The State of Financial Markets in the Southern African Region
Up to the end of 1994, there were 14 stock exchanges in the entire African continent. These were Cairo (Egypt), Casablanca (Morocco), Tunis (Tunisia) in North Africa; Abidjan (Côte d’Ivoire), Accra (Ghana), and Lagos (Nigeria) in West Africa and Nairobi (Kenya) in Eastern Africa. In the Southern African region, they were Windhoeck (Namibia), Gaborone (Botswana), Johannesburg (South Africa), Port Louis (Mauritius), Lusaka (Zambia), Harare (Zimbabwe) and Mbabane (Swaziland). In 2005, most of other countries in Southern Africa have developed their own stocks exchange markets. They are Maputo (Mozambique), Dar-Es-Salam (Tanzania) and Luanda (Angola).
With the exception of the Johannesburg Stock Exchange, and at a different level, the Zimbabwe Stock Exchange and the Namibia Stock Exchange, these markets are too small in comparison to developed markets in Europe and North America, and also to other emerging markets in Asia and Latin America. At the end of 1994 there were about 1150 listed companies in the Africa markets put together. The market capitalization of the listed companies amounted to $240 billion for South Africa and about $25 billion for other African countries.
In the countries under review, stock markets are particularly small in comparison with their economies – with the ratio of market capitalization to GDP averaging 17.3 per cent. The limited supply of securities in the markets and the prevailing buy and hold attitudes of most investors have also contributed to low trading volume and turnover ratio. Turnover is poor with less than 10 percent of market capitalization traded annually on most stock exchanges. The low capitalization, low trading volume and turnover would suggest the embryonic nature of most stock markets in the region.
We have gathered considerable information on the current state of financial markets in Africa in general, and due to a limited time frame, it was not possible to collate, analyze and harmonize them. The format of this article cannot allow to take into consideration all the data. From the latest information, it becomes clear that with the ongoing reforms within the financial sectors in the countries under investigation, a lot of progress has been achieved in terms of regulatory and institutional capacity building. We could expect more results with the promotion of more open investment regulations, allowing more financial flows in the region.
The Experience of Financial Markets Regulation in the Southern African Countries
The financial systems of Southern African countries are characterized by high ownership structure resulting in oligopolistic practices which create privileged access to credit for large companies but limited access to smaller and emerging companies. The regulatory framework must take into account all the specific characteristics of these systems, and at the same time keep the general approach inherent to every regulatory instrument.
Financial systems in Southern Africa are also noted for their marked variations. Some systems, such as those in Mozambique, Angola and Tanzania were for a long period, dominantly government-owned, consisting mostly of the central bank and very few commercial banks. Up to date, Angola has not developed a money and capital market, and the informal money markets are used extensively. Other systems had mixed ownership comprising central banks, public, domestic, private and foreign private financial institutions. These can be further sub-divided into those with rich varieties of institutions such as are found in South Africa, Mauritius and Zimbabwe, and others with limited varieties of institutions as are found in Malawi, Zambia, Swaziland, etc.
Regulatory authorities in most of these countries have, over the years, adopted the policy of financial sector intervention in the hope of promoting economic development. Interest rate controls, directed credit to priority sectors, and securing bank loans at below market interest rates to finance their activities, later turned out to undermine the financial system instead of promoting economic growth.
For example, low lending rates encouraged less productive investments and discouraged savers from holding domestic financial assets. Directed credits to priority sectors often resulted in deliberate defaults on the belief that no court action could be taken against the defaulters. In some cases, subsidized credit hardly ever reached their intended beneficiaries.
There was also tendency to concentrate formal financial institutions in urban areas thereby making it difficult to provide credit to people in the rural areas. In some countries, private sector borrowing was largely crowded-out by public sector borrowing. Small firms often had much difficulty in obtaining funds from formal financial institutions to finance businesses. Finally, the tendency of governments of the region to finance public sector deficits through money creation resulted not only in inflation but also in negative real interest rates on deposits. These factors had adverse consequences for the financial sector. First, savers found it unrewarding to invest in financial assets. Second, it generated capital flight among those unable or unwilling to invest in real assets thereby limiting financial resources that would have been made available for financial intermediation. Coupled with this was the declining inflow of resources to African countries since the 1980s.
A viable financial market can serve to make the financial system more competitive and efficient. Without equity markets, companies have to rely on internal finance through retained earnings. Large and well established enterprises, in particular the local branches of multinationals, are in a privileged position because they can make investments from retained earnings and bank borrowing while new indigenous companies do not have easy access to finance. Without being subjected to the scrutiny of the marketplace, big firms get bigger.
The availability of reliable information would help investors to make comparisons of the performance and long term prospects of companies; corporations to make better investments and strategic decisions; and provide better statistics for economic policy makers. Although efficient equity markets force corporations to compete on an equal basis for the funds of investors, they can be blamed for favouring large firms, suffer from high volatility, and focus on short term financial return rather than long-term economic return.
In various countries where domestic bond markets exist, these are generally dominated by government treasury funding which crowds out the private sector needs for fixed interest rate funding. With minor exceptions, the international fixed rate bond markets have been closed to African corporations. Thus the development of an active market for equities could provide an alternative to the banking system.
The development of financial markets could help to strengthen corporate capital structure and efficient and competitive financial system. The capital structure of firms in Southern African countries where there are no viable equity markets are generally characterized by heavy reliance on internal finance and bank borrowings which tend to raise the debt/equity ratios. The undercapitalization of firms with high debt/equity ratios tends to lower the viability and solvency of both the corporate sector and the banking system especially during economic downturn.
Case studies in selected countries of Southern Africa
In all countries under study, both the historical background, the level of financial system development and the importance of financial markets structure and operations have considerably affected the nature of the regulatory framework. However, there are few countries whose objectives of financial market liberalization were the basis for the development of a modern regulatory system. Mauritius and Botswana are examples which, together with South Africa and Zimbabwe, have developed some of the most developed and diversified financial markets systems in Sub-Saharan Africa. There is no doubt that economic and financial conditions of the economies of individual Southern African countries have played significant roles in shaping their financial market’s regulatory framework.
1. Financial Markets in Botswana
An informal stock market was established in 1989, managed and operated by a private stockbroking firm (Stockbrokers Botswana limited). In 1995, a formal stock exchange was established under the Botswana Stock Exchange Act. The BSE performed remarkably well in terms of the level of capitalization, the value of the shares and the returns to the shares. The BSE contributed to the promotion of Botswana as a destination for international investment.
In 2004, the number of domestic companies listed was 18 while foreign companies listed were 7, and two in the venture capital market. The Bank of Botswana introduced its own paper, BoBCs, since 1991, for liquidity management purposes, and there is a growing secondary market for the instrument. In 1999, the Central Bank introduced an other instruments, the Repos (Re-purchase Agreements) and the National Saving Certificates with the objective to develop local money market and to encouraging savings. In 1998, the International financial Services Centre (IFSC) was established to promote world quality financial services.
2. Financial Markets in Mauritius
The Government of Mauritius has decided as a priority, to modernize and upgrading the financial system of Mauritius and recently took measures to strengthen the financial sector and to further integrate it with both the domestic economy and the global financial market.
Thanks to a well developed network of commercial domestic banks, offshore banks, non financial institutions and financial institutions, the financial system is one of the most vibrant in the Southern African region.
The Stock Exchange of Mauritius (SEM) started its operations in 1989, with only five listed companies. In 2004, more than 44 companies were listed, and the range of activities has expanded, state-of-art technology is being used in the dealings.
In September 2001, the settlement cycle on the SEM was reduced from five to three days, to be in line with major international stock markets. The short settlement cycle has since helped to improve liquidity and turnover on the market as investors are able to sell their securities three business days after buying the, thus reducing risks and bringing better integration to global markets through strict adherence to international standards.
3. Financial Markets in Mozambique
In 1978, all private banks operating in Mozambique were nationalized and merged into two state owned institutions, the Banco de Moçambique (Central Bank) and the Banco Popular de Desenvolvimento (BPD). After the adoption of a new economic orientation in 1992, the Government implemented an economic reform programme including the financial sector reform. Foreign banks were allowed to invest in Mozambique and the regulatory and commercial activities of the Central Bank BDM were separated. Banco de Moçambique assumed the Central Bank function while Banco Comercial de Moçambique BCM led the commercial banking sector.
The financial sector liberalisation policy allowed new institutions. Apart from the already operating Standard Bank, new banks licensed since 1992 or resulting from liquidation of existing institutions include the Banco Internacional de Moçambique, the Banco Comercial de investimentos, Banco de Fomento, Banco Austral, African Banking Corporation ABC, BMI, UCB, ICB, Novo Banco, etc. There are also investment banks, leasing companies and credit cooperatives. This increased number of financial and non financial institutions resulted in the development of an active financial sector.
In October 1999, the stock market of Mozambique (Bolsa de Valores de Moçambique BVM) was inaugurated. Its regulatory agency is the Central Bank BDM and its operations are still limited. With the technical support of the Johannesburg Securities Exchange JSE and the Lisbon Stock Exchange, plans are underway to develop an international financial services centre, including a state-of-the art information technology system.
4. Financial Markets in Namibia
The Namibian Stock exchange NSX is governed by the Stock Exchange Control Act of 1985. Amendments to the Act have been recently adopted in order to bring the national laws in line with international standards.
The NSX was established in October 1992 and is the most technically advanced bourses in Africa, and also one of few self regulated financial markets in Southern Africa. The Namibian Stock exchange Association, a self regulatory, non profit organization, is the custodian of the license to operate the NSX. It approves listing applications, licenses stockbrokers and operates the trading, clearing and settlement of the exchange. Since 1998, the NSX has used the most technically advanced management tools available on the continent, which enable better surveillance and detailed client protection.
5. Financial Markets in South Africa
The South African Financial Markets system is the most sophisticated and complex with the vibrant Johannesburg Securities Exchange (JSE), the Bond Exchange of South Africa (BESA) and the and the South Africa Futures Exchange (SAFEX).
The Johannesburg Stock Exchange JSE was established in November 1887. Currently, it is governed by the Stock Exchanges Control Act of 1985 [amended in 1998 and 2001]. The JSE is the largest stock exchange in Africa and has a market capitalization of more than 10 times that of all the other African markets combined. The JSE provides technical support and capacity building, skills and information to the following exchanges in the region: Namibia, Mozambique, Mauritius, Tanzania and others in Africa (Nigeria, Ghana, Egypt, Uganda and Kenya). Since 1999, the JSE harmonized its listing requirements with the stock markets of Botswana, Malawi, Namibia, Zambia and Zimbabwe.
The BESA was licensed in may 1996 under the Financial Markets Control Act of 1989 [amended in 1998], and the SAFEX was established in 2001 as a Financial Derivatives Market and agricultural Products division of the JSE.
In June 1996, the JSE introduced the fully automatic electronic trading system known as Johannesburg Equities Trading (JET) and since May 2002, is using the Stock Exchange Trading System (SETS).
6. Financial Markets in Swaziland
The Swaziland Stock Market (SSX) was established in 1990 to promote local investment opportunities. In 2002, five companies were listed. The SSX has developed new listing requirements in line with new international regulatory standards. A new security Bill has been approved in 2002, and should be in force by now. It will allow the licensing and regulation of all securities markets, operations and participants.
7. Financial Markets in Tanzania
The Dar-Es-Salaam Stock Exchange (DSE) was incorporated in September 1996 under the Capital Markets and Securities Act of 1994. Its operations however did not start until April 1998 with the listing of the first company. In October 2002, foreign companies were allowed to operate on the DSE. Its regulatory agency is the Capital markets and securities Authority (CMSA). Plans are underway to facilitate the securing of increased financial resources from global markets.
8. Financial Markets in Zambia
The Lusaka Stock Exchange (LuSE) was created in February 1994 under the 1993 securities Act. It is controlled by the Securities and Exchanges Commission (SEC). Its operations were boosted by the successful issue of the Zambian Breweries, which raised up to US $ 8.5 million to refinance a loan secured for the acquisition of the Northern Breweries in 1998. Most of the listings were the result of the country’s privatization program.
A Commodity Exchange, the Agricultural Credit Exchange was also established in 1994, as an initiative of the Zambia National Farmers’ Union, after the liberalization of the prices of agricultural commodities. The Exchange provides a centralized trading facility for buyers and sellers of commodities and inputs. It provides also updated prices and some market information for both local and international markets.
9. Financial Markets in Zimbabwe
The Zimbabwe Stock Exchange ZSE, is one of the oldest and most vibrant stock exchanges in Africa. It was established in 1890, but had sporadic trading until 1946. In 2002, it had 76 listed companies. The ZSE operates under the Stock exchanges act, which is being amended to take into consideration new technological requirements and to align its contents with international standards (improve the security of share trading, transparency, central depository system, etc.).
The ZSE is open to foreign investors, who can purchase up to 40 percent of the equity of listed company, a single investor can purchase a maximum of 10 percent of the shares on offer. Foreign investors can invest on the local money market up to a maximum of 25 percent per primary issue of government bonds and stocks, and a single investor can acquire a maximum of 5 percent. Foreign investors are however not allowed to purchase from the secondary market. These investments qualify for 100 percent dividend and interest remittance.
Financial Markets Regulation in Southern Africa: which way ahead ?
The major issue in financial market regulation lies in the fact that the legal and institutional framework of most countries is still inadequate to support modern financial processes. Examples of such inadequacy include outdated legal systems leading to poor enforcement of laws. The following challenges are very interesting for further research opportunities.
A cohesive and comprehensive legal framework is required under the proactive approach in order to use the contracts that clearly define the rights and obligations of all intervening operators. Such a framework should encourage discipline and timely enforcement of contracts, fostering responsibility and prudent behavior on both sides of the financial transactions. Prudent and efficient financial intermediation cannot operate without reliable information on borrowers, and some legislation on accounting and auditing standards, which also ensures honesty on the part of financial institutions, Similarly, for a country’s financial markets to develop and operate efficiently, legislation should fully incorporate rules of trading, intermediation, information disclosure, take-overs and mergers.
Because of the role of financial institutions and markets in the development of a sound financial system, additional legislation is normally needed for their operations to complement company law. These are prudential regulations, especially for banks and similar financial institutions that hold an important part of the money supply, create money and intermediate between savings and investment. Company law is an example of the kind of legislation needed. It not only governs the operations of business enterprises but also protects the interests of company stakeholders. Thus, public disclosure of information on the company’s activities should be made mandatory on company management in the appropriate section of the Companies Act. Such information, especially that relating to finance and accounting, should also be statutorily required to be subsequently verified and attested to by auditors.
Prudential regulations cover such issues as criteria for entry (listings), capital adequacy standard, asset diversification, limits on loans to individuals, permissible range of activities, asset classification and provisioning, portfolio concentration and enforcement powers, special accounting, auditing and disclosure standards adapted to the needs of the banks to ensure timely availability of accurate financial information and transparency. The objective is to enhance the safety and soundness of the financial system.
There is real need for an important legislation relating to financial markets which require not only favorable policies but also legal and institutional infrastructure to support their operations, prevent abuses and protect investors. Investors’ confidence is critical to the development of the markets. Brokers, underwriters, and other intermediaries who operate in these markets therefore have to follow laid down professional codes of conduct embodied in the legislation applicable to such institutions as finance and insurance companies, mutual funds and pension funds.
An other important issue is the independence of regulatory authority, their number and the option to establish self-regulatory agency. All these aspects should take into account the objectives and principles defined by the government, and also the specific development needs in the financial system.
A major challenge concerning the Financial Markets in the Southern African region is the harmonization of the national financial regulation and the compliance with international requirements, including the SADC criteria and the international standards set by international organizations such as the International Organization of securities Commissions (IOSCO), the International Accounting Standards Committee (IASC), the Basel Committee on Banking Supervision (BCBS) and the obligations resulting from the WTO Agreement on financial Services (GATS). These key international instruments are starting to be enforced and individual countries have to keep updating their financial markets regulations and upgrade the technical skills of their staff in charge of regulatory and supervisory operations.
-Faure, A.P. An overview of the South African Financial System, in the Securities Markets, Johanesbourg, Securities Research, No.3, 1987
-Dougall, H.E. , Capital Markets and Institutions, Second Edition, New Jersey, Prentice Hall ;
-Furness, E.L.  An introduction to Financial Economics, Heinenmann, London.
-Smith, P.F. , Economics of Financial Institutions and Markets, Illinois, Irwin;
-Peltier, F.  Marchés Financiers et Droit Commun, Banque Editeur, Paris ;
-Kolb W. R, and Rodriguez J .R. , Financial Institutions and Markets, 2nd Edition, Blackwell Publishers ;
-Mattout, J. P.  Droit Bancaire International, Banque Editeur, 2e Edition, Paris;
-Schmidt R H and Wrinkler A. , Building Financial Institutions in Developing countries, Working Paper Series, Finance and Development no. 45, JW Goethe University, Frankfurt am Main ;
-Falkena H. Bamber R. Llewellyn D. and Store T. , Financial Regulation in South Africa, SA Financial Sector Forum, 2nd Edition, Rivonia ;
-Mishkin, F. S.  , The Economics of Money, Banking and financial Markets, Seventh Edition, Addison-Wesley, Boston, MA
-Fanelli`J.M. and Medhora R.  , Financial Reform in Developing Countries, IDRC Mac Millan Press Ltd, Hampshire ;
-Banco de Mozambique  , Annual Report, May 2005.
-SADC , The official SADC Trade, Industry and Investment Review, 8th Edition, SADC Secretariat, Gaborone ;
The author, is a lecturer and an International Consultant in Trade and Investment, Director of InterConsult Mozambique and is the Representative of Emerging Market Focus (Pty) in Mozambique. This insight paper is aimed at advising investors and business people involved in international trade by providing them with accurate legal data on the institutional and legal framework of Mozambique and the Southern African region.