of factors of production, including capital.
The above points towards the concept of an ownership society, referring to a society in which citizenship and responsibility are encouraged by the widespread ownership of and control over factors of production and essentially individual properties.
As we can learn this idea of ownership of capital can easily be related to ownership of land and homes – when agriculture constituted the bulk of nations product, policies to disperse ownership of capital were concentrated on land. Many governments had policies that encourage individuals living in rural areas to own farms, there were also policies that encourage urban individual home ownership – which still happens to this day in most economies.
However, such policies have discouraged the development of big companies that might have operated rental properties for the general public. Instead we have a substantial house owning population in many countries, developed, emerging and even developing countries. But this did not happen by accident – let consider the brief history into it.
The concept of property-owning democracy was developed in the UK since 1920s into the 1970s with a program to privatize and sale government owned houses to their renter inhabitants.
In recent case China, with its communist ideology, came later to the ownership society concept. China government eventually made, and still makes homeownership a priority among its population. So, the idea of encouraging homeownership seems to be popping up everywhere. Now, as it were, homeownership, in contrast to land ownership or stock/share ownership, does not usually directly involve people in many specific businesses. But it has been widely thought of as helping to create a market-oriented psychology that encourages other kinds of factors of production, specifically property ownerships well, and as encouraged a feeling of participation and equality in society. Under such circumstances it is apparent the ownership of stocks and bonds that contributes to a feeling of participation should be pro-actively encouraged by the state.
A real sense of participation in society and the economy may be promoted more broadly by policies that encourage more business and companies-oriented ownership, notably ownership of broad portfolio representing the real productive assets of the country. Now this can be executed using different approaches and strategies. For example, Singapore is known to lead the way to an ownership society with its central provident fund, which is a mandatory saving plan for its citizens, with both employers and employees contributions which allowed them to purchase both local and international shares and bonds and also housing to their members. It is being said that people who have substantial savings and assets have a different attitude towards life. And, so are many other nations.
These such policies are efforts to democratize and humanize finance, to make finance serve the people and to encourage people to consider themselves participants in a society built on the principles of finance.
To conclude – here at home we tried these policies during privatization, unfortunately just under 100,000 people participated directly in the ownership of the only seven entities that were privatized via issuance of shares to the public and listed in the DSE. We also have less than seven percent of our population that have indirectly invested in the 15 listed companies via their contributions in pension funds. As it stands, we are yet to make a dent into overall approach to democratize finance, creating an inclusive economy, and achieving economic empowerment for many in our society. So, what if we privatize a few more entities via the local stock exchange, what if we encourage supplementary pensions schemes, what if we encourage more collective investment schemes and independent fund managers, and what if we encourage more private companies to access public money in their capital raising strategies? Would we be closer to our ideals?

Employees Share Ownership Scheme for Democratization of Wealth and Finance

In the democratization of finance and wealth, ownership of shares by many in the society may help, especially in easing the tension between haves and have nots as it also helps bridge the wealth gap between the rich and poor. But, understandably despite many benefits that may be brought by a company accessing fairly priced capital from the public and hence allow for democratization of ownership, access to finance and wealth, most companies owned by individuals and families prefer not to allow strangers to part own their companies or to stand the scrutiny of the market. Hence, many companies would not pursue efforts to access capital via Initial Public Offering (commonly known as IPO) and/or thereafter list their companies to the stock exchange.
However, the key issue to contemplate and which is the topic for today’s article is that, we can somehow understand the idea and sentiments that it is difficult to share benefits and secrets of the company with strangers and outsiders, yes – even if we need that capital. But then, why is it that owners of companies do not consider giving access to ownership of their companies even to those who are not strangers and probably are closest to the company? i.e. employees –these are generally not outsiders or strangers.
And just in case, one would want to pursue this idea, how can it be implemented and why? I will explain.
The easiest way to allow employees into the ownership of the company is by way of Employee Share Option Plans, popularly known as ESOPs. This is a concept used by companies as a scheme of selling shares to the employees by which they become a shareholder in the company and thus hold a certain small level in the ownership of the company.
ESOPs are generally awarded to employees based either on performance or tenure of the employee with the company thus, it serves a two-fold purpose for both the company and the employees.
First of all, for employees it acts as a tool of motivation for a basic reason that once they own shares to the company that they serve, they therefore will feel even more responsible for the good performance of the company, which then determine the value of the shares of the company. If the company performs well, the value of the shares rises and vice-versa.
Second, it helps the employer to still retain the company but also being assured of a good level of performance from employees who are also co-owners of the company and who knows they direct benefit from the company not only in the form of salaries and wages, but also in sharing company’s profits. This will under normal circumstances enhance their efficiency and that of the company
So, in addition to ESOP being a tool that is commonly used by employers to either reward employees or as an exit mechanism from business ownership, what are other direct benefits? (i) it helps in aligning the interest of employees with those of the owners of the company; (ii) it is a non-cash compensation tool that helps the company to compete for the best human resources and attracting good talent to the company while also serving as a talent management mechanism; (iii) it gives an opportunity for corporates to pay its employees without necessarily reducing its book bottom line/profits; (iv) it provides a sense of ownership and belongingness amongst the employees; and hence (v) it significantly help in boosting the morale of employees and their commitment to the company. Further to these benefits ESOPs. as I indicated at the beginning, helps also in bridging the wealth gap and in democratization of finance and wealth.
In his research paper titled: “Employee Ownership, ESOPs, Wealth and Wages” of 2016, Jared Bernstein (the Chief Economist under Vice President Joe Biden), concludes that ESOPs do have the potential to equalize wealth and wage distribution. He further demonstrates that minimum wages, though a useful policy to reduce the gap between low and middle wages for the high-end inequalities it is found to be a n inadequate means. By this Jared suggests that ESOPs hold the potential to bridge the wealth gap.
He points the following key reasons in arguing for his proposal: (1) ESOPs have shown to reduce income inequality, he argues that since ESOPs transfer capital ownership to employees who in normal circumstances are less likely to own businesses via capital contributions; (2) companies in ESOPs appear uniquely resilient in recessions relative to companies that does not operate ESOPs schemes, Jared essentially argues that companies that do not operate ESOPs schemes its employees progress appears to be trapped in ways that may or may not improve the companies output and efficiency especially in the long run, and (3) he says – since wealth inequality is considerably less equitably distributed than wage inequality, ESOPs present the opportunity to less the overall inequality.
And when the company opts an ESOPs schemes it is recommended that it goes hand in hand with listing of the company to the stock market, even if it is by the way of introduction (i.e. listing shares in the stock exchange without IPO) which then provide a market, fair valuation and pricing for those shares issued to employees via ESOPs scheme.

Why It might be an Opportune Time to buy DSE Listed Stocks, and how?

Year-on-year the domestic market capitalization and Tanzania Stock Index is down by 13 percent following the sell-off pressure which is partly informed by some factors, such as the real liquidity need by some investors, market psychology for some, declining expected returns and looking for alternative better returns by some investors, and/or just following sentiments and becoming emotional to some investors. While this may be case especially on the securities supply side, such pressure hasn’t been matched by similar pressure on the demand side — hence the decline in stock prices almost across the board which then impact the market capitalization and indices, relatively — this is not a good sign.
As it stands the market looks vulnerable and should this pessimistic view and bear run continue, more market swings could become prevalent. But as I wrote a few weeks ago, there are many reasons to be upbeat on some of the listed stocks and for the market in general even as the market battles its way to stay optimistic and probably return to the bull run not long time to come.
Yes, though the sell-off may have knocked down a significant part of investors worth over this past one year or so, but the more extreme overselling conditions could actually put the market back on track – why? When darkness increases – the light is near, but of course this can be possible if also supported by other pro-active measures, such as the recent changes of DSE rules in order to motivate liquidity and volatility in the market.
All said and done though, this is actually the good time to be on the market, for those who understand the concept of “value-investment” – the Warren Buffet way. This is the time to put your money to work. And so, in this article I share a few tips on how to turn the current weakness into great opportunity, as you buy on the cheap.
First, do your analysis and a bit of research, if you can’t – request this from your stockbroker or investment adviser, then focus on picking those stocks which embed quality brand names but are selling at compelling prices. Look to buy on the dip, while concentrating on the underlying principle that behind that cheap stock is the strong business performance, growth in profits, strong balance sheet, stable cash flows, good management and foreseeable demand of that company’s products and services. I sometimes wonder, why don’t somebody see that it is too cheap to be true for one to buy stocks of a strong bank at a price earning ratio of 2 times. It is in very rare cases that your luck will meet such an opportunity. In such stocks, you may be in the pain for a short while, but you surely will come out of it strong – so then, why the run from it?
Secondly, I will encourage you to also take a deep look into those stocks which are currently undergoing transformation – whether a managerial transformation or an operational transformation or a strategic transformation – either way, just search and analyze, see what is around you – sector-wise, company-wise, etc. Some investors may have overbrowned their concerns and in the process have pulled many other investors through under the name of market psychology and/or market sentiments. The key point to note here is that, if you are not in some liquidity constraints and pressure, just stay positive and hang in there and if you are not under liquidity constraints accumulate your holding position on these stocks. As you do this, it fair that you also take a keen interest on companies that have lost their competitive advantage, these may not go back into their glorious days.
The third and last important point to note is that, during this time is also a time for rebalancing your investment portfolio. This can be achieved in two ways – one: selling some of the good stocks which still trades fairly relative to their fundamental values and buy those selling on the cheap; and two: if you bought stocks of a similar counter during the time when they were selling on the high, i.e. during bull run where the market was optimistic – you may now rebalance by buying on the dip targeting to achieve a weighted average value or price that is closer to the current underlying fundamental value of that company.
What have I just said, I was trying to draw our attention and submit into us that yes, these may seem like pessimistic moments for the market, but this same moment provides a good environment and opportunity to be on the buying side – that is what is called “value-investment”. You do not unnecessarily have to follow the village, the village may be on the wrong path, and just do not be emotional. However, as I say this, I also urge you to be deliberate in your choices. Your need to be selective, basing your selection on the fundamental analysis and research of the company and the stock you consider to be a good buy.

How to Sustain Financial Prosperity after the Entertaining Career

Many a time we have witnessed our youth in the entertainment industry: in music, in performing arts, films, sports, etc go broke just few years following their glorious fames, or what my friend will call “on their after-shelf life”. But before then, you will hear record breaking contracts and deals worth millions of Shillings, with either a recording studio or company, or a TV stations, a Corporate Sponsor, or a football sports team, the list so goes. These are kind of stories that haunt our artists and sportsmen, the same story haunts many artists and players in many other places where a large percentage of these former stars in the entertainment industry go into bankrupt within short periods into retirement/resignation.
Now, it may be easy to think, ooh this is a scenario of “a fool with money soon partying ways” or like it is said in the biblical book of Proverbs: “…one who chases fantasies will have his life fill of poverty”, but the reality is that sometimes there can be a very thin line between maintaining that prosperity (after your performing and sports days are gone), and sliding into poverty. This is a real threat, that somebody was as (s)he was yesterday, but today live in a poor houses, a poor neighborhood, without any form of financial security, and meals which seemingly difficult to be assured. But then what could be done?
There are many ways to stay afloat, even when you have retired or have resigned from your active entertainment activities, I will mention a few:
First: it is always proper to seek and get advice from financial or investment experts. Now, as obvious as this may seem, but many a time we rarely practice it. And going back to the book of Proverbs: “make plans by seeking advice, … obtain guidance”. There are many studies that shows that people do not take time to consult financial and investment experts at any point in their personal financial management and investment life. For instance, let me share my personal experience to contextualize this argument — in my professional career I have worked with two commercial banks, I have worked with two out the “Big Four” firms — both in corporate finance and transactions advisory services, I then worked as a stockbroker and investment adviser before landing into stock exchange, but in this career path spanning about 15-years I have never come across a person from the entertainment world seeking a financial or investment advice. I have also been writing these articles on weekly basis, without a miss for the past 6-years now – but still no one from that space has taken interest in following up with a question or seeking guidance, having read one of these articles. It then says that a large chunk of us in the arts and sports, etc depend either on our own knowledge and instincts or probably those of our family/friends, when making decisions on financial matters. And, this is not wise.
To propel this argument a bit further, many youths that I interacted with, especially in these recent years seem to consider betting as a good income source and are therefore utilizing their income from entertaining, using their mobile money for betting. This being said, we definitely need a change, we need to pursue and get all the good advice and instructions or guidance that we can get for our better tomorrow. I will come to this again.
Second: learn to embrace other asset classes (shares/stocks, bonds, mutual funds/unit trusts, etc) beside real estate. Many of us are sometimes obsessed with this land thing, and so I have heard youth and individuals from the films, music and football sports industry express whatever little or many they have in terms of the land and/or property they own. But do you recall the expression: “don’t put all your eggs in one basket”, generally this means do not risk losing everything by pinning all your hopes or future goals on one and only one option. The danger of keeping your eggs together should be obvious, once the basket falls off the wagon or experiences some other unfortunate fate you are done. Let me take you once again to the biblical wisdom, from the book of Ecclesiastes 11:1-2 which says: “Send your grain across the seas, and in time, profits will flow back to you. But divide your investments among many places, for you do not know what risks might lie ahead.”
Now, again this is not only applicable to our environment or circumstances or to individuals in the entertainment industry, it is globally applicable only that the extent and perspectives differs. For instance, according to Global Wealth Report of 2018 published by Credit Suisse, financial assets account for the biggest percentage (53 per cent) of global wealth compared to non-financial assets. The report further says following the 2007-08 global financial crisis financial assets accounted for the biggest rise in global wealth compared to real estates. In this regard, we need a complete change of mind set. The fact that we have only about half a million self-directed individuals with investment accounts at the DSE (out of more than 55 million people), it says something.
Third and last: Let me go back to the betting thing, I know it is a big topic for financial and fiscal policy makers as well as by political operatives in our society today. But let me extend it a bit – my youth friends – particularly those in entertainment, let us get off with habit of chasing after these high promising returns bogus Ponzi schemes or on-line forex trading or sports betting. You may call them “investments” but to my knowledge and experience these are just like what King Solomon called: “chasing after the wind”. In most cases, such schemes leave the individual in a worse financial situation than they were before. It is better actually to spend that money attending a financial and investment management seminar or pay for internet to access YouTube videos that teach better and wise ways to save and invest and not go broke “in the after a shelf life”.

Making Finance a Tool for our Development

A week ago, I was in Lagos Nigeria, being part of the World Federation of Exchanges (WFE)’ Inspection Team which was in the mission to inspect a securities exchange in Nigeria that has applied for full membership on this global/international body for stock exchanges. While in there I learnt a great deal about recent changes in the Nigerian financial market structures. The changes respond to the challenges around lack of transparency and inadequate price discovery mechanisms in their financial market, which raised concern on the effectiveness and efficiency of liquidity creation/enhancement, the efficiency around prices discovery, as well as the volatility and certainty in the economy’s fixed income (bonds), money market, foreign exchange and derivative markets. Prior to these notable changes, just like in our current situation, financial products traded in the “Over-the-Counter” (OTC) market.
By the way, an OTC market is where investors and dealers buy and sell securities (such as bonds, medium term notes and bills), foreign currencies, or other financial products directly between two parties in bilateral forms, without a meaningful supervision, or transparency, except for reporting purposes.
An OTC market is contrasted with open and transparent exchange market in that the open exchange has the benefit of facilitating liquidity, mitigates credit risks concerning the default of one party in the transaction, provides transparency, and maintaining better market price discovery mechanisms.
And so, financial market regulators – the Central Bank of Nigeria and the Securities Exchange Commission of Nigeria with financial markets actors (particularly banks and securities dealers) collaborated in introducing a market infrastructure that meant to address the issues around market transparency, price discovery and certainty, volatility and liquidity. This new market structure and infrastructure seem to have so far being working well – liquidity on foreign exchange, fixed income and money market has increased several-fold compared to prior situation. This has benefited; regulators, banks, dealers, investors, traders and importers, the government, and the society at large. With more transparency and liquidity bonds’ interest rates have declined and are relatively stable, resulting into lower borrowing costs across all key players, from the government which issues Treasury bonds and Treasury bills to private entities which issue corporate bonds and medium-term notes. Lower cost of borrowing means more demand and access to credit and finance to public sector, to businesses and to private individuals.
With enhanced transparency in the foreign exchange transactions and its embedded derivative market – which enables importers to lock-in medium to long term foreign exchange prices by buying futures and forward contracts which trades in the Exchange, means there has been relatively currency stability, reduced speculative tendency and low level of central bank involvement in ensuring price stability — benefiting not only the Government but also traders who import goods to the economy, and so the list goes.
The above, is but a tip of the iceberg of what consciousness and coordination around finance and financial markets can do the economy and the society – albeit on the sophisticated side of the financial markets. But still, it is doable for us as well for our collective good.
On the other end — as it were, access to finance is a determining factor of individual financial freedom and in extension economic prosperity, the good news is that this freedom and prosperity can be exercised only with minimum knowledge. It only requires that every citizen of this country to be able to understand what it means to save, lend, and invest and what/how these activities contribute to his/her well-being and the well-being of the economy at large. As a country, we must build a community that can understand and make use of different financing tools, products and services. To achieve this, basic knowledge is fundamental, and that’s why the noteworthy step in the direction of creating the legal infrastructure and institutional framework for financial education and financial consumer protection, which will be responsible for informing the public and analyzing products provided to them is worth the pursuing for all of us, no matter our stations in the sphere of finance and how it relates to our development.
I was privileged to be part of the Familiarization team which was recently in South Africa to educate ourselves on how best we can create the national financial consumer protection framework – South Africa itself having made significant stride in this space. In my opinion, this is a significant move by our government and other key stakeholders into right direction towards the role of finance as it relates to our development, with more availability and accessibility to financial products and services, consumer education to improve their awareness of financial matters and credit becomes of great necessity. Investors and consumers of financial products and services needs to be more and better informed. With a more informed society on these matters – we will be able to mobilize more finances to finance our development and unlock the potential sources of finances currently under mattress, and in the case of my tribe in the form of livestock, somehow unproductive.
Matters of finance cannot be left to bankers, we all need to understand them, argue them, use them and benefit from them. Imagine what would be possible if we could finally mobilize our intelligence and energy with the perspective in mind about the issues of finance and what they could do to our development. Now, this requires a change in mind-set, a different way of thinking about finance and how we can all be smarter about changing behaviors on how we access finance, how we keep our finances, how we use our finances, how we can mobilize our finances and how better we can make use our finances to unlock some aspects of our own growth and development. The good news is that this mobilization has already started and it’s taking the shape of a silent revolution, especially following the introduction of financial technology and digital platforms in the financing space. Let us work on it.

How to achieve financial inclusion in the capital markets for Developing Economies

A few weeks ago, I attended the Afro-Asia Fintech Festival, an event that was dual-organized by the Central Bank of Kenya and the Monetary Authority of Singapore under the theme: Focus on Sustainable Finance, Transforming Lives. Well, the event was mostly attended by banks and fintech companies show-casing their areas of complementarities and sometimes competitiveness in the quest for more and better financial services accessibility and inclusiveness.
As it is, we, from East Africa have a lot to be boastful about and show to rest of the World regarding advances we made on the use of digital platforms in enhancing and deepening of financial services for the unbanked segments of our population – i.e. the use of mobile phones for payments, money transfers via mobile phone, and such sort of things. And yes, with all fairness we have some significant achievement in this space. But then, are these achievements a reflection of the “true” financial inclusion? If not, what could be the ideal measure of financial inclusion? According to the Alliance for Financial Inclusion (AFI), the first dimension to measure financial inclusion is access to the financial services and products that formal institutions offer. That to achieve meaningful access, we have to consider other aspects of the financial markets’ ecosystem – i.e. savings, access to credits, investing, insurance, retirement funds, trading electronic funds, etc. In this article therefore, I will dwell on how “true” financial inclusion in the context of savings and investments via capital markets products and services using digital platforms and other accessibility tools.
It is a arguably a fact that as an economy, we are making real observable strides along the lines of improved savings and investments, and yes the economy is growing steadily relative to some other parts of the World, however, inclusive growth continues to be a challenge. We are, not only lagging many emerging economies, but also, we have a comparatively lesser degree of “true” financial inclusion as compared to some economies in frontier and emerging markets.
By the way, financial inclusion here means ease of access, convenience and low-cost availability of financial products and services to all sections of the population — meaning, faster and more inclusive growth prompts inclusion of diverse economic activities and geographical regions in the financial system.
Now, to broaden a bit the whole idea of inclusive – it has to touch key aspects such as savings, investments, access to credit and wealth creation. The role of capital markets is vital for such inclusive growth as well as wealth creation and distribution by making capital available to entrepreneurs mobilized it from savers and investors. Capital markets can create greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ enterprise needs and risk appetite. Innovation, investment advisory, financial education and proper segmentation of financial users constitute the possible strategies to achieve this. A well-developed capital market creates a sustainable low-cost distribution mechanism for distributing multiple financial products and services across the country.
With long-term growth trajectory, considerable financial deepening, increasing foreign cash-inflows and increase in credit, deposits and bank assets as a percentage of GDP, rapid financial inclusion appears a reality if it can be coordinated by diverse financial institutions and with the application of technology. Inadequate use of technology, poor financial literacy and financial education coupled with inadequate framework for financial consumer protection are cause of lower penetration. Alongside these, in the aspect of capital markets, challenges of excessive concentration of trading at member level, company level and geographically is also a major challenge. The market needs a fair amount of development work on the aspects of new products such as micro-savings bonds, municipal bonds, infrastructure bonds targeting retail individual investors is also fundamental.
Financial deepening also implies a larger focus on the debt and equity markets than physical assets and as a society we should not lag behind on this front. For instance, we, in the capital markets need to cast off the conventional notion that financial education and financial literacy is a just part of our social responsibility and realize that it is actually a key element that could foster profitable businesses. We need to see into it that we can enhance household savings or we could encourage our society to save and invest more in listed instruments and collective investment scheme, which currently seems to be a challenge given that less than 1 per cent of the population participates in investing on stock markets instruments. The fact that our savings levels are at 30 per cent and the fact that more than 50 per cent of household savings continue to be in relatively unproductive assets, prospects lie in driving these savings into the financial system (especially the capital markets) and channelizing them into productive investments. Through financial inclusion, capital markets can motivate investments on long term productive assets.
True, financial inclusion need financial literacy, financial education, financial consumers protections and the matching technology to enhance accessibility besides adequate competition to cause more substantial markets. On this, the agency model can be replicated for increasing financial literacy and thereby increasing direct participation of masses in the financial system.
Capital markets institutions and intermediaries could adopt innovative practices and work with banks and non-banking bodies (agents) with a wide network such as post offices, etc., to provide distribution outlets for capital markets products. Financial service providers in the capital markets can foster financial literacy on the lines of initiative such as brokers creating association with public entities such as the Post Office to provide price information and investment-based inputs to savers who could potentially be converted to investors. Such networks can fairly be used for distribution of financial products and services.

Fintech Entrepreneurship vs. Regulations in our Financial Sector

There has always been a constant battle to maintain high levels of integrity and competence in the financial sector. Financial markets stakeholders have long recognized this to be the truth — that fiercely engaging in this battle in establishing minimum set of behaviors and standards for its institutions, its intermediaries and other users of these financial services is in the sectors’ best interest. That is why, Regulators and Self-Regulatory Organizations sets of rules that regulates the conduct of its stakeholders. Having laws, rules and regulations to regulate the conduct of its members is necessary for the financial markets mainly because, if users of financial services loses trust and confidence instead develop a fear that malpractice is prevalent in the markets, they will not allow their deposits and funds to flow through the financial market systems.
If the conducts of financial markets were to be left into gentlemen’s agreement, assuming that all participants have good intents and that they will behave ethically, would have created a room where crooks and incompetents would have joined the band wagon and become industry’s intermediaries free-riding on the industry’s reputation. Thus, the need for regulations, rules and minimum standard of conduct is a necessary hindrance.
The other key reason for the necessity of rules and regulations is that in financial markets, the failure of one player or an intermediary may lead to the situation of systematic failure and instability into the whole system. In our recent memory, the failure of Lehman Brothers led to contagion effect, with very serious consequences not only for the United States financial system, but for the overall global economic health where businesses failed to meet their obligations, banks and businesses collapsed, investors wealth were eroded, insurances and pensions were lost, etc.

Furthermore, if left to their own devices, would tend to move towards a structure where one or a few players exerts undue power to the market, affecting its pricing mechanism in favor of a few over many. If not well managed, this undue influence, creates the desire for beneficiaries to control prices products. In the case of a stock market, this will be the situation where few individuals or institutions manipulates the price mechanism in the market by controlling liquidity and the price of a listed stock towards a direction of the choice of the influencer.

So, regulations have significant benefits for the proper conduct of any financial markets’ activities. However, despite these benefits and necessities, it is important for the society to ensure there is a good tradeoff between benefits of regulations and its negative effect on the innovation, enterprising, creation and growth. Without a good balance and tradeoff between regulations and innovations; regulations may be particularly detrimental to industries and economic prosperity.

I recently read an Article in the Harvard Business Review by Efosa Ojomo titled: “6 Signs You’re Living in an Entrepreneurial Society”. In the article, Ojomo mentions six major signs and the one that caught my attention mostly, is the one saying that if you are in a society where innovation precedes regulations, and not the other way round, then you know you are living in an innovative and entrepreneurial society. Oromo argues that in entrepreneurial societies, innovation always precedes regulation. In the United States, he argues, scientist and engineers in Silicon Valley, Boston and New York are always one step ahead of regulators, in developing innovations that helps societies to solve some of its most critical problems. The regulators eventually catch up, but not before the innovators have developed viable solutions for us to improve our lives. Ojomo says, if regulations in your society precede innovation from entrepreneurs, this is likely to curb the entrepreneurial spirit of innovators and therefore limits the growth and development that the society, in often cases, needs.

Last week I attended the Afro-Asia Fintech Festival where fintech entrepreneurs from the East Africa region and Singapore show-cased how they have allowed majority of us to have an easy access, as well as an efficient, flexible and better user experience in some aspect of financial services, especially on payments and access to credit. Besides this, I also have met several young Tanzanian innovators and entrepreneurs in the fintech who are in the verge of creating technological breakthroughs that can unlock some of the existing potentials in developing and growing some of our industries, but in several cases these young, ambitious and energetic young professionals are being hindered by the practice of letting regulations precede innovation and entrepreneurship.

As said above, markets are always a step ahead of regulators, important as regulations and regulators are, we should learn to let innovators and entrepreneurs help us solve our most critical problems, underscoring that, as Ojomo’s puts it the entrepreneurial society is a prosperous society, where more and more people are able to choose what they do, and when they do it. Innovation and entrepreneurship are the necessary ingredients for any economy or market flourish. This is topical matter, requiring a serious debate like it is other — but is a good debate for us to engage in.

Values and Conduct in Developing Sustainable Financial Markets

In the last week’s article, I wrote about the role of financial markets (particularly the capital markets) in financing our economic development. Given the history that we and our finance world have sometimes gone through, the recent being in 2008, for some then – finance can be equated to an enemy of the people, dispossessing them with their savings, their pensions, their wealth and sometimes their sovereignty. For others, finance is perceived as the tangible expression of human greed – considered as an instrument of domination, making it possible to create value without efforts and accumulate wealth without actually producing. But to some, finance (and by finance I mean financial tools used by stakeholders in the finance-ecosystem (such as banks, investors, pension funds, stock markets, financial advisers, etc) is the fundamental mechanism for the mobilization and allocation of wealth and financial resources to benefit the economy in an inclusive manner. This is part of what I covered in the last week’s article – somehow inspired by a book I recently read, titled: Can Finance Save the World? Regaining Control over Money to Serve the Common Good by Bertrand Badre. Today’s article is more about how we can sustainably make finance serve for good by address the bad, especially approach this question from the culture and governance space.
It is been 11-years since the 2008 financial crisis has brought in some new knowledge and insights on how regulators of financial markets should go about conducting their business and fulfilling their mandates. We observed that, the regulatory response to the prudential crisis has been profound, equal to the significance of the crisis itself and in trying to mitigate the repeated happenings, at least if it has to happen within similar contexts.
The response from the learned insights has redefined and reshaped the financial markets, especially the banking and capital market industry. Examples of ring-fencing and separation of investment banking from commercial banking activities are some of clear indications. The introduction of IFRS 9, which came to operation in the January of 2018, is such other example.
For a keen observe of the conduct of financial markets’ regulators, one will learn that from their different points of views, they perceive such aspects related to their mandates as well as market conduct as not just being the cause from business conducts of firms operating in the financial markets – but rather more into it there are personal and individuals conducts too that impacts the happenings. That sometimes people who are afforded with fiduciary duties to oversee and provide oversight to businesses and those responsible for their operations in some cases gets ahead of themselves, for various motives and reasons.
As a result, for example, having individuals within financial firms being held personally accountable for their work has shown to affect outcomes positively. For instance, there is evidence related to accounting and financial management practices, even here at home, which indicates an increasing perceived individual accountability, such as by requiring audit engagement partners to sign the audit report with their own name, rather than the company name, with the aim of improving both the quality of the audit and decreasing manipulative practices – this has indicated positive results.
As it is with other societal issues and challenges, firms operating in the financial markets whether they are listed or not listed are focusing on the aspect of culture too. For instance, we now hear in boardrooms relentless discussions of culture and we often are being asked how senior managers in firms that operate in the financial markets should measure their culture and how regulators, could measure and set targets for their businesses’ culture. Many regulators have recently opted to assess what management is doing to manage issues of culture within their firms by using four types of lever.
The first lever is a clearly communicated sense of purpose and approach. Clearly communicating the ‘what’ and the ‘how’ are very important to getting a firm to work effectively and efficiently. But they pale into the background when contemplating the power and effect of a well communicated and resonant ‘why’. It is the tacit understanding, shared by employees, of a company’s true purpose. This may not necessarily what is articulated formally in a company’s mission statement and values. I often learn more about a firm’s sense of meaning by reading the strategic plans. And I suspect that employees do too.
The second lever available to senior managers is ‘tone from the top’ – what staff hear and see from senior management. What are the behaviors that senior managers role model to their employees?
The third lever is the formal governance processes and structures, the policies and systems that specify expected behaviors and decisions. From a conduct culture point of view, regulators look for a well thought through conduct risk framework: is there a clear exposition of conduct risks, the systems and controls for mitigating them and risk indicators for monitoring them?
Finally, there are people related practices, including incentives and capabilities. Remuneration, promotion and recognition criteria all matter. Does a firm’s pay structure reward misconduct? Is the pressure to turn a profit driving employee to act against consumers’ interests?
People capabilities are becoming more and more important to having the right culture. It’s not enough to be motivated to behave in a new way; people also need to understand how to be successful with the new behaviors.

Stock Market in Financing of Economic Growth

Many within our society think of stock market as one of those things that virtually exist for some few. Many among us can not relate the stock market to our economic growth, understandably so.
However, as it were, the functioning of the economy depends on the financial system of the country. This financial system includes capital markets, stock exchange, central bank, and commercial banks as central entities along with other financial services providers. Normally, the financial system should be deeply entrenched in the society and provide employment to a relatively large population. Accordingly, the three major functions of the financial system are: providing capital and credit; providing liquidity which protect businesses and individuals against sudden cash needs and providing risks management mechanisms.
Another important work of finance is to boost growth of capital markets. Business needs two types of capital – fixed capital and working capital. Fixed capital relates to funds that are needed to finance infrastructure, production and other such activities which are long term in nature. To achieve these, business and governments issue shares and bonds to raise fixed capital.
On the other hand, money needed to run business on the day to day basis (working capital) i.e. ongoing purchase of raw materials, financing cost of finished goods, costs of proving services, transportations, operating costs, facilitating trades, etc are provided by banks. Businesses access this type of financing by issuance of bills and promissory notes or bank borrowings, etc. These instruments are valid in the money market, and banks exist for that purpose. Banks also facilitate international trade via issuance of letters of credit, trade guarantees, and provide access to foreign exchange by businesses.
Thus, it is somehow clear that the financing of infrastructure, or industrial development, or financing of such other long-term projects which plays an important role in the socio-economic development of the nation and its people depends on the development of the nation’s financial markets, particularly in this context, the capital markets and its key institutions such as the stock market. It is argued that there have been few economies that have run successfully and sustainably without a sound capital market.
So, where are we on this finance-growth nexus, particularly in the tale of capital markets? Well, our market capitalization to Gross Domestic Product (GDP) ratio is less than 10 per cent, our liquidity to market capitalization is less than 5 per cent and the number of people with investment accounts at the Stock Exchange is less than 1 per cent of the population.
With domestic equity market capitalization of Tsh 9.1 trillion and Outstanding bonds worth Tsh. 9.4 trillion relative to the GDP of about Tsh 125 trillion; with only 28 listed companies; with market turnover of about Tsh. 400 billion per annum; and about 550,000 investors out of more than 55 million population, it says that as a society we need to do more in this important aspect of an market-based economy. What does these data tell us?
It means, as a country, we could potentially unlock a substantial portion of highly needed capital to build our physical and social infrastructure system, build industries and finance local development projects. We need to enhance and diversify the role of finance in our economic development. The stock market can be a tool and a platform that could inject much needed capital into our country’s growth engine. Crucially, however, is the fact with our current direction where domestic financial resources mobilization seems to take a significant consideration in our political and policy discussions, then the stock market could be one of the focal vehicles which can enable local citizens to play a more active role in financing our own economic development by way of releasing some of the idle savings in financing investable enterprises and development projects.
The key question, however, is, how do we get there? by creating awareness and forming a mutually shared understanding and appreciating this matter. How do we bring this awareness? Or how can we act towards this direction? These requires both political and policy leadership, especially if this is considered to be one of the policy priorities – and I do not see why it is not, why it should not be a policy priority especially if there is a fundamental understanding that economic development requires financing, and that the stock markets is one of the key tool for mobilization of domestic and foreign funds for investing in our development.
Without prejudice to the above, the government has so far done a significant portion of its part. It has put in place the regulatory framework and key institutions for the operationalization of the market. There are several tax incentives provided by the Government to incentive businesses to participate in the capital markets.
The other aspect where the Government has led the way is championing mandatory listings of companies from some sectors for the purpose of enhancing economic empowerment to citizens, creating the atmosphere of good corporate citizenship as well as encouraging transparency in the Tanzania corporate environment.
Privatization via the stock markets and enabling many Tanzanians to participate in the ownership of some key entities in our economy is another key contribution by the Government.
In conclusion — the growth of our stock market represents an opportunity which has the potential to accelerate development and promote financial inclusion and economic empowerment. However, stock markets do not grow on their own — political willingness and leadership, policies mandates and priorities, strategies and action by public and private sector should accompany a mere existence of a stock market.