AFRICAN UNIONUNION AFRICAINE

UNIÃO AFRICANA

REPORT OF THE FEASIBILITY STUDY ON THE ESTABLISHMENT OF THE PAN AFRICAN STOCK

EXCHANGE

Department of Economic AffairsDecember 2008

Table of Contents

Table of Contents...................................................................i

Executive Summary..............................................................vi

I Introduction: From regional stock exchanges to an African stock market.........................................................................1

I.I COMPREHENSIVE VIEW OF STOCK EXCHANGE DEVELOPMENT IN AFRICA...............2I.II TOWARDS THE INTEGRATION OF AFRICAN FINANCIAL MARKETS........................3I.III METHODOLOGY....................................................................................................4I.IV ORGANISATION OF THE STUDY............................................................................5

CHAPTER 1: ANALYSIS OF THE CONTEXT OF THE INTEGRATION 6

OFAFRICAN STOCK EXCHANGES..............................................6

1.1 THE IMPROVING MACRO-ECONOMIC CONTEXT IN AFRICA...................................61.2 DEVELOPMENT OF THE FINANCIAL SECTOR.........................................................91.3 OPINIONS OF STAKEHOLDERS ON THE ECONOMIC AND FINANCIAL SITUATION..131.4 ANALYSIS OF THE LEGAL, INSTITUTIONAL, FISCAL REGULATORY AND TECHNICAL ENVIRONMENT.............................................................................................14

1.4.1 Different legal systems...............................................................................151.4.2 Regional attempts to harmonise business law and insurance activities151.4.2.1 In the banking sector.........................................................................161.4.2.2 In the stock exchange sector..................................................................17

1.4.3 An unsuitable fiscal context.......................................................................191.4.4 A divergent technological environment....................................................21

CHAPTER 2: ANALYZING THE PERFORMANCES OF EXISTING STOCK.................................................................................23

EXCHANGES.........................................................................23

2.1 GENERAL PRESENTATION OF AFRICAN STOCK EXCHANGES..............................232.1.1 Structure of African stock exchanges........................................................232.1.2 Players in the stock exchange....................................................................24

2.1.2.1 Issuers....................................................................................................242.1.2.2 Investors.................................................................................................252.1.2.3 Brokers...................................................................................................262.1.2.4 Central depository, clearing house and settlement bank.......................26

2.2 COMPARATIVE ANALYSIS OF THE PERFORMANCES OF AFRICAN STOCK EXCHANGES....................................................................................................................27

2.2.1 Equity markets...........................................................................................272.2.1.1 Capitalisation........................................................................................272.2.1.2 Number of listed companies...................................................................292.2.1.3 Volume of Transactions.........................................................................312.2.1.4 Liquidity ratio of the market or rotation rate.......................................312.2.1.5 Yield......................................................................................................32

2.2.2 Bond markets...........................................................................................332.2.2.1 Capitalisation........................................................................................342.2.2.2 Volume of trade or transactions............................................................34

CHAPTER 3: EXAMINING THE VARIOUS OPTIONS FOR THE......36

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INTEGRATION OF AFRICAN STOCK MARKETS..........................36

3.1 BRIEF STUDY OF STOCK EXCHANGE ASSOCIATIONS...........................................373.1.1 Experiences of stock exchange integration in Africa................................38

3.1.1.1 Southern Africa......................................................................................383.1.1.2 Arab Maghreb Union.............................................................................393.1.1.5 East African Community (EAC).............................................................413.1.1.6 West Africa.............................................................................................41

3.1.2 Experiences of stock exchange integration in the rest of the world..........423.1.2.1 ASEAN...................................................................................................423.1.2.2 NOREX.................................................................................................433.1.2.3 EURONEXT...........................................................................................44

3.2. MODELS SUGGESTED FOR THE PAN-AFRICAN STOCK EXCHANGE.....................453.2.1 Option 1: National / regional stock exchanges and a Pan-African stock exchange 45

3.2.1.1 The realisation of this option requires overcoming challenges.............463.2.2 Option 2: National/regional stock markets with an existing African Financial Market as a Continental Platform.............................................................463.2.3 Option 3: Integrated transaction platform, while maintaining national/regional stock markets................................................................................47

3.2.3.1 Advantages of this model.......................................................................483.2.3.2 Disadvantages and costs of this model..................................................48

3.2.4 Option 4: Integration through transaction on the Internet.......................483.2.4.1 Advantages of this model.......................................................................493.2.4.2 Disadvantages and costs of this option.................................................50

3.2.5 Option 5: Gradual integration...................................................................503.3 SUMMARY OF BENEFITS OF THE INTEGRATION OF AFRICAN STOCK EXCHANGES

513.4 SUMMARY OF THE CHALLENGES TO OVERCOME FOR THE INTEGRATION OF STOCK EXCHANGES IN AFRICA.......................................................................................51

3.4.1 Legal and regulatory differences...............................................................523.4.2 Multiplicity of regulators...........................................................................523.4.3 Differentiation of products........................................................................523.4.4 Variances in accounting standards and fiscal systems..............................523.4.5 Information costs and prejudices of country of origin..............................533.4.6 Fragmentation of trading, clearing and settlement systems......................533.4.7 Technological aspects................................................................................533.4.8 Governance................................................................................................533.4.9 Implementation of credible contractual engagements...............................543.4.10 Lack of political will.................................................................................54

3.5 WAY FORWARD.................................................................................................543.6 CONCLUSIONS....................................................................................................57

CHAPTER 4: GENERAL CONCLUSIONS AND RECOMMENDATIONS...........................................................................................59

4.1 CHOICE OF AN OPTION FOR INTEGRATION OF AFRICAN STOCK EXCHANGES.....594.1.1 Harmonisation of the regulatory framework.............................................594.1.2 Adapting to international standards..........................................................604.1.3 Harmonisation of securities taxes.............................................................60

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4.1.4 Lifting of exchange control and harmonisation of payment systems.........604.1.5 Incentive for the development of strong companies and a dynamic private sector 604.1.6 Promotion campaigns................................................................................61

Bibliography........................................................................63

APPENDIX: RECAP TABLE OF THE FINDINGS OF THE SURVEY. .65

List of Tables

Table 1.1 Domestic Savings (% of GDP)............................................................................8Table 1.2 Foreign Direct Investment, net inflows (in millions of current $US)...............10Table 1.3 Opinion on the creation of a Pan African Stock Exchange...............................14Table 2.1 Annual Market Capitalisation, 2002-2006 (US $ billion, end of period)..........30Table 2.2 Number of listed companies, 2005-2006...........................................................31Table 2.3 Yield, 2002-2006 (in millions of US $, end of period).....................................34Table 3.1 Preferences for various models of the Pan-African stock exchange.................50Table 4.1 Opinion on legislative reforms..........................................................................61

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Executive Summary

Within the frame work of its mandate on the economic and financial integration of the Continent, and pursuant to the decision of the Assembly of the African Union in Khartoum, the Sudan, of January 2006, the African Union Commission carried out this study on the feasibility of an African Stock exchange. Faced with the dependency of African countries on external resources for financing their investments and their development; confronted with a multitude of limited and inefficient national stock markets, African leaders, in keeping with the commitments made in Abuja in June 1991, requested the African Union Commission 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 late eighties, and an international economic situation characterized by the rise in the prices of raw materials, has created the bases for the integration of African financial markets in general and stock exchanges in particular.

At the end of 2006, the capitalization of all African stock exchanges, the main indicator of trading activity, represented less than 2% of the world total, and was equivalent 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 stock exchanges are characterized by their low liquidity and the volume of transactions they record.

In order to make up for the inadequacies observed in the functioning of the 23 existing stock markets, the managers of these institutions, through the African Stock Exchange Association or their respective Regional Economic Community, have already initiated reflections and actions for the integration of the stock exchanges. In fact, the majority feel that financial integration, ensuring the circulation of capital at regional and continental level, will provide greater visibility and 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, mainly through a survey carried out in November and December 2007, by means of questionnaires distributed throughout the Continent and discussions with the different stakeholders concerned with stock market development confirmed the high level of challenges to be addressed in order to establish close alliances between existing stock exchanges and create a harmonized African stock exchange.

Taking into account the many challenges (political, institutional, legal, regulatory, technical, economic, financial, fiscal, etc) and based on African and foreign experiences in the harmonization and unification of stock exchanges, the African Union Commission proposes five options for the integration of African stock exchanges, 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) Option 2: national/regional stock exchanges with an existing African stock exchange as

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a continental platform; (iii) Option 3: an integrated transaction platform, while maintaining national / regional stock exchanges; (iv) Option 4: integration of transactions through the internet; (v) Option 5: gradual integration.

To evaluate the detailed advantages and costs of each of these options, a comprehensive study will undoubtedly be necessary. However, in order to facilitate the realization of this additional study, bearing in mind the ultimate objective of continental financial integration and the necessary pragmatism for such a project, it important that institutional experts ( stock exchanges, regulatory organizations) and the economic agents concerned, as well as African governments, decide on 2 or 3 viable options on which this subsequent study can be carried out.

On the whole, the integration of stock exchanges in Africa will be an extremely long process requiring significant structural changes, the requisite technology and infrastructure, appropriate legal, regulatory and accounting frameworks and most importantly, the political will. Based on the results of the feasibility study, all African stakeholders in the development of stock markets in particular, and financial markets in general, should make credible recommendations for all actors, that can be implemented according to a pace to be determined.

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I Introduction: From regional stock exchanges to an African stock market

1. During the 6th Summit of Heads of State and Government of the African Union held in Khartoum (Sudan) in January 2006, it was resolved that the proposal to set up a Pan-African Stock Exchange would be considered by the African Union Commission and the conclusions of this study presented to a subsequent summit. This decision was taken in the light of the Abuja Treaty adopted in 1991, which plans on creating national and regional stock markets, as well as the free flow of capital in order to promote economic development and integration. This process is supported by projects underway or geared towards setting up regional stock exchanges. The African Stock Exchanges Association (ASEA) set up in 1993, also aims at the regional harmonisation and integration of existing African stock exchanges.

2. Stock exchanges have a reputation for encouraging greater economic dynamism and producing higher levels of wealth by providing investors with the opportunity to share the risks and profits of enterprises. Thus they improve market mechanisms in order to raise and allocate scarce financial resources, mobilize local capital, attract foreign direct investment and allocate resources to projects likely to be beneficial to the economy.

3. The stock exchange is an alternative for securing capital at a relatively low cost in comparison with bank loans, and may help the government and private sector to mobilize capital to finance a wide range of infrastructure thereby satisfying social needs as well as growth, and jobs. Stock markets are perceived as a tool for the promotion of the financial sector and the development of private savings, thereby supporting the non-monetary funding of the economy and the fight against inflation.

4. In the wake of other studies previously carried out by the Organisation of African Unity, notably during the Forum on the promotion of the integration and development of financial markets (Grande Baie, Mauritius, 1997), the United Nations Economic Commission for Africa (ECA), the African Stock Exchanges Association and the International Monetary Fund1, this study sets out to examine the necessity, constraints and viability of an efficient financial market within African countries and regions and to explore possible scenarios for setting up an integrated stock market in Africa. This study is designed to establish an African financial zone opened to economic operators on the continent and the world. It has carried out an exhaustive analysis of all the technical aspects conditioning any modern stock market, including the location, rules and regulations governing such a market and its operators.

1 IMF, Stock market development in Sub-Saharan Africa: Critical issues and challenges, WP/07/2091

I.I Comprehensive view of stock exchange development in Africa

5. The number of African stock exchanges has more than doubled since the beginning of the 1990s from about 10 (ten) to 23 (twenty three). The Johannesburg Stock Exchange (JSE) is the first stock market ever set up in Africa, in November 1807, against the backdrop of the discovery of gold. A certain number of stock exchanges were set up in the wake of the independence of African countries in the 1960s. The last stock market that has been launched is the Stock Exchange of Central Africa (BMVAC), in August 2008 after having been 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 limited and select number of operators, who define on their own or through a financial broker, rules governing their transactions, and appears more like a stage towards the creation of a stock market open to the public. Historically, over-the-counter markets have preceded the establishment of stock exchanges. Such a market operates notably in The Gambia and Gabon and has just been set up in Rwanda particularly for its bonds. It is also generally used after the explicit authorization of the regulatory authority, in the stock markets of listed securities for some operations often on non-traditional financial products such as by-products.

7. To a greater extent, the creation of stock exchanges in Africa was done under the impetus of the political will to mobilize national resources, notably as part of privatisation programmes which concerns an important sector of public enterprises, besides attracting foreign investors. Kenya and South Africa are examples of countries where bond markets helped to finance infrastructure development. Stock exchanges also seek to attract foreign investment.

8. On the whole, African stock markets represent less than 2% of the world market capitalisation, according to the 2006 data published by the International Federation of Stock Exchanges. The JSE accounts for close to 75 % of the total and is ranked on the 19th position in the world money market as concerns share capital market value. The second stock market in Africa, Cairo and Alexandria Stock Exchange, only represents 10 % of the African total. In general, the performances of African stock markets are weak and their liquidity is limited.

9. Many obstacles hamper the African stock market in particular and the financial market in general, including: unfavourable macro-economic conditions (unstable and high inflation, fiscal deficit, public indebtedness, etc.), a restricted volume of demand and supply of financial products, a weak volume of transactions, 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 general business climate in order to ease the establishment of active African stock markets. One way forward to develop stock exchange activities and improve capital raising, especially at the domestic level for investment on the continent, is to integrate existing national and regional stock markets.

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I.II Towards the integration of African financial markets

11. As in other fields, the small size of African stock markets contributes to the high cost of operations and hinders their efficiency. In the face of considerable global need for investments in Africa and the concomitant existence of countries with excess resources and countries lacking resources, the integration of financial markets may lead to: a better mobilization of resources, available within and outside the continent (capital invested abroad and the savings of the Diaspora), 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 the African Union in January 2006, it was indicated that the Pan-African Stock Exchange is not designed « to replace local stock exchanges but to strengthen their role on the local financial market, and spread the use of financial and monetary securities throughout the continent owing to its promising financial and economic resources”. Thus the shape of the integration at the continental level is to be determined by the choice of the most efficient option and by imagining a progressive solution taking into account the diversity of African economies.

13. The advantages expected from setting-up this market at the continental level are identical to those which prevailed for the launch of regional stock markets but that have not, so far, been achieved by the latter: increase the depth and the liquidity of the present financial market, attract higher volume of resources towards investment, promote the modernization and efficiency of financial operations, develop intra-continental trade and economic growth, promote competition among enterprises on the one hand and between the banking sectors and the non-banking financial sector on the other, benefit from economies of scale and reduce the administrative burden of international enterprises. With new information technologies and globalisation, the stock exchange has lost the features of a fixed structure and basically gained the shape of a mechanism based on transactions likely to emanate from any part of the world.

14. However, in financial matters where the commitment of operators, and the protection of the public and stakeholders’ confidence are primordial, realism and pragmatism should feed the process of evaluating and designing the project of the Pan African stock market. It falls in line with a comprehensive project of setting up African financial institutions (African Investment Bank, African Central Bank and African Monetary Fund) that the African Union is promoting in a bid to further the development of financial systems and African economies.

15. Africa has already experienced the integration of stock markets, especially in West, Central, Southern and East Africa. The results obtained fail to meet the expectations. But this lacklustre performance is due to known problems that if corrected 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

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consolidated African stock exchanges, many stakeholders (African and foreign political and economic decision makers, experts and researchers, etc.) consider a more advanced integration of existing stock markets as the way forward to be explored rapidly and seriously. The President of the Association of African Central Banks (AACB) at the end of a symposium on the theme “ Capital markets and mobilization of resources for poverty reduction and growth “ stated that “the integration of financial markets was crucial for Africa and that there was no need for each country to develop its own Wall Street on the continent”2

17. This study thus sets out to examine the feasibility of a Pan African stock exchange, likely to better ease up the free flow, and at low cost, of financial resources from surplus economic agents of the continent and foreign investors towards long term investment of dynamic African enterprises and the non monetary financing of States. The macro-economic progress accomplished in recent years in most countries, the commitment demonstrated by an increasing number of African economic operators, including stock markets, to extend their scope beyond their national borders, and the increasing will of Member States of the African Union to speed up economic integration are driving forces to the execution of this project.

I.III Methodology

18. In order to see through its mission, the African Union Commission carried out a study on an African stock market in a bid to assess the need for such a financial institution and the various options necessary for carrying out this project. Based on the results of this study and the recommendations of Member States on the options to be retained, a technical study shall be carried out subsequently.

19. A questionnaire was thus forwarded by the Commission to present and potential stakeholders. A mission was led in a number of member countries from all the regions of the continent to seek advice from concerned institutions and economic agents. Lastly, the Commission drew on the abundant existing literature review on the development and progress of stock exchanges in Africa and 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 of financial market, banking institutions, insurance companies and selected employers’ associations.

21. Over 130 questionnaires were sent, 39 were filled and returned, representing 15 countries and covering 5 African regions including countries with developed financial markets and those having underdeveloped financial markets.

22. The questionnaire was subdivided into two parts: a part dealing with data collection while the other probed participants on the development of stock markets, the Pan-African Stock Exchange project and the necessary conditions for the establishment of the latter.

2 Dr Acquah, ABCA Symposium, Windhoek (Namibie), 20064

23. Missions were conducted in all the countries hosting the headquarters of a Regional Economic Community, apart from the Arab Maghreb Union (AMU). The delegation met with the African Development Bank (ADB), operators of the Tunisian Stock Market, and the Regional Stock Exchange “Bourse Régionale des Valeurs Mobilières (BRVM)”, as well as the West African Economic and Monetary Union - WAEMU) in Côte d’Ivoire.24. The combination of documentary research and data collected from actors and 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 Study

25. The first chapter deals with an in-depth analysis of economic, financial and overall environment for the development of the stock market. This part is subdivided into 5 subparts that address the following issues: (1) the present macro-economic framework in which African stock exchanges are operating; (2) the financial context; (3) the legal and institutional environment; (4) the fiscal framework; and (5) the technological context.

26. The second chapter analyses the performances of African stock markets in the light of variables like the liquidity and the pattern of stock market indices. These performance indicators are thereafter compared among African stock markets, on the one hand, and with stock exchanges of other emerging countries in Asia and Latin America, on the other hand. This is followed by an assessment of the financial and economic viability of African stock markets individually as well as the Pan-African Stock Exchange as a whole.

27. Chapter 3 studies the various options for the integration of African stock markets by analysing the strengths, weaknesses, opportunities and threats (SWOT analysis) for each of the options. Challenges relating to the implementation are also addressed in this chapter.

28. Chapter 4 makes recommendations on the most appropriate options to integrate stock markets and relating to the plan of action, timing, and the sequence by which the plan of action should be implemented

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CHAPTER 1: ANALYSIS OF THE CONTEXT OF THE INTEGRATION OFAFRICAN STOCK EXCHANGES

29. Owing to the low investment and the need to boost economic growth, considering the high indebtedness of African countries, low foreign direct investments and the need to reduce the recourse to external funding, it is important to mobilize more domestic resources. However, efforts to develop savings and the financial sector, which hitherto has been dominated by banks, and promote investment at the national level are stifled by the size of the economies concerned. The regional and continental integration of these efforts should produce better results. 30. This chapter delves into macro-economic and financial variables and other factors which influence the savings and investment behaviour: evolution and structure of GDP, level and pattern of inflation and interest rates, evolution and structure of savings and investment, evolution and components of money supply, size of the banking sector and depth of the financial sector, flexibility of the payment system, tax system, legal and institutional framework, etc. The level of education, which also influences the development of the financial sector, shall not be addressed in this study.

1.1 The improving macro-economic context in Africa

31. The beginning of the new Millennium is marked by better economic performances in practically all the African countries. Even though poverty has not been eradicated, the percentage of the population living below the poverty line fell from 47% in 1999 to 41% in 20043 due to the achievement of a high average economic growth rate close to 5 % since 2000. Furthermore, real per capita income 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 poverty alleviation in Africa, an increasing number of countries are riding on that growth path. In 2007, only 10% of African countries recorded a negative GDP growth rate 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 basically supported by the mining and hydrocarbons sectors where the surge in product prices has led to hikes in production and export prices. Nevertheless, a better mastery of the main macro-economic aggregates especially the prices and public deficits has helped to secure the remarkable participation of petroleum exporting countries in the global economic growth. On the whole, countries of North Africa and Southern Africa registered the highest results.

34. With regard to inflation, Africa has accomplished laudable efforts but which have to be followed up in order to improve the competitiveness of economies.

3 UNCTAD, development in Africa, 2007 4 ADB/OCDE, Economic Prospects in Africa (EPA), 20075 ADB/OECD, supra

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The average rate of inflation fell to 10% in the period 2004 - 2007 while being higher than the 5 to 7% obtained in Latin America. The number of countries with an inflation rate lower than 10% rose from 40% during the period 1998-2001 to 43% during the period 2002-2005.

35. Regarding public finance, on the whole Africa has significantly reduced the level of budget deficit since the beginning of the 21st century. This progress is basically due to the substantial surpluses recorded in petroleum producing countries, the growth of the aid volume received and the extent of external debt relief 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 Indebted Poor Countries (HIPC) Initiative contributed to a significant reduction of Africa’s external 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 of payments, including grants, which has been in excess since 2003 (0.9%) reached 4.7% in 2006 under the impulse of trade surpluses made by oil producing countries7. In 2007, the surplus reached 1.5%, thanks to the increase of deficits recorded by importing countries and in spite of the increase in deficits registered by oil exporting countries. Africa’s share in the exports of goods and services only rose from 2.1% in 2002 to 2.9% in 2005 essentially due to the present oil sales dynamics. However, it is lower than the 3.1% and 5.5% rates reached in 1990 and 1975 8 respectively.

38. On the whole the recent favourable trend of improved macro-economic policies and performances and the high level of external capital flows have induced the stabilization of exchange rates in most countries. Many African countries have improved the convertibility of their currency among themselves while the majority have refrained from resorting to multiple exchange rates and have liberalized their exchange rate system. This situation is nevertheless fragile owing to the persisting dependence of Africa on commodity exports and the present difficulties encountered by Africa in promoting the diversification of its production base. The various trends analysed above, contributed to the increase of domestic savings and investments to 26.3% of GDP and 21.4% in 2006 as against 18.4% and 17.5% in 19909 respectively. In East and Pacific Asia, the rate of investment on GDP reached an average of 35% in the period 1990-2003, and the savings rate related to the GDP stood around the same figure. In African oil producing countries, the rates are higher; 26% for the investment rate (19.6% for non-oil producing countries) and 33.7% for the savings’ rate (6.6% for non-oil producing countries).

6 ADB/OECD, EPA, 2007, op cit7 Ibid8 WTO, 20069 ECA Economic Report, 2007 and 2008

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Table 1.1 Domestic Savings (% of GDP)

(1998-2001)

(2002-2005)

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

Source : ECA

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39. It is worth noting that these rates generally fluctuate relatively showing their dependence on external factors like the variation in the prices of raw materials and foreign direct investment. But since 2000, the recent trends in the oil market and direct investment in new prospecting countries (Sao-Tomé and Principe, 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 in 2006, double of that achieved in 2004, reflects a growth of the relative attractiveness of African countries despite a concentration on a few sectors including oil and mining products. However, Africa is far from the level of FDI received in 2007 by Asia (18%) and Latin America (8.2%). 41. Capital flight from Africa invested abroad on real or financial assets constitute a substantial short fall in terms of savings and investments. For Sub-Saharan Africa, studies carried out on different periods and groups assess them between 2.6 % and 7 % of GDP that is, amounts varying from 3 to 13 billion US dollars yearly. Apart from political and related reasons (instability, corruption, bad governance, etc.), there are numerous causes that account for this financial exodus which has been depriving Africa of important resources for its economic and financial development: budget imbalances and high indebtedness, instability of exchange, lack of diversification of financial products, search for better profit and safety, etc.10

42. The recent general economic recovery and the improvement of savings and investment augur well for a more sustainable development of the financial sector in general and the activities of African stock markets in particular. The narrowness and the low viability of most national and regional stock exchanges tell for an initiative designed to regroup existing stock markets.

1.2 Development of the financial sector

43. The positive macroeconomic performances came along with relatively significant changes in the financial sector. The positive effects of changes in the economic situation were further strengthened by the favourable impact of the reform of the banking sector undertaken in the late 1980s, following the crises that hit most banking systems in Africa.

44. The reform of the financial sector, backed by international financial institutions, generally entailed the privatisation of banks and insurance companies considered to be sound and the liquidation of those that were deemed unviable, as well as the absorption by the State of most of the moribund bank credit. The non-banking financial sector in Africa remained limited. The financial market is still underdeveloped and concentrated on share and bond transactions while retirement funds and by-product markets are unheard of in

10 ECA Economic Report, 2006; UNCTAD, Economic Development in Africa, Mobilisation of domestic resources and the development-oriented State, September 2007

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most African countries. This state of affairs therefore limits the possibilities of choice 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 Principe

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Senegal 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

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45. However, the liquidity rate of the economy, made up of the ratio between the money supply in circulation and the Gross Domestic Product (M2/GDP), a key indicator of liquidity in the economy, increased from 22.3%11 to 38.4% in 2006 (2006 ADB statistics). This rate is higher in Southern Africa, excluding Zimbabwe whose statistics are not available, and Northern Africa, at 56.9% and 44.4% respectively. In countries having a stock exchange market and for the most part found in these two regions, excluding Mozambique and Zimbabwe whose statistics are not available, this rate stands at 40.1%.

46. In spite of this significant increase, the financial sector continues to be weak compared to developing countries in Asia with a rate higher than 120% in 2004 and that of Latin American countries and the Caribbeans (about 50% during the same period12). Furthermore, the liquidity ratio is very variable, even in regions where it is highest. This ratio is lowest in Equatorial Guinea (5.5%), and highest in Mauritius Island (153.2%) as against 24.7 % for WAEMU countries for instance which have the BRVM in common, 61.8 % in South Africa, 74.8% in Djibouti and 93.1% in Egypt.13 On average, intermediate income countries have an M2/GDP ratio more than twice that of low-income countries. In Sub-Saharan Africa, 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 (fiduciary money) and demand, savings and term deposits (bank money and quasi money) is still made up of a considerable proportion of fiduciary money, about 25%. In Latin America, this rate stands at 12%. A large fraction of bank deposits is made up of demand deposits, more than 75% of the total in some countries, as against term deposits, thereby limiting investment financing possibilities.

48. According to the World Bank, non-bank financial savings are generally limited and lower than 20% of total savings. In less developed countries, this rate is very low. Only a few African countries with high intermediate income show diversified savings patterns (South Africa, etc.). These products of savings are mainly made up of insurance premiums, with a share not more than 1% of the GDP in most of the countries and for the most part concentrated on automobile risk and stocks and shares. The development of stock exchange markets will be treated below under a separate topic.

49. Generally speaking, the advent of micro finance has not really changed the situation although it has allowed rural households and low-income urban households to have access to financial transactions.

50. It is worth adding that the payment systems in Africa, mainly in cash, are generally less efficient, more onerous, and impedes the smooth conduct of transactions, despite all the efforts being deployed in some regions to modernise the system of payment.

11 CERUDEB, CIRAD12 Catherine Patillo, IMF 2004: the Financial sector in sub-Saharan Africa: problems, challenges and reform strategies13 ADB/OECD: supra. Referring to money in the broad sense/GDP

12

51. Looking at another indicator of financial sector density, the ratio of loans to the private sector over GDP, also shows that Africa is on the good path but that the 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 as against 30% in South Asia and 107% in high-income countries as against 19% in 200014. While low- income sub-Saharan African countries saw their ratio increase from only an average 12.3% over the period 1990 – 1999 to 13.3% over the period 2000-2004 (21% in low income countries out of Africa15), intermediate income countries, including South Africa, recorded an increase from 52.1% to 64%. Apart from South Africa, the performances of intermediate income countries are quite modest.

52. The same scenario between low and high-income countries also holds true for Northern Africa, with national peculiarities depending on the level of loans to the private sector. While the ratio of loans to the private sector over GDP in 2005 was 4.5%, 8.2% and 10.4% respectively in Algeria, Libya and Sudan, it was 51.2% in Egypt and 62.6% in Tunisia for the same year.16 However, a huge fraction of loans to the private sector is used to finance routine transactions, with a marginal fraction directed towards productive investments.

53. The African financial system is also characterised by ever-high interest rates as confirmed by the existence of interest margins (variation between debit interest rate and credit interest rate) of 8% in Africa as against a world average of 4.8%17, with a bank intermediation margin that is higher in low income countries than in intermediate income countries. This is a reflection of poor competition within the banking system and the limited role of non-banking institutions. 54. On the whole, the financial sector is still fragile. The percentage of poor performing loans compared to total loans, an indicator of the soundness of a financial 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 from a change in the monetary policy applicable in African countries as from the mid 1990s. Particularly, under economic reforms supported by the World Bank and the International Monetary Fund, these countries adopted some financial liberalisation measures, notably: elimination of privileged debit interest rates and a generalised placing of a ceiling on bank interest rates, deregulation of the distribution of credits, authorisations for foreign banks to establish, etc.

56. The putting in place of independent and professional banking supervisory institutions also facilitated a more efficient and cautious control of the banking sector. However, the relative weakness of the African financial sector compared to other developing regions of the world calls for additional efforts to be made by States, in conjunction with the financial system, to promote a banking culture

14 IMF: Regional Economic Prospects (REP), Sub-Saharan Africa, October 2007 15 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

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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 financial sector is particularly low at less than 20% as against 30% in East and Pacific Asia.19, This is not enough to stimulate the development of the financial sector especially in its modern dimensions such as the stock exchange market because banking institutions constitute a key ingredient for embracing new financial products.

1.3 Opinions of stakeholders on the economic and financial situation

58. Respondents to the survey and interviews conducted throughout the continent on the feasibility of a pan-African stock exchange indicate that the high level of inflation and inadequate interest rates are impediments to the development of financial markets. 35.3% of the respondents consider weak economic growth, low household incomes, low savings, and low investments as obstacles to the emergence of financial markets. Lack of macroeconomic and financial information, inadequate infrastructure, as well as crushing debt burdens and 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 of macroeconomic stability and the putting in place of a sound and fair taxation system that is favourable for strong savings are needed for the establishment of a pan-African stock exchange. Conversely, promoting economic integration or macroeconomic convergence, creating a common currency and encouraging free movement of goods are not seen as priorities. Yet, 47.1% of respondents indicated that with a view to setting up a pan-African stock exchange market, the creation of a common currency is a prerequisite.

60. At this point, considering the narrowness of African economies taken individually, and the variability of their economic and financial performances, a long term viable stock market for investments and mobilization of capital can only be envisaged at the continental level

61. Indeed, the economic results and financial solidity of the continent on the whole are more sustainable than national and regional performances, given that the weaknesses of each country are offset. Moreover, with regard to essential variables, such as savings and investments, their global volume facilitates the operation of an efficient financial market than their amount at the national and even regional level. Liquidity ratio which varies amongst African countries and low in most of them show how difficult it is to develop the financial sector in African countries taken individually.

Table 1.3 Opinion on the creation of a Pan African Stock Exchange

No. %

19 WB, MFW4A14

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 16.7Mobilization 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 36 Source: AUC Survey

62. 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 the continental level would provide better visibility and a wider scope of arbitrage to those looking for capital and investors both African and foreign. The modest performances of existing African stock exchanges should be an inducement to actively explore avenues to integrate African national and regional stock exchanges.

1.4 Analysis of the legal, institutional, fiscal regulatory and technical environment

63. In Africa, the legal, institutional, accounting, fiscal and technical environment of financial operations in general and stock markets in particular is on the whole archaic, are hardly favourable for their internal development and can hardly attract foreign investors who do not have a lot of confidence in dispute resolution mechanisms and in the stability of rules established both in the legal domain and business tax system. The small proportion of foreign direct investment that Africa receives is characteristic of the unfavourable business climate, which also affects African economic operators. In some countries, it is difficult to know the norm applicable for transactions or particular activities. Legal insecurity is considered as one of the most serious impediments to attracting investors.

64. Furthermore, the diversity of regulations in force and existing technologies are major challenges to the integration of stock exchanges in Africa. Although there are several initiatives designed to harmonise the business laws and environment in some Regional Economic Communities, the level of conformity is not adequate for the creation and blossoming of a Pan African stock market.

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65. The following section shall deal with the situation on the continent and some experiences to harmonise the regulations and adapt present systems.

1.4.1 Different legal systems

66. There are three major legal systems on the continent: civil law, common law and religious law (sharia) systems. Civil law also known as continental or Romano-Germanic laws is dominant and covers French-speaking countries as well as some English-speaking and Arab countries (Côte d’Ivoire, Mali, Botswana, Tunisia, Egypt, etc). Common Law is drawn up in Anglo-Saxon countries 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 legal systems. The differences between the three systems reside in their origin and in the manner of their implementation. In countries practicing civil law, the legal system is based on one or many codifications adopted by lawmakers who establish the major principles of law. In this case, the law is interpreted instead of being drawn up or “made” by judges and only texts enacted and not jurisprudence, defined as, are considered as force of law.

67. In countries practicing common law, the legal system is drawn up according to customs and is created and/or fine tuned by judges. Rulings are given depending on the jurisprudence and affect the law applied on future cases.

68. Where no legal declaration is binding, judges have the authority and the obligation to “institute” the law by setting precedence.

69. Religious law refers to a system using a religious text like the Koran as the legal source.

1.4.2 Regional attempts to harmonise business law and insurance activities

70. 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 and principles to be used as rules and guidelines as well as the elimination of differences in the technical contents of norms. Harmonisation is generally carried out by international treaties or it involves the adoption by some States of regulatory principles of other States. It is not necessarily a unique or uniform set of 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 of Cameroon uses common law.

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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 of investments in Africa. In this regard, in 1993, 14 (fourteen) African countries of the franc zone signed the treaty to set up the Organization for the Harmonisation of Business Law in Africa (OHADA), in a bid to harmonise their business law especially with the purpose of attracting more local and foreign investments. The Comoros Island and Guinea have become OHADA members and the Democratic Republic of Congo is planning to join and become the 17th member. The activities of 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 join the bandwagon21.

72. Even if OHADA is a possible framework for the harmonisation of business law in Africa, its legal principles that are clearly civil law oriented are nevertheless likely to hamper its adoption by countries with different legal systems. Furthermore, in 1992, franc zone member countries signed a treaty setting up an organization in charge of regulating the insurance sector in their countries. The Inter-African Conference on Insurance Markets (CIMA) is designed to enhance cooperation in the insurance field, develop insurance and reinsurance companies in relevant economies, etc.

73. Many initiatives have been taken to move towards a common supervision and harmonisation of rules governing banking and stock markets activities in Regional Economic Communities (RECs) giving impetus to the creation of a Pan-African Stock Market.

1.4.2.1 In the banking sector

74. In the banking sector, a lot of progress has been made in the regional supervision of activities. For instance, all the countries of the West African Economic and Monetary Union (WAEMU) have the same legislation and have set up a regional banking commission in charged of closely monitoring banking activities in their region.

75. Member States of the Economic and Monetary Community of Central Africa (CEMAC) are governed by the same banking legislation and the Central African Banking Commission (COBAC) is responsible for the sector’s supervision in all the member States. In 1994, a Committee of Banking Supervisors of West and Central Africa (CBSWCA) was set up. It is made up of officials in charge of banking supervision of 12 countries and those of the two regional banking commissions22. Furthermore, SADC Sub-committee of Banking Supervisors (SSBS) was set up in 2004, following the dissolution of the East and Southern African Banking Supervisors Group (ESAF). SSBS has the same objectives as the CBSWCA mentioned above. It has already signed a Memorandum of Understanding to include SADC finance and investment sector’s protocol.1.4.2.2 In the stock exchange sector

21 www.OHADA.com22 Burundi, DR Congo, Cap-Vert, Ghana, Guinée, The Gambia, Madagascar, Nigeria, Sierra Leone, Soudan, Rwanda, CEMAC et UEMOA.

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76. Most African countries have set up regulation structures for financial markets, or financial markets authorities, with different names (stock market valuation Commissions, financial services Commissions, etc.)They are responsible for establishing and adapting rules, granting licenses for the management of stock market operations, and supervising trade transactions and the activities of brokers. Such a structure generally sets the standards that market players must observe with a view to protecting the interests and rights of investors and listed companies.

77. Considering that a properly defined regulatory system is the bedrock of any efficient and transparent securities market, it is necessary to have strong institutions with mission to harmonize the rules in order to make investors confident and facilitate increased cross border economic activities. Consequently, most African countries have already adhered to the 30 principles of the International Organization of Securities Commissions (IOSCO) and which are well accepted all over the world. Also, with regard to accounting, the International Financial Accounting Standards (IFAS) provide guidelines on the standards that African countries can apply.

78. It has to be recalled that there are two types of quotation systems now being used in financial markets: continuous scoring and fixing. On stock exchanges based on continuous scoring, transactions can take place at any time provided the order received reflects the current price. In a stock exchange based on quotation fixing, purchase and sales orders are regularly placed side by side following a periodicity earlier agreed upon before being compared, at a point in time of the business day, on the basis of a price at which there is very little disparity 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 the transactions seem to be a key factor for the investor who would like to quickly make up his mind. Transactions are finalized within five business days after the day of quotation.

80. Continuous negotiation systems allow for greater transparency in price fixing processes, and this is very important in reassuring investors who happen to have very little knowledge when the stock market is still in its infancy.

81. Despite the disparities between country systems, recent trends seem to suggest that players of financial markets are increasingly involved in regional activities and African companies are embracing trans-border stock quotation. For example, AngloGold Ashanti, a Ghanaian company, has dual quotation on the Ghana Stock Exchange (GSE) and the Johannesburg Stock Exchange Limited (JSE Ltd), and Oando, registered in Nigeria, has adopted a similar practice on the Nigeria Stock Exchange (NSE) and at the JSE Ltd.

82. Currently, there are various initiatives aimed at giving a regional dimension to the supervision of stock exchanges. In West Africa, WAEMU is a fully 25 IDA, World Bank. Stock Exchange Development, 1997

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integrated bloc since the countries of this sub-region use the same currency, one central bank and uniform rules and regulations for accounting and trade. Furthermore, the West African Monetary Agency (WAMA) is working towards the creation of a common currency and a common central bank for Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leon, which are all member countries of the Economic Community of West African States.

83. However, each of the three existing stock exchange markets within the ECOWAS, that is to say the Nigerian Stock Exchange, the GSE, and the Regional Stock Exchange (Bourse Régionale de Valeurs Mobilières - BRVM) has its own regulatory body and different rules and systems but allows for simultaneous quotation of companies of their respective territories. Examples include 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 of Ecobank 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 is not only possible but also cumbersome. Indeed, the mechanism is quite onerous due to its costs and other expenses linked to the need to comply with various rules and currencies and the dissemination of information. Also, differences were noted on the listings of Ecobank securities between the three stock exchanges, a situation which brings to the fore the problems of effective information flow. In order to make up for these shortcomings, the Nigerian SE, the BRVM and the GSE initiated discussions aimed at promoting greater cooperation and harmonizing their rules.

85. In Central Africa, a regional stock exchange, the Central African Stock Exchange, (Bourse des Valeurs Mobilières d’Afrique Centrale - BVMAC), has been created and established in Gabon. It covers the Economic and Monetary Community of Central Africa (CEMAC), made up of Cameroon, the CAR, Congo, Gabon, Equatorial Guinea, and Chad which also have in common harmonized trade rules, a common currency (the CFA F), a common central bank (the Bank of Central African States, BEAC). Another stock exchange, the Douala Stock Exchange, has been created in Cameroon. Given that these two stock exchanges are found in the same monetary zone and that their individual viability is weak, some attempts are being made to merge them.

86. A lot of progress has also be made in East Africa where the regulatory bodies of the Nairobi Stock Exchange, the Dar es Salaam Stock Exchange and the Uganda Stock Exchange, under the East African Community (EAC), signed a memorandum of understanding in 1997 to establish an organization called the East 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 stocks develop their cross border activities. For example, the shares of East African Breweries, Kenya Airways and Jubilee Holdings are negotiated on the three stock exchanges mentioned above.

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88. Within the Southern African Development Community (SADC), a funding and investment protocol has been signed and aims at encouraging the harmonization of the funding and investment policies of Member States. Furthermore, there is a Community of SADC Stock Exchanges (COSSE) with the main goal of fostering cooperation between the stock exchanges of member countries and developing a regional stock exchange.

89. In fact, as of now, all SADC stock exchanges have already harmonized their listing, negotiation and clearing standards within the framework of the Committee of Insurance, Securities and Non-Bank Financial Institutions Association (CISNA), COSSE, the Association of African Central Banks and the Association of African Stock Exchanges. There are also initiatives aimed at finalizing the harmonization of transaction systems, and discussions are underway on the training of investors, a common certification test for brokers and the cross-border listing of securities in SADC stock exchanges.

90. In a nutshell, at the level of the continent, there is very little harmonization of stock exchange regulations. It is necessary for African countries to create a platform where this harmonization process can be initiated. To increase the confidence 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 context

91. In all the countries, the taxation of savings and securities has far reaching implications on the development of financial markets. The tax administration in Africa, characterized by inadequacy and bureaucracy, does not facilitate economic and financial development. African taxation systems are also quite often characterized by high levels of tax evasion and corruption.

92. Tax regulations and high tax rates are often seen as obstacles to economic activities in Africa. In South Africa, foreign companies are taxed up to 34%24. According to the AfDB a new company tax law has reduced company tax in 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 exchange market, it is very important for the taxation policies of African countries, especially on financial transactions, to be harmonized. We must avoid a situation of disparities which may lead to tax competition between the countries as they seek to attract foreign investors or investors from other African countries.

94. The differences between taxation systems inhibit economic integration and growth. However, most African regional communities are now tending towards harmonizing their taxation systems. This is the case of WAEMU and CEMAC that have harmonized their domestic consumption taxes during the 1990s.

95. Another factor that can also influence investment decisions is the availability of tax incentives. Countries granting tax incentives stand a better chance of attracting investors than those with rigid taxation policies.

24 AfDB, 200620

96. Forty four per cent of the answers to the questionnaire of the AU Commission survey on the pan-African stock exchange project mentioned unfavourable tax systems as one of the major factors affecting the development of financial markets in Africa. Seventy four per cent underscored the importance of a harmonized tax system for a viable stock market. The officials who were interviewed noted the absence of attractive taxation measures as a challenge for most African countries to attract investments.

97. Recent studies have equally confirmed that attracting foreign direct investments through tax exemptions can have a great impact on low- income countries now competing for export-based foreign investments. Consequently, it is imperative for countries to harmonize their taxation policies thereby improving their investment environment. It is advisable to adopt a tax rate that will boost the economy while maintaining fiscal equilibrium.

98. In the SADC region, a funding and investment protocol has been signed by Member States to harmonize their funding and investment policies. By virtue of the annex on taxation and related issues, the Member States have to adopt a common approach on the treatment and application of tax incentives.

99. Certainty, simplicity and fiscal stability should be able to reassure investors about returns on investment. So, taxation systems should be administered with transparency in order to increase the confidence of businesses.

100. However, fiscal coordination could be more attractive than fiscal harmonization. Inter-jurisdictional tax equity is one of the main criteria for tax coordination because it ensures uniformity in the assessment of companies and tax withholding among countries. Tax coordination also ensures fairness and neutrality for taxpayers.

Table1.4 Major factors affecting the development of financial markets in Africa

NoTotal of

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 Survey

1.4.4 A divergent technological environment

101. The technological context varies considerably from one African country to another. While basic infrastructure (electricity, telephone, Internet, etc.) are hard

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to come by in some countries, yet other countries are acquiring frontier technology infrastructure.

102. Thus, in 2005, according to the ADB, electricity consumption varies from 10 kwh per year in Chad to 5 060 kwh in South Africa, with 23 countries consuming 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 a country with less than 20 subscribers per 1,000 inhabitants (Ethiopia) and countries like South Africa and the Seychelles where the number of subscribers for 1000 population is around 919 and 1058 respectively, most countries with a figure lower than 250 subscribers despite the progress enabled by the cellular phone.

103. In the same period, with regard to Internet access, there is a clear divide between the 18 countries with fewer than 10 people connected per 1000 inhabitants (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; Africa South, 105.6; Tunisia, 126.8). It should be noted in the figures provided above that the countries better equipped for energy and telecommunications infrastructure are those with the most active stock exchanges.

104. Transaction systems in developed stock exchange markets have improved from the public outcry system where stocks were traded orally to automated systems where transactions are computerised. There was a proliferation of computer-based systems around the world to respond to increased competition between stock exchange markets in terms of exactitude, error margins, and quality of execution.

105. Today, African stock exchange markets still use the public outcry system, even though most of them are gradually changing to computerize their transactions in spite of the costs considered being excessive. This trend finds justification in the observation that most stock markets recorded an increase in turnover just after computerizing their transactions.

106. Many observers even think that the automation of transactions is particularly important for an integrated market given the fact that most stock markets recorded an increase in turnover just after adopting such systems. Moreover, the automation of the trading system should be done simultaneously with the introduction of a central securities depositor. Such a depository is responsible for minimizing the risks involved in the holding and circulation of securities and also reduces related errors and delays.

107. Automation would encourage capital flow through out the continent as it would lead to a reduction in the costs and inefficiencies inherent in each stock market, and would swell the volume of activities and liquidity. An automated trading system would equally shorten the negotiation chain by reducing the number of intermediaries and allowing investors to operate directly on stock markets. Even more important is the confidence generated by automation as it allows for very little manipulation.

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Table 1.5Negotiation system and settlement date of selected stock exchange markets in 2006

Stock ExchangeTrading system

Settlement date

System Type

Botswana Stock Exchange Public outcry Manual T+4

Cairo & Alexandria Stock Exchanges EFA Automated T+2

Dar Es Salaam Stock Exchange N/A Automated T+5

Ghana Stock ExchangeContinuous auction sale

systemManual T+3

Johannesburg Stock Exchange Ltd TradElect Automated T+5

Lusaka Stock Exchange N/A Manual T+3

Nairobi Stock Exchange N/A Automated T+5

Namibian Stock Exchange TALX Automated T+5

Nigerian Stock Exchange Horizontal trading system Automated T+3

The Stock Exchange of MauritiusAutomated system

(SEMATS)Automated T+3

Uganda Securities ExchangePublic auction sale

system, manualManual T+5

Zimbabwe Stock Exchange Public outcry Manual T+7

Source: ASEA Yearbook 2006

CHAPTER 2: ANALYZING THE PERFORMANCES OF EXISTING STOCK EXCHANGES

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108. On the whole, African stock exchanges record mixed performances. Apart from the Johannesburg Stock Exchange, which is modern and well known in the world, most of the other stock exchanges are bugged down by numerous problems including: low demand and supply of financial products, low volume of trade, high taxes, poor macroeconomic conditions, lack of market infrastructure, etc.

109. Generally, African stock markets are mainly dominated by equity markets to which could be added some fledgling covered bond markets. Stock markets for derivative instruments and other sophisticated products are not well developed, and thus are rare in Africa.

2.1 General presentation of African stock exchanges

110. There are currently twenty-three stock exchanges on the African continent geographically distributed as follows:

111. In Northern Africa, four stock exchanges: Algeria, Casablanca, Cairo and Alexandria (CASE) and Tunis;

112. In West Africa, four stock exchanges: the BRVM which brings together eight 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 BVMAC regrouping the six countries of the Economic and Monetary Community of Central 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 bond markets, which are preponderant, even if in South Africa, the derivative instruments market has made great strides in recent years. Given the lack of data, this analysis will not take into account securities traded on over-the-counter markets even if this type of trading is quite considerable on many stock markets, especially Cairo and Alexandria.

2.1.1 Structure of African stock exchanges

117. To ensure the effective and efficient functioning of stock exchanges, their regulatory authorities have, in keeping with international standards, adopted the principle of net separation of the missions and responsibilities of the various players. This choice is generally manifested in the creation of two distinct poles of competence on each stock exchange: a public pole which acts as the stock exchange regulatory and supervisory Authority with its main role being to

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regulate and supervise the stock exchange, and a generally private pole with the primary purpose of coordinating and organizing the stock exchange market.

118. The first pole acts as the representative of the State. It operates independently. It protects the general interest of actors of the market, and ensures the security and integrity of the stock exchange. In most countries, a specific body is set up. In a few countries, this function is entrusted directly to a department in the Ministry in charge of finance. The missions and functions of the 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 or company market place, has a mission to organize and coordinate the activities of the 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 exchange

120. The range of players is made up of issuers, brokers / dealers, and investors both domestic and foreign. 2.1.2.1 Issuers

121. In terms their shares and bonds, issuers are mainly private companies. With regard to bonds, other issuers are governments and supranational authorities. Through privatisation programmes, governments have become key stock exchange players by getting their securities listed. By listing treasury bills governments have become major issuers of securities that could be traded on the secondary market. Today, this has become a major stock exchange activity that injects a lot of liquidity into the market.

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2.1.2.2 Investors

122. Stock exchange markets are mostly dominated by institutional investors (insurance companies, pension schemes, common investment funds, etc.) Apart from these investors, we also have private investors, banks, foreign companies and foreign private investors.

123. In recent years, thanks to numerous reforms undertaken by authorities, an increasing number of foreign investors are beginning to develop interest in African stock exchange markets. In 2006, foreign capital investors in shares on African financial markets stood at a net total of 10.5 billion dollars126. Most of it was 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 shares of these flows. Foreign investors are mainly made up of pension schemes, common investment funds, and hedge funds. Among them, some are specialised regional funds because they have a long-term objective and/or sufficient local resources to overcome information differences.

124. On bond markets, investment are mainly realised by private or institutional investors (insurance companies, pension schemes, banks), and foreign companies. In 2006, investments by hedge funds and other debt funds increased considerably. This flow of capital into the continent is however concentrated in high yield countries that export raw materials (commodity products) and in those with attractive macroeconomic prospects or rather open capital markets such as Nigeria, Zambia, Malawi, Botswana and Ghana. The BRVM and, to a lesser extent, Kenya and Uganda also received capital flows on the respective debt funds.

125. An estimated total of one billion US dollars was invested in Nigeria in the first semester of the year 2006, that is to say more than 5 times the total foreign investment received in 2005. More moderately, the Zambian debt market attracted some 250 million dollars while that of Tanzania received a little more than 150 million dollars.27The interest foreign investors have been showing in Africa 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, Afrology

27 Source : Voir ci-dessus

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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 Brokers

126. Brokers are mostly found around stock exchange firms that have been able to develop securities trading services such as portfolio management, the management of funds and securities underwriting activities. They have increased their products through the creation consulting, research and data analysis services. Many specialised services have developed to better meet the increasing needs in assets management, especially of institutional investors such as pension schemes, as well as to satisfy the counselling needs of companies.

127. In some countries, brokers and dealers or stock exchange firms are stock exchange shareholders. In others, the shareholding of stock exchanges is more diversified, including notably the State as well as financial and non financial enterprises. In the first case, the ownership of the stock exchange is like that of a credit union of some sort.

2.1.2.4 Central depository, clearing house and settlement bank

128. The chain for the conduct and finalisation of stock exchange transactions also includes the activities of specific structures in charge of performing some functions, notably that of facilitating the settlement and delivery of securities between buyers and sellers, generally with brokers as intermediaries.

129. Hence, the clearinghouse has a role to ensure the circulation of securities between brokers while the central depository keeps the securities and keeps record of transactions relating to such securities. Increasingly, the circulation of securities is done rather that in paper. In some stock exchange markets, these different functions are entrusted to one and the same structure.

130. The function of settling transactions on securities is sometimes performed by a particular operator who may be a central bank, a commercial bank, or another structure. Each broker/dealer has an obligation to open an account in the settling bank.

28 Source: AfDB27

2.2 Comparative analysis of the performances of African stock exchanges

131. We will examine the performances of African stock exchanges by referring to the results recorded by share and bond markets since those of the other financial products (right, derivative and final products, etc.) are rather insignificant.

2.2.1 Equity markets

132. The analysis of performances on equities markets will be centred on the results recorded by some key stock exchange indicators over the period 2002-2006.

2.2.1.1 Capitalisation

133. Capitalisation measures the financial capacity of a stock exchange. It is equal to the total of the products of stock exchange prices of listed securities and the number of each of the shares listed. This indicator is used, inter alia, to assess how safe the investment is through the stock exchange weight of the companies listed.

134. From 2002 to 2006, the capitalisation of African stock markets increased from 238.4 to 955.5 billion US dollars, i.e. a 75.1% increase made possible by the growth of the number of stock markets, the relatively large size of the new listed companies and the flow foreign investors on African markets such as South Africa and Egypt13.

135. In 2006, the JSE Limited accounted for nearly 75% of the capitalisation of African stock markets, followed by CASE with 10%. Together, these two exchanges constitute about 85% of the capitalization of African stock exchanges but only 1.5% of the capitalization of the International Federation of Stock Exchanges in which they are the only two African members.

136. However, the capitalisation of the smaller African stock markets increased considerably between 2002 and 2006, the most notable variations have been noticed 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 to the GDP stood at 36% for Africa as against 161.3%, 70.6% and 25.4% for Malaysia, Thailand and Mexico respectively. Still in 2004, this ratio stood at 214.1% for the JSE Limited and 51.3% for CASE, figures which confirm the relatively advanced level of these two financial markets.

138. North Africa, with four stock markets, had a capitalisation of 147 billion dollars 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, which 13 Pazisma Corporation14

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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 markets increased 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 stock exchange, the fourth most active stock exchange and largest of the continent in 2006 and whose capitalization is about 80% of the region. The BRVM, despite of being regional, has a limited capitalization of 5% while the Stock Exchange of Ghana contributes 15% of the entire region.

140. East African, with five stock markets, has a total stock capitalisation of 4 billion dollars in 2002 and 22 billion dollars in 2006, a 400% increase in five years. This growth, exceeding the continental average, is largely due to developments on the Kenyan market.

141. The Southern Africa region, if it concentrates relatively the largest number of stocks in Africa, eight, is also the most active, that of South Africa. Thus, its capitalization has increased from 188 billion in 2002 to 736 billion dollars in 2006 following an increase of 290%, a rate significantly below the continental average. From other stocks in the region, only Malawi has a market capitalization greater than $ 10 million in 2006 (12.29 million).

142. In the Central African region, with a listed company in 2006, the Douala Stock Exchange has a capitalization of approximately 4 million U.S. dollars while BVMAC has started operations in August 2008 with the listing of a government bond.

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Table 2.1 Annual Market Capitalisation, 2002-2006 (US $ billion, end of period)Stock Exchange 2002 2003 2004 2005 2006

Algeria - 0.14 0.14 0.09 0.10

Botswana 1.49 1.94 2.33 2.43 3.94

Cote d’Ivoire (BRVM) 1.33 1.64 2.09 2.35 4.14

Egypt 26.34 27.85 38.08 79.51 93.50

Ghana 0.72 1.48 10.97 10.09 11.88

Kenya 1.45 4.15 4.04 6.35 11.35

Malawi 4.54 5.43 7.05 8.89 12.29

Mauritius 1.35 1.96 2.4 2.66 3.54

Morocco 9 13 25 27 49

Mozambique - - - - 0.10

Namibia 0.08 0.15 0.22 0.21 0.429

Nigeria 5.89 9.67 14.50 22.48 34.06

South Africa 182.00 260.75 442.52 549.31 711.23

Sudan 0.75 0.81 2.06 3.12 4.62

Swaziland 0.14 0.17 0.22 0.20 0.23

Tanzania 0.74 0.67 0.66 2.00 0.47

Tunisia 2.09 2.18 2.59 2.83 4.26

Uganda 0.20 0.69 1.73 1.85 2.42

Zambia 0.25 0.77 1.65 2.46 3.19

Zimbabwe - - - - 4.76

Sources: Local stock markets and central banks, Bloomberg, S&P, Standard Bank, Arab Monetary Fund, Pazisma Corporation

2.2.1.2 Number of listed companies

143. The number companies listed on African stock markets fell from 1 834 in 2002 to 1714 in 2006, that is a reduction of 120 companies over the five years. This number is slightly higher than that of the total number of companies listed on the financial markets in Malaysia Thailand (1 427) and is lower than the number of companies listed in the London Stock Exchange (2 682) or the Madrid Stock Exchange (3 223) in 2003.

144. In 2006, the CASE led with more than 603 enterprises listed, followed by the JSE Limited with 401 companies. These two financial markets alone have nearly 60% of the companies listed in Africa. Table 3.3 below shows the number of companies listed on each African stock exchange in 2005 and 2006. It should be noted that the number of companies listed dropped in the CASE from 744 in 2005 to 603 in 2006, that is a reduction of 141 companies and this accounts for the trend observed. Five other financial markets witnessed a drop in the number of companies listed as follows: Botswana (11), Nigeria (10), Nairobi (4) and Algeria (1 out of 3 companies listed). Conversely, the JSE Limited (+13),

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Casablanca Stock Exchange (+9) and Namibia Stock Exchange (+5) recorded an increase in the number of companies listed over the same period.

Table 2.2 Number of listed companies, 2005-2006 Stock Exchange 2005 2006

Algeria 3 2

Botswana 28 17

Cote d’Ivoire (BRVM) 39 40

Egypt 744 603

Ghana 30 33

Kenya 48 44

Malawi 10 11

Mauritius 38 41

Morocco 54 63

Mozambique 2 2

Namibia 28 33

Nigeria 214 204

South Africa 388 401

Sudan 49 52

Swaziland 6 6

Tanzania 8 8

Tunisia 45 48

Uganda (Composite) 7 8

Zambia 14 18

Zimbabwe 79 80Sources: Local stock markets and central banks, Bloomberg, S&P, Standard Bank, Arab Monetary Fund, Pazisma Corporation

145. In 2006, three African stock markets (JSE Limited, CASE and Nigeria) have more than 100 listed companies. These three stocks represent over 71% of the total listed companies in Africa. Fourteen stocks have less than 50 titles listed, while five have ten or less (Algeria, Uganda, Mozambique, Swaziland and Tanzania).

146. On the whole, African financial markets are thus quite small. If urgent action is not taken to promote and merge these stock markets, their usefulness for economic development will be insignificant.

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2.2.1.3 Volume of Transactions

147. The volume of operations or transactions is the total number of deals carried out on a stock exchange. Between 2002 and 2006, it moved from 86.4 billion US dollars to 368.3 billion US dollars, i.e. an overall increase of 76.5% for the whole of Africa over this period. Johannesburg, Nairobi, Casablanca, Namibia, Nigeria and Sudan are the only ones stock exchanges to have experienced increases throughout that period. However, transactions on stock exchanges in Africa have formed in 2006 only 0.5% of total transactions recorded by the FIBV, confirming low overall liquidity of the stock market in Africa.

148. In 2006, the largest stock exchange in terms of traded shares was the JSE Limited with transactions worth 311 billion dollars, accounting for 84.5% of the continental total. It is followed, with 48.1 billion dollars by the CASE (13.3% of the total). Lagos and Nairobi Stock Exchange lag behind with 3,4 billions and 1,4 billion.

149. All other African exchanges have each annual transactions amounting less than one billion, some of them (Algeria, BRVM, Mozambique and Swaziland) bring up the rear with less than one million dollars worth of transactions.

150. The volume of transactions compared to the GDP is low for a majority of African stock markets. Although this ratio was 76.5% in South Africa in 2004, it was only 7.5% in Egypt and less than 2% for most of them. The JSE is the only one that can stand competition from stock markets in emerging countries, with the 2004 ratio being 50.8% in Malaysia and 66.7% in Thailand.

151. For most of the stock markets of the continent, the volume of operations increased overall in 2006 compared to 2002. However, only six financial markets recorded a successive rise during the five years (JSE Limited, Nairobi, Casablanca, Namibia, Nigeria and Sudan). In addition to these financial markets are those of Tunis, Uganda and Egypt whose stock markets progressed during four consecutive years, as from 2003. The volume of operations of the other stock markets recorded rather inconsistent results.

152. With regard to volumes traded and stock exchange capitalization, there is a close relationship between these two factors. This relationship between the volume of operations and the stock market capitalisation represents the liquidity of the financial market or the rate of rotation examined here below.

2.2.1.4 Liquidity ratio of the market or rotation rate

153. The rotation rate, ratio of the volume of transactions with the capital in circulation or the number of securities open to the public, measures the degree of liquidity of a security and gives a good indication on how easy it is for an investor to enter and/or leave a market. In general, when an operator acquires a security, he must be sure of the possibility of selling it when necessary. The higher the

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liquidity ratio, the more cash there is on the financial market and the more this can attract investors.

154. Going by the available data, it appears clearly that the African stock exchanges have very little liquidity. Indeed, from 2002 to 2005, none of them recorded a liquidity ratio higher than 50%, as against a liquidity ration varying from 100 to 130% in 2003 for stock markets like Euronext, of Frankfurt or London with the average being 66%. Nevertheless, the rotation rate of African stock markets can compare with the financial markets of the new members of the European Union that also have transitional economies, or Latin American stock markets. In 2003, this rate was on the average 30%, close to those of several small European or Latin America stock markets, i.e. 35%, 29% and 25% respectively for Athens, Mexico City and Vienna, as against 1% for the Luxemburg Stock Exchange.

155. It was only in 2006 that the CASE (Egypt) obtained a liquidity ratio of 52%. The Johannesburg Stock Exchange comes second with 44%. The average ratio during the period is 40% for JSE, 29% for Egypt, 17% for Morocco, 12% for Tunisia, 10% for Nigeria, 7% for Kenya and 5% for Mauritius. Each of the other stock markets of the continent has an average liquidity ratio less than or equal to 3.5%. Of these stock markets, at least five, including the BRVM have a ratio lower than 1%.

156. These ratios, which are generally lower than 10%, indicate that only long-term investments could be made on these stock markets as it is relatively difficult for an investor to quickly buy and/or sell his securities there. Moreover, with the exception of the JSE Limited and the CASE, African stock markets tend to be expensive and saturated due to the very small number of share securities traded there. 2.2.1.5 Yield

157. The yield of a share refers to the returns (paid or announced dividend and other related emoluments) on invested share capital calculated using the selling price of the said share. The yield determines the gain in terms of remuneration on investment.

158. Generally, stock markets recorded high profits between 2002 and 2006. That of the Malawi Stock Exchange was the highest in 2006 with a rate of 128.2%, followed by Mozambique (123.2%) and Morocco (87.2%). In 2006, except for the Sudan Stock Exchange that had a negative yield, all the other 19 stock markets recorded returns on investment of between 3 and 128.2% in US dollars and sixteen of them obtained yields higher than 10%. The cumulative profit over the five years from 2002 to 2006 is higher than 100% for eleven financial markets, including Egypt 928% and Zambia 526%.

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Table 2.3 Yield, 2002-2006 (in millions of US $, end of period)Stock Exchange 2002 2003 2004 2005 2006

Algeria - - - - -

Botswana 31.8 22.4 20.6 -4.7 12.6

Cote d’Ivoire 13.55 23.31 24.39 11.92 10.6

Egypt -1.80 75.27 120.60 151.67 7.57

Ghana 27.7 141.7 88 -30.5 2.9

Kenya -1.2 111.5 4 46.6 47.6

Malawi -35.6 -20.3 53.9 42.2 128.2

Mauritius 21.2 53.9 19.9 4.5 37.6

Morocco -3.32 53.27 22.21 8.87 87.17

Mozambique - - - - 123.2

Namibia -25.4 57.9 34.7 -3.6 16.53

Nigeria 3.6 51.7 28.2 2.3 36.34

South Africa 39.6 28.2 18 27.8 24.27

Sudan - - - 0.50 -0.17

Swaziland 13.2 20.2 20.5 -11.5 14.55

Tanzania - -8.9 2.6 -12.2 13.4

Tunisia -11.7 11.7 6.5 21.3 44.3

Uganda -0.3 -2.7 15.4 -9.2 28.51

Zambia -2.9 31.9 71.5 125.3 26.48

Zimbabwe -58 25.7 58.8 138.00 14.1Sources: Local stock exchanges and central banks, Bloomberg, S&P, Standard Bank, Arab Monetary Fund, Pazisma Corporation

2.2.2 Bond markets

159. The second principal component of African stock exchanges is the bond market. This market developed rapidly in recent years. Bonds are primarily issued by states, with supranational or foreign financial institutions (IFC, ADB, French Development Agency, etc), national financial institutions and non-financial companies following far behind. Some analysts are of the opinion that for African stock markets to develop, bonds should be issued to mobilise the resources intended to finance basic integrating, industrial and social projects.

160. In the absence of a comprehensive table of statistical data on bond markets, we will try to analyse the performances using the same indicators as above.

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2.2.2.1 Capitalisation

161. On the whole, the levels of prices had a positive impact on bond capitalisation in Africa. In North Africa, the CASE recorded a capitalisation of 63 billion Egyptian pounds in 2006 compared to 52 million in 2005, i.e. 11.7% of the total stock market capitalisation distributed as follows: 10.9% for the State and 0.8% for private companies. In 2006, on the Tunisian stock exchange, the market share of bonds stood at 0.9% of the total capitalisation of 4.6 billion dinars.

162. In West Africa, the BRVM recorded a strong capitalisation growth during the last five years 2002-2006 as this aggregate on that regional stock exchange moved from 158.1 billion CFA F in 2002 to more than 402.03 billion in 2006 i.e. a 60.7% rise. In Ghana, the bond market is dominated by the State with an outstanding $ 260 million in 2006.

163. In East Africa, on the Kenyan stock exchange (NSE), the bond market had an outstanding of 2.4 billion U.S. dollars in 2003.

164. In Southern Africa, the South African bond market, the largest in Africa, had an outstanding of 737 billion rand or U.S. $ 105.5 at the end of 2006, far ahead that of CASE, 11,269 billion dollars.

2.2.2.2 Volume of trade or transactions

165. The bond market of South Africa recorded an outstanding value of 2 024.9 billion U.S. dollars in 2007, after an increase of 25% over the year 2006. Bonds issued by the private sector account for 30% of the total. Bond transactions on the Stock Exchange of Namibia are more marginal, 161.8 million U.S. dollars. In Egypt, the volume of bonds traded accounts for 5.9% of total transactions on the CASE. In 2006 it rose to 11 billion Egyptian pounds after 8.9 billion in 2005, that is to say an increase of 24%. This performance is mainly due to transactions on bonds issued by the government in 2006 (360 million as against 161 million the previous year). The amount of transactions requires the Nairobi Stock Exchange increased by 697.9 million U.S. dollars in 2006 to 1 330.4 million in 2007. This level of transaction far exceeds that seen in 2007 on the Exchange of Mauritius, 3.5 million. 166. As a conclusion, it can be said that constraints of size, volume of operations and liquidity force African stock markets to function rather like closed institutions where only some traders/dealers can handle the majority of institutional investments needs. They thus find themselves isolated on the international financial system because they happen to be of little interest to the major managers of funds for whom the capacity to quickly move capital is of the essence.

167. In addition, most of the countries have undertaken serious reforms to boost the stock exchange sector. However, these reforms (instituting or strengthening the capacity of the structure responsible for regulating and

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supervising activities and players; reviewing and adapting stock exchange and accounting regulations to meet international standards; opening up markets to foreign investors by reviewing the regulatory and fiscal framework; adopting the electronic system of quotation and transactions; modernising clearing or payment houses; reducing the time needed to settle transactions; harmonising the taxation system of securities for regional stock markets; establishing a credit rating agency; etc) are still inadequate if African capital markets are to develop fully, trigger the issuance of new securities, be of interest to new national or regional investors and really attract much more foreign investments which are very necessary for the development of public infrastructure and private initiative.

168. Beyond the actions to be taken at the national level to increase the size, volume of transactions and the liquidity of existing stock exchanges, another avenue worth exploring is regional or continental integration of these financial markets in order to give them depth and liquidity. In this regard, the experiences of the BRVM and the BVMAC as well as the merging of stock markets in other parts of Africa are quite encouraging and thus go a long way to confirm the idea that stock market integration or regionalisation is gradually taking root in the continent and that only the nature of the process still has to be developed.

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CHAPTER 3: EXAMINING THE VARIOUS OPTIONS FOR THE INTEGRATION OF AFRICAN STOCK MARKETS

169. Recent attempts to consolidate stock markets around the world raised a lot of debates and interest on the possible advantages to accrue from such an initiative. Generally, these tendencies arise from the forces of globalisation, which call for unity in order to reduce the cost of operations and increase their volume.

170. It is therefore not surprising that the interest to grasp the advantages and disadvantages of such alliances of stock markets is also gaining ground in Africa. The need to set up a Pan-African stock exchange therefore stems from successful experiences in other parts of the world as well as the motivation to consolidate the splintered African financial markets with a view to helping them enjoy the economies of scale, reduce costs and diversify their products, to mention just a few points. On-going efforts, made particularly by the African Securities Exchanges Association (ASEA), are an eloquent testimony of the interest being shown in this endeavour. The main aim of this association, created in 1993, is to provide a formal framework for mutual cooperation among stock markets in Africa through various processes including information sharing and providing assistance for the development of member stock exchanges.

171. A critical look at the existing literature indicates that Europe underwent profound changes during the 1990s, implying the consolidation and integration of stock exchanges. Similar trends were recorded in the Caribbean. Over recent years, the Association of South East Asian Nations (ASEAN) also discussed the need to carry out far-reaching reforms aimed at achieving financial integration, including the integration of financial markets.

172. It is therefore imperative to carefully consider some of these experiences and determine how they can be adopted and adapted to suit the African context. It should be noted that although the pace for the integration of stock exchanges in Africa has not been as fast as it was elsewhere, some associations of stock exchanges have however been initiated, particularly during the 1990s. More precisely, these associations were encouraged in fields such as technology transfer, the harmonisation of rules and standards (including the quotation of stock exchanges, clearing and settlement systems), and trans-border trade activities, to mention only a few.

173. Thus, the creation of the African Stock Exchanges Association (ASEA), the Committee of SADC Stock Exchanges (COSSE), the BRVM and the BVMAC, and the signing of memorandums of understanding between stock exchanges in other African regions are proof of the importance attached to the integration of stock markets, even though it is done on very loose terms.

174. In the case of Europe, for example, the movement towards integrated stock exchanges also began in the early 1990s, following the stiff competition between traditional European financial markets and foreign stock markets. It is worth noting that that the advent of the Euro played a big role in the process by

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eliminating currency-related risks, so that investors can negotiate assets by sector and not by country and be concerned more about liquidity.

175. Some big alliances took place in Europe, including the merger of the Paris, Brussels and Amsterdam stock exchanges, which gave birth to Euronext, and the integration of the stock exchanges in Scandinavian countries to create NOREX. In the same vein, through parallel initiatives, Baltic countries also unified their stock exchanges to form the OMX.

176. Several stock exchanges in South America also formed alliances with other Latin American stock markets and with foreign stock exchanges. Caribbean countries are also working towards creating a regional stock exchange. There are currently seven stock markets in the region but three big ones (Barbados, Jamaica and Trinidad and Tobago) could serve as the foundation for a regional stock exchange.

177. Because of the above mentioned successful experiences, this chapter, as earlier indicated, made use of some essential ingredients for consolidating and merging stock exchanges to identify possible approaches to follow for setting up a Pan-African stock exchange, including the costs, the advantages and hurdles involved in the process.

3.1 Brief study of stock exchange associations

178. Before delving into an analysis of the various models that may be suggested to guide decisions on the establishment of a Pan-African stock exchange, it is important to quickly review the fundamental trends in regrouping stock markets in Africa and in other parts of the world.

179. The experience gathered indicates that the formation of alliances and the creation of networks within stock markets can be achieved through a myriad of ways and means. The adopted mechanisms and models depend on the operationality of existing stock exchanges and their capacity to put in place the relevant networks, the degree of economic integration realised between the countries concerned, the level of financial integration and the reasons justifying the need to merge the stock markets concerned.

180. To a greater extent, the creation of links and the subsequent integration, inter alia, call for profound reforms that can lead to the harmonisation of the regulatory and legal frameworks necessary for the supervision of these stock markets to be effective, including the technology transfer platforms with a view to facilitating the efficient conduct of transactions. The latter point entails the putting in place of physical infrastructure which is essential for linking up the stock exchanges concerned as well as the adoption of a common set of rules and standards listing of securities, clearing and settlement applicable to listed companies or brokers/dealers.

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181. The issues raised in the process for the consolidation of stock exchanges justify the need to examine the various mechanisms and methods adopted, in order to suggest possible models that the common stock exchange could draw from.

182. We will start by presenting some on-going experiences of stock exchange integration in Africa before examining the various recent experiences of stock market alliances in other parts of the world. 3.1.1 Experiences of stock exchange integration in Africa

183. African stock markets, which for the most part are a recent creation, have for a few years now initiated moves to merge their activities, drawing lessons from their limited viability and stimulated by the ASEA.

3.1.1.1 Southern Africa

184. Within the framework of the Southern African Development Community (SADC), the Committee of SADC Stock Exchanges (COSSE) created in January 1997, initiated a strategy for the integration of the region’s stock markets through automated negotiation systems by way of a common regional mechanism that is accessible to all members. Also, COSSE has continued to promote the harmonisation of the listing of securities, clearing and rules for the settlement of transactions within the region.

185. In fact, all the stock exchanges in the SADC region have succeeded to harmonise their listing rules by 2000, in accordance with the 13 principles of the Johannesburg Stock Exchange. Today, national rules for the listing of securities are identical within the region except for minor differences at the level of accounting constraints and technical development.

186. At this juncture, it is necessary to note that the Namibia Stock Exchange is today totally linked to the JSE Limited. The installation of the electronic trading system of the JSE Limited in the Namibia Stock Exchange in November 1998, through telecommunication links with the JSE Limited, was a major leap forward towards harmonizing transactions within the region.

187. It should be noted that the JSE continues to offer not only the installation of its transaction system but also technical assistance to the other stock markets in the SADC region. As a matter of fact, these financial markets are always reflecting on the best ways and means in which the JSE negotiation system could be adopted as a regional platform as well as considering other technological options for an integrated stock exchange network.

188. It is relevant to indicate that in 2003, the JSE Limited announced that it had begun serious discussions with the Ghana, Namibia, Zambia and Zimbabwe stock exchanges with the main aim being to establish a Pan-African council under which major enterprises could conduct transactions on a virtual Pan-African stock exchange. With such a structure, an eligible company could be listed simultaneously on all the participating stock exchanges. As envisaged in

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the project, the participating national stock exchanges would retain their autonomy, as they will still be responsible for determining the regulations and the type of sanctions to impose on their members and subscribers. At the same time, the JSE Limited would be the supervisory authority of the new board of directors. It shall immediately inform the national stock markets of any illegal practices. Before the implementation of this structure, the other financial markets outside the SADC region must have harmonised their listing criteria with those of SADC.

189. It was expected that as soon as this alliance is finalised, other national stock exchanges could join it and as such lay the groundwork of a Pan-African stock exchange. The reason for making the JSE Limited the sole transaction platform is to enable it enjoy economies of scale, reduce costs and improve efficiency, at least in the short and medium terms, because this stock exchange is the largest in Africa in terms of size and liquidity.

190. The lukewarm attitude being shown towards this project finds justification in the fact that there is some fear it could lead to capital flight towards the JSE Limited, thereby reducing the number of investors and issuers as well as the volume of transactions in the other stock exchanges of the SADC region.

191. In the final analysis, the COSSE gives more importance to the adoption of an automated and interconnected transactions system, as well as clearing and settlement systems than the putting in place of a completely uniform, common system for all the stock markets of the SADC region. This approach aimed at harmonizing the rules, procedures and system is expected to help clear all unwanted obstacles standing in the way of integration.

3.1.1.2 Arab Maghreb Union

192. Three stock markets operate in The Arab Maghreb Union (AMU), in Algeria, Morocco, and Tunisia (table 17). The two other AMU member states, Libya and Mauritania, do not have stock market . The Moroccan exchange is by far the largest of the three in terms of capital, number of listed firms, and value traded. All together, Maghreb stock markets have half of the capitalisation of the Cairo and Alexandria stock exchange.

193. Nevertheless, it is important to highlight the rapid growth of the Moroccan stock exchange in the last years. Since 2005, the number of listed companies has increased from 53 to 76 and, at the end of 2008, its capitalization has more than doubled from Dhs 252 billion to some Dhs 586 billion. The traded values have also almost tripled to Dhs 360 billion during this period .

194. Similarly, the Tunisian stock exchange has shown a good performance in 2007, boosted by the measure taken in T 2005 to reduce the list of information and certification requirements from companies In addition, the recent introduction of a new trading platform and the new department dealing with SME has added further business to the Exchange. In 2007 the market capitalisation increased by 19 percent from MD 5,491 million to MD 6,527 million and the trading volume rose by 23 percent to MD 915 million.

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195. . Opening up the two markets, particularly the adoption of international standards, would certainly boost and encourage further capital integration. There are, however, obstacles to this development such as the current capital controls that inhibit residents to invest abroad, including in the Maghreb region, and the reluctance of UMA companies to be listed in non-domestic exchanges.

3.1.1.3 Central African Economic And Monetary Community( CEMAC)

196. The Central African countries have long been aware of the importance of economic cooperation and regional integration as factors likely to contribute to the acceleration of their growth and development. Indeed, since the pre-independence era, they share a common currency.The process of establishing a regional financial market ends with two competing markets, the Douala Stock Exchange, an national stock market, and the Bourse des Valeurs Mobilières d’Afrique Centrale (BVMAC), the Central African Stock Exchange, located in Libeville, Gabon in 2003. This situation is unsustainable given the actual and, indeed, potential size of the regional economy.

197. The launching of BVMAC was supported by the creation of a regional regulator, the Central African Financial Market Supervision Commission (COSUMAF). The official launch of listing activities on the BVMAC has intervened on August 13, 2008 with the bond issue “Gabonese State 5.5% net 2007-2013" for a capitalization of XAF 81 514 470 000 (approximately USD 178 945 900).

198. In Cameroon, a regulatory body, the Financial Markets Commission, was also set up. Only two shares, one introduced in July 2006 and the other in May 2008, are currently listed there.

3.1.1.4 Common Market for Eastern and Southern Africa (COMESA),

199. In COMESA the following member countries have organized stock exchanges: Zimbabwe, Egypt, Kenya, Mauritius, Uganda, Zambia, , Malawi, Swaziland, and Sudan.. With the notable exception of Egypt, these exchanges are generally characterized by a relatively small number of listed companies, few market participants, low capitalization, and low trading volume.

200. While most COMESA countries have adequately functioning payment systems, they are yet not all modernized with few of them having introduced Real Time Gross Settlement System RTGS systems. Only six countries are using a RTGS system (Kenya, Malawi, Mauritius, Uganda, Zambia, and Zimbabwe). Kenya has also implemented an RTGS, and Egypt, Madagascar, and Rwanda are close to implementing such systems operational.

201. As in other African countries, small and medium size businesses experience EAC members, most of which are also COMESA members are fairly advanced in coordinating securities market regulation and in setting up a joint Stock Exchange. COMESA member states have created an East African Member States Securities Regulatory Authority to serve as a coordinating body for capital market cooperation and integration. Partial capital account

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liberalization has been implemented and cross listing encouraged. In November 2006, the Uganda Stock Exchange and the Nairobi Stock Exchange signed an agreement to cross list over 35 blue chip companies and to merge within two years. However, apparently cost considerations refrain several companied from availing themselves of cross listing.

3.1.1.5 East African Community (EAC)

202. East African countries, especially Kenya, Uganda and Tanzania, have equally taken steps to link up their stock exchanges by harmonising the listing of securities, as well as clearing and settlement rules. These countries have been joined recently by Rwanda with its Over-the-Counter Market.

203. To this end, many memorandums of understanding have been signed to foster closer links. The Nairobi stock exchange is the flagship in this process given its high level of development in the region. As such, it provided substantial support to strengthening the capacity of the Dar-Es-Salaam Stock Exchange (DSE) and to the Uganda Securities Exchange (USE) during their commencement phases. Finally, the East African Securities Exchange has commence a regional trading system in May 2008.

204. The fact all these three countries are members of the East African Community (EAC) and that they share a common colonial past as well as similar legal framework makes it easier for the stock markets concerned to pull together. The integration of the three stock exchanges concerned was achieved more easily considering the good work done upstream in computerising their transactions system and harmonising their regulatory and legislative frameworks.

205. This process is one of the most promising models of stock exchange integration in the light of the above-mentioned favourable conditions. It therefore becomes easy to see how sub-regional initiatives could be linked up to form a regional stock exchange that would become the chief anchor for the Pan-African stock exchange. The consolidation of regional stock exchanges on the continent could be done later, when the appropriate conditions would have been put in place. In fact, considering the complexity of and obstacles inherent with the integration of stock exchanges, it should be noted that most of the officials interviewed during the survey on this topic carried out by the African Union Commission seem to be strongly in favour of concentrating efforts on regional and sub-regional levels before thinking of establishing a continental stock exchange.

3.1.1.6 West Africa

206. The regional stock exchange (BVRM) is a regional stock exchange made up of eight member countries of the West African Economic and Monetary Union (WAEMU). Created in 1998, it has its headquarters in Abidjan (Côte d’Ivoire) and has branches in each of the countries. To a large extent, the BRVM is a private company with a 13.4% equity investment by the 8 (eight) States mentioned above.

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207. Transactions on the BVRM are carried out through a satellite network to which each of the country branches is connected, where brokers and foreign exchange dealers can place and deliver orders on the central platform in Abidjan.

208. Although the volume of transactions on the BRVM is still low and irregular, the partnership between the participating countries subsists. The existence of a common colonial heritage seen notably through homogeneous legal systems and the use of a common currency, contributed to easily overcome some bottlenecks that were also observed in other attempts to form regional stock exchanges.

209. Within the West African Monetary Zone (WAMZ), ECOWAS countries non- members of the WAEMU recently started discussions on the creation of a regional stock exchange to be born mainly out of the Ghana and Nigeria stock exchanges that are already operational. A feasibility study on this project has been finalized and its findings will soon be submitted to the relevant authorities of the West African Monetary Institute (WAMI).

210. It is also worth mentioning that conciliation moves have been made between ECOWAS stock exchanges, particularly the BRVM and the stock exchanges in Ghana and Nigeria. Such moves are mainly aimed at facilitating the development of cross quotation on the various stock exchanges of the region. These operations have already been carried out but they are still limited to a few securities.

3.1.2 Experiences of stock exchange integration in the rest of the world

211. With the globalisation of trade and the deregulation of international financial transactions, a wave of stock market integrations took place in the late 1980s. To conclude, it should be noted that the integration mainly concerned average size stock exchanges because in Europe the Frankfurt and London stock exchanges are still autonomous after some attempts at merging with other European stock markets or the New York Stock Exchange.

3.1.2.1 ASEAN

212. To support efforts aimed at integrating their economy, ASEAN countries agreed on a two-component approach for the development of a regional stock exchange. Component one is concerned with strengthening institutional capacity in fields necessary for the development of stock markets, notably the legal frameworks, and the harmonisation of rules and regulatory activities, and market infrastructure.

213. Component two is concerned with rationalising initiatives to foster greater cross-border collaboration between the stock exchanges of the region. The man priority areas include strengthening training networks, diversification of financial products and of links between the stock markets, as well as the harmonisation of stock exchange standards (including in securities listing, clearing and settlement systems).

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214. ASEAN is now examining the implementation of various proposals. The different efforts can be brought under three domains. The first domain is aimed at the harmonisation of transactions, of clearing and settlement rules, etc. Pursuant to the Forum of ASEAN financial markets, stock exchange regulatory authorities of the ASEAN region went beyond just improving the governance of their respective stock exchanges and rules under which information from the various stock markets may be disclosed. They are also working together to harmonise standards on disclosure, proper representation of brokers from each country in the respective stock markets, bookkeeping and professional qualifications. The aim of such a process is to reduce the costs of products made by the issuers who comply with a range of regulations and to increase liquidity and improve the efficiency of transactions, clearing and settlement operations.

215. The second series of effort is hinged on improving access to the market by improving negotiation links. These links are expected to help increase liquidity on the various stock markets as well as provide a wider range of products to investors in each country. In the same light, ASEAN governments and stock exchanges have also set up a working group to explore the various types of alliances and links within their structures. Their hope is that an integrated stock market will be able to provide investors with many specific access points to securities in the ASEAN region. Furthermore, a proposal has been made to create a Pan-ASEAN clearinghouse similar to Euroclear. This initiative is expected to improve transactions in real time to the mutual benefit of the countries concerned.

216. The third domain of activities concerns common treatment. This term refers to the lifting of restrictions on the capital account to see to it that all obstacles to cross-border transactions are cleared, with a view to promoting regional economic integration and reducing the costs of transactions. In keeping with this objective, the ASEAN is also working towards instituting a harmonized taxation system.

3.1.2.2 NOREX

217. The NOREX, Northern Stock Exchange, is a strategic alliance between four Scandinavian stock markets: Copenhagen Stock Exchange, Iceland Stock Exchange, Oslo and Stockholm Stock Exchanges. Together, these financial markets cover 80% of the stock market and 90% of the bond market of Scandinavian countries. NOREX has a common system for all transactions on securities or shares. It seeks to harmonise the rules and criteria between stock markets with regard to listing of securities and transactions.

218. This alliance is based on cooperation between independent stock exchanges and operates following numerous principles including: (i) crossed membership where member companies are encouraged to list their securities on all NOREX stock exchanges; (ii) a single point of liquidity as the issuing companies are encouraged to list their securities on only one NOREX member stock exchange; (iii) a common negotiation system whereby NOREX stock exchanges operate using a single system, the SAXESS, such that they can

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benefit from the economies of scale; and (iv) a common regulatory framework for transactions, listing of securities, licensing of brokers/dealers, membership and authorisation to undertake regulatory changes.

3.1.2.3 EURONEXT

219. Euronext was created in September 2000, following the merger of the Paris (SBF), Amsterdam and Brussels Stock Exchanges. It was created as a result of strong demand from the market, in the backdrop of a favourable climate for integration of the European stock market in particular and the financial market in general, as well as to satisfy the increasing liquidity need and cost reduction resulting from the introduction of the Euro. It has the biggest capital market in Europe (a total of 51 %), that of raw materials and is first for options.

220. Although the jurisdictions and licences (approvals) of each stock market are maintained, Euronext provides a single opening for operations for the three stock exchanges. Transactions are centralised and a uniform negotiation platform, the driving force for NSC transactions of the Paris Stock Exchange, is thus used to determine a single price for each security. The shares are listed at national level and companies can select their place of transaction among the tree stock exchanges.

221. The three stock exchanges have become full-fledged branches of Euronext NV, a Dutch portfolio company, and its names have been changed to Euronext Paris, Euronext Brussels and Euronext Amsterdam. As a result of this merger, Euronext NV is now 60 % owned by the former shareholders of SBF, 32% owned by the former AEX and the former purchasers of certificates of participation issued by AEX, and 8 % owned by the former BXS.

222. Although the securities still remained listed in the initial market, all the financial instruments are traded on a single platform, while listing on the market and the rules of transactions will subsequently be harmonised, leading to a single manual of rules. The issuers are subjected to the same rules of supervision and control, information obligation and public bids set by regulators in the countries where their securities are listed.

223. Thus, companies wishing to be listed on Euronext can opt to do so in any one of the three stock exchanges. In determining their point of entry, they automatically chose their country of origin as concerns regulations. The jurisdiction wherein the listing agreement is signed determines the market supervision department the regulator shall address in case of irregularity in transactions. 224. Participants in the market are subject to the supervision of the regulator of the country from where they received their main (initial) licence. In spite of the merger, the three stock exchanges have maintained their separate legal status on regulations. Since its creation, Euronext has bought over the London International Financial Futures Exchange, and has also merged with the Lisbon Stock Exchange.

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3.2. Models suggested for the Pan-African stock exchange

225. The ideas and options for a Pan-African Stock Exchange proposed in this study arise from discussions with various officials of the bodies concerned, during missions carried out to some member countries of the African Union, as well as answers provided in questionnaires sent out to countries of the Union. This reflection has also tried to learn lessons from some experiences from the field both in Africa and other parts of the world. The presentation of possible options shall be accompanied by a succinct analysis of certain cost benefits concerned with adopting them.

3.2.1 Option 1: National / regional stock exchanges and a Pan-African stock exchange

226. According to this model, national stock exchanges shall be used as negotiation platforms for local investors and issuers, who are not capable of being listed in more developed stock exchanges that have difficult and expensive standards, while at the same time, there will be a Pan-African stock exchange aimed at enabling big companies that want to raise huge amounts, to address institutional and foreign investors, or investors with a broad financial base.

227. It should be emphasised that the Pan-African stock exchange should be physically present in a country accepted by all participating countries. Besides its status of place of conduct of all transactions, it will also play the role of regulatory body. This option presupposes that all the stock markets concerned are electronically interconnected.

228. In order to ensure that as soon as the Pan-African stock market is instituted it serves all segments of the market, two different compartments would be put in place. The main compartment shall cover the specific needs of large companies that find that the present stock markets are too small to meet up with their needs in terms of resources and diversified financial products. These companies have to abide by more stringent standards. Apart from services offered to African companies, the main compartment shall also accept large international firms, including venture capital companies that wish to invest their excess resources in Africa.

229. The other compartment shall serve small and medium companies. Thus the conditions to take part in it shall be less stringent as compared to the main compartment.

230. As concern regulations, an independent regulatory institution, made up of members of the various national and regional jurisdictions, could also be created to ensure that regulations in force are respected and help in settling any conflicts that may arise.

231. An expected advantage of this model remains the maintenance on the continent of large companies that will be able to raise the volume of capital desired at a competitive cost. This option shall therefore make it possible to avoid the migration of these large companies to the financial markets of industrial

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countries, as it was the case with the Anglo-American company that has repositioned itself at the London Stock Exchange after leaving the JSE.

232. However, this model poses the problem of how to build an institution responsible, inter alia, for regulating various stock exchanges. Moreover, it raises the question of how to finance the infrastructure necessary for the liaison between the stock markets belonging to the system, especially the automation of transactions as well as clearing and settlement systems.

3.2.1.1 The realisation of this option requires overcoming challenges

233. The first challenge of this model presupposes that all the stock markets are linked electronically, which is not the case for several stock markets that are currently operational. In order to achieve this goal, huge investments are required.

234. The second challenge of this option is the harmonisation of various active transaction systems. In effect, existing systems should be able to communicate with one another before starting a Pan-African stock exchange project.

235. The third challenge concerns related risks, given the diverse legislative and regulatory systems, currencies used, governance structures and institutional frameworks in force.

236. The fourth challenge is that all African economies and stock exchanges are at varying stages of development while the need to develop stock markets is not well understood by all. Mention should also be given to the political dimension surrounding this issue, translated by the reticence of some countries to merge or support efforts to integrate stock markets, motivated for the most part by the willingness to safeguard their sovereignty and take control of the process.

237. Answers given by most officials questioned in the survey carried out by the African Union Commission seem to accept the idea of consolidating stock markets at the regional level as opposed to continental integration. A Pan-African stock exchange looked like an objective that is both ambitious and unrealistic for now.

3.2.2 Option 2: National/regional stock markets with an existing African Financial Market as a Continental Platform

238. This model contains several characteristics similar to the former, except for the existing financial market chosen for its level of sophistication and its predominant size in Africa, is proposed as a central platform of transactions for other stock markets. The rules used by this market shall inspire the regulatory standards applied to other stock markets. In order to have compatibility between the various negotiation systems, the stock markets concerned should improve their technology and harmonise their regulatory standards.

239. This model is a hybrid of the vertical and bottom – top approaches. By linking stock markets that are currently operational to this stock market place that

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should be the JSE, liquidity will increase and price fixing will improve. The implementation of this option shall start at the SADC before developing towards integration at continental level. Its main latent challenge is how to make the JSE Ltd the platform of the Pan-African stock exchange. The realisation of this also poses the problem of availability of funds for electronic installations.

240. It is also proposed that the JSE serves as a platform for transactions and on the strength of its existing electronic technology, interested countries would develop a flourishing market. The development of such an infrastructure for the entire continent also has a very high financial cost.

241. The AU may also play an important role by contributing in setting up an appropriate institutional body to regulate the market, in close collaboration with regional economic communities. On the whole, an acceptable model for all member countries must satisfy several conditions including: (i) protection of the assets of various stock exchanges; (ii) strengthening the viability of existing stock markets; (iii) creation of an opportunity for SME to raise capital, on the basis of equity; and (iv) the generation of tangible benefits for the economies concerned.

242. This model presents a certain number of challenges including the prevalence of different legal frameworks and the situation that most African countries are at varying stages of development. However, as earlier mentioned, some stock markets in the SADC region are reticent about the integration of stock markets geared towards initiatives supported by the JSE. These stock markets are hesitant to use the JSE as their transaction platform, for the fear that their listed companies may eventually migrate to JSE.

243. Furthermore, it was observed that connecting their markets to the JSE will require considerable financial resources that most of them do not have. However, the alliance of African stock markets with the JSE will foster improvements in overall liquidity, the volume of transactions, the clearing and settlement system, and the adoption of international good practices.

3.2.3 Option 3: Integrated transaction platform, while maintaining national/regional stock markets

244. Another suggested option draws inspiration from the Euronext model that allows for various stock markets to coexist alongside a continental stock exchange. In this federal-type system, each stock market shall be regulated by the national or regional supervisory agency and conserve its own legal statute. 245. Although companies may remain listed on their original stock markets, all the securities shall be negotiated on a single integrated platform and listing and transaction rules shall eventually be harmonised, resulting in a single manual regulating the market. Issuers shall also be subjected to supervision and control rules, information obligation and public bids determined by regulators in the stock markets of the country where they are listed.

246. In practical terms, companies wishing to be listed on the stock market would do that in all the stock markets that are operational. When determining

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their point of entry, they would be automatically choosing their regulator. Intermediaries may intervene in all the stock markets but will be also subjected to the supervision of the regulator of the country where their main licence was granted.

3.2.3.1 Advantages of this model

247. The first anticipated advantage of this option is that, in the African context, the Euronext model shall make it possible to preserve some form of sovereignty and conditions for the functioning of the local stock market.

248. Secondly, this model will contribute in creating a simple and flexible regulatory environment for companies listed on the stock market, approved intermediaries and the stocks themselves.

249. Thirdly, the institution of a single negotiation platform will increase liquidity, transparency and improve price fixing.

250. Fourthly, this option will make it cheaper and easier to access through a simple connection a wide range of securities in each of the stock markets, which is not possible at the moment. Consequently, a Pan-African stock exchange designed on this model shall stimulate activities and attract new and big potential actors who do not consider the separated markets sufficient to place their capital.

3.2.3.2 Disadvantages and costs of this model

251. To maintain in activity small and /or non viable stock markets engenders high costs and reduces synergy potentials that may be generated by the merger of transaction platforms at continental level.

3.2.4 Option 4: Integration through transaction on the Internet

252. This model proposes the integration of African stock markets through transboundary transactions using the Internet. It is based on the freedom given to African investors to carry out stock operations on all African stock markets, in their countries and out of their boundaries. This also presupposes therefore that intermediaries can carry out transboundary transactions and clearing and settlement.

253. Stock markets are responsible to provide automated negotiation and compensation systems as well as efficient Internet information sites on the market.

254. Like the other models, this option is also conditioned by the dismantling of exchange control and convertibility of the currencies of interested countries. In order to implement it, the stock exchanges involved have to sign a protocol agreement on transboundary transactions. Intermediaries shall also have to be linked by agreements, approved by the control authorities of each party concerned, on the transactions, clearing and settlement.

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255. Finally, stringent training of all the actors as well as control authorities involved in transboundary transactions, in view of the legal and operational requirements of various participating stock markets, is indispensable.

3.2.4.1 Advantages of this model

256. This model allows for streamlined harmonisation of regulations as well as negotiation and settlement systems. Moreover, there is no obligation for the transformation of existing stock markets but it favours a gradual development of activities and liquidity on the basis of the development needs of the stock market.257. On the whole, a transboundary transaction through the internet is an initial means and process to achieving the long term integration of stock markets. The implementation of this option shall not disrupt current practices of the various stock markets, their rules, regulations or procedures.

258. Moreover, it does not require investments from intermediaries and central filing systems. All that is important is an agreement between stakeholders in the process, notably stock exchanges and stockbrokers and the setting up of adequate information and communication infrastructures as well as training and awareness programmes for participants in the market.

3.2.4.2 Disadvantages and costs of this option

259. For stock exchanges that do not have established infrastructures, the required investments are inevitable. Equipment fees benefiting intermediary participants of various countries should be shared between them. However, the setting up of this type of system does not seem to be easy and does not favour the fast integration of African stock markets for it presupposes good knowledge of various national and regional rules as well as the complex evolution of net benefits made from the transactions realised.

3.2.5 Option 5: Gradual integration

260. This model promotes the idea that stock exchanges establish close alliances to ensure that there is consolidation at the level of regional economic communities and sub-regions. It also recommends a gradualist approach for the creation of the Pan-African stock exchange.

261. This option is inspired by the OMX model adopted by the Baltic States, where several stock markets are linked up and harmonised regulations and standards allow for transboundary listing on each of the member stock exchanges. The pre-existing stock exchanges are maintained to cater for national sentiments and ensure that national or regional stock markets satisfy the specific needs of each country involved.

262. According to this model, a Pan-African stock market may emerge later, after significant progress has been made at regional and sub-regional levels. This process of integration of stock exchanges should be guided by the private sector instead of being rooted in political imperatives. Consequently, it is proposed to concentrate efforts on encouraging the harmonisation of standards

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at a regional level, by basing itself on international good practices, before getting into a project to create a continental stock market. Thus, a big-bang type approach is not recommended.

263. Prior to the start of the establishing phase of a Pan-African stock market, it will be indispensable to examine progress made as prerequisites. This evaluation should be about some key indicators such as the level of harmonisation of legal, regulatory, fiscal and accounting frameworks, the degree of sharing activities, clearing and settlement platforms, etc.

264. There are a number of ongoing initiatives between the existing stock markets towards promoting harmonization of the rules and standards in West Africa, in Southern Africa and East Africa. This point therefore gives grounds on the need for a model that is adapted to the regional context.

265. Serious obstacles still exist, provoked by the widespread use of many different currencies, varying legal and accounting systems and transaction platforms, as well as the lack of a strong political will to give impetus to the changes required for the harmonisation of national regulations and systems.

3.3 Summary of benefits of the integration of African stock exchanges 266. The success of any consolidation or merger of companies depends on the synergy created following the realisation of this operation. As concerns the African stock exchange, the question is to know the extent of the integration of their transactions, clearing and settlement systems (including the ensuing costs) and to know how the credibility of this operation is viewed by issuers, investors and intermediaries in the market.

267. Consolidation of the African stock markets will probably lead to non negligible gains for the financial sector, participating companies and African economies. In general, the integrated stock exchanges have had high scale savings both at the level of its running and their transactions (Pagano, 1989; Stein 2001). Operational economies of scale can emerge from the creation of compatible transaction platforms while economies of scale of negotiation can be realised from the strengthened liquidity and reduced fragmentations of the market. 268. The integration of stock exchanges has also facilitated the elimination of redundant investments from various stock market participants. Given that negotiation systems have similar baseline architectures, a merger of stock exchanges or the sharing of a common platform improves overall efficiency. This also benefits financial intermediaries who operate transboundary transactions. In this regard, a consolidation of stock exchanges may lead to greater standardisation of negotiation formats used by the financial sector.

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Table 3.1 Preferences for various models of the Pan-African stock exchange

NoTotal of responses % Weighting

Based on existing stock exchanges 16 36 44,4 30,2

Creation and connection of national stock exchanges 11 36 30,6 20,8

Creation and connection of regional stock exchanges 16 36 44,4 30,2

Single common supervisor for African financial markets 6 36 16,7 11,3Creation of a continental stock exchange independent from existing stock exchanges 3

368,3 5,7

Others 1 36 2,8 1,9Source: African Union Commission Survey

269. As concerns improving market liquidity, the compatibility of negotiation platforms on the continent, by reducing transboundary operation costs, should attract new issuers and investors and increase the volume of transactions. In fact, when seller and buyers are few and they arrive sporadically to the market, they may not meet immediately and huge price fluctuations may result (Pagano, 1989).

3.4 Summary of the challenges to overcome for the integration of stock exchanges in Africa

270. The assessment of the various options for integrating African stock exchanges recommended above has shown that basic challenges are still there to achieve this objective. We are going to give a brief analysis of these challenges and possible means of overcoming them here below. 3.4.1 Legal and regulatory differences 271. The prevailing legal and regulatory differences in Africa are probably going to obstruct the consolidation of existing stock exchanges and the project of creating the Pan-African stock exchange. In the immediate, disparities between national regulations discourage transboundary transactions for investors and companies have to be familiar with the regulations of various countries. There are for example significant differences in the requirements of listing as well as in negotiation practice, even at regional level. Attempts at harmonising these systems at continental level will certainly face serious difficulties.

3.4.2 Multiplicity of regulators

272. If market participants are faced with many regulators when operating in various countries, they risk facing regulatory uncertainties and complexities, and high costs directly when they have to comply with various regulations, and indirectly when they have to pay for services of several regulators at the same time. These problems can be obvious in all areas that are subject to supervision and for all market participants.

273. Legal and regulatory obstacles of all kinds may slow down integration, including differences between sanction regimes, ownership restrictions for foreigners, exigencies for the creation of local companies and restrictions

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imposed on local issuers, to intermediaries and investors in providing transboundary services.

3.4.3 Differentiation of products

274. Potential economies of scale offered by a Pan-African stock exchange cannot necessarily mean that such a possibility represents the most efficient structure as concerns differentiation of products. Investors and companies may prefer to be served by a variety of stock exchanges that offer distinct products targeting specific clients, instead of a single continental stock market. Consequently, though it would reduce the number of independent operational stock markets and thus improve their liquidity, consolidation may not produce effective, efficient and credible results that satisfy all market participants. Maintaining various stock exchanges, even if they operate below their optimum capacity, may continue to serve their clientele.

3.4.4 Variances in accounting standards and fiscal systems

275. The diversity of accounting and fiscal systems is another obstacle. The standards on information disclosures and accounting vary widely across the continent, due for the most part to colonial heritage. A good example of this situation is that the former English and French colonies still continue to have different accounting systems for efforts aimed at encouraging their convergence have been fruitless. Now, the divergences between the fiscal and accounting systems may disrupt stock flow. In particular, accounting differences may hamper the capacities of market participants to analyse and compare financial statements, and thus to engage in stock market operations.

276. Tax payment is also unbalanced in Africa with various tax systems and various tax collection mechanisms as well as the existence of bilateral treaties of double taxing. Furthermore, several governments have adopted policies that give priority to domestic investment by nationals often with favourable tax payments. In some countries, pension funds and insurance companies are compelled to lodge their resources in national financial instruments.

3.4.5 Information costs and prejudices of country of origin

277. In Africa, the consolidation of stock exchanges may be slowed down by high information costs associated to transboundary transactions. Investors, in Africa and other regions of the third world, often think that cultural and linguistic differences as well as geographical distances between local and foreign markets make access to information on foreign capital more difficult and expensive to obtain. In fact, information costs have been considered as an essential reason for investors to be chauvinistic and to show notable preference for holding assets of their country, in spite of the benefits of diversifying portfolios.

278. Among the points where there are high transactions costs are transboundary listing, information dissemination, routing of orders, negotiation, clearing and settlement.

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3.4.6 Fragmentation of trading, clearing and settlement systems 279. The diversity of negotiation, clearing and settlement systems also block the integration of stock exchanges. This situation that is characteristic of Africa, results in extremely high transaction costs and slows down effective connection of existing stock markets.

3.4.7 Technological aspects

280. Of the many cooperation attempts initiated between stock markets, very few have been concretely been implemented, and, amongst those that have been implemented, most have failed. Several reasons explain this outcome, especially technology. Often, more time and more resources are required to conceive an appropriate technology for stock market connection infrastructures that is often not understood or anticipated at the start. According to various officials met during the survey on the Pan-African stock exchange, the question of knowing who finances the required technology to ensure the link between national stock exchanges has often been raised. 3.4.8 Governance

281. Governance influences the development and success of alliances that are not neutral to the various stakeholders of the participating stock markets. Governance structures of stock exchanges that collaborate among themselves determine how the benefits obtained by the system will be shared. If these stakeholders think that their interests may be in danger, they have the power to change or block its execution.

282. Co-companies may also result in conflicts both within an institution and between participating institutions and those that are supposed to work together. The resolution of these conflicts may depend not only on contractual agreements signed between the parties, but also on their relative negotiation power and on the good will of public authorities.

3.4.9 Implementation of credible contractual engagements

283. The difficulty of creating credible contractual engagements between partners is raised in the realisation of the project of a single Pan-African stock market. In order to circumscribe this difficulty, such agreements should initially appear to be beneficial to the participants and continue to be so in a changing environment. If material circumstances vary, as is often the case, one or several participatory entities can decide that the initial agreement is no longer appropriate. However, more importantly, even if a participatory stock market can be compelled to take an action that is deemed unfavourable, market participants carrying out stock transactions would not be compelled to be in this alliance.

284. Thus, it is useless to compel an unwilling stock market to continue to honour an initial participation agreement without active support from its clients and members.

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3.4.10 Lack of political will

285. The process of African integration remains problematic because of insufficient commitment from high political authorities to implement action plans. To a great extent, this problem is because Africa is still the most balkanised continent on earth, especially because of the colonial heritage. Furthermore, the apprehension of losing national sovereignty is another major challenge with regard to abiding to regional commitments. From discussions held with representatives of stock exchanges, these fears and the possible disappearance of their institution are often raised as the main reasons for the difficulty of consolidating stock exchanges.

3.5 Way forward

286. Considering the various possible options of integrating stock markets, it will be interesting to look at the lessons that may be learnt from experiences in Europe, the United States and ASEAN, to advance on the path towards a Pan-African stock exchange.

287. Even if member countries of the African Union chose a different itinerary, from that of these regions, it is a well-known fact that these stock markets have a well-established practice in the field. Also, serious lessons can be learnt on how to promote stock market integration in Africa and to lay solid foundation for the creation of the Pan-African stock exchange.

288. Here below, we are attempting to briefly review some of the important lessons and to define ways to be followed.

The integration of the African stock market will be an extremely long process that will require significant structural changes, needed technology and infrastructure, appropriate legal, regulatory and accounting staff and most importantly the political will. Consequently, in order to progress, there is no need to reinvent the wheel. The best choice for African countries will be to open up to new and practical ideas while adapting them to their national or regional situation.

Three lessons may be drawn, especially from the experience of the

BRVM. Firstly, a long time is required to build a regionally integrated stock exchange. Secondly, the creation of a regional exchange means that the latter will be used by or will integrate other stock markets. The BRVM experience shows that the financial sector of countries involved remains fragmented and it seems that this regional stock market has raised many substantial benefits for the economies of the participatory countries. Thirdly, as concerns this last point, the viability of any regional or continental project should be carefully evaluated before it starts. Participants of the private sector, contrary to regulators, central banks or other public institutions, are urged to determine if expenses on a particular integration project is worth it, especially when they invest their own funds.

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Two simple lessons are obvious from the NOREX case. Firstly, it is possible to agree to successfully execute a regional cooperative project between stock markets within a relatively short period of time. Secondly, though it is difficult to measure it formally, the common culture of the Scandinavian countries seems to have been a significant factor in the success of the venture. A careful study of the African landscape gives us an image of diverse cultures, languages, political, legislative and economic systems, accounting and fiscal regulations, levels of development, etc. Initiatives aimed at creating the Pan-African stock exchange should take full account of this situation. The approach retained will be to initially concentrate integration efforts on countries with very close historical, cultural and economic ties like the East African Community, UEMOA, CEMAC, UMA and SADC.

It seems premature to give the exact structure, the model, the establishing period or the viability of the Pan-African stock exchange. Nevertheless, we have attempted to propose in the foregoing some possible options. Many obstacles exist in all areas relating to the running of the regional or continental stock market: regulatory and legal disparities; differences between negotiation, clearing and settlement systems; attribution of exclusive negotiation rights for nationals or natives of a region. To forge ahead, African governments can play an important role in the transformation of existing stock exchanges. For example, they may facilitate the integration process by encouraging competition for transactions between stock exchanges instead of following protectionist strategies. Competition may be stimulated by ensuring that there is regulatory standardisation between markets and by enabling freer transactions according to various scenarios. The acquisition of modern technology is another crucial area, especially the adoption of automated negotiation systems by all the stock exchanges.

If stock exchanges have to be considered as a realistic option to strengthen integration of African financial markets, they have to come up with clear benefits to the companies concerned and to the economies in which they operate. The most tangible indicators of the economic benefits are related to profit and growth. Economic research proves that stock listing improves the probability of turnover increase and rise in the profits of listed companies as compared to those that are not. Thus, any attempt to create the Pan-African stock market should take into consideration the commercial and economic viability of the project proper.

It is observed that the activity of stock markets in Africa is currently less effective partly because of information asymmetries that exist between key investors and those that are out of their pool of preference. These inefficiencies are further accentuated for small companies that are geographically removed and that have limited capacities in terms of level of sophistication. The lack of information on some aspects of stock markets (regulations, listing development, exchange rates, development of the financial situation and company strategies, allocation policies of investors, available financial instruments, documentary files on the life of

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and activities of companies, etc) can block regional integration. It is crucial to look into these bottlenecks if the Pan-African stock exchange has to be a reality.

Without a convertible currency and the lifting of exchange control, the development of stock markets in particular and financial markets in general shall be reduced. It is also recommended that African governments make efforts to promote closer monetary integration in order to strengthen transboundary stock market transactions.

Several lessons can also be learnt from the Euronext experience. Firstly, it is possible to merge big stock exchanges with each having strong traditions of national sovereignty and nurturing the ambition of becoming a powerful financial centre, when the governments involved are politically committed, as the European economic integration has shown. In the same vein, the leadership of the private sector in this process, as also shown from the alliances and mergers in Europe, is very important. Secondly, in order to carry on with successful mergers of stock exchanges, it is essential to have the support of all the supervisory authorities of the countries concerned. Thirdly, clarity and simplicity in the ownership structures of markets and regulator environments are attractive elements for participants of the market.

Several conditions need to be met prior to the creation of an efficient regional or continental stock exchange. Firstly, there is need to create the regional connectivity by using state of the art technologies to improve on communication between intermediaries of stock holders and small investors. Secondly, it is urgent for countries to encourage the idea of creating a single negotiation platform in accordance with uniformed regulations. Thirdly, African countries have to encourage initiatives that aim at promoting transboundary clearing and settlement or the creation of links between central depositories of various stocks. Fourthly, the integration of African stock exchanges will continue to be rooted on progress made in harmonising legislation on stocks and shares, mainly the creation of a common regulatory body with real authority to supervise and regulate current stock markets, at least at regional level.

3.6 Conclusions

289. This chapter has reviewed efforts aimed at close alliances between African stock exchanges. Successful integration experiences were presented with the aim of engaging brainstorming on various possible options for the creation of a Pan-African stock exchange.

290. We have also identified the possible forms that the Pan-African stock exchange may take using the discussions we had with officials of various institutions interested in this project and the responses of the related questionnaire. But it is still very early to anticipate the exact structure or time limit for the creation of the Pan-African stock market because of various obstacles highlighted above.

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291. Without any figured evaluation, this chapter has also attempted to highlight some cost benefits related to each of the options or models, with the aim of throwing light on certain challenges that may come up in the creation of the Pan-African stock exchange. However, it should be underlined that, as integration efforts will take root, national stock markets will benefit from economies of scale, both in their operations and their transactions as mentioned above. 292. It has been demonstrated that although in a competitive environment market forces converge toward efficient solutions, there is need for a dose of public intervention (harmonisation of legal, regulatory and accounting systems; promotion of negotiation systems, clearing and settlement, etc.) to foster faster changes. 293. In order to forge ahead, African governments have to play an important role in transforming present stock exchanges and the entire landscape where they operate. In fact, it may for example facilitate the process by encouraging competition within stock markets rather than waste time and money promoting introvert policies that block efforts and undermine innovation. Competition may be stimulated by harmonisation of rules and standards on the markets and by allowing transboundary activities. The profits generated would certainly benefit investors and companies in the form of improved financial services, fall in costs of transaction and capital. Finally, progress made on these fronts will determine how the Pan-African stock exchange may see the light of day.

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CHAPTER 4: GENERAL CONCLUSIONS AND RECOMMENDATIONS

2941. The idea of a Pan-African stock exchange may on a first look seem unrealistic, but it will make it possible to develop a long-term strategy for the integration of African stock exchanges, the development of financial sector. Furthermore, the experiences from other parts of the world show that though there may be some hurdles on the way, what is determinant is the commitment of countries and actors concerned in the realisation of set objectives. Besides, it is possible to avoid errors committed in the countries studied with regards to the integration process of the financial market in general and the stock market in particular.

295. An analysis of the development of the macro-economic, institutional, fiscal and technical context of African stock exchanges, their performances as well their experiences in the integration of stock markets both in Africa and the rest of the world lead us to the conclusion that unification of existing stock exchanges on the continent foster the development of the stock market and beyond the financing of investments and economic growth in Africa. 296. Given the limited size of all African stock exchanges put together, in 2006 capitalisation equities (955.5 thousand million US Dollars) below 2% of the total of member stock markets of the FIBV and that of the Shanghai Stock exchange (917.5 thousand million US Dollars), and equity transactions (368.3 thousand million US Dollars) representing 0.5% of the total operations of FIBV member stock markets (below those of the Indian National Stock Exchange, 422.6 thousand million), their merger would foster the creation of synergy capable of promoting the emergence of an efficient and useful stock market for the economic development of the continent.

297. In all, the following key recommendations can be proposed for examination by member states and African stock exchanges.

4.1 Choice of an option for integration of African stock exchanges

298. The feasibility study and the opinion shared by the majority on the continent from the respondents of the Commission’ survey supports an integration of African stock markets. On the variety of possible options, the one on phased integration, starting with grouping per region, seems to be the most appropriate. In this option, a single transaction platform shall be available in each region and a light country office would be opened in each participating country. A variant of this option is that of adding to each regional stock exchange a continental platform opened to share negotiations of very large companies.

4.1.1 Harmonisation of the regulatory framework

299. The integration of capital markets involves the harmonisation of national legislation and standards on company law and accounting regulations (laws and regulations on public saving bid, publication of obligatory information by listed companies, bankruptcy, issuance of licences to stock brokers, stock fraud and

59

insider dealings, etc.). The African Union should quickly launch a brainstorming on the harmonisation of the regulatory framework of stock market activity, drawing inspiration from the OHADA texts. These endeavours that have to associate all stakeholders (States, stock exchanges, financial intermediaries, non-financial private sector, etc) shall make it possible to determine the level of harmonisation, total or partial, desired and thus the type of stock market integration desired.

4.1.2 Adapting to international standards

300 Regulator committees in the REC and/or a taskforce under the aegis of the AU Commission have to be set up to set minimum standards inspired by IOSCO and international accounting standards and to better reflect the African reality. These structures shall work together on the harmonisation of regulations and accounting and financial standards.

Nonetheless, international standards (IOSCO, IFAS, etc ) should not be adopted without restraint, for binding standards may turn out to be more costly than beneficial. Realism should dictate flexibility and gradualism for standards have developed with time and they evolve with financial innovations. Adequate institutional arrangements at the level of regional economic communities or the AU may be the way forward15.

4.1.3 Harmonisation of securities taxes

301. In order to avoid fiscal competition between countries and to increase attraction of issuers and investors, both African and foreign, for African stock exchanges, member countries of the African Union have to adopt common incentive measures. In the absence of setting uniform applicable rates, these measures shall concern for example: reduction of tax rates on corporate benefits to put them within a reduced bracket, especially for companies that accept to list their securities on the stock market; partial exoneration from the tax on securities revenues; tax rebate on the incomes of individual persons for a rate to be set by stock investments, etc.

4.1.4 Lifting of exchange control and harmonisation of payment systems

302. Exchange control between African countries first, and later with the rest of the world, has to be suppressed to allow for free flow of capital and their efficient allocation.

4.1.5 Incentive for the development of strong companies and a dynamic private sector

303. National authorities have to take measures that will allow for increase of the number of companies listed in the stock exchange by making their listing conditions attractive and by lifting major obstacle arising from the business

15 There have been constraints in terms of resources and capacity in adopting international standards (e.g. the IOSCO principles).

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environment (administrative bottlenecks; mediocre transport infrastructures, energy, etc.); and weakness of banking systems.

4.1.6 Promotion campaigns

304. Here it requires concentrating efforts on the promotion of African stock markets to local and foreign investors. A securities stock market should first and foremost target local clientele made up of small shareholders and institutional investors (insurance companies, pension funds, basket investment funds, banks, etc.). If these investors are quite active on the markets, the volume of transactions and ratio of liquidity shall increase. This in turn arouses interest in foreign investors and encourages other companies to list their securities on the stock market. The stock market culture should be developed in African people by regularly organising targeted events (forums, conferences, training seminars, etc.) that are given wide media coverage for identified segments including schools and universities.

305. Finally, in order to effectively raise domestic funds required for its development and as such reduce dependence on foreign funding, African countries have to come out with individual development schemes of their financial sector to resolutely engage in an integration process of their financial system.

306. As concerns stock exchanges whose existence is relatively discrete in most African countries, only the gradual building of a continental market, through the fast blotting-out of barriers to foster mobility of capital, can make it attain the critical size that may attract African companies looking for diversification of their source of funding and its cost, and African and foreign investors, looking for diversification of portfolios and risks. If nothing is done quickly, African stock exchanges shall continue to be marginalized, and in spite of the general bulkiness of returns, the greatest financial investors will continue to ignore them

307. At a time when even the biggest financial world markets are pursuing alliances, the actors concerned with stock market activities should not hesitate if they want to stop the final nose dive of Africa from the rest of the world and contribute to sustainable economic growth that supports the fight against poverty on the continent.

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Table 4.1 Opinion on legislative reforms

Legislative reforms

Number of responses

Total no. Of respondents

% Weights

(%)

Protection of investors, putting in place of a well defined regulatory framework for operators

14 34 41.2 29.8

Encouraging fiscal policies and benefits for companies listed on the stock exchange

5 34 14.7 10.6

Harmonisation of commercial/fiscal legislations, and rules and regulations

15 34 44.1 31.9

Suppression of exchange control 5 34 14.7 10.6

Appropriate laws against money laundering and funding terrorism

4 34 11.8 8.5

Sundry 4 34 11.8 8.5

Source: AUC Survey

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APPENDIX: RECAP TABLE OF THE FINDINGS OF THE SURVEY

Table 1: Number of responses by region

No %

North Africa 3 8.3

West Africa 6 16.7

Central Africa 3 8.3

East Africa 8 22.2

Southern Africa 16 44.4

Total 36 100.0

Table 2: Number of responses by organization

No %

Stock Exchange 6 16.7

Capital Market Authority 7 19.4

Ministries of Finance 2 5.6

Central Banks 15 41.7

Regional Economic Communities 2 5.6

Others 4 11.1

Total 36 100.0

Table 3: Opinion on the creation of a Pan African Stock Exchange

No %

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 SEs first 4 16.7Mobilization 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


No response 3

Total 36

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Table 4: Opinion on the creation of a Pan African Stock Exchange, by region

For Against

No of Resp.

North Africa3 0

3100.0% 0.0%

West Africa3 2

560.0% 40.0%

Central Africa3 0

3100.0% 0.0%

East Africa5 1

683.3% 16.7%

Southern Africa10 6

1662.5% 37.5%

Table 5: Opinion on the creation of a Pan African Stock Exchange, by type of organization

For Against

No of Resp.

Stock Exchanges4 2

666.7% 33.3%

Capital Market Authorities5 1

683.3% 16.7%

Ministries of Finance1 0

1100.0% 0.0%

Central Banks8 6

1457.1% 42.9%

Regional Economic Communities2 0

2100.0% 0.0%

Others4 0

4100.0% 0.0%

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Table 6: Major factors affecting the development of financial markets in Africa

NoTotal of


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 7.9

Table 7: Major macroeconomic constraints affecting the development of financial markets in Africa

NoTotal of


Low economic growth/Low household income/low saving and investment 14 36 38.9 19.4

Industrial tissue not developed/Majority of companies are SMEs 2 36 5.6 2.8

Agriculture and tourism are inadequately represented 1 36 2.8 1.4Poor social and economic context /Poor investment climate: High Inflation, Inadequate interest rates, Corruption and Lack of good governance, Political instability, Unattractive fiscal policies 23 36 63.9 31.9

Lack of macroeconomic and financial information 4 36 11.1 5.6

Lack of infrastructure 6 36 16.7 8.3

Currency convertibility and volatility of exchange rates 4 36 11.1 5.6

High levels of indebtedness 6 36 16.7 8.3

Others 12 36 33.3 16.7

Table 8: Reforms necessary for the establishment of the African stock exchange

NoTotal of


Institutional reforms Establishment of regulatory and surveillance authority, and dispute resolution mechanisms 8 36 22.2 23.5

Establishment of trading, clearing and settlement infrastructure 4 36 11.1 11.8

Establishment of rating agency 2 36 5.6 5.9

Depository of securities 2 36 5.6 5.9

Regional SE first 1 36 2.8 2.9

Others 17 36 47.2 50.0

Macroeconomic reforms

Promotion of African economic integration/Macroeconomic convergence 4 36 11.1 10.3Establishment of a sound and equitable fiscal framework/Policies that encourage saving (tax concessions) 9 36 25.0 23.1

Establishment of accounting practices adapted to the environment 2 36 5.6 5.1

Freedom of trade/Expansion of markets, products and good trading systems 2 36 5.6 5.1

Macro-economic stability (inflation and interest rates...) 14 36 38.9 35.9

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Others 8 36 22.2 20.5

Legislative reforms Protection of investors/Establishment of a well-defined regulatory framework for market operators (regulatory framework for trading, settlement and depository of securities) 14 36 38.9 29.2

Encouraging policies, and fiscal advantages for listed companies 6 36 16.7 12.5

Harmonization of (business/commercial/fiscal) laws, regulations and rules 15 36 41.7 31.3

Removing exchange controls 5 36 13.9 10.4Appropriate legislation with respect to anti-money laundry and terrorist financing 4 36 11.1 8.3

Others 4 36 11.1 8.3

Financial reforms Definition of a trading currency/Address currency converti+C91bility problem/Creation of an African Central Bank and a single currency 2 36 5.6 9.1

Definition of a trading system 1 36 2.8 4.5

Establishment of standards to comply with capital requirements 1 36 2.8 4.5

Statutory requirement for result disclosure 1 36 2.8 4.5Harmonization and standardization of financial reporting, accounting and auditing requirements (adoption of international best practices) 4 36 11.1 18.2

Others 13 36 36.1 59.1

Other reforms

Sensitization programs/Training and education programs 5 36 13.9 33.3

Establishment of regional SE before the PA SE/Proper sequencing 3 36 8.3 20.0

Dependent on the type of model 1 36 2.8 6.7

Others 6 36 16.7 40.0

Table 9: Most preferable model

NoTotal of


Based on existing stock exchanges 16 36 44.4 30.2

Creation and connection of national stock exchanges 11 36 30.6 20.8

Creation and connection of regional stock exchanges 16 36 44.4 30.2

Single common supervisory structure for African financial markets 6 36 16.7 11.3Creation of a continental stock exchange independent from the existing stock exchanges 3 36 8.3 5.7

Others 1 36 2.8 1.9

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Table 10: Opinion on the creation of a special compartment for SMEs

No %

For 22 71.0

Against 9 29.0


No response 5

Total 36

Table 11: Eligibility criteria of listing at the African stock exchange

NoTotal of


Equities Clear and guaranteed reporting of results for many fiscal years (Profitability track record) 15 36 41.7 30.6

Minimum market capitalization 15 36 41.7 30.6

Minimum years in operation 7 36 19.4 14.3

Others 12 36 33.3 24.5

Bonds

Minimum market capitalization 13 36 36.1 26.0

Minimum years in operation 5 36 13.9 10.0

Profitability track record 7 36 19.4 14.0

Credit rating report of the issuer/Guaranteed security/Type of issuer 16 36 44.4 32.0

Others 9 36 25.0 18.0

Others

Legal enforceability of agreements 4 36 11.1 13.8

Standardization of contracts 4 36 11.1 13.8

Historical performance 6 36 16.7 20.7

Credit rating report on the assets in reference 6 36 16.7 20.7

Others 9 36 25.0 31.0

Table 12: Impacts on African economies

NoTotal of


At continental level

Enhances the continent's profile 10 36 27.8 21.3

Enhances the cooperation among the African economies 10 36 27.8 21.3

Increases access to long term, cost effective capital 21 36 58.3 44.7

Opportunities for mergers 2 36 5.6 4.3

Others 4 36 11.1 8.5

At national level

Provision of cost effective, long term capital 18 36 50.0 50.0

Enhances intra-trade among African economies 4 36 11.1 11.1

Reduces the reliance on donor funding 2 36 5.6 5.6

Economic development/Reduces poverty/Create jobs 6 36 16.7 16.7

Others 6 36 16.7 16.7

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On companies Enhances the profiles of companies listed, including marketing of their products and services/Enhances companies' competitiveness 11 36 30.6 28.9

Access to long term, cost effective capital 18 36 50.0 47.4

Better transparency 5 36 13.9 13.2

Others 4 36 11.1 10.5

On investors

Increased investment opportunities/Diversification of investment portfolio 26 36 72.2 86.7

Economies of scale 2 36 5.6 6.7

Others 2 36 5.6 6.7

On issuers Enhances the profile of issuers including marketing of their products and services 2 36 5.6 6.5Increased opportunities for resource mobilization/Access to long term, cost effective capital 20 36 55.6 64.5

Economies of scale 6 36 16.7 19.4

Transparency and good governance 1 36 2.8 3.2

Others 2 36 5.6 6.5

Table 13: Importance of the following for a viable continental stock exchange

NoTotal of


Suitable legal framework 30 36 83.3 18.9

Independent private financial institution 17 36 47.2 10.7

Favourable harmonized tax system 26 36 72.2 16.4

Creation of a continental supervisory body 19 36 52.8 11.9

Staff training 20 36 55.6 12.6

Public sensitization 22 36 61.1 13.8

Creation of a continental rating agency 21 36 58.3 13.2

Others 4 36 11.1 2.5

Table 14: Opinion on the creation of an electronic stock market

No %

Yes 30 100.0

No 0 0.0


No response 6

Total 36

Table 15: Reasons for the creation of an electronic stock market

No Total of % Weights

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respondents

Greater transparency 24 30 80.0 25.5

Reduction of risks 22 30 73.3 23.4

Maximization of transactions volume 23 30 76.7 24.5

Greater participation of institutional and foreign investors 25 30 83.3 26.6

Table 16: Roles of Member States in the development of the African stock exchange

NoTotal of


Sensitizing issuers 3 36 8.3 5.9

Encouraging cross border listing and trading 2 36 5.6 3.9

Modernizing trading and settlement infrastructure 7 36 19.4 13.7

Harmonizing regulations to facilitate the creation of the PA SE 10 36 27.8 19.6

Active participation in the market/Regulating role 17 36 47.2 33.3

Others 12 36 33.3 23.5

Table 17: Opinion on whether RECs must be the engine of the development of the African stock exchange

No %

Agree 25 80.6

Somewhat agree 6 19.4

Disagree 0 0.0


No response 5

Total 36

Table 18: Reasons

NoTotal of

respondents % WeightsBetter to start with regional structures and informal interactions between countries within regions/There are ongoing initiatives to establish regional stock exchanges 21 31 67.7 87.5

To minimize fears and suspicions among African countries 1 31 3.2 4.2

NSE should be the driving force 1 31 3.2 4.2

Others 1 31 3.2 4.2

Table 19: Importance the following for the establishment of an African stock exchange

NoTotal of


Harmonization of regulatory rules 26 36 72.2 11.5

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Standardization of communication infrastructure 24 36 66.7 10.6

Improvement, harmonization and integration of national payment systems 26 36 72.2 11.5

Improvement of socio-policy framework 18 36 50.0 8.0

Harmonization of accounting standards 27 36 75.0 11.9

Standardization of taxation of financial assets 22 36 61.1 9.7

Standardization of rules on FDI 17 36 47.2 7.5

Harmonization of national corporate rules 20 36 55.6 8.8

Autonomy of the stock exchange 24 36 66.7 10.6

Creation of a common African currency 16 36 44.4 7.1

Others 6 36 16.7 2.7

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Table of Contents

Business

stock exchange sector

regional stock exchanges

ofafrican stock exchanges

performances of existing

east african community

economic context

southern africa

west africa