Updated: Aug 2
Tapping into and unlocking Africa's Markets'Potential
Author: Stanley Montwedi
Tapping into and unlocking the Continent's Markets Potential.
Although stock exchanges in Africa are less developed than those in emerged economies, they present an incredible platform for domestic firms to raise funds and mobilize domestic savings by offering a variety of instruments for investors to diversify their savings. With the right international partnerships, they can also provide opportunities for international investors to enter a local markets and take stakes in companies they find attractive. To that end, on the 8th July 2022, as a Motswana and like many Batswana (i.e. Botswana citizens), I was delighted (and proud) to see Botswana Stock Exchange (BSE) CEO, Mr. Thapelo Tsheole Head of Market Development, Ms. Thapelo Moribame and Head of Product Development, Mr. Kopano Bolokwe engage in discussions with American Stock Exchange (Nasdaq) counterparts to forge a mutual partnership. This is indubitably a step in the right direction as it creates a tremendous opportunity to attract prospective issuers and investors to the local market. With more innovative visions like this across the continent and digitalization of end-to-end trading ecosystem, removal (at times) of self-imposed ill-designed government interventions, partnerships like this can create more liquidity and depth to African markets, which in turn would bring further investments.
Challenges and Structural impediments that continue to curtail further growth
In developing and emerging African economies, two constraints of stock exchanges are the limited diversity of financial instruments and the limited number of listed stocks. Broadly, the financial instruments available in African financial markets are equity shares and government bonds. There are few exceptions where derivatives are also traded.
With a limited number of companies and investment vehicles listed and illiquidity partly due to fixed-quotation methods (which do not provide real-time stock price updates), Stock Markets in Africa attract few investors.
To name but a few, the common (and interlocked) problems encountered in African Stock Exchanges are:
Lengthy (paper-based) Listing process due to lack of appropriate technology
Binding and difficult Listing Conditions / Requirements
Limited number of licensed brokers, which limits competition and innovation
Low volume of trading driven by limited stocks which forces brokers to increase the fees on each trade to cover their Brokerage costs
High transaction costs which include brokerage commissions, exchange fees and clearing and settlement fees. In many developing markets around the world, transaction costs are below 1 per cent of the value of the trade. However, most African exchanges charge well over 1 per cent.
Lack of knowledge about stock markets and, in some exchanges, lack of transparency.
Significant lack of skilled resources (e.g. Brokers, PDs, Asset Managers and legal practitioners etc.) locally to structure transactions resulting in undue outsourcing and complete reliance on the neighboring country’s or indeed international service providers. Inevitably, this creates a number of challenges that include but are not limited to:
a) Inflated prices as both parties want to make some money out of the deal
b) Role clarity and coordination issues – the contract is normally signed with the local company while the duties are executed by another country’s counterpart.
c) Significant reconciliation and compliance issues caused by differing regulatory guidelines between local and 3rd party country
8. Limited diversity in instruments
9. Fixed quotation methods also disincentivize trades and market makers—financial firms, such as hedge funds, that trade at high frequencies and volumes on narrow pricing gaps.
10. Issues relating to taxation transparency on foreign participants
11. Trading and Settlement – Though Automated Trading Systems (ATS) have largely been introduced in African markets, many global Bond Markets still use Inter-Dealer Broker (IDBs). ATS alone wont solve liquidity issues
12. Infrequent Government bonds and T-bill issuance – Move away from half-yearly to quarterly issuing of bonds to increase liquidity and drive interest
….plus many more issues
Solutions and Opportunities
AEminds.org (AE stands for Africa & Else), is a global collaborative think tank focused on socio-economic development strategies, creating cultural diplomacy corridors in order to foster intra-African trade and multilateral socio-economic cooperation policies. Centered around ‘interconnectedness’ and ‘bi-lateral’ pledge to the following four pillars, we help organizations and governments unlock the potential of their socio-economic growth visions, by providing expertise to deliver transformational changes that bring positive, irreversible value.
Together, we will respect and embrace diverse perspectives which will foster for authentic thinking.
Together, we will create new markets and opportunities.
Together, we will be relentless in the pursuit of our goals to enable the realization of yours.
Together, we will strive to consistently develop the very best in class.
Together, we will always do and deliver what we say we’re going to.
Together, we listen, understand and empathize with/to one another.
Together, we will collaborate internally and externally to solve problems.
Together, we will enable our people, customers and clients to fulfil their potential.
Together, we will make a positive, sustainable contribution to our communities.
Against this backdrop, with our Stock Exchange sector ‘Industry leading’ partners; we can deliver change in
(to name a few practical examples):
Innovative Technology that streamlines the listing process thereby significantly lowering transaction costs in many markets.
Establishment of new laws or revision of existing ones to open doors for new brokerage firms particularly digital-savvy ones which will create ‘healthy’ competition and drive costs further down.
Proactive yet measured approach with the introduction of new (at times, untapped but lucrative) markets to meet investors demands which will increase liquidity. For example:
REPO (Repurchasing) MARKETS - There is little data on Africa’s repo market except South Africa where there has been recent well-documented successful use-cases
COMMODITY MARKETS - African countries are dominant global producers of many agricultural and natural resource goods and yet, the goods are traded or have their prices quoted on exchanges outside the continent! Commodities Markets can help unlock the African futures market thereby enhancing the efficiency in selling and buying commodity products. Perhaps more significantly and attractive is participants can use these markets to purchase commodities at guaranteed prices. This market can also help farmers access finance and give fund managers a way to provide greater liquidity and participation in price formation.
4. Providing Industry expertise and delivering best-in-class ‘knowledge-transfer’ to local teams across Risk Management, Regulatory and Compliance Frameworks. For African capital markets to truly thrive, this requires many financial services sector participants such asset managers, insurance companies, investment banks, sovereign wealth and pension funds, and other institutional investors to be fully upskilled (or skills refreshed) across the entire trading ecosystem including monitoring, price regulation and transfer functions which in turn will give investors confidence to invest.