On the Disliking of Debt-Related External Financing

In recent days there has been discussions, both in the mainstream as well as social media platforms, with regard to how we Africans finance (and intend to finance) our economic development. China seems to be at the center of these discussions, particularly in the context of lending/borrowing. If we step back and relook on the current state of matters as to how most of developing nations finance their economic activities from the external sources’ paradigm – can we see a better option? According to the 2018 World Investment Report, issued by the United Nations Conference on Trade and Development (UNCTAD) — developing economies draws on a few external sources of finance, these mainly include Foreign Direct Investment (FDI), Portfolio equity, Long-term and Short-term loans (private and public), Overseas Development Assistance (ODA), as well as Diaspora Remittances. FDI has been the largest source of external finance over the past decade, and probably the most resilient to economic and financial shocks. To be precise, sources of external financing to Africa stands as follows: ODA & other official flows (36 percent); Diaspora Remittances (28 percent); FDIs (21 percent), Loans and other related investments (14 percent) as well as Portfolio Investment (1 percent). As data indicates, loans are yet to become the main source of external finances to Africa, rather FDIs and Remittances are gaining impact.
The good news here is that the growth of ODA has stagnated over the past decade, currently it amounts to about a quarter of FDI inflows to developing economies. On average, between 2013 and 2017 FDI accounted for 39 per cent of external finance for developing economies.
The other good news is that FDI, being the major source of such financing, does exhibit lower volatility than other sources. Debt-related flows on the other hand are susceptible to sudden stops and reversals – good that it is yet to become major. And to date, portfolio equity flows account for a low share of external finance to developing economies, especially where capital markets are less developed, like in our case, which is not a good sign, but like debt-related flows, portfolio equity are also considered as relatively unstable because of the speed at which positions can be unwound.
Now, under circumstances where many African countries expresses their desire to pursue socio-economic development propelled by industrialization and its imbedded structure – if we assume for a minute that we are serious with our intent this time around — if we think external debt-related finance has some dirty attached into it, where will the financial resources for infrastructure development and industrialization come from? How can we sustainably finance these industrialization drives? Yes, we know for a fact that any successful and sustainable industrialization policy needs to be preceded and/or accompanied by important development/transformation in the financial sector – but while we are developing the financial sector and its institutions, while we are enhancing national capacities to mobilize financial resources, both domestically and externally, what needs to happen?
If we so much dislike debt-related flows, should it come down to FDIs, Yes? but when it comes to FDIs, wouldn’t it be fair for us then if we seriously consider diverting from resource-seeking FDIs into both “market and efficiency-seeking FDIs”. Here, history could be a good teacher, that focusing on “resource-seeking FDIs” without strategic diversification seems like not a sensible approach worth pursuing. Currently the stock of FDIs in Africa is estimated at US$ 867 billion; about US$ 83 billion allocated to the East Africa nations and US$ 20 billion of this is in Tanzania. We know that a significant portion of these FDIs investments are resource and/or commodity-based – actually the decline in FDIs inflows to only about US$ 7.6 billion for the whole of East Africa and US$ 1.2 billion for Tanzania in 2017 relates to this. That’s why the recent challenge in both demand and pricing of commodity quickly got reflected to the reduction in annual FDI inflows to Africa. Much as there are expectations FDIs inflows renewals in 2018, but reasons underpinned such hope for recovery are in tied to better commodity prices. Again, a sensible approach is to create conducive climates to attract such investors from the usual top-10 sources of FDIs for Africa (i.e. US, UK, France, Italy, China, South Africa, Singapole, India, Turkey, etc) to bring their efficiency and market-seeking manufacturing FDIs into textile, automobile, ICT, industrial parks, etc.
If we are hesitant to the market and efficiency seeking FDIs route as well, then a little over a year ago my friends – Ali Mufuruki, Gilman Kasiga, Rahim Mawji and I wrote a book, titled: Tanzania’s Industrialization Journey 2016-2056, under the resource mobilization section of the book, we offered some other proposals we thought to practical given our circumstances. In a relatively lengthy way we labored to explain why we entertained and actually encouraged the idea that we need to proactively and aggressively encourage domestic resources mobilization, basically by strengthen our financial institutions (especially those with long term financing mandates) by enhancing the legal/regulatory and other infrastructure aspects as well as the accompanied financial instruments that will be linked to the practical resource mobilization for industrialization projects and entities that requires such funding. We also indicated the need for introduction of institutions such as industrial development bank(s) and banks to be more involved and align themselves in the country’s industrialization goals. We proposed the need for a combination of ownership (between the state, strategic/industrial investors and the public (via IPOs) and management of entities and projects that execute the industrialization programs. As well as the need to engage the Diaspora in our industrialization not only in financing (through remittances) but also leveraging from their knowledge, skills and experiences.

The Stock Markets and the Financing our Industrialization and Economic Transformation

In my last week’s article, I tried to indicate, picking from other country’s industrial revolutions and transformations perspectives, how they financed their transformation and how necessity it is for a country to transform its domestic financial resources mobilisation as it aims to transform its economy through industrialisation — like we intend to do. Today, I will focus on the need for a vibrancy stock market, as part of the tools economies normally utilise in financing their economic transformation.

History tells us, most successful industrialisation and economic transformation policies were preceded and/or accompanied by important development in the country’s savings and capital formation. The lesson in front of us is somehow clear in the sense that the process of capital formation go hand in hand with efforts to industrialise and transform. In my reading of the National Five Year Development Plan (FYDP-II) 2016/17 – 2020/21, which carries the theme: “Nurturing Industrialisation for Economic Transformation and Human Development”, the almost 400 pages document, the word Dar es Salaam Stock Exchange has been mentioned only once — the DSE mentioning came under the context of trying to explain why FYDP-I didn’t achieve some of its intended objectives. One of the reasons given being the lack of capital and funds to implement some of the key priorities, and DSE underdeveloped being one of the reasons. Other than that, DSE (or the capital market in that matter) has not been mentioned in the FYDP-II and its proposed financing strategies. And I think this is a mistake, similar to the one we made in FYDP-I.

FYDP-II is right — our local stock market is relatively underdevelopment. After almost 20 years of existence, the DSE is still narrow and thin, domestic market capitalisation (Tshs. 8.5 trillion) ratio to GDP is only about 10 percent, liquidity/turnover ratio (averaging about Tshs. 800 billion p.a) to market capitalisation is also about 10 percent. Only 17 domestic listed companies (23 inclusive of cross listings) are listed, and three currently outstanding corporate bonds. Government’s listed bonds worth about Tsh. 4.8 trillion are also listed, less than 5 percent of our current GDP; and the total number of investors at the Exchange is only about 450,000 — closer to only one percent of total investable population.

In my opinion, the upside potential is high, but only if we consciously decide to create and pursue the right policies under this context. Previously (& currently), the stock market has not been part of the country’s development plans (the same seems to apply under FYDP-II). DSE has not been treated as the primary national engine of capital formation and economic development by the Government or the donors. For instance, instead of driving most privatisations through the DSE and creating a tax efficient structure for companies listed on the exchange and investors in listed securities, different policies are normally chosen. The consequences of these policies are an economically weak stock market (as rightly stated in the FYDP-II), without a vastly adequate supply of securities in the market place. This is a big lost opportunity for financial inclusion, domestic capital formation and broad-based economic empowerment.

To avoid repeating similar mistakes, FYDP-II should specifically aim to revolutionise the growth and vibrancy of the stock market in the process of sustainable domestic capital formation as we strategies to finance our future. FYDP-II should have made DSE as one of the tenets of financing the envisaged industrial programs and its related infrastructure programs. How can the government facilitate growth and development of the stock markets? — there are several tools that can be deployed to achieve this objective. I will mention a few:

Out of hundreds of privatised state-owned entities, only seven (7) were privatised via listing into the exchange. These are TOL Gases, TBL, TCC, Swissport, Tanga Cement, Twiga Cement, and NMB. Hundreds of others were privatised via private sales, large part of these didn’t bring the financing, skills, technology or job creation, as was envisaged and most of these entities are no longer in operations. Comparably, entities that were privatised through the stock market on an efficient combination of ownership, by: the government, strategic/industrial investors and the public (by way of IPOs); have been more impactful, both socially and economically compared to entities that were privatised through private sales. The 7 mentioned companies are some of the largest tax payers, they provide some of most quality jobs — propelling their employees to middle income earners, being listed entities, they are relatively more effective for tax administration purpose. I therefore, urge the government to learn from this experience; the remaining SOEs should be conducted across the DSE. With the vibrant stock market (brought by, among others, privatisation of SOEs through the DSE), entrepreneurs, industrialist and business owners from the private sector will be attracted to use the capital market for their enterprises growth and development as well as an exit mechanism. This is how consideration to use the stock market for funding industrialisation would be meaningful.

Apart from privatisation, the government should also implement policies and legislative actions whose spirit was to facilitate growth of the local stock market, a wider economic empowerment and an inclusive growth i.e. policies such the economic empowerment; financial inclusion; local content; privatisation, etc. Furthermore, the Mining Act of 2010 as well as the Electronic and Postal Communications Act (EPOCA) of 2010 (amended in 2011) are some of the legislative actions meant to economically empower local citizens by way of ownership in such key sectors of our economy, however, provisions of these laws in the context of ownership distribution hasn’t been implemented, or for the case of EPOCA, the 2015 regulation provided an option. Were these laws implemented, we would have increased the depth, liquidity and the number of local investors in our stock market; that’s how we will encourage more savings and domestic capital formation.

Additionally, we should proactively and aggressively encourage domestic savings by pursuing programs that will introducing other financial instruments that can then be used as investment platforms for many. Financial instruments such as, common stock (for common ownership), micro savings bonds, infrastructure bonds, municipals revenue bonds, real estate investment schemes, collective investment schemes, etc must be championed by both the government and private sector using existing and potential financial institutions. These financial instruments should be linked to the practical industrialisation projects and enterprises that requires such funding.

As we pursue this approach, we need to be mindful of the fact that our current savings rate as a proportion of our GDP is about 20 percent while the country’s investment rate per annum is about 30 percent of the GDP, the gap is financed using foreign funds and capital. We need to gradually reduce this gap by way of developing our domestic capability to raise the rate of domestic savings and capital formation.

Blending private domestic and foreign investment through shareholding on the state-owned enterprises is vital for creating a vibrant local capital market. In relation to FYDP-II financing, a combination of government’s substantial ownership in existing (and new industries) via financial interests/commitments, combined with large number of shares trading publicly in the stock market, plus joint ventures between strategic/industrial investors on one hand and small investors (via IPOs) on the other hand, plus debt instruments i.e. syndicated trade credits, project finance will encourage the financing of the envisaged industrial program, enterprises and projects.

The FYDP-II has mentioned many strategies of financing identified priority sectors and projects; i.e. increase tax revenue by broadening our base; establishment or enhancement of specialist banks; foreign direct investments (FDIs); domestic borrowing; issuance of sovereign bonds, etc. What is clearly missing is the intent to grow the stock market so it can facilitate capital raising, encourage savings and capital formation — which is vital for the envisaged industrialisation program and for economic transformation. We shouldn’t continuously avoid this opportunity.

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Lessons from the Existence of Stock Markets

What do you think is the most important thing that investors in the stock markets do? Keep their expenses low? Hire good fund managers? Avoid paying taxes? Have perfect investment timing? Well, these are all important, but arguably the very most important decision is choosing what kinds of things to invest in. In other words, a good selection of asset class to invest in. The action of setting aside some money to invest in the first place is the absolute most essential step. But then, if you don’t do that, you are not even an investor in the first place.
In the stock market, you can invest in popular growth stocks or the unloved value stocks – it depends. You can invest in big companies (commonly known as “large-cap”) with years of existence or small companies (“small-cap”). You can invest in domestic listed stocks or in international stocks, etc.
According to the experts, more than 90 percent of your ultimate investment return depends on your choices of asset classes. But then, this assumes that you invest money and leave it invested. If you move in and out of your investments, then your results are totally unpredictable.
If one was observing stock performance for the DSE over a period of 10 years, by the way the reason I say 10 years is because of a famous maxim from Warren Buffett, who says: don’t buy something unless you would be willing to hold on to it if the market were shut down for 10 years. So, the performance of DSE listed stocks for these past 10 years indicates there has been both significant growth in value and dividend elements.
On the other side of the coin, some people perceive and compare stock exchanges to casinos or betting joints or places to make quick money. Some of these sentiments are partly informed by news report that show frantic traders speculating on where prices would go next, almost becoming euphoric if the shares have had a good run up (also called a bull market), or thoroughly depressed if the market is down (a bearish market).
The image portrayed by the media is somehow unfortunate because alongside speculative traders and investors are millions of value-based investors, representing retirements savers, pensions funds, insurance funds, who genuinely try to understand the long term prospects for a company, calculate intrinsic values, deciding allocations of money to companies — facilitating their growth and expansion, or building new factory, make new invents, go into new frontiers, etc.
Through the actions of these genuine investors, societies access new products, new industries, employments, wealth creation, economic empowerment, etc as money is taken from idle and inefficient activities and re-allocated to new frontiers and efficient use. That way everyone benefits: from businesses ideas in need of funds, to those with savings in a pension schemes, to those with life insurance covers, to those with idle held cash, to those with investments in lower returns assets, etc.
As it is, economies need diversified investors and investment avenues to facilitate business growth, especially long-term enterprises and projects — many investors would prefer the liquidity and vibrancy offered by stock markets compared to the difficulty of alternative avenues.
In the same vein, societies need people willing to take risks — either in establishing new business ventures, or expanding current businesses into other new territories, or innovations based on ideas or people with the willingness to provide risky funds to new ventures and ideas. Some financial institutions, by their nature, or business model and mandates are not willing to accept such risks. Institutions, such as banks — would like to strike deals with companies whereby even if the profit is small or when the company makes losses, they are still paid their money in agreed terms. Also, they usually require collateral so that if business plans turnout to be not as expected, the bank can recoup its money by selling off property or other assets under collateral. Holders of other forms of debt capital such as bonds, take similar low-risk (but also low-returns) deals.
Imagine if debts were the only form of capital available for businesses. In such case, few businesses would be established or flourished, it would be rare for entrepreneurs and business managers to come-up with investment projects that would offer lenders the security they need or the certainty and predictable returns they require. Part of the reason why businesses flourish in various uncertain environment, is because they are also financed by capital whose source recognize that uncertainty and risk taking is part of the business and investment environment. Such fund providers factors-in such situations in their capital and investment pricing.
Now, consider a company whose business is continuously cyclical, or whose sustainability depends on its customers sentiments, or weather, or other external factors — can such a business be purely financed by debt? Probably no — such a business would require part of its finance be partly equity. That way non-risk takers can finance part of the business and risk takers can finance it partly — naturally risk takers will want high reward for putting their hard-earned savings in such an exposure. In exchange to such risk taking they would want to have their views on who should be on the board, they would want the power to vote down major moves proposed by the managers. They would also want regular information on the progress of the company. One important aspect to note is that these holders of shares, in the success or failure of the enterprise, they do act as shock-absorbers so that other parties contributing to the company, from suppliers and creditors to bankers, do not have to bear the shock of a surprise recession, a loss of market share. That’s why it is important for any society to appreciate the relevance of a stock market.

What to Consider When Investing in Shares (II)

The capital market is a crucial component of the economy, putting savings and investments in the hands of those in need of capital. The capital which is then used to generate economic output, thus supporting development and creating wealth. A humming capital market can elevate a country’s socioeconomic conditions, as it has done in many economies where financial infrastructure and its supporting institutions are fundamental to economic development agenda. When correctly harnessed and channeled, capital markets can prove to be transformative: not just for the economy, but for society too — by unlocking opportunity and giving citizens a greater stake in their nation’s success (in the democratization of finance and wealth), capital markets can strengthen both individual prospects and the bonds of community, when many people are engaged in financing their economic development and are economically empowered.
For this to happen, there has to be financing tools, and products that may be used to mobilize savings for productive investments. The economy needs a sizable investor base, made of by both individual households and institutions, not only by the quantity of their participation but also by the quality of their investment strategy and decisions based on the understanding and appreciation the fundamental workings of the capital markets. In the last week’s article I shared some of the factors, approaches and activities for one to undertake during the process of saving and investing in financial instruments that are issued by participants in the capital markets.
I said, anyone who is keen on investing in the capital markets should have a clearly informed personal investment plan, followed by an evaluation of his or her risk tolerance level for various asset class (or securities within the asset class). While on this, it is important for one to understand and appreciate a principle of investment that says: the higher the risk, the higher the return. I discourage the speculative mentality and “quick money” motives – it is not good for an investor, especially on value-based investments.
The element I emphasize on is for one to determine where he/she want to end up financially. In the thinking process towards achieving the outcome to such a determination, questions such as at what age one wants to retire, how much money s/he need in order to retire comfortably, how much time one have between retiring, how much money he/she need to work with and how much risks are comfortable and willing to take on – needs to be responded into in a careful manner.
Once you know the answers to these questions you will have a good idea of how much you need to invest to reach your goal. Remember the wise saying which says: “if you do not care where you end up, any road will get you there”. So, do not choose to take any road – because any road will not help you to get where you want, you need to be specific, for example, if you are 45 years old and you intend to retire at age 60 and your net income (after deducting your expenses and liability obligations, and without consideration for inflation and time value of value) is Tsh. 1 million a month. This means that for you to achieve the Financial Freedom during your retirement, your Financial Freedom Fund Target should be to generate about Tsh. 180 million by the year 2033. With careful planning, financial literacy, good investment selection and financial discipline – this can be achieved.
If you do not have necessary competences and skills for financial planning, or you are not as savvy and disciplined, how can you go about this? You need to start by a bit of researching on the idea, which should be followed by opening an investment account at the stock exchange via a stock brokerage firm. As it with the bank accounts, which you use for your savings and investment purposes relating to financial products and services provided by banks, for investing in shares and bonds which are listed on the stock market, requires you to open an investment account. In our local environment, there are two primary routes you can take when it comes to investing in the stock market, you may have to use the services of the stock broker who will make investment recommendations based on your needs, desires and risk appetite; or the other option is for use to invest via a unit trust/mutual funds, i.e. the Unit Trust of Tanzania, which provides both diversification and professional management, coupled with researches and analysis.
Once you have opened an investment account, either with the stock broker or a mutual fund, develop the discipline to invest a certain amount, like the Tsh. 1 million as above, on a constant/regular basis – this approach will give you the benefit of averaging, the average cost per unit share will be lower relatively. Along the lines of discipline on investing, you may need to note that stock have a tendency to go up and down, for you to create wealth in the stock market, do not be emotionally attached to a certain stock. Develop the discipline to always setting a stop-loss price – this being the amount you are willing to lose, but not beyond, and once reached get rid of the stock. We talked about the need for diversification in order to manage your investment risk, I would like to end up by re-emphasizing on it, remember that the bedrock of all the investment advice in large part of human history has been: “don’t put all your eggs in one basket”. There is not better long-term risk management strategy than the diversification of investments.

The Relevance of Transparency and Accountability for Sustainable Enterprises Growth

One of the key business issues that impend business and enterprise growth in our society is, the sometimes preference for lack of transparency and good governance. And this is rather the broader issue challenging many markets in the region. And so our entrepreneurs and owners of local enterprises are constantly willing to sacrifice expansion of their enterprises via capital raising, either privately (through private equity, venture capital funds) or public (from stock market or crowd-funding) in favour of otherwise — we observed such trends again and again.

As it is, transparency and accountability are the two key words that have acquired uncanny ability to strike fear into the hearts of operatives in both private and public sector alike. Contrary to popular opinion or possibly correctness of opinion – that the public sector is the centre for fraud, mismanagement of funds and corruption – however, sometimes the truth is, private sector carry a fair share of such economic crimes as well. The difference is that public sector scandals attract more publicity, possibly because there are more interested parties, and well — as it should be, public funds invite public scrutiny – (for private sector most of these issues remains private, unless a private entity turns into a public entity (by way of ownership). But is also a fact that, taxes are by far the most hotly contested funds in terms of appropriation or, in many cases, misappropriation — so it is fair to expect much scrutiny.

Transparency, efficiency, accountability, responsibility along with integrity, ethical practices and equality, comprise important tenets of good governance, which is one of the key requirement for raising funds or capital from the public and listing into the stock exchange, as well as for the continuous listing obligations. Unfortunately though, good governance in our country elicits fraud, economic crimes, corruption, and a determined less preference for transparency (especially in the private sector space): the list goes on. And so, lack of good governance is not just a concern for the public sector, but in the private sector as well. The recent PWC survey on the subject indicates that economic crimes erode an organization’s reputation and bottom line (profits). And, as it is in the case of business enterprises practice, if the threat to the bottom line is not enough to worry shareholders and other key stakeholders alike, then probably nothing is.

Can the company deliver value to shareholders with transparency, accountability and integrity? – yes they can. We, at the stock markets have seen, experimented and experienced how compliance to good governance, transparency and accountability have resulted into the increase in enterprises efficiency and in extension this outcome has improved profitability and shareholders value. Listed companies, which by nature are more transparency and accountable are some of the best performing enterprises in our economy and do feature in the large taxpayers category..

One of the criteria for a companies to raise public money and for such companies to continue be listed in the stock market is that they need to develop and embed cultures and values that are aligned to good governance, more transparency and accountability.

We have also seen the experience of companies and business enterprises that have changed from small or mid-sized to great companies whose social and economic contributions to the society are qualitatively and quantitatively significant because of the tough but good decisions that were made to turn the company from a mid-sized private company to a larger public company where efficiently priced capital is relatively easily accessed.

This is also to say Government policies and actions that propels some commercially-run government parastatals through creation of a wider share ownership, democratisation of wealth through equitable wealth distribution or legislative actions that are meant to create wider ownership of key sectors or assets in our economy through listing into the exchange are also meant to provide leadership and example by the government in creating a society that values not only the necessity of democratisation of wealth and finance but also the culture of good governance, transparency and accountability. These are good policies and decisions made by policy makers – it is for those entrusted to implement such policies, legislative actions and decisions to implement timely.

So, when the government puts up policies, make decisions and enacts legislative actions that are meant to broadly empower its citizens through ownership of economic entities/factors of production or enable a broader financial and economic inclusion or any other form of economic empowerment that can be achieved through a wider ownership of economic entities – that is good leadership — not only to the implications on socio-economic policies, but also in propelling a society that values and embraces transparency, accountability, rule of law and good governance.

Why am I relating this to good leadership, what is good leadership in this context? I will explain: I will see good leadership, when I see a sense of selfless as it relates to matters explained above, i.e. in this context, when there is good leadership there is sense of accountability and transparency. There is also courage to progress, even when progress seems impossible. Transparency, accountability, and the courage to pursue these aspects of managing and governing businesses are some of the key ingredients of how corporates and parastatals are to be governed; implementation of these is an indication that such companies or parastatals are destined into being well governed. Good leaders are supposed to create accountability mechanisms for themselves and their teams.
As it usually has been, we — human beings, no matter how good our intents, one must be aware of the consequences of bad decisions that can be made or actions that may be taken. It is on such basis that I see the relevance and importance of creating systems that guard against any form of negative temptations. Listing companies in the stock market and complying to continuous listing obligations (disclosures, sustainability reporting and transparency), apart from affording enterprises with efficient capital to finance their growth, is meant to encourage discipline, against bad decisions or inappropriate temptations that may then erode the potential for significant prosperity or bigger ambitions. Now, experience tells me that these may be a difficult choices to make, but in most cases, it is worth a pursuit, most of the large global and regional companies making with significant brand names that we use, see or talk or relate with on our daily doings, chose this path.
One may therefore ask, can a private company deliver value to its shareholders while exercising such leadership ingredients as: transparency, accountability and good governance? – the answer may be yes; because compliance to good governance, exercising transparency and accountability in many cases increase enterprises efficiency and improves profitability and shareholders value.

20 years – a journey of growth and challenges for the DSE

DSE started operations in 1998 which was the period of active privatization of state-owned entities/enterprises, somehow it has grown (in relative terms) to become the among the few stock markets in the region to achieve significant milestones, as measured by stock markets indicators and context, i.e. achieving the self-listed status (being the third and only three among 27 Stock Exchanges in Africa – after Johannesburg Stock Exchange and Nairobi Securities Exchange), having a market segment that focuses into enabling Small and Medium Enterprises (SMES) as well as new ventures [and loss making enterprises but with concrete plans and strategies for turnaround] to access long term efficiently priced capital, and a significantly growing market –pace-wise, for debt securities listings and trading.
Since beginning, political authorities and policy makers wanted DSE to be one of tools for privatization of state-owned entities (SOEs), targeting dispersing wealth and economic empowerment among many; in the process making DSE an official capital raising market for domestic securities, especially those emanating from private sector, which was to be the engine for propelling our economic growth as well as a listing platform for multi-national companies (MNCs) operating in the market but which are listed abroad—local users and consumers/market of goods and services produced by these MNCs loses the benefits of financing or enjoying ownership, profitability and other such benefits enjoyed by such companies. Or else, these MNCs prefer to take advantage of external political, economic, cultural and legislative situations that attract international issuers and investors, which rightly for us – it is difficult to compete.
The official number of current listings is 28 equity securities, 5 corporate debt securities (though 15 entities have issued bonds and listed) and about 140 Government (Treasury) bonds. DSE’s [sometimes] innovative tendencies has created one of the region’s exchange platform that is aligned to the best international standards and practices as they relate to delivery and settlement (DvP) of cash and securities, using automated trading system that is linked to national payments system and central depositories both at the DSE and Bank of Tanzania, ATS which can be accessed via their mobile phones, and fiscal incentives applying equally to investors and issuers without segregating local investors from foreign investors.
The equity market size as at 30 June 2018 was Tsh. 22 trillion (of which Tsh. 11 Trillion emanates from Domestic Listed Companies and the rest from cross-listed companies); while the debt/bonds market size is Tsh. 9.4 trillion – largely Government bonds, which makes up about 99 per cent of the bonds listed. Average annual turnover is about Tsh. 500 billion for equity instruments and about Tsh. 700 billion for bonds. Investor base for listed equity instruments is about 550,000 and about 2,000 investors for bonds instruments. Relatively, the stats above says – the domestic market Cap is only 10 per cent of the Gross Domestic Product (GDP) while bonds market size is only 9 per cent of the GDP, while the investor base is only 1 per cent of the population – under such a situation one should not feel good because arguably the GDP growth of 7 per cent is not largely shared partly because it is not widely dispersed in the form of formal ownership.
We may wish to know that one pillar of success story for any stock exchange, in any country is its strategic alignment with the particular country’s political agenda – whether it relates with supporting the particular socio-economic agenda, or democratization of wealth and finances, or the local content, or economic empowerment, or deepening the financial inclusion, or market integration and harmonization of legal/regulatory environment to facilitate easy of doing business and trading, etc – whatever it is, our experience have been different — the DSE is not being treated as the primary national engine for financing of economic development. Instead of creating efficient structure, monetary and fiscal, that will encourage companies to access public money, expand businesses, create employment, pay taxes, etc, or using it as a savings mobilization tool and intermediary for access to finance and economic growth, different or alternative policies have been chosen. The consequences of such alternative policies are an economically weak exchange, with a vastly inadequate supply of securities in the market place. This is a big lost opportunity for democratization of wealth and finances, financial inclusion, financial literacy and economic development
As for DSE operatives and stakeholders, we must appreciate that financial markets currently operating in an extremely complex environment, influenced by diverse factors and technologies. Big data, Artificial Intelligent, Climate change, Crypto-currencies, Smart grids, and Shifting geopolitical powers, are becoming our day-to-day reality, and we cannot afford to entertain an idea that we can do otherwise, or we are far from being impacted.
So, as we celebrate the past 20-years, we need to appreciate that in this globalized environment where information travels at the speed of light and manual tasks are automated, technology is increasing the flow of information, and reduces operating and transaction costs for everyone, including the experts. Yes, this phenomenon will not eliminate intermediaries, in fact the value of their advice keeps on increasing as the world becomes more connected; but yet, we need a significant reorientation of our entire operating system: a transition to a system that focuses on the long-term promotion of sustainable social-economic development, instead of short-term profit maximization; inequality and exclusion; and sustainable environmental development rather than ongoing environmental degradation. If we don’t want to drown, literally, we need to balance these perspectives well.

 

The democratization of finance for Economic empowerment

In this article, I basically entertain the idea that ownership of land, home, stocks, bonds and other kind of property ownership as fundamental to the process of creating a market-oriented psychology, a feeling of inclusiveness in the socio-economic participation and equality which contribute to achieving a good/better society. I will also explain the necessity of finance in people’s empowerment.

The history of financial is to a substantial extent a history of deliberate government policies to disperse financial interests and economic ownership across a wider segment of the population. Historically, such policies have helped in the democratization of finance and its content. We seldom stop to reflect/realize the extent to which we live in a society that is structured by financial design, so we can become better and better overtime. This history has brought us, the humanity and society, to certain financial arrangement that we have – most of us, without noticing or being conscious about how these arrangements works for our betterment and in creating a good society.

Yes, a modern market economy seems to many observers increasingly run by a relatively small number of business leaders who are, by the virtue of their financial and general business savvy, becoming excessively influential, now even blamed as lacking the essential humanity. However, at the same time praised as being responsible for setting the pace for the society as a whole – and given their entrepreneurial ambitious and mindset, their aggressions and dispose – as a result, many in the global society – not only those in the bottom of the pyramid, but also in developed industrialized economies – feels like, given the income inequality, the society is putting the economic power and ambitions to a few inhumane at the top who somehow offends the sense of participatory and inclusive society that aspires respect, appreciation and support of everyone.

Yes, it’s agreeable that a society needs to make it possible for relatively few individuals (i.e. political leaders, policy makers, business owners and managers) to use their personal judgement to decide on the direction of societies’ major activities, however if this could be achieved in a manner that is also inclusive, the equilibrium will be much appreciated.

This discontent is nothing new, the kind of loss of sense of humanity among the wealthy and the loss of a sense of individuals participation in society was a concern that occupied by leading economist of the 20th Century, such Friedrich Hayek (the Austrian Economist), in his book: The Road to Serfdom – where for him, it is the excessive government intervention which is a source of the problem for lack of a sense of humanity in our finance and business undertaking, rather than the practices of big business, but then he also wrote of government being captured by big businesses. Excessive reliance on such large controlling entities, Hayek believed, lead to a defeated attitude, the attitude of serfs.

According to Robert Shiller (Professor of Finance and Economics at Yale University), in the modern capitalist system with all its regulatory machinery, it may, if power within it does not become too centralized and institutionalized, be liberated from just such serf mentality. He says, if the right rules are in place, they may pave way for the development of a multitude of creative organizations that can achieve far more than any individual, however free, ever could. These set of rules and assumptions that allow orderly businesses to be initiated and then to proceed represents a kind of social capital that is enabling for creativity.

According to Hayek, dispersal of information about the economy and its opportunities across millions of people – with their different situations, locations, eyes and ears – is where the society and its political and business leaders should focus on. He argues that the society need controls to facilitate, on top of these arrangement, a dispersal of opportunities, but its control as well. This can be achieved by encouraging broader public participation in ownership of factors of production and especially shareholding of corporations, or by giving tax preferences to small firms, or by other means to encourage the dispersal of property holding throughout the population.

Collectively, as a society, we can make a deliberate decision to plan a more broadly based financial market. Such plan to could be modelled after the traditional communism – that we experienced from the 1960s to 1980s, which similarly sought to equalize the ownership and control of economic opportunities. By the way, this idea also reflects on what is known as “ownership society”, referring to a society in which citizenship and responsibility are encouraged by the widespread ownership of and control over properties and assets.

So, how can this be achieved? (i) Land Reform –  as it is, agriculture still constitute the bulk of our national output and employment and may continue to have a front role in years to come, if we must borrow from the knowledge and advise of Professor Joseph Stiglitz (Nobel Laurent Professor, Columbia University and Former Chief Economist of the World Bank) which he specifically encouraged us to pursue, when he was in the country recently. Policies to disperse ownership of capital must be concentrated on land. In the world history, land reforms (and there have been many land reforms in many countries, especially in the nineteenth and twentieth centuries), while sometimes imposed harshly, but usually represent the real social progress, and helped many economies in their growth path. So, whether in Brazil, or Canada, or Ethiopia, or Namibia, or Syria, or Taiwan, or Zimbabwe, or Russia, or South Korea, or China, you mention them, even the United States of America – a good part of the sense of equality and a common good feeling that exists in America today probably owes its origin at least in part to their democratization of wealth via land reforms.

These land reforms, while sometimes imposed harshly for some countries, but they usually represent real social and economic progress in a society, helping the economic growth – especially in the aspects of easy access to finance and financial services, financing of business enterprises, lessening of income inequality, the approach to agriculture and agricultural enterprises, in the creation and generation of wealth within a society, in the increase in the proportion of homeownership, etc. To achieve these attributes of a good society, emanating from land reforms – a good land policy should have provisions on equitable allocation of land. (ii) Homeownership – this is yet another important aspect of democratization of finance, or rather using finance for economic empowerment and creating a good society. Again, going by world history — as societies and economies become more urbanized, governments have embarked on policies that enable large home-owning population as opposed to the development of huge corporations that operate rental properties for the public. This has been the case in the United Kingdom with their concept of “property-owning democracy” in the 1930s, the “home building programs” of 1950s and the “program of selling council houses to renter inhabitants” in 1980s. Similar examples has been in the United States especially under President F.D. Roosevelt’s New Deal where the Federal Housing Administration was created in order to provide for government insurance of new mortgages and creating the “Fannie Mae” to buy mortgages from their originators to support the housing market. So, has been the case with China, with its communist ideology, that later came into the ownership society concept, and in the late 1990s China created a Housing Provident Fund aiming at making home-ownership and affordable housing a priority and a compulsory saving plan.

The idea of encouraging homeownership pops up almost everywhere now, why? Because it promotes the ideals of independence and personal responsibility where families are encouraged to make sacrifices to acquire or build a home in which they are responsible and accountable for, including the use of houses for accessibility to finance and financial services and for supporting other aspects of human well being such as entrepreneurship, business management, etc. Homeownership helps to create a market-oriented psychology that encourages other kind of ownerships and encourages a feeling of participation and equality in society. Thus, a general degree of government support for individual homeownership to many people in a society contribute to the ideals economic empowerment and a better society.

Before I exit here let me link this up with the other idea I have written on in several of my previous articles – that is linking the idea of homeownership, its financing and investments via the Real Estate Investment Trust (REITs). REITs can be one of the tools that could be considered to actualize the goal of providing homeownership and accessible to housing in our country. REITs serves three fold purpose as it relates to this – it provides accessible to housing, while providing an investment platform for retail/individual investors who wants to have an investment stake in the housing/real estate sector. REITs also has the benefit to housing or property developers as it enables them access larger pools of funds that would otherwise be inaccessible while providing a platform for implementation of financial inclusion, economic empowerment and homeownership policies – as means to providing alternative to loans and equity financing, it helps developers against the risk of repayments for loans and/or shareholding dilution in case of equity financing. REITs as a new alternative to construction finance, give access to diversified investment platform by retail and institutional investors while enabling source of financing the homeownership policy and programs. (iii) Ownership of investment portfolio: Ownership in the form of shares/stocks, bonds, or land or home ownership as I had elaborated and argued above, gives people a real sense of participation in society and the economy may be promoted more broadly by policies that encourage more business-oriented ownership, notably ownership of broad portfolios representing the real productive assets of the economy. Reading from Lee Kuan Lew’s From Third World to First, it seems to me that, Singapole, under Lee Kuan Lew, led the way to an ownership society with its Central Provident Fund, a mandatory saving plan for its citizens, with both employer and employee contributions, that allowed them to purchase both local and international investments in stocks/shares, bonds as well as housing for citizens in Singapole. Resulting from this approach, the Central Provident Fund made Singapole different society. People who have substantial savings and assets have a different attitude to life. They are more conscious of their strength and take responsibility for themselves and their families.

Defined (of otherwise) contribution pensions plans, even for us, also encourages people to become owners, albeit indirectly, of investment portfolio, which ostensibly enables pension funds to provide a pension for individuals within the economy, which is an important income for retirement. But other than using pension as vehicles for citizens ownership of investment portfolio, there are several opportunities than can be created to enable citizens to participate in the ownership of investment portfolio. Privatization policies via IPOs and listing of state owned companies in the stock market is one of such tools, the other tool is creating a business and investment environment that promotes enterprises to access public funds via IPOs and get listed in the stock markets – that way enterpreneurs and business owners dilute part of their holding in exchange for an efficient sources of capital from a wider investors base. Another tool can come from policy and legislative approach such as our Electronic and Postal Communications Act (EPOCA) and Mining Acts which requires companies in these selected sectors to sale part of their shares to the wider public and list such companies in the stock market.

Our privatization policy resulted into the listing of seven companies that in total has a combined investor base of over 100,000; so is the case for EPOCA where a single company’s compliance to this law has brought in about 40,000 investors in Vodacom, many of whom are first time investors in the investment portfolio category as local citizens. All these efforts, knowingly or not, are efforts to democratize and humanize finance, to make finance serve people and to encourage people to consider themselves participants in a society built on the principles of finance, and its role in economic empowerment.

Lastly, and I admit, not so common for us, are policies that promotes (iv) employees ownership of business, commonly known as employees shares ownership schemes (ESOP). This is the idea aimed at promoting the ideals and the legacy of better employees’ morale and high effectiveness in work place, while in the process an ownership society is created. This finance or economic empowerment idea is based on the argument that to achieve morale and high effectiveness in the work place, it is helpful if the worker feels loyalty to the employer while at the same time help the company to manage [sometimes] contentious issues of labour-management conflicts/situations which then affects the productivity of the company.

In ESOP, companies encourage their employees to participate in the ownership of the firm by obtaining stock in the company, such a plan motivates employees to work more efficiently and effectively and help create an ownership culture and develop an anti-shirking culture.

Build your Knowledge in Shares Investments

In his 53rd Letter to Berkshire Hathaway’s investors/shareholders, as usual Warren Buffet had a lot of words of wisdom that he had to share with his co-investors. He has been doing the same for the past 53 years through his Annual Letters to Shareholders, which are highly anticipated not only by his co-investors but by many across the world. One among many words of wisdom that his recent letter (released on 24th February 2018) was the words related to the investor psychology, and he says: “seizing the market opportunities offered does not require great intelligence, a degree of economics, or a familiarity with Wall Street jargons such as Alpha and Beta. What investors need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for sustained periods — or even look foolish — is also essential”. 

Basically, what Warren seem to say is that investors should focus on their long term goals and understand it’s not going to be straight line to get there. That the problem of chasing returns and failing to stock to investment plans is the undoing of most investors.

In my recent past articles, I have focused in sharing the knowledge and understanding on the basics of investing in shares. In the process, we learnt that with some basic education and a simple strategy, over the long-term, one can become extremely wealthy by investing in shares. Let us recap again on this important aspect of investment by looking at the two simple, yet inspiring true investment miracle story in the United States and then in Australia that will reveal to us, even if we forget other aspects of investing in shares that we have covered, we may need to remember this. 

If you invested about Tsh. 1 million in Berkshire Hathaway’s (Warren Buffet Investment Vehicle) 53 years ago — that investment is now worth Tsh. 11 billion (that is over 10,000 times the initial investment) with a compounded annual growth rate of 19 per cent per annum for a period of 53 years. Yes, I understand how you may want to interpret this, but it is what it is, and yes, as Warren says — it doesn’t require a great intelligence, or a degree of economics. It requires a great deal of focus on a few simple fundamentals. 

Second example, if you had invested the equivalent of Tshs. 1 million in the listing of Westfield Holdings (an Australian shopping centre group undertaking ownership, development, design, construction, funds/asset management, property management, leasing, and marketing activities, in September 1960 (when Westfield listed in the Australian Stock Exchange), that amount of Tshs. 1 million that inflation has turned into today’s about Tshs. 12 million, and reinvested every dividend and bonus that Westfield paid, your investment would have been valued at about Tshs. 152 billion today! 

The Berkshire Hathaway’s and Westfield experiences are some of the best example of long-term wealth creation by investing in shares. Some years of consecutive increases in Berkshire or Westfield’s overall investment and profits have gone toward generating these amazing investment records. 

And before I forget, it is important we note that not every share does what Berkshire or Westfield has done. There are cases where companies’ fail and their shares disappear from the market and take their investors’ money as well. Plucking one exceptional share out of many may distort what is possible. 

Closer to us (understanding my limits on commenting in either of the DSE listed companies, but for the sake of knowledge sharing and awareness creation — I need to mention something closer to us so it may make better sense), there are many shares on the Dar es Salaam Stock Exchange that have similar successes but are smaller context. And, the message is a simple one. Tsh. 1 million invested in September 1998 in Tanzania Breweries Limited is worth Tsh. 35 million today. A similar example is that of Tanzania Cigarettes Company whose current price is Tsh. 16,300 from Tsh. 410 when it was listed in the DSE in year 2000, in a period of 17 years, investors total investment growth of 40 times or 3,900%. This means that Tsh. 1 million invested in TCC in year 2000 is currently wealth  Tsh. 40 million. (and in both TBL as well as TCC cases, dividends incomes have been excluded in the computation).

The TBL and TCC cases do not exactly compare to either Berkshire or Westfield examples, but they are similarly better examples closer to us that investors may easily compare. 

So, the moral of the above cases is that with some basic education, knowledge and skills coupled with a simple strategy, over the medium to long-term, one can become relatively wealthy. 

With regard to education and knowledge, in our recent articles, we learnt the basic education about investing in shares, we know that shares represent ownership of a company and its assets and earnings. We learnt in detail about valuation and pricing of shares as well as what to look out for when investing in shares. We learnt that the important point in determining the value of shares in a particular company, is on paying close attention to its operating environment as well as its strategy and performance. 

As it relates to analysis prior to investing, we learnt that taking a top-down approach to analysing a company’s prospects involves looking first at the broad macroeconomic, social and political environment. We then focus the analysis to consider the more industry specific or even locational influences on a company’s earnings. We learnt that the bottom-up approach of share analysis begins with the narrow focus of the individual merits of a particular company and then expands to look at the sector, the market and the economy. We also learnt that earnings or profit is the single most important item on the statement.

We learnt about factors that influence return on a share and therefore its pricing. We learnt that company shares tend to track the market and sector or industry peers. We learnt that share prices react to supply and demand. We also learnt that economic statistics such as interest rates, affect the share market. Market sentiment also plays an important role.

Investing in shares in an educated way will give you a great start and an important foundation on your path to financial literacy.

Like anything in life, investing in shares is really quite easy if you are prepared to learn, be disciplined and apply basic common sense to the choices you make. There is no magic formula or quick solutions to becoming well off when buying and selling shares, but education about what a share is and why you would invest in shares is very important before you dive further into the such investments.

Family Businesses: Capital Raising & Listing Opportunity for Stock Markets

Family firms dominate the business landscape across developing, frontier, emerging and developed markets. They are major contributors to both employment and gross domestic product (GDP), accounting for over 50 percent of of GDP in many markets, and range from micro-enterprises to some of the largest listed companies in the world. Recent news published in our local media outlets somehow confirms this — that about 10 families-run businesses’ seem to control a relatively substantial part of the country’s GDP — in the process of their pursuing enterprising motives they generate wealth to their families while at the same time providing much needed jobs, paying taxes, facilitating the availability of goods and services that we somehow need for our living, supporting other businesses in their supply chain, etc. A recent survey by the World Federation of Exchanges (WFE) also supports the same line of argument.

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

Under such circumstances, the integration of family and business can be both a source of strategic advantage, especially in cases where well-run family firms outperform other businesses, but also family-run businesses can potentially be the source of inertia and governance-related challenges, where in some extreme cases may create significant socio-economic challenges to communities and societies in which they operate.
While the peculiar characteristics of family businesses are likely to influence how the family think about raising more capital via public issuance of equity or debt instrument and listing into the exchange, however, these companies will also be influenced by economic, financial and managerial considerations that have little or nothing to do with being owned and managed by a family. Thus, one may find cases where a founder-owned and managed firm, characterised by a strong paternalistic outlook and distrust of outsiders, would probably be reluctant to list on a stock exchange — we face this challenge in our society today, since we established the alternative window for capital raising by Small and Medium Enterprises (SMEs), called the Enterprise Growth Market at the DSE about four years ago — there has not been any of the family-owned businesses that have considered to pursue this route. Our engagements with such families has been somehow futile for now. At the other end though, we remain patiently optimistic that probably third-generation owned and professionally managed companies would consider going public, should listing be needed to sustain the long-term growth of their companies.

Given the prevalence of family firms across markets and the importance of their economic contribution there is value, particularly for us as stock market operators and the supporting eco-system (stockbrokers, financial/investment transactions advisers, nominated advisers, regulators, etc), in understanding the impact of ‘family-ness’ on the public capital raising and listing decisions and therefore engage in identifying possible mechanisms to enhance the attractiveness of equity and debt markets for these firms. For a example in this process I have learned that we need to understand that family firms are a discrete category of businesses with specific characteristics that impact the way they take decisions, perceive their activity and relate to stakeholders and other companies. We need to live with the reality that for the family owners/managers the company is not simply an investment, but also a source of income and professional realisation for the current and future family generations. We need to appreciate the fact that family owners/managers extract a significant amount of non-financial benefits from owning and administering a family firm, benefits such as the pleasure of owning and controlling a company that has their own name, or the benefit of influencing public opinion through their businesses, etc. Because of these, family owners/managers place a premium on maintaining control over the company and having family members involved with the firm.
So, what categorises a family business? According to the recent WFE survey report, family business may be expressed in a variety of ways, though typically includes elements of: (i) ownership: where the founding family has a reasonable ownership stake and the family do exert control through a majority stake in the company and (ii) management: where the controlling family is involved in the management of the company, generally through family members holding senior management or key decision making roles within the firm.

So, we understand that in most family-run businesses, companies are not simply investments, No — actually they are also a source of income and professional realisation of current and future family generations — many families that I talk to are in the position that the family expects future generations to participate in the ownership and running of the business.

We also understand that family owners/managers do extract significant non-financial benefits from owning and administering a family firm and therefore places a premium on maintaining control over the company and having family members involved. Given these kind of understanding — that family firms are source of economic stability and professional realisation for families over generations to come, and that family owners/managers naturally prefers that the firm continues to exist beyond their own direct involvement with the firm — some families therefore, do adopt long term, multi-generational outlook of their companies aimed at ensuring the continuity of the firm — despite the fact that this may sometimes negatively impact the firm and how it is run.

Again, given the emotional and strong sense of attachment that family members may have towards the business, especially when the business produces positive economic results, such attachment reinforces the family’s reluctance to dilute control, and sometimes such aspects induce them to be more risk averse or stimulate members of the family to have strong cohesion among them when they mutually run the company.

And then of course there is a whole issue of cases where family values, which in most cases do underlie family conducts, extend into defining of the firm as a whole, including some situational cases where the traditional expectations of profit maximisation is not one of the top priorities in characterising the way the business is run as well as the general conduct around the business management — cases where the desire to maintain control of the firm outweighs the more standard economic considerations.
Now, all these above together, where/what may be the capital markets proposition and opportunity for such businesses? The truth is, while family businesses differ from other businesses in several ways, they are also motivated by many of the same entrepreneurial motivations, as the case for non-family businesses. For example, retaining of control, resenting the level of external scrutiny, challenges to comply with good governance principles — these factors make businesses, whether family or non-family to perceive going public as a threat to their authority, independence, identity and values.

However, many companies and families that managed to overcome these concerns, and once they have overcame such concerns to the point of listing considerations, then it is in such moments when reasons for going public and being listed in the stock market become so strong. Consideration such as obtaining funding at cheaper terms, funding long-term projects and enable further growth and expansion of business, ensure stability of business, increasing visibility, brand awareness and affirming their competitive advantage, providing business new opportunities, benefiting from fiscal incentives, among other benefits because so attractive to the extent of exceeding concerns over the desire of ownership, control, strong paternalistic characteristics, distrust of outsiders, etc.
Now, in order to facilitate the competing motivations above, we, at the stock exchange and the whole eco-system of capital markets need to consider to explicitly align SMEs and family firms in our listing strategy i.e. addressing issues like adjusting the free-float requirements or strong demands of corporate governance requirements which discourages listing of family businesses. We need to consider adopting modified requirements specifically aimed at family business, for example allowing issuance and listing of dual-share structures (i.e having multiple classes of shares — some of which with more control and voting rights even though they may carry low financial interests) — these that may make listing less challenging for family firms — as it is family firms tends to prefer financing choices that do not open them to external control. This is what translates into preference for use of internally generated funds (such as retained earnings), or preference for debt financing (such as bank funding, and other financial institutions’ loans over equity). Yes, some family firms when are so much in need for equity financing; they would rather have it in the form of private equity, or venture capital fund or even crowdfunding — but not in the listed form.

So, in addition to addressing the concern about loss of control, the other aspect that, we, at the stock exchange and the capital markets in general can do in order to attract family firms in our space is to address the concerns around strictness in listing requirements, compliance to continuous listing obligations as well as the amount of paperwork and prospectuses’ content requirements.
To conclude, if we can identify the number of family firms in our jurisdiction that are of sufficient size to meet the listing requirements (either in the main investment market or the less restrict requirements for the enterprise growth market); if we can demonstrate that we understand family firms and their specific requirements and work with other stakeholders (such as professional services firms that are dedicated for family business offerings); if we could host forum and sessions that bring family firms and relevant experts in the field to discuss matters of common interest; if we can showcase good examples of other listed family firms in other economies; if we consider to have differentiated listing requirements (including free-float requirements, the permit of issuing of dual-class shares, occasionally allow waivers to allow such firms to move to requisite governance standards over time, corporate bonds markets which serve as a more palatable alternative to listing family firms), and so on — we may be closer to attracting family businesses in our capital market space. This may sound transformative and difficult — may if we can think of it and strike a balance that will ensure the investment public interests are still protected, it is worth a try.

Tips for Investing in Stock Markets

So, you want to succeed in the share market and make a fortune out of it! Probably the answer is: Yes I am ready. Well, but before you proceed any further, you have to map out your action plan for getting there. In this article I  will share with you a few suggestions for the lesser-sophisticated investors on shares and portfolio management.

The first thing you need to consider in deciding on whether you are ready to invest in shares is to look at your current circumstances. Some of us have goals, which are a good start, but we need to see if we can actually afford the investment required to realize our goals. In other words, you need to determine if you have the spare/surplus cash to make investments in shares.

Thus, you need to construct your personal balance sheet and seek answers to some important questions to see where you stand.
Only once you have paid off all your short-term debts and paid for all you important expenses and you still have income (savings) left-over should you consider investing in shares. Therefore, first thing you need to consider, is to settle your expenses and  pau outstanding high interest debts. This is not a rule but it is a prudent advice because if you have debts that costs you say 20 per cent in interest per annum and if you invest in shares, your shares investment is growing at more than 20% per annum and that, at some stage you can sell the share to repay the debts and still remain with some profits, you are then doing very well, but this is often difficult to achieve and thus it is advisable or rather recommendable for you to take a simple approach, which says invest your savings, do not borrow or get into debts trying to make a share investment – because the moment you do that, it then amounts into speculation. I know some retail private individual investors who in often cases take this approach during Initial Public Offering (IPOs); where they borrow from banks with the speculative motives that after the IPO prices will go up and they will then be able to liquidate their investment shares, pay the debt and retain some profits


So, the first step is to look at your current financial position, i.e., your personal balance sheet. You will note that the assets have been listed in the order of liquidity. This gives a picture of which assets you can quickly convert to cash. Liabilities are obligations that you are required to pay. Whether it’s a personal and/or business loan payments, it’s an amount of money you have to pay back (sometimes with interest).

Having done that, you then need to have a closer look at your attitude towards risk. This will help you see where you would like to be in the future.
So, what kind of things do you need to look at to see where you are now?
Here are some points you need to consider:
• Age and time remaining before retirement – how much time do you have to achieve your goals?
• Occupation and employment status – do you have job security and a reliable income, or are you self-employed or a pensioner?
• Standard of living – what are your ongoing requirements for an enjoyable standard of living, including personal belongings, holidays and luxury (entertainment) items? Are you comfortable now? Are you able to budget?
• Family and dependents – do you wish to provide for your children and dependents’ education or for other needs?
• Need for financial independence – do you have a strong need for financial independence and don’t wish to rely on a pension upon retirement?
• Personal control – how much control do you like to have in managing your financial situation?
• Insurance – do you have adequate insurance against risks to your property, possessions, income and wellbeing?
I suggest you speak to a financial advisor to assess this if you do not have the objectivity or knowledge to do so.

Funding your share investment
If you’re going to invest money in shares, the first thing you need is…..money! Where is that money going to come from. For many investors, reallocating their investments and assets does the trick.
Reallocating simply means selling some investments or other assets and reinvesting that money into shares. It boils down to deciding what investment or asset you should sell. Generally you want to consider those investments and assets that give you a low return on your money. Re-allocation is only part of the answer; your cash flow is the other part.

Your cash flow refers to what money is coming in (income) and what money is being spent (outflows). The result is either a positive cash flow or a negative cash flow, depending on your cash management skills. Maintaining positive cash flow helps to increase your net worth.
In the mix of it, it is important that you set the right expectations and learn what to expect from the share (stock) market, learn to evaluate and analyze businesses that you intend to invest into. Most of these information and data can be obtained from the companies’ published financial statements; also company news and releases might assist. Historical precedents and information related into it are also things to consider, as it is history tends to repeat itself in the share market.

Market Psychology
Market psychology is the overall sentiment or feeling that the market experiences at any particular time. Greed, fear, expectations, circumstances, etc are all factors that contribute to the market’s overall investing mentality or sentiment.
While financial theory describes situations in which all the players in the market behave rationally, such theory, however, do not account for the emotional aspect of the market that can sometimes lead to unexpected outcomes that can’t be predicted by simply looking at the fundamentals of the economy, or the underlying performance of the company, etc.
However, analysts normally use trends, patterns and other indicators to assess the market’s current psychological state in order to predict whether the market is heading in an upward or downward direction.

Market sentiment
Market sentiment refers to the psychology of market participants, individually and collectively. It represents the general prevailing attitude of investors as to the anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, financial performance reports, seasonal factors, as well as national and world events.
Market sentiment is perhaps the most challenging category because as it is, it matters critically, but we are only beginning to understand it. Market sentiment is often subjective, biased, and obstinate. For example, you can make a solid judgment about a share’s future growth prospects, and the future may even confirm your projections, but in the meantime the market may simply decide to dwell on a single piece of news that keeps the share artificially high or low — albeit this can especially be prevalent in emerging and developed markets. And you can sometimes wait a long time in the hope that other investors will notice the fundamentals.
Market sentiment is monitored with a variety of technical and statistical methods such as the number of advancing versus declining stocks and new highs versus new lows comparisons. A large share of overall movement of an individual stock has been attributed to market sentiment. In the last decade, investors are also known to measure market sentiment through the use of news analytics, which include sentiment analysis on textual stories about companies and sectors.

Emotions and perceptions
Share prices can change because of perceptions, greed, hype, momentum, fear, etc. Sometimes the stock market can be seen as the sum of the emotions of its human entrepreneurs, subject to the arbitrary human whims and flights of fancy.
According to a Wall Street saying, only two influences are at work on the stock market – “fear and greed”. Most of the time they are in equilibrium, with greed only staying dominant long enough to produce the long-term trend depicted on a share market graph. The 1999 – 2000 technology boom was a good example of greed taking over. The Internet, and anything connected with it, became the spice of the moment and the technology shares skyrocketed in price. But, when it all got too much later in the year 2000 — some of us may recall what happened in the Nasdaq Stock Exchange — where most internet and tech companies were (are) listed.

Bullish & Bearish
This is the other side of hype and momentum of the market. If investors expect upward price movement in the stock market, the sentiment is said to be bullish. On the contrary, if the market sentiment is bearish, most investors expect downward price movement. When a bear market sets in, fear takes share prices downward, to a long, bitter winter of discontent. During a recession nobody wants to buy shares. Only in hindsight do people realise that it was the best time to buy shares. This is what “value investors” the like of Warren Buffet operate and recommend.

Seasons
“To every thing there is a season, and a time to every thing, and a season for every activity under heaven”, says the author of the Book of Ecclesiastes in the Bible. He could have been talking about the stock market as well!
Most stock markets show a distinct seasonal pattern. It has a regular seasonal correction at the end of the financial year. This is normally followed by a major seasonal rallies i.e. beginning of the tax year, periodical financial reporting seasons, etc. The stock market is more likely to rise and fall in certain months than in others; i.e. portfolio or fund managers tend to withdraw from the markets at the end of each tax year to balance their holdings. They start spending again at the beginning of the subsequent tax year.

Market cycles
Besides psychological factors that determine market prices and rates of return on share investments, there is a totally different concept to consider and that is the market cycle.
Stock market cycles are the long-term price patterns of the stock market. It is very important for investors to know where the market is in its cycle at the time when they will be investing, particularly if they are entering the market for the first time.
Two key types of models that have been developed to help you to understand at what stage of the cycle the market is in are: macroeconomic models and intuitive market models. For either type of model, the two most important factors in determining the market cycle will be the interest rates and monetary policy. To determine whether interest rates are favorable for share market investment, it is necessary to calculate their ‘real’ level (which is the current six-months treasury bills rate, minus underlying inflation).
Along with macro-economic models, the other way to identify and predict market cycles is intuitive market models. Intuitive market models are imprecise and rely on subjective inputs from the investor – for example, where you think you are in the market cycle. Although they are partially based on economic conditions, they are mainly based on an intuitive understanding of how markets work.

As we stated in previous pieces, when you buy a stock, you are not buying a lottery ticket., rather, you are actually becoming a part owner of the real operating business. The value of your shares will rise or fall based on the company’s perceived fortunes. Many stocks also pay dividends, which are periodical distributions of profits back to the shareholders. By investing in a stock, you are making the shift from being a customer to being an owner. For example, if you buy a beer or cigarette, you are a consumer of TBL or TCC products, but if you buy a TBL or TCC stock/share, you are buying your ownership of the company — and a entitled to a percentage of its future earnings, as well as its assets.
What and how much can you expect to earn as an investor of a stock? Much as this is impossible to predict, but we can use the past as a (very) rough guide on the potential earnings and gains. Historically, for those stock markets with long time of existence and experience and bigger markets, the stock market has returned an average of 10 per cent a year over more than a century. But of course if these figures are looked separately, they may seem deceptive because stocks can be wildly volatile along the way — in the process of averaging 10 per cent per annum. It is not unusual for the market to fall by more than 20 or even 50 per cent in a period of time and every few years. Analysts and observers tells us that on average the market is down once in every four years. You need to recognise this reality so you wont be shocked when stocks tumble — and so you will avoid excessive risks. However, as you do that remember and usefully recognise that the market has made money three out of every four years and continues this tend even today.
In the short term, the stock market is entirely unpredictable, despite the claims of some “experts” who here and there would pretend to know what is going on about the market! A vivid example which in more recent is that in January of 2016 the S&P 500 sank by 11 per cent — but then it made a U-turn almost during that same period and rose nearly as rapidly. Same has been in the past few days where it lost by more than 7 percent — but then changes to the positive can be seen even today — for those who follows up; why? some analysts and long time followers of stock markets trends say — there are no good reasons for the decline. equally there are no good reasons for the recovery. This is true even in our market, a keen observe would have noticed this, albeit for us the context may be a bit different given our market size and lack of sophistication.
Despite the above, in the long run, nothing reflects economic expansion or the shrink thereof more than the stock market — that’s why it is called the barometer of the economy. As it is, overtime the economy and population grow, and workers become more productive. The rising economic tide makes businesses more profitable and predicted to trend the same in the future, which then drives up the stock prices. That explains why markets soared in the twentieth century, despite all wars, crashes and crisis. By now I presume that you might have guested or reasoned out why it pays to invest in the stock market in the long term. This seemingly fact of matters makes me almost suggest that: over the long term stock markets news will be good. If you can buy into this seemingly factual statement, it will help you to be patient, unshakable and ultimately relatively rich by investing in stocks of companies listed in the stock market — and of course choices of stocks to invest into matters as well.
So what exactly does this mean — it means that if you believe that the economy and businesses will be doing better 10 years from now it them makes sense to allocate a portion of your investments in the stock market. Of course, it is undesirable that it may be a bit of a challenge to stay in the market long enough to enjoy these gains, given that needs for money for individuals may be abrupt as emergencies may dictate. In all these, the last thing you want is to be a forced seller during a prolonged bear market. But then how can you avoid such fate? For a start — either don’t live beyond your means or saddle yourself with too much debt/loans — both of these are reliable ways to putting yourself in a vulnerable position. As much as possible try to put a financial cushion, you will reduce the chances of raising cash by selling stocks when the market is crashing. Of course one way of achieving such an objective is to invest in fixed income instruments such as bonds — given their contractual nature of paying fixed amounts in pre-agreed periods.

When you buy a bond, you are basically making a loan to a government (if it is treasury bonds), or a company (if it is corporate bonds), or a municipal (if it is municipal bonds) or some any other entity on that matter. As it is the financial markets loves to make the idea of investing in such financial instruments as bonds seem complex, but if you look at it — it is pretty simple. Bonds are loans. When you lend money to the central government, it is called Treasury bonds, when you lend money to a city, or a municipal or a local government, it is a municipal bond, when you lend money to a company such as NMB Bank, or Exim Bank or TBL etc, it is a corporate bond. And when you lend money to a less dependable company and hence a high risk company, it is called a high-yield bond or a junk bond. You see! it is that much simple — do not let anyone tell you how complex the concept of bonds is, simply because it is not.
So, how much can you earn as money lender (or often called a bond holder)? — the answer is, it depends. In normal cases, lending money to the Government you may not earn as much — why? because there is little chance that the government may renege on its debt — why? because it is significant repetitional matter when a government fails to honour its bonds obligation. It basically impact the overall cost of funding in the economy. I said in normal cases, however, we have observed many a case where loaning money to some governments is a way riskier that loaning money to a corporate entity. So the interest rates in such governments’ treasury bonds ought to be much higher because of the risk related. Now, it is unfortunate for such a situation to happen, because as I said earlier it impact interest rates (cost of funding) in all other financial instruments in the economy — why? because yields in government bonds are used as benchmarks in arriving at other financial instruments’ interest rates. However, whatever the case — these are matters of trade-offs between risk and reward. A good analogue of what I am saying here as it relates to risk and return would be that of one government (or entity) asking you to cross a traffic-free rural road somewhere in Butiama on a sunny day, and another government (or entity) is asking you to cross a busy high-way in the city of Dar es Salaam on a rainy stormy night while wearing a blindfold — now that is too dangerous. That is how one need to consider the issue of risk as it relates to the entity that issues bonds.
What it is however, is that normally the odds that a company will go into bankruptcy and fail to pay its bondholders are higher than the odds that a credible and well governed government will default on its loans. So the company has to pay a higher rate of return to its bondholders compared to a government. This addition amount of interest rate is called a risk premium. Similarly, a young and small company in a risky business that wants to borrow money by issuing a bond has to pay a higher rate than a blue-chip, good brand and established company. So, whenever contemplating on investing in bonds consider this fact as well. In other parts of the world rating agencies like Moody’s, Standard & Poor, Fitch, etc provide ratings for companies, and these rate grades are used to benchmark risks and hence interest rates.
The other critical factor for investments in bonds is the duration of the loan. The Tanzania government will currently pay you about 10 per cent per annum for a 2-years bonds; 12 per cent per annum if you lend the government for 5-years. If you lend that money for 7-years, 10-years and 15-years the government will pay you 14 percent and 15 per cent respectively. And of course there is a reason why you receive a higher rate for lending the money over a longer period: it is riskier.
So, why do people want to own bonds? For a start, as we indicated last week and in the opening of this article — they are much safer than stocks. That’s because the borrower is legally required to repay you, and at the agreed rate and periods. If you hold a bond to maturity, you will receive all your original loan (called principal) bank, plus the interest payments — unless the bond issuer goes bankrupt. As an asset class, statistics — globally, indicate that bonds deliver positive calendar-year returns approximately 85 per cent of the time.

Pooled Investment Funds — A tool to unlock long term financing sources (II)

This is second piece in a series of articles on pooled investments. They aim at informing us how other countries are using these tools to effectively mobilize financial resources for investment in productive activities within the economy – we should see this as a possibility for us as well. And so, in my last week’s piece, I started by saying – imagine if you are employed and earn a regular income, but could not rely on soundly-run pension funds, imagine how fearful you might be as you grew older, not knowing where your income was going to come from? I further said you probably are one of those who save their money under the mattress as one of the ways to reduce this fear. I further said — wouldn’t it be far better to save your money into the fund that invested that money in industries, projects, enterprises and in various assets classes within the economy in the form of shares, bonds, etc producing steady accumulation of wealth, which ends up benefitting you and (indirectly) others whose benefits ends up to you again, instead of saving under the mattresses?

In that article, I covered the concept of pensions – being one of the forms of pooled investment funds. Today, I will delve into the concept of collective investment schemes, but before I go there – I will touch on some further aspects of pension funds, this follows comments I received from readers of my last week’s article. So, yes there are “unfunded schemes” and “funded schemes”. Unfunded pension schemes, which are also termed as ‘pay-as-you-go” are schemes where the money put aside each month by employees and employer pays the pensions of current pensioners. This means that there is not a pot of accumulated money to pay pensions, and if there is a shortfall, it is met by the Government from its treasury. Looking around the world we see that the majority of state-funded pensions so far have been pay-as-you-go schemes, but many countries are in the process of reforming their pensions provisions as unfunded schemes have begun to prove unsustainable with the increasing age of the population and its increasing nature of dependency on the state.

Then there are “funded schemes” – these are designed so that the employees, and employers, make regular payments to a pension fund, which will (hopefully) grow and provide future pension income. Many employers run such schemes for their staff, one of the benefits of this form of scheme is that it can be designed as a low-cost scheme so that even very small and medium sized companies with just a handful of employees can also contribute to it without having to establish their own internally managed/administered schemes. The increasing longevity and the sharp fall in return on pension fund assets particularly in these past few decades have caused pension deficits (pension deficit arises when the actual amount of assets expected to be in the pension pot at retirement is not sufficient to pay out of the pensions required) in a considerable number of companies providing a kind of funded pension called “defined benefits pensions” – for the purpose of this article, I wouldn’t prefer to elaborate further on the workings of such schemes.

The last concept my readers allured into is the one known as “defined contribution” – this type of pension is becoming increasingly prevalent because it offers lower risk of unexpected liability to employers. The defined contribution pension is a pension where the contributions (from employees and employers) are fixed, but the actual pension paid out is linked to the return on the assets of pension fund and the rate at which the final pension fund is annualized; at the retirement age, an annuity is generally purchased with the accumulated funds to provide the pension. Under this arrangement, as investment performance before retirement and annuity rates fluctuates with the economic and financial volatility, it is entirely possible for the pension to be less (or more) than expected. And therefore, there is no obligation for the employer to guarantee a level of pension under defined contribution. If the fund underperforms while the employee is still working and saving in the scheme, or administrative costs rise, there will simply be lower pension. In other words, the risk of poorly performing investments is transferred to the prospective pensioners.

As it were, my intent for writing on this topic of pooled investment is to engage us on a possibility that someday in the near future these issues may be reflected in our country’s financing and investment policy frameworks and therefore we can somehow strategize the operability as we pursue our socio-economic development and growth; so, I would rather focus on the investment side, not the administrative or operations side as I have just done above under the request of my readers. Going forward, I’d request my readers to appreciate this. I will now go into elaborating the concept of collective investments, read on:

The idea of collective investments (pooled funds) has been around since around 1800. Its concept is simple; money from a group of people is gathered together and put into a range of investments. For investors this reduces the risk of total loss for all contributions by enabling them to invest in a far wide range of investments than they could individually; for corporate enterprises and the government it is source of sizable funds available for investing in productive investments. Worldwide, collective investments are responsible for a vast amount of funds, according to the Investment Company Institute (www.ici.org), worldwide mutual (collective) funds were at an astonishing US$ 28 trillion administered by about 70,000 funds by the end of 2016. Like the case with pension assets, where out of US$ 40 trillion global size, about 65 per cent is held by the United States pensions; again, the United States’ share of the global mutual funds’ assets is about 55 per cent (i.e. US$ 15 trillion), this being about 80 percent of the US Gross Domestic Product. These US$ 15 trillion US mutual funds’ assets are administered by about 9,500 funds. In our case, ever since the Government championed the concept of mutual funds/unit trusts about 15 years when the Unit Trust of Tanzania (UTT) was established, there has not been another notable such institution, we hence have only UTT as fund manager managing about 5 funds/schemes worth about Tsh. 250 billion (US$ 110 million) –about 0.25 per cent of our GDP. I wish private sector (i.e. insurance companies, banks, securities brokers, etc) could be in this space.

Collective investment offers some significant advantages to the investor, I will mention some of the advantages:

  • First, a more diverse portfolio can be created. Investors with a relatively small sum to invest, say Tsh. 5,000,000 (five million) would find it difficult to obtain a broad spread of investments to invest into without incurring high transaction costs. If, however, 1,000 people come together and each put Tsh. 5 million into a fund, there would be Tsh. 5 billion available to invest in a wide range of securities. A large fund like this can buy in large quantities, say Tsh. 100 million at a time in different assets classes (shares, bonds, money market instruments, etc) and in different companies, thereby reducing dealing and administrative costs per Shilling invested.
  • Second, even very small investors can take part in the stock markets and other financial markets – hence putting into practice the policy of financial inclusion and economic empowerment among many in the society. It is possible to gain exposure to the equity, bonds or other markets by collective investing for small amount (e.g. Tsh. 10,000 per month).
  • Third, professional management removes the demanding tasks of researching, analyzing and selecting shares and other securities to invest on, then going into the market place to buy, the time-consuming process of collecting dividends (no wonder we have many cases for many years of unclaimed and uncollected dividends in many of our listed companies), etc, all these nuances can be dealt with by handing the whole process over to professional fund managers.
  • Finally, if our capital account was fully liberalized, such individual small investments from individual retail investors’ investments could be made into exotic and far-flung markets ranging from South American companies, to US hi-tech industry, to Chinese technology companies, etc without the risks and complexities of buying shares direct. Collective funds run by managers familiar with the relevant country or sector can be a good alternative to going it alone.

These advantages, considerable as they are, but they can often be outweighed by the disadvantages of pooled funds, which includes high fund management costs and possible underperformance compared with the market index. Also, collective investments many lose any rights that accompany direct investments in shares, bonds and other such asset classes e.g. money market instruments – Treasury bills, bank fixed/term deposits, etc; for investment in shares, this include the rights to attend in the company Annual General Meetings and voting for appointment of directors, dividends payments, appointment of auditors, etc. We will continue next week.