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Mwania

  1. 1. AFRICAN UNION UNION AFRICAINE UNIÃO AFRICANA REPORT OF THE FEASIBILITY STUDY ON THEESTABLISHMENT OF THE PAN AFRICAN STOCK EXCHANGE Department of Economic Affairs December 2008
  2. 2. Table of ContentsTable of Contents..............................................................iExecutive Summary........................................................... iv I Introduction: From regional stock exchanges to an African stockmarket......................................................................... 1 I.I COMPREHENSIVE VIEW OF STOCK EXCHANGE DEVELOPMENT IN AFRICA ...................2 I.II TOWARDS THE INTEGRATION OF AFRICAN FINANCIAL MARKETS..............................3 I.III METHODOLOGY.........................................................................................................4 I.IV ORGANISATION OF THE STUDY.................................................................................5CHAPTER 1: ANALYSIS OF THE CONTEXT OF THE INTEGRATION . 6OFAFRICAN STOCK EXCHANGES...........................................6 1.1 THE IMPROVING MACRO-ECONOMIC CONTEXT IN AFRICA.........................................6 1.2 DEVELOPMENT OF THE FINANCIAL SECTOR............................................................. 10 1.3 OPINIONS OF STAKEHOLDERS ON THE ECONOMIC AND FINANCIAL SITUATION.......14 1.4 ANALYSIS OF THE LEGAL, INSTITUTIONAL, FISCAL REGULATORY AND TECHNICAL ENVIRONMENT ...........................................................................................................15 1.4.1 Different legal systems..................................................................................... 16 1.4.2 Regional attempts to harmonise business law and insurance activities........16 1.4.2.1 In the banking sector.................................................................................17 1.4.2.2 In the stock exchange sector .....................................................................17 1.4.3 An unsuitable fiscal context..............................................................................20 1.4.4 A divergent technological environment...........................................................21CHAPTER 2: ANALYZING THE PERFORMANCES OF EXISTING STOCK................................................................................23 EXCHANGES .............................................................. 23 2.1 GENERAL PRESENTATION OF AFRICAN STOCK EXCHANGES ....................................24 2.1.1 Structure of African stock exchanges............................................................... 24 2.1.2 Players in the stock exchange...........................................................................25 2.1.2.1 Issuers........................................................................................................ 25 2.1.2.2 Investors.....................................................................................................26 2.1.2.3 Brokers.......................................................................................................27 2.1.2.4 Central depository, clearing house and settlement bank............................27 2.2 COMPARATIVE ANALYSIS OF THE PERFORMANCES OF AFRICAN STOCK EXCHANGES ........................................................................................................................................28 2.2.1 Equity markets..................................................................................................28 2.2.1.1 Capitalisation............................................................................................. 28 2.2.1.2 Number of listed companies ..................................................................... 30 2.2.1.3 Volume of Transactions.............................................................................32 2.2.1.4 Liquidity ratio of the market or rotation rate............................................32 2.2.1.5 Yield..........................................................................................................33 2.2.2 Bond markets..................................................................................................34 i
  3. 3. 2.2.2.1 Capitalisation ............................................................................................ 35 2.2.2.2 Volume of trade or transactions.................................................................35CHAPTER 3: EXAMINING THE VARIOUS OPTIONS FOR THE .......37 INTEGRATION OF AFRICAN STOCK MARKETS.....................37 3.1 BRIEF STUDY OF STOCK EXCHANGE ASSOCIATIONS .................................................38 3.1.1 Experiences of stock exchange integration in Africa....................................... 39 3.1.1.1 Southern Africa..........................................................................................39 3.1.1.2Arab Maghreb Union.................................................................................. 40 3.1.1.5 East African Community (EAC)................................................................42 3.1.1.6 West Africa................................................................................................ 42 3.1.2 Experiences of stock exchange integration in the rest of the world.................43 3.1.2.1 ASEAN...................................................................................................... 43...............................................................................44 3.1.2.2 NOREX.....................................................................................................44 3.1.2.3 EURONEXT .............................................................................................45 3.2. MODELS SUGGESTED FOR THE PAN-AFRICAN STOCK EXCHANGE ..........................46 3.2.1 Option 1: National / regional stock exchanges and a Pan-African stock exchange ...................................................................................................................46 3.2.1.1 The realisation of this option requires overcoming challenges.................47 3.2.2 Option 2: National/regional stock markets with an existing African Financial Market as a Continental Platform.............................................................................47 3.2.3Option 3: Integrated transaction platform, while maintaining national/regional stock markets................................................................................ 48 3.2.3.1 Advantages of this model...........................................................................49 3.2.3.2 Disadvantages and costs of this model...................................................... 49 3.2.4 Option 4: Integration through transaction on the Internet.............................. 49 3.2.4.1 Advantages of this model...........................................................................50 3.2.4.2 Disadvantages and costs of this option...................................................... 50 3.2.5 Option 5: Gradual integration ........................................................................ 50 3.3 SUMMARY OF BENEFITS OF THE INTEGRATION OF AFRICAN STOCK EXCHANGES . 51 3.4 SUMMARY OF THE CHALLENGES TO OVERCOME FOR THE INTEGRATION OF STOCK EXCHANGES IN AFRICA ................................................................................................ 52 3.4.1 Legal and regulatory differences......................................................................52 3.4.2 Multiplicity of regulators..................................................................................52 3.4.3 Differentiation of products............................................................................... 53 3.4.4 Variances in accounting standards and fiscal systems.................................... 53 3.4.5 Information costs and prejudices of country of origin..................................... 53 3.4.6Fragmentation of trading, clearing and settlement systems............................. 54 .................................................................................................................................. 54 3.4.7 Technological aspects...................................................................................... 54 ......................................................................................................................................54 3.4.8 Governance.......................................................................................................54 3.4.9 Implementation of credible contractual engagements..................................... 54 3.4.10 Lack of political will......................................................................................55 3.5 WAY FORWARD ......................................................................................................55 3.6 CONCLUSIONS ..........................................................................................................57 ii
  4. 4. CHAPTER 4: GENERAL CONCLUSIONS AND RECOMMENDATIONS...59 4.1 CHOICE OF AN OPTION FOR INTEGRATION OF AFRICAN STOCK EXCHANGES ..........59 4.1.1 Harmonisation of the regulatory framework....................................................59 4.1.2 Adapting to international standards.................................................................60 4.1.3 Harmonisation of securities taxes.................................................................... 60 4.1.4 Lifting of exchange control and harmonisation of payment systems ..............60 4.1.5 Incentive for the development of strong companies and a dynamic private sector......................................................................................................................... 60 4.1.6 Promotion campaigns.......................................................................................61Bibliography ................................................................ 63APPENDIX: RECAP TABLE OF THE FINDINGS OF THE SURVEY ......65 List of TablesTable 1.1 Domestic Savings (% of GDP).................................... 8 Table 1.2 Foreign Direct Investment, net inflows (in millions of current$US).......................................................................... 11Table 1.3 Opinion on the creation of a Pan African Stock Exchange . . .14 Table 2.1 Annual Market Capitalisation, 2002-2006 (US $ billion, endof period).....................................................................30Table 2.2 Number of listed companies, 2005-2006 .....................31Table 2.3 Yield, 2002-2006 (in millions of US $, end of period) .......34 Table 3.1 Preferences for various models of the Pan-African stockexchange..................................................................... 52Table 4.1 Opinion on legislative reforms .................................62 iii
  5. 5. Executive SummaryWithin the frame work of its mandate on the economic and financial integration ofthe Continent, and pursuant to the decision of the Assembly of the African Unionin Khartoum, the Sudan, of January 2006, the African Union Commission carriedout this study on the feasibility of an African Stock exchange. Faced with thedependency of African countries on external resources for financing theirinvestments and their development; confronted with a multitude of limited andinefficient national stock markets, African leaders, in keeping with thecommitments made in Abuja in June 1991, requested the African UnionCommission to envisage the establishment of a continental stock market.The substantial progress made in Africa since the beginning of the 21st Century,especially in the macroeconomic and financial reforms undertaken since the lateeighties, and an international economic situation characterized by the rise in theprices of raw materials, has created the bases for the integration of Africanfinancial markets in general and stock exchanges in particular.At the end of 2006, the capitalization of all African stock exchanges, the mainindicator of trading activity, represented less than 2% of the world total, and wasequivalent to that of the 15th world stock exchange. Apart from the JSE Limited,which was the 19th world stock exchange in 2006, all the other African stockexchanges are characterized by their low liquidity and the volume of transactionsthey record.In order to make up for the inadequacies observed in the functioning of the 23existing stock markets, the managers of these institutions, through the AfricanStock Exchange Association or their respective Regional Economic Community,have already initiated reflections and actions for the integration of the stockexchanges. In fact, the majority feel that financial integration, ensuring thecirculation of capital at regional and continental level, will provide greater visibilityand a larger area of arbitrage for those seeking capital; African, as well as,foreign investors.The study conducted by the Commission’s Economic Affairs Department, mainlythrough a survey carried out in November and December 2007, by means ofquestionnaires distributed throughout the Continent and discussions with thedifferent stakeholders concerned with stock market development confirmed thehigh level of challenges to be addressed in order to establish close alliancesbetween existing stock exchanges and create a harmonized African stockexchange.Taking into account the many challenges (political, institutional, legal, regulatory,technical, economic, financial, fiscal, etc) and based on African and foreignexperiences in the harmonization and unification of stock exchanges, the AfricanUnion Commission proposes five options for the integration of African stockexchanges, some of which are variants of the same type of model: (i) Option 1:national/regional stock exchanges and a Pan-African stock exchange; (ii) Option2: national/regional stock exchanges with an existing African stock exchange as iv
  6. 6. a continental platform; (iii) Option 3: an integrated transaction platform, whilemaintaining national / regional stock exchanges; (iv) Option 4: integration oftransactions through the internet; (v) Option 5: gradual integration.To evaluate the detailed advantages and costs of each of these options, acomprehensive study will undoubtedly be necessary. However, in order tofacilitate the realization of this additional study, bearing in mind the ultimateobjective of continental financial integration and the necessary pragmatism forsuch a project, it important that institutional experts ( stock exchanges, regulatoryorganizations) and the economic agents concerned, as well as Africangovernments, decide on 2 or 3 viable options on which this subsequent studycan be carried out.On the whole, the integration of stock exchanges in Africa will be an extremelylong process requiring significant structural changes, the requisite technologyand infrastructure, appropriate legal, regulatory and accounting frameworks andmost importantly, the political will. Based on the results of the feasibility study, allAfrican stakeholders in the development of stock markets in particular, andfinancial markets in general, should make credible recommendations for allactors, that can be implemented according to a pace to be determined. v
  7. 7. I Introduction: From regional stock exchanges to an African stock market1. During the 6th Summit of Heads of State and Government of the AfricanUnion held in Khartoum (Sudan) in January 2006, it was resolved that theproposal to set up a Pan-African Stock Exchange would be considered by theAfrican Union Commission and the conclusions of this study presented to asubsequent summit. This decision was taken in the light of the Abuja Treatyadopted in 1991, which plans on creating national and regional stock markets, aswell as the free flow of capital in order to promote economic development andintegration. This process is supported by projects underway or geared towardssetting up regional stock exchanges. The African Stock Exchanges Association(ASEA) set up in 1993, also aims at the regional harmonisation and integration ofexisting African stock exchanges.2. Stock exchanges have a reputation for encouraging greater economicdynamism and producing higher levels of wealth by providing investors with theopportunity to share the risks and profits of enterprises. Thus they improvemarket mechanisms in order to raise and allocate scarce financial resources,mobilize local capital, attract foreign direct investment and allocate resources toprojects likely to be beneficial to the economy.3. The stock exchange is an alternative for securing capital at a relatively lowcost in comparison with bank loans, and may help the government and privatesector to mobilize capital to finance a wide range of infrastructure therebysatisfying social needs as well as growth, and jobs. Stock markets are perceivedas a tool for the promotion of the financial sector and the development of privatesavings, thereby supporting the non-monetary funding of the economy and thefight against inflation.4. In the wake of other studies previously carried out by the Organisation ofAfrican Unity, notably during the Forum on the promotion of the integration anddevelopment of financial markets (Grande Baie, Mauritius, 1997), the UnitedNations Economic Commission for Africa (ECA), the African Stock ExchangesAssociation and the International Monetary Fund1, this study sets out to examinethe necessity, constraints and viability of an efficient financial market withinAfrican countries and regions and to explore possible scenarios for setting up anintegrated stock market in Africa. This study is designed to establish an Africanfinancial zone opened to economic operators on the continent and the world. Ithas carried out an exhaustive analysis of all the technical aspects conditioningany modern stock market, including the location, rules and regulations governingsuch a market and its operators.1 IMF, Stock market development in Sub-Saharan Africa: Critical issues and challenges, WP/07/209 1
  8. 8. I.I Comprehensive view of stock exchange development in Africa5. The number of African stock exchanges has more than doubled since thebeginning of the 1990s from about 10 (ten) to 23 (twenty three). TheJohannesburg Stock Exchange (JSE) is the first stock market ever set up inAfrica, in November 1807, against the backdrop of the discovery of gold. Acertain number of stock exchanges were set up in the wake of the independenceof African countries in the 1960s. The last stock market that has been launchedis the Stock Exchange of Central Africa (BMVAC), in August 2008 after havingbeen officially set up in 2003.6. It is also worthwhile to mention the existence of over-the-counter (OTC)markets in some countries. This type of stock market is characterized by a limitedand select number of operators, who define on their own or through a financialbroker, rules governing their transactions, and appears more like a stage towardsthe creation of a stock market open to the public. Historically, over-the-countermarkets have preceded the establishment of stock exchanges. Such a marketoperates notably in The Gambia and Gabon and has just been set up in Rwandaparticularly for its bonds. It is also generally used after the explicit authorization ofthe regulatory authority, in the stock markets of listed securities for someoperations often on non-traditional financial products such as by-products.7. To a greater extent, the creation of stock exchanges in Africa was doneunder the impetus of the political will to mobilize national resources, notably aspart of privatisation programmes which concerns an important sector of publicenterprises, besides attracting foreign investors. Kenya and South Africa areexamples of countries where bond markets helped to finance infrastructuredevelopment. Stock exchanges also seek to attract foreign investment.8. On the whole, African stock markets represent less than 2% of the worldmarket capitalisation, according to the 2006 data published by the InternationalFederation of Stock Exchanges. The JSE accounts for close to 75 % of the totaland is ranked on the 19th position in the world money market as concerns sharecapital market value. The second stock market in Africa, Cairo and AlexandriaStock Exchange, only represents 10 % of the African total. In general, theperformances of African stock markets are weak and their liquidity is limited.9. Many obstacles hamper the African stock market in particular and thefinancial market in general, including: unfavourable macro-economic conditions(unstable and high inflation, fiscal deficit, public indebtedness, etc.), a restrictedvolume of demand and supply of financial products, a weak volume oftransactions, high taxes levied on financial operations, inadequate infrastructure,narrow financial culture, poor economic governance, etc.10. It is therefore necessary to lift structural barriers and improve the generalbusiness climate in order to ease the establishment of active African stockmarkets. One way forward to develop stock exchange activities and improvecapital raising, especially at the domestic level for investment on the continent, isto integrate existing national and regional stock markets. 2
  9. 9. I.II Towards the integration of African financial markets11. As in other fields, the small size of African stock markets contributes to thehigh cost of operations and hinders their efficiency. In the face of considerableglobal need for investments in Africa and the concomitant existence of countrieswith excess resources and countries lacking resources, the integration offinancial markets may lead to: a better mobilization of resources, available withinand outside the continent (capital invested abroad and the savings of theDiaspora), thanks to a wider choice of securities; a reduction of the interest rate;a stronger level of investment and economic growth; etc.12. In the proposal on the creation of a Pan-African stock market by theAfrican Union in January 2006, it was indicated that the Pan-African StockExchange is not designed « to replace local stock exchanges but to strengthentheir role on the local financial market, and spread the use of financial andmonetary securities throughout the continent owing to its promising financial andeconomic resources”. Thus the shape of the integration at the continental level isto be determined by the choice of the most efficient option and by imagining aprogressive solution taking into account the diversity of African economies.13. The advantages expected from setting-up this market at the continentallevel are identical to those which prevailed for the launch of regional stockmarkets but that have not, so far, been achieved by the latter: increase the depthand the liquidity of the present financial market, attract higher volume ofresources towards investment, promote the modernization and efficiency offinancial operations, develop intra-continental trade and economic growth,promote competition among enterprises on the one hand and between thebanking sectors and the non-banking financial sector on the other, benefit fromeconomies of scale and reduce the administrative burden of internationalenterprises. With new information technologies and globalisation, the stockexchange has lost the features of a fixed structure and basically gained theshape of a mechanism based on transactions likely to emanate from any part ofthe world.14. However, in financial matters where the commitment of operators, and theprotection of the public and stakeholders’ confidence are primordial, realism andpragmatism should feed the process of evaluating and designing the project ofthe Pan African stock market. It falls in line with a comprehensive project ofsetting up African financial institutions (African Investment Bank, African CentralBank and African Monetary Fund) that the African Union is promoting in a bid tofurther the development of financial systems and African economies.15. Africa has already experienced the integration of stock markets, especiallyin West, Central, Southern and East Africa. The results obtained fail to meet theexpectations. But this lacklustre performance is due to known problems that ifcorrected could improve the situation.16. Faced with the size of African stock markets which on the whole are small-barely 1% of global capitalization-and the inadequate liquidity of all the 3
  10. 10. consolidated African stock exchanges, many stakeholders (African and foreignpolitical and economic decision makers, experts and researchers, etc.) considera more advanced integration of existing stock markets as the way forward to beexplored rapidly and seriously. The President of the Association of AfricanCentral Banks (AACB) at the end of a symposium on the theme “ Capital marketsand mobilization of resources for poverty reduction and growth “ stated that “theintegration of financial markets was crucial for Africa and that there was no needfor each country to develop its own Wall Street on the continent”217. This study thus sets out to examine the feasibility of a Pan African stockexchange, likely to better ease up the free flow, and at low cost, of financialresources from surplus economic agents of the continent and foreign investorstowards long term investment of dynamic African enterprises and the nonmonetary financing of States. The macro-economic progress accomplished inrecent years in most countries, the commitment demonstrated by an increasingnumber of African economic operators, including stock markets, to extend theirscope beyond their national borders, and the increasing will of Member States ofthe African Union to speed up economic integration are driving forces to theexecution of this project.I.III Methodology18. In order to see through its mission, the African Union Commission carriedout a study on an African stock market in a bid to assess the need for such afinancial institution and the various options necessary for carrying out this project.Based on the results of this study and the recommendations of Member Stateson the options to be retained, a technical study shall be carried out subsequently.19. A questionnaire was thus forwarded by the Commission to present andpotential stakeholders. A mission was led in a number of member countries fromall the regions of the continent to seek advice from concerned institutions andeconomic agents. Lastly, the Commission drew on the abundant existingliterature review on the development and progress of stock exchanges in Africaand on national and continental economic data.20. As concerns the survey, questionnaires were sent to Ministries of Finance,Central Banks of all the African countries, stock exchanges and regulators offinancial market, banking institutions, insurance companies and selectedemployers’ associations.21. Over 130 questionnaires were sent, 39 were filled and returned,representing 15 countries and covering 5 African regions including countries withdeveloped financial markets and those having underdeveloped financial markets.22. The questionnaire was subdivided into two parts: a part dealing with datacollection while the other probed participants on the development of stockmarkets, the Pan-African Stock Exchange project and the necessary conditionsfor the establishment of the latter.2 Dr Acquah, ABCA Symposium, Windhoek (Namibie), 2006 4
  11. 11. 23. Missions were conducted in all the countries hosting the headquarters of aRegional Economic Community, apart from the Arab Maghreb Union (AMU). Thedelegation met with the African Development Bank (ADB), operators of theTunisian Stock Market, and the Regional Stock Exchange “Bourse Régionaledes Valeurs Mobilières (BRVM)”, as well as the West African Economic andMonetary Union - WAEMU) in Côte d’Ivoire.24. The combination of documentary research and data collected from actorsand countries should help to have: - A comprehensive analysis of the issue of stock market development in Africa; - A general view on lessons to draw from experiences within Africa and abroad; - A proposal on possible recommendations to be studied by experts and then presented to the African Union authorities.I.IV Organisation of the Study25. The first chapter deals with an in-depth analysis of economic, financial andoverall environment for the development of the stock market. This part issubdivided into 5 subparts that address the following issues: (1) the presentmacro-economic framework in which African stock exchanges are operating; (2)the financial context; (3) the legal and institutional environment; (4) the fiscalframework; and (5) the technological context.26. The second chapter analyses the performances of African stock marketsin the light of variables like the liquidity and the pattern of stock market indices.These performance indicators are thereafter compared among African stockmarkets, on the one hand, and with stock exchanges of other emerging countriesin Asia and Latin America, on the other hand. This is followed by an assessmentof the financial and economic viability of African stock markets individually as wellas the Pan-African Stock Exchange as a whole.27. Chapter 3 studies the various options for the integration of African stockmarkets by analysing the strengths, weaknesses, opportunities and threats(SWOT analysis) for each of the options. Challenges relating to theimplementation are also addressed in this chapter.28. Chapter 4 makes recommendations on the most appropriate options tointegrate stock markets and relating to the plan of action, timing, and thesequence by which the plan of action should be implemented 5
  12. 12. CHAPTER 1: ANALYSIS OF THE CONTEXT OF THE INTEGRATION OFAFRICAN STOCK EXCHANGES29. Owing to the low investment and the need to boost economic growth,considering the high indebtedness of African countries, low foreign directinvestments and the need to reduce the recourse to external funding, it isimportant to mobilize more domestic resources. However, efforts to developsavings and the financial sector, which hitherto has been dominated by banks,and promote investment at the national level are stifled by the size of theeconomies concerned. The regional and continental integration of these effortsshould produce better results.30. This chapter delves into macro-economic and financial variables and otherfactors which influence the savings and investment behaviour: evolution andstructure of GDP, level and pattern of inflation and interest rates, evolution andstructure of savings and investment, evolution and components of money supply,size of the banking sector and depth of the financial sector, flexibility of thepayment system, tax system, legal and institutional framework, etc. The level ofeducation, which also influences the development of the financial sector, shallnot be addressed in this study.1.1 The improving macro-economic context in Africa31. The beginning of the new Millennium is marked by better economicperformances in practically all the African countries. Even though poverty has notbeen eradicated, the percentage of the population living below the poverty linefell from 47% in 1999 to 41% in 20043 due to the achievement of a high averageeconomic growth rate close to 5 % since 2000. Furthermore, real per capitaincome has risen by 4.3 % between 1998 and 20064.32. Even if the average growth rate is not equally distributed on the continent;and is still far from the 7 to 8% target which is likely to enable sustainable povertyalleviation in Africa, an increasing number of countries are riding on that growthpath. In 2007, only 10% of African countries recorded a negative GDP growthrate or a reduction lower than 3% as opposed to 18 per cent in 19985.33. It is worthy to note that the recovery of African economies is basicallysupported by the mining and hydrocarbons sectors where the surge in productprices has led to hikes in production and export prices. Nevertheless, a bettermastery of the main macro-economic aggregates especially the prices and publicdeficits has helped to secure the remarkable participation of petroleum exportingcountries in the global economic growth. On the whole, countries of North Africaand Southern Africa registered the highest results.34. With regard to inflation, Africa has accomplished laudable efforts but whichhave to be followed up in order to improve the competitiveness of economies.3 UNCTAD, development in Africa, 20074 ADB/OCDE, Economic Prospects in Africa (EPA), 20075 ADB/OECD, supra 6
  13. 13. The average rate of inflation fell to 10% in the period 2004 - 2007 while beinghigher than the 5 to 7% obtained in Latin America. The number of countries withan inflation rate lower than 10% rose from 40% during the period 1998-2001 to43% during the period 2002-2005.35. Regarding public finance, on the whole Africa has significantly reduced thelevel of budget deficit since the beginning of the 21st century. This progress isbasically due to the substantial surpluses recorded in petroleum producingcountries, the growth of the aid volume received and the extent of external debtrelief obtained from 2004 to 2006.36. Advanced repayments by some oil producing countries (Angola, Algeria,etc.) the cancellation of the debt of countries benefiting from the Highly IndebtedPoor Countries (HIPC) Initiative contributed to a significant reduction of Africa’sexternal debt from 110.6% of the GDP in 2005 to 7.7% in 20076.37. The foreign balance improved globally in Africa. The current balance ofpayments, including grants, which has been in excess since 2003 (0.9%)reached 4.7% in 2006 under the impulse of trade surpluses made by oilproducing countries7. In 2007, the surplus reached 1.5%, thanks to the increaseof deficits recorded by importing countries and in spite of the increase in deficitsregistered by oil exporting countries. Africa’s share in the exports of goods andservices only rose from 2.1% in 2002 to 2.9% in 2005 essentially due to thepresent oil sales dynamics. However, it is lower than the 3.1% and 5.5% ratesreached in 1990 and 1975 8 respectively.38. On the whole the recent favourable trend of improved macro-economicpolicies and performances and the high level of external capital flows haveinduced the stabilization of exchange rates in most countries. Many Africancountries have improved the convertibility of their currency among themselveswhile the majority have refrained from resorting to multiple exchange rates andhave liberalized their exchange rate system. This situation is nevertheless fragileowing to the persisting dependence of Africa on commodity exports and thepresent difficulties encountered by Africa in promoting the diversification of itsproduction base. The various trends analysed above, contributed to the increaseof domestic savings and investments to 26.3% of GDP and 21.4% in 2006 asagainst 18.4% and 17.5% in 19909 respectively. In East and Pacific Asia, the rateof investment on GDP reached an average of 35% in the period 1990-2003, andthe savings rate related to the GDP stood around the same figure. In African oilproducing countries, the rates are higher; 26% for the investment rate (19.6% fornon-oil producing countries) and 33.7% for the savings’ rate (6.6% for non-oilproducing countries).6 ADB/OECD, EPA, 2007, op cit7 Ibid8 WTO, 20069 ECA Economic Report, 2007 and 2008 7
  14. 14. Table 1.1 Domestic Savings (% of GDP) (2002-2005) (1 998-2001)Algeria 36 47Angola 24 25Benin 6 6Botswana 47 50Burkina Faso 8 4Burundi -6 -11Cameroon 20 19Cape Verde -16 -16Central African Republic 9 10Chad 4 29Comoros -4 -7Congo, Republic of 4 5Congo,. Democratic Rep. 46 50Côte d’Ivoire 20 21Djibouti -3 6Egypt 13 15Equatorial Guinea 20 ..Eritrea -34 -45Ethiopia 10 6Gabon 38 45Ghana 11 10Gambia 7 7Guinea 17 8Guinea-Bissau -10 -4Kenya 10 12Lesotho -23 -13Liberia -3 -1Libya 21 25Madagascar 9 8Malawi 4 -10Mali 11 11Mauritania 25 23Mauritius .. ..Morocco 18 19Mozambique 11 12Namibia 14 24Niger 4 6Nigeria 29 34Rwanda 0 1Sao Tome and Principe -13 -19Senegal 11 8Seychelles 22 17Sierra Leone -8 -6Somalia .. ..South Africa 19 19Sudan 10 15Swaziland 2 16Tanzania 5 10Togo 1 4Tunisia 24 21Uganda 7 7Zambia 7 18 8
  15. 15. Source : ECA 9
  16. 16. 39. It is worth noting that these rates generally fluctuate relatively showingtheir dependence on external factors like the variation in the prices of rawmaterials and foreign direct investment. But since 2000, the recent trends in theoil market and direct investment in new prospecting countries (Sao-Tomé andPrincipe, Ghana, etc.) maintain them at a high and stable level.40. FDI remained relatively derisory in the global total in 2007 (2.3%)amounting to 36 billion US dollars. This figure, equivalent to that achieved in2006, double of that achieved in 2004, reflects a growth of the relativeattractiveness of African countries despite a concentration on a few sectorsincluding oil and mining products. However, Africa is far from the level of FDIreceived in 2007 by Asia (18%) and Latin America (8.2%).41. Capital flight from Africa invested abroad on real or financial assetsconstitute a substantial short fall in terms of savings and investments. For Sub-Saharan Africa, studies carried out on different periods and groups assess thembetween 2.6 % and 7 % of GDP that is, amounts varying from 3 to 13 billion USdollars yearly. Apart from political and related reasons (instability, corruption, badgovernance, etc.), there are numerous causes that account for this financialexodus which has been depriving Africa of important resources for its economicand financial development: budget imbalances and high indebtedness, instabilityof exchange, lack of diversification of financial products, search for better profitand safety, etc.1042. The recent general economic recovery and the improvement of savingsand investment augur well for a more sustainable development of the financialsector in general and the activities of African stock markets in particular. Thenarrowness and the low viability of most national and regional stock exchangestell for an initiative designed to regroup existing stock markets.1.2 Development of the financial sector43. The positive macroeconomic performances came along with relativelysignificant changes in the financial sector. The positive effects of changes in theeconomic situation were further strengthened by the favourable impact of thereform of the banking sector undertaken in the late 1980s, following the crisesthat hit most banking systems in Africa.44. The reform of the financial sector, backed by international financialinstitutions, generally entailed the privatisation of banks and insurancecompanies considered to be sound and the liquidation of those that weredeemed unviable, as well as the absorption by the State of most of the moribundbank credit. The non-banking financial sector in Africa remained limited. Thefinancial market is still underdeveloped and concentrated on share and bondtransactions while retirement funds and by-product markets are unheard of in10 ECA Economic Report, 2006; UNCTAD, Economic Development in Africa, Mobilisation of domesticresources and the development-oriented State, September 2007 10
  17. 17. most African countries. This state of affairs therefore limits the possibilities ofchoice between financial products,Table 1.2 Foreign Direct Investment, net inflows (in millions of current $US) (1998-2001) (2002-2005Algeria 612 916Angola 1652 1331Benin 49 49Botswana 53 373Burkina Faso 11 19Burundi 3 0Cameroon 108 210Cape Verde 26 26Central African Rep. 4 1Chad 156 705Comoros 0 1Congo, Dem. Rep. of 199 383Congo, Rep. of 204 342Cote d’Ivoire 303 232Djibouti 4 20Egypt 972 1878Equatorial Guinea 399 1320Eritrea 68 11Ethiopia 204 383Gabon -35 204Gambia 38 43Ghana 167 110Guinea 23 77Guinea-Bissau 2 5Kenya 35 44Lesotho 166 104Liberia 119 194Libya .. ..Madagascar 63 16Malawi 29 3Mali 54 159Mauritania 33 113Mauritius 75 37Morocco 95 1183Mozambique 247 259Namibia .. ..Niger 8 14Nigeria 1097 1942Rwanda 5 6Sao Tome and 4 2PrincipeSenegal 80 65Seychelles 49 57Sierra Leone 12 35Somalia 0 11South Africa 2573 2119Sudan 427 1470Swaziland 93 21Tanzania 405 475Togo 45 37Tunisia 552 663Uganda 166 217Zambia 138 188Zimbabwe 133 35 11
  18. 18. 45. However, the liquidity rate of the economy, made up of the ratio betweenthe money supply in circulation and the Gross Domestic Product (M2/GDP), akey indicator of liquidity in the economy, increased from 22.3%11 to 38.4% in2006 (2006 ADB statistics). This rate is higher in Southern Africa, excludingZimbabwe whose statistics are not available, and Northern Africa, at 56.9% and44.4% respectively. In countries having a stock exchange market and for themost part found in these two regions, excluding Mozambique and Zimbabwewhose statistics are not available, this rate stands at 40.1%.46. In spite of this significant increase, the financial sector continues to beweak compared to developing countries in Asia with a rate higher than 120% in2004 and that of Latin American countries and the Caribbeans (about 50% duringthe same period12). Furthermore, the liquidity ratio is very variable, even inregions where it is highest. This ratio is lowest in Equatorial Guinea (5.5%), andhighest in Mauritius Island (153.2%) as against 24.7 % for WAEMU countries forinstance which have the BRVM in common, 61.8 % in South Africa, 74.8% inDjibouti and 93.1% in Egypt.13 On average, intermediate income countries havean M2/GDP ratio more than twice that of low-income countries. In Sub-SaharanAfrica, over the period 2000-2004, this rate stood at 55.6% and 21.9%respectively.47. In Africa, money supply, made up of bank notes and currencies (fiduciarymoney) and demand, savings and term deposits (bank money and quasi money)is still made up of a considerable proportion of fiduciary money, about 25%. InLatin America, this rate stands at 12%. A large fraction of bank deposits is madeup of demand deposits, more than 75% of the total in some countries, as againstterm deposits, thereby limiting investment financing possibilities.48. According to the World Bank, non-bank financial savings are generallylimited and lower than 20% of total savings. In less developed countries, this rateis very low. Only a few African countries with high intermediate income showdiversified savings patterns (South Africa, etc.). These products of savings aremainly made up of insurance premiums, with a share not more than 1% of theGDP in most of the countries and for the most part concentrated on automobilerisk and stocks and shares. The development of stock exchange markets will betreated below under a separate topic.49. Generally speaking, the advent of micro finance has not really changedthe situation although it has allowed rural households and low-income urbanhouseholds to have access to financial transactions.50. It is worth adding that the payment systems in Africa, mainly in cash, aregenerally less efficient, more onerous, and impedes the smooth conduct oftransactions, despite all the efforts being deployed in some regions to modernisethe system of payment.11 CERUDEB, CIRAD12 Catherine Patillo, IMF 2004: the Financial sector in sub-Saharan Africa: problems, challenges and reformstrategies13 ADB/OECD: supra. Referring to money in the broad sense/GDP 12
  19. 19. 51. Looking at another indicator of financial sector density, the ratio of loans tothe private sector over GDP, also shows that Africa is on the good path but thatthe continent is still lagging behind compared to the rest of the developing world.In deed, in 2005, this ratio stood at about 21% in Africa south of the Sahara asagainst 30% in South Asia and 107% in high-income countries as against 19% in200014. While low- income sub-Saharan African countries saw their ratio increasefrom only an average 12.3% over the period 1990 – 1999 to 13.3% over theperiod 2000-2004 (21% in low income countries out of Africa15), intermediateincome countries, including South Africa, recorded an increase from 52.1% to64%. Apart from South Africa, the performances of intermediate incomecountries are quite modest.52. The same scenario between low and high-income countries also holdstrue for Northern Africa, with national peculiarities depending on the level of loansto the private sector. While the ratio of loans to the private sector over GDP in2005 was 4.5%, 8.2% and 10.4% respectively in Algeria, Libya and Sudan, it was51.2% in Egypt and 62.6% in Tunisia for the same year.16 However, a hugefraction of loans to the private sector is used to finance routine transactions, witha marginal fraction directed towards productive investments.53. The African financial system is also characterised by ever-high interestrates as confirmed by the existence of interest margins (variation between debitinterest rate and credit interest rate) of 8% in Africa as against a world average of4.8%17, with a bank intermediation margin that is higher in low income countriesthan in intermediate income countries. This is a reflection of poor competitionwithin the banking system and the limited role of non-banking institutions.54. On the whole, the financial sector is still fragile. The percentage of poorperforming loans compared to total loans, an indicator of the soundness of afinancial system, is still high in Africa south of the Sahara, at 14.5%, with a 17.5%rate for low income countries and 6.7% for intermediate income countries18.55. The reforms that were undertaken in the financial sector mainly stem froma change in the monetary policy applicable in African countries as from the mid1990s. Particularly, under economic reforms supported by the World Bank andthe International Monetary Fund, these countries adopted some financialliberalisation measures, notably: elimination of privileged debit interest rates anda generalised placing of a ceiling on bank interest rates, deregulation of thedistribution of credits, authorisations for foreign banks to establish, etc.56. The putting in place of independent and professional banking supervisoryinstitutions also facilitated a more efficient and cautious control of the bankingsector. However, the relative weakness of the African financial sector comparedto other developing regions of the world calls for additional efforts to be made byStates, in conjunction with the financial system, to promote a banking culture14 IMF: Regional Economic Prospects (REP), Sub-Saharan Africa, October 200715 World Bank, Make Finance Work for Africa,16 IMF: International Financial Statistics, September 2007, authors’ estimates17 Partnership for Make Finance Work for Africa, 200718 IMF, REP supra 13
  20. 20. within a large segment of the population, the diversification of the financial sector,new financial instruments, and trigger a drop in interest rates.57. In Africa today, the rate of access to the formal and semi-formal financialsector is particularly low at less than 20% as against 30% in East and PacificAsia.19, This is not enough to stimulate the development of the financial sectorespecially in its modern dimensions such as the stock exchange market becausebanking institutions constitute a key ingredient for embracing new financialproducts.1.3 Opinions of stakeholders on the economic and financial situation58. Respondents to the survey and interviews conducted throughout thecontinent on the feasibility of a pan-African stock exchange indicate that the highlevel of inflation and inadequate interest rates are impediments to thedevelopment of financial markets. 35.3% of the respondents consider weakeconomic growth, low household incomes, low savings, and low investments asobstacles to the emergence of financial markets. Lack of macroeconomic andfinancial information, inadequate infrastructure, as well as crushing debt burdensand the inadequate system of trade, are less mentioned as hindrances.59. As a confirmation of the points of view expressed above, respectively,38.2% and 20.6% of the persons interviewed think that reforms supportive ofmacroeconomic stability and the putting in place of a sound and fair taxationsystem that is favourable for strong savings are needed for the establishment ofa pan-African stock exchange. Conversely, promoting economic integration ormacroeconomic convergence, creating a common currency and encouraging freemovement of goods are not seen as priorities. Yet, 47.1% of respondentsindicated that with a view to setting up a pan-African stock exchange market, thecreation of a common currency is a prerequisite.60. At this point, considering the narrowness of African economies takenindividually, and the variability of their economic and financial performances, along term viable stock market for investments and mobilization of capital can onlybe envisaged at the continental level61. Indeed, the economic results and financial solidity of the continent on thewhole are more sustainable than national and regional performances, given thatthe weaknesses of each country are offset. Moreover, with regard to essentialvariables, such as savings and investments, their global volume facilitates theoperation of an efficient financial market than their amount at the national andeven regional level. Liquidity ratio which varies amongst African countries andlow in most of them show how difficult it is to develop the financial sector inAfrican countries taken individually.Table 1.3 Opinion on the creation of a Pan African Stock Exchange No. %19 WB, MFW4A 14
  21. 21. For 24 72.7 Reasons for the creation of a Pan African Different stages of development but we can start with a few countries / Regional stock exchanges first 4 16.7 Mobilization and improved allocation of financial resources/Economies of scale and cost efficiencies/More efficiency, liquidity, transparency… 17 70.8 PA SE will inspire trust/Improvement of corporate governance 2 8.3 Will benefit issuers (listed companies and governments) 7 29.2 Will enhance opportunities for investors 2 8.3 Promotion of economic and financial integration 2 8.3 Others 2 8.3 Against 9 27.3 Reasons against the creation of a Pan African Premature/Different stages of development 7 77.8 Will be another competitor/Commercial viability is doubtful 2 22.2 Others 1 11.1 Total of respondents 33 100.0 No response 3 Total 36Source: AUC Survey62. On the whole, the creation of a Pan African stock exchange and beyond it,the establishment of a financial market ensuring the flow of capital at thecontinental level would provide better visibility and a wider scope of arbitrage tothose looking for capital and investors both African and foreign. The modestperformances of existing African stock exchanges should be an inducement toactively explore avenues to integrate African national and regional stockexchanges.1.4 Analysis of the legal, institutional, fiscal regulatory and technical environment63. In Africa, the legal, institutional, accounting, fiscal and technical environmentof financial operations in general and stock markets in particular is on the wholearchaic, are hardly favourable for their internal development and can hardlyattract foreign investors who do not have a lot of confidence in dispute resolutionmechanisms and in the stability of rules established both in the legal domain andbusiness tax system. The small proportion of foreign direct investment that Africareceives is characteristic of the unfavourable business climate, which also affectsAfrican economic operators. In some countries, it is difficult to know the normapplicable for transactions or particular activities. Legal insecurity is consideredas one of the most serious impediments to attracting investors.64. Furthermore, the diversity of regulations in force and existing technologiesare major challenges to the integration of stock exchanges in Africa. Althoughthere are several initiatives designed to harmonise the business laws andenvironment in some Regional Economic Communities, the level of conformity isnot adequate for the creation and blossoming of a Pan African stock market. 15
  22. 22. 65. The following section shall deal with the situation on the continent andsome experiences to harmonise the regulations and adapt present systems.1.4.1 Different legal systems66. There are three major legal systems on the continent: civil law, commonlaw and religious law (sharia) systems. Civil law also known as continental orRomano-Germanic laws is dominant and covers French-speaking countries aswell as some English-speaking and Arab countries (Côte d’Ivoire, Mali,Botswana, Tunisia, Egypt, etc). Common Law is drawn up in Anglo-Saxoncountries prevails in English-speaking countries20, whereas religious law (sharia)is characteristic of some countries in North Africa including Sudan, Libya, etc.The following diagram presents African countries according to their legalsystems. The differences between the three systems reside in their origin and inthe manner of their implementation. In countries practicing civil law, the legalsystem is based on one or many codifications adopted by lawmakers whoestablish the major principles of law. In this case, the law is interpreted instead ofbeing drawn up or “made” by judges and only texts enacted and notjurisprudence, defined as, are considered as force of law.67. In countries practicing common law, the legal system is drawn upaccording to customs and is created and/or fine tuned by judges. Rulings aregiven depending on the jurisprudence and affect the law applied on future cases.68. Where no legal declaration is binding, judges have the authority and theobligation to “institute” the law by setting precedence.69. Religious law refers to a system using a religious text like the Koran as thelegal source.1.4.2 Regional attempts to harmonise business law and insurance activities70. Harmonisation is a process by which different States adopt identical laws,by bridging the gap between the rules. It often induces the creation of norms andprinciples to be used as rules and guidelines as well as the elimination ofdifferences in the technical contents of norms. Harmonisation is generally carriedout by international treaties or it involves the adoption by some States ofregulatory principles of other States. It is not necessarily a unique or uniform setof rules or the standardization of all the rules. There are various types: i)complete/maximum, ii) partial/minimum, iii) hybrid, and iv) one set of rules.20 South Africa and Namibia use a blend of civil law and common law while the English speaking part ofCameroon uses common law. 16
  23. 23. 71. There is no doubt that the unification of business law is one of the pre-requisites to the creation of a Pan African stock exchange and the promotion ofinvestments in Africa. In this regard, in 1993, 14 (fourteen) African countries ofthe franc zone signed the treaty to set up the Organization for the Harmonisationof Business Law in Africa (OHADA), in a bid to harmonise their business lawespecially with the purpose of attracting more local and foreign investments. TheComoros Island and Guinea have become OHADA members and the DemocraticRepublic of Congo is planning to join and become the 17th member. The activitiesof this organization are not well known in English-speaking countries. However,OHADA is making efforts to fill this loophole. Ghana is alleged to prepare to jointhe bandwagon21.72. Even if OHADA is a possible framework for the harmonisation of businesslaw in Africa, its legal principles that are clearly civil law oriented are neverthelesslikely to hamper its adoption by countries with different legal systems.Furthermore, in 1992, franc zone member countries signed a treaty setting up anorganization in charge of regulating the insurance sector in their countries. TheInter-African Conference on Insurance Markets (CIMA) is designed to enhancecooperation in the insurance field, develop insurance and reinsurance companiesin relevant economies, etc.73. Many initiatives have been taken to move towards a common supervisionand harmonisation of rules governing banking and stock markets activities inRegional Economic Communities (RECs) giving impetus to the creation of a Pan-African Stock Market.1.4.2.1 In the banking sector74. In the banking sector, a lot of progress has been made in the regionalsupervision of activities. For instance, all the countries of the West AfricanEconomic and Monetary Union (WAEMU) have the same legislation and haveset up a regional banking commission in charged of closely monitoring bankingactivities in their region.75. Member States of the Economic and Monetary Community of CentralAfrica (CEMAC) are governed by the same banking legislation and the CentralAfrican Banking Commission (COBAC) is responsible for the sector’s supervisionin all the member States. In 1994, a Committee of Banking Supervisors of Westand Central Africa (CBSWCA) was set up. It is made up of officials in charge ofbanking supervision of 12 countries and those of the two regional bankingcommissions22. Furthermore, SADC Sub-committee of Banking Supervisors(SSBS) was set up in 2004, following the dissolution of the East and SouthernAfrican Banking Supervisors Group (ESAF). SSBS has the same objectives asthe CBSWCA mentioned above. It has already signed a Memorandum ofUnderstanding to include SADC finance and investment sector’s protocol.1.4.2.2 In the stock exchange sector2 1 www.OHADA.com22 Burundi, DR Congo, Cap-Vert, Ghana, Guinée, The Gambia, Madagascar, Nigeria, Sierra Leone,Soudan, Rwanda, CEMAC et UEMOA. 17
  24. 24. 76. Most African countries have set up regulation structures for financialmarkets, or financial markets authorities, with different names (stock marketvaluation Commissions, financial services Commissions, etc.)They areresponsible for establishing and adapting rules, granting licenses for themanagement of stock market operations, and supervising trade transactions andthe activities of brokers. Such a structure generally sets the standards thatmarket players must observe with a view to protecting the interests and rights ofinvestors and listed companies.77. Considering that a properly defined regulatory system is the bedrock ofany efficient and transparent securities market, it is necessary to have stronginstitutions with mission to harmonize the rules in order to make investorsconfident and facilitate increased cross border economic activities.Consequently, most African countries have already adhered to the 30 principlesof the International Organization of Securities Commissions (IOSCO) and whichare well accepted all over the world. Also, with regard to accounting, theInternational Financial Accounting Standards (IFAS) provide guidelines on thestandards that African countries can apply.78. It has to be recalled that there are two types of quotation systems nowbeing used in financial markets: continuous scoring and fixing. On stockexchanges based on continuous scoring, transactions can take place at any timeprovided the order received reflects the current price. In a stock exchange basedon quotation fixing, purchase and sales orders are regularly placed side by sidefollowing a periodicity earlier agreed upon before being compared, at a point intime of the business day, on the basis of a price at which there is very littledisparity between the purchase and sales orders25.79. Just like the majority of the most powerful stock markets in the world,many African financial markets operate on the model of continuous transactions.The continuous quotation of securities and the ensuing immediate nature of thetransactions seem to be a key factor for the investor who would like to quicklymake up his mind. Transactions are finalized within five business days after theday of quotation.80. Continuous negotiation systems allow for greater transparency in pricefixing processes, and this is very important in reassuring investors who happen tohave very little knowledge when the stock market is still in its infancy.81. Despite the disparities between country systems, recent trends seem tosuggest that players of financial markets are increasingly involved in regionalactivities and African companies are embracing trans-border stock quotation. Forexample, AngloGold Ashanti, a Ghanaian company, has dual quotation on theGhana Stock Exchange (GSE) and the Johannesburg Stock Exchange Limited(JSE Ltd), and Oando, registered in Nigeria, has adopted a similar practice onthe Nigeria Stock Exchange (NSE) and at the JSE Ltd.82. Currently, there are various initiatives aimed at giving a regional dimensionto the supervision of stock exchanges. In West Africa, WAEMU is a fully25 IDA, World Bank. Stock Exchange Development, 1997 18
  25. 25. integrated bloc since the countries of this sub-region use the same currency, onecentral bank and uniform rules and regulations for accounting and trade.Furthermore, the West African Monetary Agency (WAMA) is working towards thecreation of a common currency and a common central bank for Gambia, Ghana,Guinea, Liberia, Nigeria and Sierra Leon, which are all member countries of theEconomic Community of West African States.83. However, each of the three existing stock exchange markets within theECOWAS, that is to say the Nigerian Stock Exchange, the GSE, and theRegional Stock Exchange (Bourse Régionale de Valeurs Mobilières - BRVM) hasits own regulatory body and different rules and systems but allows forsimultaneous quotation of companies of their respective territories. Examplesinclude the listing of Trust Bank of Gambia on the GSE and on the Over-The-Counter, OTC, market of Gambia in 2002, and the recent cross-border listing ofEcobank Transnational Inc, a company registered in Togo, on the GSE, the NSE,and the BRVM.84. However, the experience of ECOWAS has shown that multiple listing isnot only possible but also cumbersome. Indeed, the mechanism is quite onerousdue to its costs and other expenses linked to the need to comply with variousrules and currencies and the dissemination of information. Also, differences werenoted on the listings of Ecobank securities between the three stock exchanges, asituation which brings to the fore the problems of effective information flow. Inorder to make up for these shortcomings, the Nigerian SE, the BRVM and theGSE initiated discussions aimed at promoting greater cooperation andharmonizing their rules.85. In Central Africa, a regional stock exchange, the Central African StockExchange, (Bourse des Valeurs Mobilières d’Afrique Centrale - BVMAC), hasbeen created and established in Gabon. It covers the Economic and MonetaryCommunity of Central Africa (CEMAC), made up of Cameroon, the CAR, Congo,Gabon, Equatorial Guinea, and Chad which also have in common harmonizedtrade rules, a common currency (the CFA F), a common central bank (the Bankof Central African States, BEAC). Another stock exchange, the Douala StockExchange, has been created in Cameroon. Given that these two stockexchanges are found in the same monetary zone and that their individual viabilityis weak, some attempts are being made to merge them.86. A lot of progress has also be made in East Africa where the regulatorybodies of the Nairobi Stock Exchange, the Dar es Salaam Stock Exchange andthe Uganda Stock Exchange, under the East African Community (EAC), signed amemorandum of understanding in 1997 to establish an organization called theEast African Securities Regulatory Authorities (EASRA).87. Cross border listing in East Africa is also on the increase as brokers-traders, money market managers and investment funds for ordinary stocksdevelop their cross border activities. For example, the shares of East AfricanBreweries, Kenya Airways and Jubilee Holdings are negotiated on the threestock exchanges mentioned above. 19
  26. 26. 88. Within the Southern African Development Community (SADC), a fundingand investment protocol has been signed and aims at encouraging theharmonization of the funding and investment policies of Member States.Furthermore, there is a Community of SADC Stock Exchanges (COSSE) with themain goal of fostering cooperation between the stock exchanges of membercountries and developing a regional stock exchange.89. In fact, as of now, all SADC stock exchanges have already harmonizedtheir listing, negotiation and clearing standards within the framework of theCommittee of Insurance, Securities and Non-Bank Financial InstitutionsAssociation (CISNA), COSSE, the Association of African Central Banks and theAssociation of African Stock Exchanges. There are also initiatives aimed atfinalizing the harmonization of transaction systems, and discussions areunderway on the training of investors, a common certification test for brokers andthe cross-border listing of securities in SADC stock exchanges.90. In a nutshell, at the level of the continent, there is very little harmonizationof stock exchange regulations. It is necessary for African countries to create aplatform where this harmonization process can be initiated. To increase theconfidence the public has in financial markets, in general, and stock exchanges,in particular, it is crucial to consolidate the terms of contracts and rule of law.1.4.3 An unsuitable fiscal context91. In all the countries, the taxation of savings and securities has far reachingimplications on the development of financial markets. The tax administration inAfrica, characterized by inadequacy and bureaucracy, does not facilitateeconomic and financial development. African taxation systems are also quiteoften characterized by high levels of tax evasion and corruption.92. Tax regulations and high tax rates are often seen as obstacles toeconomic activities in Africa. In South Africa, foreign companies are taxed up to34%24. According to the AfDB a new company tax law has reduced company taxin this country by 12 to 32% for industry and by 20 to 40% for the other sectors.93. Within the framework of a project to set up a common stock exchangemarket, it is very important for the taxation policies of African countries,especially on financial transactions, to be harmonized. We must avoid a situationof disparities which may lead to tax competition between the countries as theyseek to attract foreign investors or investors from other African countries.94. The differences between taxation systems inhibit economic integration andgrowth. However, most African regional communities are now tending towardsharmonizing their taxation systems. This is the case of WAEMU and CEMAC thathave harmonized their domestic consumption taxes during the 1990s.95. Another factor that can also influence investment decisions is theavailability of tax incentives. Countries granting tax incentives stand a betterchance of attracting investors than those with rigid taxation policies.24 AfDB, 2006 20
  27. 27. 96. Forty four per cent of the answers to the questionnaire of the AUCommission survey on the pan-African stock exchange project mentionedunfavourable tax systems as one of the major factors affecting the developmentof financial markets in Africa. Seventy four per cent underscored the importanceof a harmonized tax system for a viable stock market. The officials who wereinterviewed noted the absence of attractive taxation measures as a challenge formost African countries to attract investments.97. Recent studies have equally confirmed that attracting foreign directinvestments through tax exemptions can have a great impact on low- incomecountries now competing for export-based foreign investments. Consequently, itis imperative for countries to harmonize their taxation policies thereby improvingtheir investment environment. It is advisable to adopt a tax rate that will boost theeconomy while maintaining fiscal equilibrium.98. In the SADC region, a funding and investment protocol has been signedby Member States to harmonize their funding and investment policies. By virtueof the annex on taxation and related issues, the Member States have to adopt acommon approach on the treatment and application of tax incentives.99. Certainty, simplicity and fiscal stability should be able to reassureinvestors about returns on investment. So, taxation systems should beadministered with transparency in order to increase the confidence ofbusinesses.100. However, fiscal coordination could be more attractive than fiscalharmonization. Inter-jurisdictional tax equity is one of the main criteria for taxcoordination because it ensures uniformity in the assessment of companies andtax withholding among countries. Tax coordination also ensures fairness andneutrality for taxpayers. Table1.4 Major factors affecting the development of financial markets in Africa Total of No respondents % Weights Low per capita income 22 36 61.1 15.7 Lack of knowledge on financial assets and investment in stock exchange 27 36 75.0 19.3 Mistrust with respect to financial institutions 9 36 25.0 6.4 Mistrust with respect to issuers (drawers) 7 36 19.4 5.0 Lack of financial information 25 36 69.4 17.9 Unfavourable tax systems 16 36 44.4 11.4 Legislation and regulatory framework not conducive 23 36 63.9 16.4 Others 11 36 30.6 7.9Source: AUC Survey1.4.4 A divergent technological environment101. The technological context varies considerably from one African country toanother. While basic infrastructure (electricity, telephone, Internet, etc.) are hard 21
  28. 28. to come by in some countries, yet other countries are acquiring frontiertechnology infrastructure.102. Thus, in 2005, according to the ADB, electricity consumption varies from10 kwh per year in Chad to 5 060 kwh in South Africa, with 23 countriesconsuming less than 100 kwh and 12 countries consuming more than 1 000 kwh.The same gap is found in 2006 in terms of telephone, fixed and mobile, with acountry with less than 20 subscribers per 1,000 inhabitants (Ethiopia) andcountries like South Africa and the Seychelles where the number of subscribersfor 1000 population is around 919 and 1058 respectively, most countries with afigure lower than 250 subscribers despite the progress enabled by the cellularphone.103. In the same period, with regard to Internet access, there is a clear dividebetween the 18 countries with fewer than 10 people connected per 1000inhabitants (Sierra Leone, 1.7 connection; Niger, 2.9; Liberia, 0,3; Ethiopia, 2,etc) and 6 countries with over 100 connections per 1000 inhabitants (Morocco,197.7 connections, Mauritius, 255.6, Sao Tome, 187.1; Seychelles, 337.2; AfricaSouth, 105.6; Tunisia, 126.8). It should be noted in the figures provided abovethat the countries better equipped for energy and telecommunicationsinfrastructure are those with the most active stock exchanges.104. Transaction systems in developed stock exchange markets have improvedfrom the public outcry system where stocks were traded orally to automatedsystems where transactions are computerised. There was a proliferation ofcomputer-based systems around the world to respond to increased competitionbetween stock exchange markets in terms of exactitude, error margins, andquality of execution.105. Today, African stock exchange markets still use the public outcry system,even though most of them are gradually changing to computerize theirtransactions in spite of the costs considered being excessive. This trend findsjustification in the observation that most stock markets recorded an increase inturnover just after computerizing their transactions.106. Many observers even think that the automation of transactions isparticularly important for an integrated market given the fact that most stockmarkets recorded an increase in turnover just after adopting such systems.Moreover, the automation of the trading system should be done simultaneouslywith the introduction of a central securities depositor. Such a depository isresponsible for minimizing the risks involved in the holding and circulation ofsecurities and also reduces related errors and delays.107. Automation would encourage capital flow through out the continent as itwould lead to a reduction in the costs and inefficiencies inherent in each stockmarket, and would swell the volume of activities and liquidity. An automatedtrading system would equally shorten the negotiation chain by reducing thenumber of intermediaries and allowing investors to operate directly on stockmarkets. Even more important is the confidence generated by automation as itallows for very little manipulation. 22
  29. 29. Table 1.5Negotiation system and settlement date of selected stock exchange markets in 2006 Trading system Settlement Stock Exchange date System TypeBotswana Stock Exchange Public outcry Manual T+4Cairo & Alexandria Stock Exchanges EFA Automated T+2Dar Es Salaam Stock Exchange N/A Automated T+5 Continuous auction saleGhana Stock Exchange Manual T+3 systemJohannesburg Stock Exchange Ltd TradElect Automated T+5Lusaka Stock Exchange N/A Manual T+3Nairobi Stock Exchange N/A Automated T+5Namibian Stock Exchange TALX Automated T+5Nigerian Stock Exchange Horizontal trading system Automated T+3 Automated systemThe Stock Exchange of Mauritius Automated T+3 (SEMATS) Public auction saleUganda Securities Exchange Manual T+5 system, manualZimbabwe Stock Exchange Public outcry Manual T+7Source: ASEA Yearbook 2006CHAPTER 2: ANALYZING THE PERFORMANCES OF EXISTING STOCK EXCHANGES 23
  30. 30. 108. On the whole, African stock exchanges record mixed performances. Apartfrom the Johannesburg Stock Exchange, which is modern and well known in theworld, most of the other stock exchanges are bugged down by numerousproblems including: low demand and supply of financial products, low volume oftrade, high taxes, poor macroeconomic conditions, lack of market infrastructure,etc.109. Generally, African stock markets are mainly dominated by equity marketsto which could be added some fledgling covered bond markets. Stock marketsfor derivative instruments and other sophisticated products are not welldeveloped, and thus are rare in Africa.2.1 General presentation of African stock exchanges110. There are currently twenty-three stock exchanges on the African continentgeographically distributed as follows:111. In Northern Africa, four stock exchanges: Algeria, Casablanca, Cairo andAlexandria (CASE) and Tunis;112. In West Africa, four stock exchanges: the BRVM which brings togethereight countries of the West African Economic and Monetary Union (WAEMU),Cape Verde, Ghana and Nigeria;113. In Central Africa, two stock exchanges: Douala and the BVMACregrouping the six countries of the Economic and Monetary Community ofCentral Africa (CEMAC);114. In Southern Africa, eight stock exchanges: Botswana, Johannesburg,Malawi, Mozambique, Namibia, Swaziland, Zambia and Zimbabwe.115. In East Africa, five stock exchanges: Nairobi, Mauritius Island, Kampala,Tanzania and Sudan.116. In this study, our analyses will be based on the securities and bondmarkets, which are preponderant, even if in South Africa, the derivativeinstruments market has made great strides in recent years. Given the lack ofdata, this analysis will not take into account securities traded on over-the-countermarkets even if this type of trading is quite considerable on many stock markets,especially Cairo and Alexandria.2.1.1 Structure of African stock exchanges117. To ensure the effective and efficient functioning of stock exchanges, theirregulatory authorities have, in keeping with international standards, adopted theprinciple of net separation of the missions and responsibilities of the variousplayers. This choice is generally manifested in the creation of two distinct polesof competence on each stock exchange: a public pole which acts as the stockexchange regulatory and supervisory Authority with its main role being to 24
  31. 31. regulate and supervise the stock exchange, and a generally private pole with theprimary purpose of coordinating and organizing the stock exchange market.118. The first pole acts as the representative of the State. It operatesindependently. It protects the general interest of actors of the market, andensures the security and integrity of the stock exchange. In most countries, aspecific body is set up. In a few countries, this function is entrusted directly to adepartment in the Ministry in charge of finance. The missions and functions ofthe pole are broken down around the following elements: • protecting savings invested in financial instruments and any other investment that may give rise to public invitations to save; • providing complete and dependable information, in a fair manner, to all the stakeholders or investors; • ensuring the proper functioning of stock exchanges and the smooth conduct of stock public sales; • regulating and controlling all financial transactions relating to quoted companies (listing, capital increase, public sale or takeover, merger, etc.); and • developing an organized, fair and efficient stock exchange.119. The second pole, commonly referred to as the stock exchange orcompany market place, has a mission to organize and coordinate the activities ofthe stock exchange. It is responsible, inter alia, for: • listing of securities; • quoting of securities; • monitoring and controlling quotation sessions; • disseminating/publishing of stock exchange information; • setting rules to govern negotiations, clearing and settlement-delivery as well as the rules of good practice which brokers and dealers must respect in order to ensure transparency, impartiality and proper organization of the stock exchange.2.1.2 Players in the stock exchange120. The range of players is made up of issuers, brokers / dealers, andinvestors both domestic and foreign.2.1.2.1 Issuers121. In terms their shares and bonds, issuers are mainly private companies.With regard to bonds, other issuers are governments and supranationalauthorities. Through privatisation programmes, governments have become keystock exchange players by getting their securities listed. By listing treasury billsgovernments have become major issuers of securities that could be traded onthe secondary market. Today, this has become a major stock exchange activitythat injects a lot of liquidity into the market. 25
  32. 32. 2.1.2.2 Investors122. Stock exchange markets are mostly dominated by institutional investors(insurance companies, pension schemes, common investment funds, etc.) Apartfrom these investors, we also have private investors, banks, foreign companiesand foreign private investors.123. In recent years, thanks to numerous reforms undertaken by authorities, anincreasing number of foreign investors are beginning to develop interest inAfrican stock exchange markets. In 2006, foreign capital investors in shares onAfrican financial markets stood at a net total of 10.5 billion dollars126. Most of itwas invested in the JSE Limited (10.4 billion), while Tunisia (33.8 million),Mauritius Island (30.7 million) and Zambia (15.4 million) received modest sharesof these flows. Foreign investors are mainly made up of pension schemes,common investment funds, and hedge funds. Among them, some are specialisedregional funds because they have a long-term objective and/or sufficient localresources to overcome information differences.124. On bond markets, investment are mainly realised by private or institutionalinvestors (insurance companies, pension schemes, banks), and foreigncompanies. In 2006, investments by hedge funds and other debt funds increasedconsiderably. This flow of capital into the continent is however concentrated inhigh yield countries that export raw materials (commodity products) and in thosewith attractive macroeconomic prospects or rather open capital markets such asNigeria, Zambia, Malawi, Botswana and Ghana. The BRVM and, to a lesserextent, Kenya and Uganda also received capital flows on the respective debtfunds.125. An estimated total of one billion US dollars was invested in Nigeria in thefirst semester of the year 2006, that is to say more than 5 times the total foreigninvestment received in 2005. More moderately, the Zambian debt marketattracted some 250 million dollars while that of Tanzania received a little morethan 150 million dollars.27The interest foreign investors have been showing inAfrica since 2006 stems from: • the existence of abundant liquidity in the world, and the reduction of interest rate differences on government bonds between developing and emerging economies; • the reduction of the risk allowance (for cessation of payment) on some State loans and the improvement of the creditworthiness of many countries thanks to their good macroeconomic performances and the substantial reduction of their debt burden through the various debt relief initiatives for heavily indebted poor countries;126 Source :Amevi M. Atiopou, Marchés financiers azfricains 2002-2006, Afrology27 Source : Voir ci-dessus2 26
  33. 33. • the increase in commodity prices (oil, timber, minerals, etc.) which has led to an appreciation of the currencies of exporting countries; • the considerable improvement of the accessibility of foreign investors to African markets. Consequently, many more African financial asset purchases can now be paid for through Euroclear, and this goes a long way to reduce the costs of transactions. Before 2006, of all the African currencies, only the South African Rand was paid for through Euroclear. In 2006, seven other currencies joined the Euroclear system thanks to the leadership of the African Development Bank that issued bonds in these currencies, by making sure that the authorities concerned fulfilled Euroclear requirements28.2.1.2.3 Brokers126. Brokers are mostly found around stock exchange firms that have beenable to develop securities trading services such as portfolio management, themanagement of funds and securities underwriting activities. They have increasedtheir products through the creation consulting, research and data analysisservices. Many specialised services have developed to better meet theincreasing needs in assets management, especially of institutional investors suchas pension schemes, as well as to satisfy the counselling needs of companies.127. In some countries, brokers and dealers or stock exchange firms are stockexchange shareholders. In others, the shareholding of stock exchanges is morediversified, including notably the State as well as financial and non financialenterprises. In the first case, the ownership of the stock exchange is like that of acredit union of some sort.2.1.2.4 Central depository, clearing house and settlement bank128. The chain for the conduct and finalisation of stock exchange transactionsalso includes the activities of specific structures in charge of performing somefunctions, notably that of facilitating the settlement and delivery of securitiesbetween buyers and sellers, generally with brokers as intermediaries.129. Hence, the clearinghouse has a role to ensure the circulation of securitiesbetween brokers while the central depository keeps the securities and keepsrecord of transactions relating to such securities. Increasingly, the circulation ofsecurities is done rather that in paper. In some stock exchange markets, thesedifferent functions are entrusted to one and the same structure.130. The function of settling transactions on securities is sometimes performedby a particular operator who may be a central bank, a commercial bank, oranother structure. Each broker/dealer has an obligation to open an account in thesettling bank.28 Source: AfDB 27
  34. 34. 2.2 Comparative analysis of the performances of African stock exchanges131. We will examine the performances of African stock exchanges by referringto the results recorded by share and bond markets since those of the otherfinancial products (right, derivative and final products, etc.) are ratherinsignificant.2.2.1 Equity markets132. The analysis of performances on equities markets will be centred on theresults recorded by some key stock exchange indicators over the period 2002-2006.2.2.1.1 Capitalisation133. Capitalisation measures the financial capacity of a stock exchange. It isequal to the total of the products of stock exchange prices of listed securities andthe number of each of the shares listed. This indicator is used, inter alia, toassess how safe the investment is through the stock exchange weight of thecompanies listed.134. From 2002 to 2006, the capitalisation of African stock markets increasedfrom 238.4 to 955.5 billion US dollars, i.e. a 75.1% increase made possible bythe growth of the number of stock markets, the relatively large size of the newlisted companies and the flow foreign investors on African markets such as SouthAfrica and Egypt13.135. In 2006, the JSE Limited accounted for nearly 75% of the capitalisation ofAfrican stock markets, followed by CASE with 10%. Together, these twoexchanges constitute about 85% of the capitalization of African stock exchangesbut only 1.5% of the capitalization of the International Federation of StockExchanges in which they are the only two African members.136. However, the capitalisation of the smaller African stock markets increasedconsiderably between 2002 and 2006, the most notable variations have beennoticed in Ghana (+ 1,559%), in Zambia (1,196%) and in Ugandan (+1,085%).For its part, Swaziland appeared the less dynamic with only 57%.137. In 2004, according to the IMF14, the overall capitalisation ratio compared tothe GDP stood at 36% for Africa as against 161.3%, 70.6% and 25.4% forMalaysia, Thailand and Mexico respectively. Still in 2004, this ratio stood at214.1% for the JSE Limited and 51.3% for CASE, figures which confirm therelatively advanced level of these two financial markets.138. North Africa, with four stock markets, had a capitalisation of 147 billiondollars in 2006 compared to 37 billion dollars in 2002, that is to say a 297%increase, lower than the average for the continent over the same period, which13 Pazisma Corporation14 28
  35. 35. was 379%. The Cairo and Alexandria Stock Exchange (CASE) represents 63.7%of the capitalisation of that region. While that of Algiers is still insignificant (0.1%)mainly due to the fact that it only went operational recently.139. In West Africa, stock capitalisation on the three existing stock marketsincreased significantly between 2002 and 2006, from 8 billion to 50 billion dollars.This strong growth, 525%, is largely due to the dynamism of the Nigerian stockexchange, the fourth most active stock exchange and largest of the continent in2006 and whose capitalization is about 80% of the region. The BRVM, despite ofbeing regional, has a limited capitalization of 5% while the Stock Exchange ofGhana contributes 15% of the entire region.140. East African, with five stock markets, has a total stock capitalisation of 4billion dollars in 2002 and 22 billion dollars in 2006, a 400% increase in fiveyears. This growth, exceeding the continental average, is largely due todevelopments on the Kenyan market.141. The Southern Africa region, if it concentrates relatively the largest numberof stocks in Africa, eight, is also the most active, that of South Africa. Thus, itscapitalization has increased from 188 billion in 2002 to 736 billion dollars in 2006following an increase of 290%, a rate significantly below the continental average.From other stocks in the region, only Malawi has a market capitalization greaterthan $ 10 million in 2006 (12.29 million).142. In the Central African region, with a listed company in 2006, the DoualaStock Exchange has a capitalization of approximately 4 million U.S. dollars whileBVMAC has started operations in August 2008 with the listing of a governmentbond. 29

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