Africa Finance Forum
Let me say again that I see a huge gap between the potential of new electronic channels and the results that are being observed on the ground. Much as we might convince ourselves of the inexorable logic of bringing financial services to the corner shop near where people live (agent banking) and right onto their hands (mobile money), what I see as I visit country after developing country is too much effort and too many resources being expended in entirely sub-scale operations. Must getting there feel so hard?
Commercial players: don't play hero
As in any network business, mobile money operations are about numbers of customers and breadth of ecosystems. Unless you have the kind of scale Safaricom had in Kenya, are you sure you want to tackle the whole mobile money ecosystem on your own?
Are you sure you can convince people to get off using that grimy physical cash which touches and is immediately accepted by everyone, and instead hop onto your private, exclusive electronic cloud? Your cloud would cast such a bigger shadow on cash if it was combined with all other similar clouds into a single, interconnected electronic payment network for everyone.
Are you sure you want to make the management of cash in/out (CICO) -that thing which wears you down and which you so dearly would like to go away-the key competitive battlefield with everyone else who abhors cash as much as you do? Your cloud would be much more accessible for those sadly stuck on cash if you joined forces with all the other electronic types and worked together to create CICO networks that work for all of providers.
Are you sure you want to take it upon yourself to sign up every primary school who wants to bill parents, and to sign up every small employer who wants to pay employees, one by one? They will not want to force all their parents and employees to join your cloud, and yet they will not have the appetite to sign up with every other cloud, so they'll feel it's easier to just continue with cash like they have always done. They would be so much amenable to e-payments if the various players empowered a few payment aggregators to work on their collective behalf in signing up those schools and employers and distributing the transactions according to who has which parents and workers as their customers.
If players are able to leverage the collective scale, the total will be more than the sum of the parts. But getting to this result requires that the industry as a whole work out which areas they must collaborate on and which areas they want to fight tooth and nail on. Now competition between mobile money operators tends to be focused on size of payment network, ubiquity and liquidity of cash in/out points, and the length of the list of billers/bulk payers signed up. Those are precisely the aspects on which scale matters most, but the resulting fragmentation is only making cash loom more supreme. How about if these became areas of collaboration, and the competitive field was shifted to brand, customer service, product development and quality of user interface instead? Aren't these, in fact, the things that should turn on modern digital-based services?
Regulators: tear down those walls
Many regulators have gone to surprising lengths to allow new services to emerge, often without explicit regulation, against prevailing orthodoxy. But still, when the supply response is so weak as it is in many countries, policymakers have to wonder whether there are other tacks they can take to spur the market on.
For one, free up cash in/out (CICO) networks from the clutches of banks and mobile money operators. Forcing service providers to be contractually responsible for anything that goes on in thousands of stores (the current regulatory mantra) is not only illusory but counterproductive: how can such fuzzy liability not lead to smaller, proprietary cash networks? Instead, create a license for CICO networks, with clear consumer protection rules, and let them operate for any and all financial service providers. All they would need to be a CICO point for a given bank or mobile money provider, beyond having a CICO licence, would be to have a funded account with that institution and access to their secure, real-time electronic channel.
Many regulators can also give up on their aspirations to be match-makers for happy bank-telco partnerships. These are not natural things, they remain rare on the ground to this day. They may emerge in time, but don't predicate the development of the sector on two species with different genetic make-up mating and working together (India's RBI, take note). Let banks and telcos compete, under clear guidelines and a level playing field. Let telcos and other non-bank players contest the market with an e-money license that exempts them from onerous prudential regulations for the very good reason that (if they are licensed and supervised properly) they do not create new prudential risks. Let banks compete on the basis of the same third-party CICO and account opening regulations that apply to non-banks, for the equally good reason that CICO and anti-money laundering risks are the same no matter who the account issuer is.
Regulators need to offer pathways to mobile money providers that require less commercial brute force. And providers need to develop a more nuanced view of how they can cooperate to build a new market and compete to gain share within that market. Such is the modern way with most network and digital industries.
Ignacio Mas is an independent consultant on mobile money and technology-enabled models for financial inclusion. He is also a Senior Research Fellow at the Saïd Business School at the University of Oxford, and a Senior Fellow at the Fletcher School's Center for Emerging Market Enterprises at Tufts University. Previously, he was Deputy Director of the Financial Services for the Poor program at the Bill & Melinda Gates Foundation, and Global Business Strategy Director at the Vodafone Group.
It is about two years ago that the AfDB, GIZ and World Bank published the Financing Africa book, a broad analysis of trends in Africa's financial systems, of gaps and challenges, and of different policy options. For researchers focused on Africa's financial systems, the past years have been exciting, with many different forms of innovations being introduced and assessed. But there have also been new challenges for analysts and policy makers alike, as I will lay out in the following. Cooperation between different stakeholders, including practitioners, donors, policy makers and researchers can help move forward the frontier for Africa's financial systems. In the following, I will focus on five areas where more data and more research can support better informed policy making.
One first area is that of long-term finance, which can be seen as the second (next to lack of financial inclusion) critical dimension of shallow financial markets in Africa. As documented in the Financing Africa publication, there is a bias on banks' balance sheets toward short-term liabilities and, more critically, short-term assets, only few countries have liquid equity and debt markets, and there is a dearth of effective contractual savings institutions, such as insurance companies, pension funds and mutual funds. This dearth of long-term financial intermediation is in contrast to the enormous need for long-term financing across the continent, for purposes of infrastructure, long-term firm financing for investment and housing finance.
The long-term finance agenda is an extensive one, both for researchers and policy makers. First, there is still a dearth of data on long-term financing arrangements, including on corporate bond market structures and costs, insurance markets and private equity funds. Second, identifying positive examples and gauging interventions and policies will be critical, as will be expanding to Africa the small literature on equity funds and their effect on enterprises that exists for U.S. and Europe and (increasingly) for emerging markets. One important constraint mentioned in the context of long-term finance is the lack of risk mitigation tools. Partial credit guarantees can play an important role, but their design and actual impact has not been studied sufficiently yet.
Small enterprise growth
A second important challenge is that of extending the financial inclusion agenda from micro- up to small enterprises, both in terms of supply- and demand-side constraints. The emphasis stems from the realization that job-intensive and transformational growth is more likely to come through formal than informal enterprises. Assessing different lending techniques, delivery channels and organizational structures conducive to small business lending is important, as is assessing the interaction of firms' financing constraints with other constraints, including lack of managerial ability and financial literacy. This research agenda is important for both financial institutions and policy makers. For financial institutions, the rewards can lie in identifying appropriate products for small enterprises and entrepreneurial constraints that might prevent take-up and impact repayment behavior by small enterprises.
For policy makers, the rewards can lie in identifying policies and institutions that are most relevant in alleviating small firms' growth constraints.
Regulatory reform agenda
A third important challenge refers to regulatory reform. While global discussions and reform processes are driven and dominated by the recent Global Financial Crisis and the fragility concerns of economies with developed if not sophisticated financial markets, Africa's fragility concerns are different and its reform capacity lower. Some of the suggested or implemented reforms seem irrelevant for almost all African countries (such as centralizing over-the-counter trades) or might have substantially worse effects in the context of shallow financial markets than in sophisticated markets increasingly dominated by high frequency trading (such as securities trading taxes). Prioritizing regulatory reforms according to risks and opportunity costs for financial deepening and inclusion is therefore critical in the definition of the regulatory reform agenda for African countries. While not necessarily an area for fundamental academic research, financial sector researchers can contribute to this conversation by helping identify regulatory constraints for financial deepening and broadening and potential sources for stability risks, based on past experiences from Africa and other regions.
A fourth important challenge is that of cross-border banking and the necessary regulatory framework. Identifying cross-border linkages between countries is critical, and data collections, such as by Claessens and van Horen (2014), represent an important first step. Understanding the channels through which cross-border banking can help deepen financial systems and foster real integration, and the channels through which cross-border banks can threaten financial stability, is critical. In this context, the optimal design of cross-border cooperation between regulators and supervisors to minimize risks from cross-border banking while maximizing its benefits is important (Beck and Wagner, 2013). African supervisors have been addressing the challenge of regulatory cooperation both on the bi-lateral and sub-regional level as well as on the regional level, with the establishment of the Community of African Bank Supervisors. Financial research can support this cooperation and integration process.
The politics of financial sector reform
A final important area is the political economy of financial sector reform. Short-term political interests and election cycles undermine the focus on long-term financial development; interests to maintain the dominant position of elites undermine the incentives of governments to undertake reforms that can open up financial systems and, thus, dilute the dominant position of the elites. On the other hand, the financial sector is critical for an open, competitive, and contestable economy because it provides the necessary resources for new entrants and can thus support economic transformation. Better understanding the political constraints in financial sector reforms and identifying windows of opportunity are therefore important. Focusing on the creation of broader groups with a stake in further financial deepening can help develop a dynamic process of financial sector reforms. An increasing literature has tried to understand the political economy of financial sector reform in developed and emerging markets; extending this literature to Africa can support the optimal design of financial sector reform programs.
Research in these five areas will have to be supported by an array of new data and a variety of methodological approaches. This implies expanding data availability towards non-bank providers, such as equity funds, but also exploiting existing data sources better, including credit registry and central bank data sets. In addition to exploiting more extensive micro-level data sets, a variety of methodological approaches is called for. I would like to point to just two of them. First, randomized experiments involving both households and micro- and small enterprises will shed light on specific technologies and products that can help overcome the barriers to financial inclusion in Africa. One of the challenges to overcome will be to include spill-over effects and thus move beyond partial equilibrium results to aggregate results. Second, further studies evaluating the effect of specific policy interventions can give insights into which policy reforms are most effective in enhancing sustainable financial deepening and positive real sector outcomes.
For research to succeed in obtaining the necessary data, asking relevant questions but also maximizing its impact, a close interaction between researchers and donors, practitioners and policy makers is necessary. This relationship can often be critical for obtaining micro-level data, such as from credit registries or specific financial institutions, or for undertaking experiments or RCTs. However, these links are also critical for disseminating research findings and having an impact on practice and policy in the financial sector.
Thorsten Beck is Professor of Banking and Finance at Cass Business School in London and Professor of Economics at Tilburg University in the Netherlands. He was the founding chair of the European Banking Center at Tilburg University from 2008 to 2013. Previously he worked in the research department of the World Bank and has also worked as consultant for - among others - the IMF, the European Commission, and the German Development Corporation. His research and policy work has focused on international banking and corporate finance and has been published in /Journal of Finance/, /Journal of Financial Economics/, /Journal of Monetary Economics/ and /Journal of Economic Growth/. His research and policy work has focused on Eastern, Central and Western Europe, Sub-Saharan Africa and Latin America. He is also Research Fellow in the Centre for Economic Policy Research (CEPR) in London and a Fellow in the Center for Financial Studies in Frankfurt. He studied at Tübingen University, Universidad de Costa Rica, University of Kansas and University of Virginia.
References and further readings
Beck, Thorsten, 2013a. Finance, Growth and Fragility: The Role of Government. CEPR Discussion Paper 9597.
Beck, Thorsten, 2013b. Finance for Development: A Research Agenda. Research Report for ODI.
Beck, Thorsten and Robert Cull, 2014. Banking in Africa, in: Berger, Allen, Phil Molyneux and John Wilson (Eds.): Oxford Handbook of Banking, 2nd edition.
Beck, Thorsten, Samuel Munzele Maimbo, Issa Faye, and Thouraya Triki, 2011. Financing Africa: Through the Crisis and Beyond. Washington, DC: The World Bank.
Beck, Thorsten and Wolf Wagner, 2013, Supranational Supervision: How Much and for Whom? CEPR Discussion Paper 9546.
Claessens, Stijn and Neeltje van Horen. 2014. Foreign Banks: Trends and Impact. Journal of Money, Credit and Banking, forthcoming.
All of us are working hard to help the world be a better place.
In the agriculture sector we work every day to develop innovative means of financing agriculture, growing crops, and getting them to market, new ways to assist the poor break the traps of poverty and illiteracy. We combine these activities with double, triple, and quadruple bottom line measurements that seek to, notably, protect the environment, help minorities and empower those that we feel need to be empowered.
Additionally, we have taken on the issues of risk mitigation, power, transport, water, storage, new seeds, new crops, new pesticides and herbicides, microfinance, rural finance, family financial services, literacy and numeracy, to name but a few. And yet we are still far from done in terms of achieving our objectives.
One of our latest models is agricultural value chain development, competitiveness, and financing. We have recognized that to grow food and make a living at it, other than feeding oneself in a subsistence manner, commercial linkages need to be improved. We have acknowledged that access to markets and customers has to be strengthened, as well as production, to meet the markets needs, wants and desires whether they are real physiological needs or derived needs.
We all work on these issues very diligently taking into account the best tools we have and referring to them as best practices. However the more advanced we get as advisors, donors and developers, the more our space age systems appear to be neither understandable, nor very affordable, to the people we expect to use them.
So in many cases after our donor funds for support projects and programs run out, the pilot projects collapse and the people we seek to help revert back to their age-old ways of life which after all have proven to be effective after thousands of years of use - right?
So we watch our good work go from tractors and roto-tillers to hoes and ox drawn ploughs, from high yield seeds, fertilizers and pesticides to traditional crops and ways of growing them. Maybe some larger farms tied into value chains, which have contracts to supply to growing food and beverage retailers survive with the new ways and it is these that set in motion the normal survival of the fittest which we have become accustomed to in our economic system. The ancient Roman "latifundia" re-emerges on the production side, powerful traders and their corporate value chains/supply chains take over the profitable market segments leaving the rest to survive as best as they can. To compete with these organizations which are highly efficient and highly productive in part by lowering costs, we are seeking to get small holder producers (farmers and their associated MSMEs in the agro food processing chains) to increase efficiency, improve competitiveness, improve product quantity and quality, and keep low prices. On the other hand we are hoping that the agricultural sector that currently employs so many in the world will absorb more labour as well as raise incomes and standards of living, and slow down the rural urban migration that is changing the face of the world.
So let's pause for a minute and reflect on this "efficiency and competitiveness model" and the potential for it to meet our needs. If we look around we might see many markets where the major chunk of the sales, production and profits are concentrated within a few large transnational corporations able to mobilize human resources, production technology and finance to deliver affordable products available when and where consumers want them. This process is facilitated by the population concentrated in cities as the rural to urban migration trends continue and supermarket chains decide on the products to be offered along with the standards to be met.
So can we achieve food security the way we are trying to achieve it so that all people at all times have access to affordable, sufficient, safe, nutritious food to maintain a healthy and active life?
Do we have the ability amongst ourselves to help coordinate the systems, processes, and structures in place to ensure this has a high probability of happening? Do we go small, go large, go modular, go integrated, or go in all directions at once? Do we need to change the way we are doing things? How do we deal with the increase in interest in using food as an alternative investment vehicle so that our investors are able to hedge, diversify and achieve the yields required by the financial market on their portfolios? Is food, its trading and pricing, the same as oil, gold, small cap stocks, treasury bills, bonds and mortgage backed securities?
How do we balance the corporate concentration that occurs when economies of scale in organized value chains, (that are very competitive, capital and technology intensive, use less labour and smaller numbers of intensively grown crops), versus the small scale, low efficiency and high cost food producers that feed and employ so many in the world?
There has never been a better time than now to wake up, smell the coffee, and look at where we are really heading. Recessions, economic slowdowns and budget cuts have a way of concentrating the mind and focusing attention on what is needed to be competitive and thus survive in this world of ours.
What do you think?
The author has worked in the areas of agriculture investment and development including value chain financing for over ten years in Africa and Asia. He is currently involved in researching and implementing, as well as training on, risk mitigation tools to enhance the flow of funding to agriculture production and processing with a focus on Small and Medium Enterprises in agricultural value chains in emerging markets.
Indices have been around for centuries to measure performance and change. The first conceptual index was created by Rice Vaughan in 1675 in his book 'A Discourse of Coin and Coinage' when he compared price levels over time (Chance, 1966). In 1707, William Fleetwood published the first price index in the Chronicon Preciosum to show the change of prices over time (Chance, 1966). The first investment index was calculated when, according to McHugh and Wood (2006), Charles Henry Dow "invented" the concept of following parts of the stock market separately as indices, in 1896. As editor of the Wall Street Journal, he believed that "averages" or indices can be an indicator of business conditions. Charles Dow set up the rail index (now called the Trannies) and the Industrial index.
Many initiatives have been launched to construct weighted benchmark indexes to reproduce the underlying performance of emerging and African domestic bond markets, such as Ecobank Middle Africa Bond Index, JP Morgan EM Index, JP Morgan Next Generation markets index, Citi's WGBI, the GBI-EM Index, etc. They all look at a clear and transparent set of inclusion rules for selecting countries and instruments eligible for the index. This is well aligned with the African Development Bank agenda to actively contribute to the development of sustainable domestic debt markets in Africa through the creation of the African Domestic Bond Fund (ADBF) which will be invested in local currency denominated sovereign and state guaranteed sub-sovereign bonds.
An index is defined as a selection of securities with the same or similar risk features chosen to represent a particular market. Investors use indices to measure the performance (i.e. beta) in those particular markets. However, the debt crises in Europe for both sovereign and corporate bonds have steered some investors to query the advantages of indexes constructed based on the traditional technique of market-capitalization. For some index developers, cap-weighted fixed income indices are considered to provide suboptimal portfolio allocations and impair performance.
Market capitalization-weighted fixed income indexes
For an index to measure market performance it should be fully inclusive. For practical purposes it is impossible to measure the beta of every single instrument in the market. Therefore a representative sub-set is selected based on a transparent, replicable, relevant and objective rules set. For practitioners, a cap-weighted index reveals the relative value of debt securities as determined by market participants, without altering the market's relative structure. The main variable defining a security's weight in a cap-weighted index is its price (Bennyhoff, 2012). In an open economy, the market price of a security reveals every market participant's information, views, and anticipations about the value of that bond. Additionally, a liquid market makes sure that the price of any given security reflects the consensus appraisal of its intrinsic value, accounting for the projected risk and return from every investor's valuation practice. The cap-weighted index is the benchmark for most of fixed income investors. It holds its constituents in proportion to the size of their issuance. A benefit of the cap weighted index methodology is the easiness to track because it changes automatically as the price of underlying bonds change.
However, for many index developers (Arnott, Hsu, Li and Shepherd, 2010), the optimality of cap-weighted indexes as investment options hinge on the hypothesis of perfectly efficient capital markets and rational investors with mean-variance utility preferences. In the real-life, market mispricing is reflected in the market prices. As the rationale is that a cap-weighted portfolio bases its component weights on prices and that is a correlation between pricing errors and portfolio weights that leads to suboptimal distribution and performance. In brief, should an investor focus on elements, such as GDP, landmass, population, energy consumption, or an investor focus more on issues such as political risk, inflation, exchange rate policy, external debt... Practitioners consider that market capitalization captures all the potential factors that investors collectively analyze to fix a bond's price.
Fundamentally-weighted fixed income indices
In the weighting methodology constructed using fundamental variables (GDP, landmass, population, energy consumption); the weighting is based on the issuer's aptitude to pay its debt rather than on the quantity of debt outstanding. This methodology suggests that countries with better fundamentals get greater weights than those with weaker fundamentals. The use of these proxies lies in the fact that these four elements symbolize a country's capital, labor force, natural resources and technological sophistication. They play a catalytic role as primary inputs to an economy's growth. It seems that the fundamentally weighted portfolios outperform both cap-weighted portfolio benchmarks (Shepherd, 2012) and weighting according to fundamentals has led to a major enhancement to the Sharpe ratio.
The weighting of these indexes is based on several macroeconomic elements. Nonetheless, indebtedness is not the sole factor in assessing sovereign risk. For instance, if a country crowds in the market with new bond issues to the extent that investors start having doubts about the repayment capabilities of the sovereign entity, prices of outstanding issues may drop in anticipation of a lower credit value of the debt, and consequently the country's market capitalization will fall. This is well aligned with Reinhart (2010) analysis that showed that there is a certain level of debt that governments can reach before a slowdown in economic growth begins.
What needs to be considered for decision?
A cap-weighted fixed income index leads to suboptimal allocations and performance (or beta). On the contrary, a fundamentally weighted fixed income index yields superior performance over time. However, for practitioners the best index is certainly not one that offers the highest return during a given period of time but the one that most precisely measures the risk-reward features of the collective capital invested within the market being tracked.
Market capitalization offers advantages when considering the entire market and fundamentally weighted indices represent the segment of the universe that has the higher return potential. Both approaches have pros and cons. whereas in 'normal' times market cap weighted indices are less volatile in its composition and therefore cheaper to track, the fundamentally weighted indices have advantages in times of recessions and market turmoil. Maybe a combination of both would be the ideal solution - so called 'collared' schemes. The advantage would be moderate turnover and full scalability in times of efficient markets and diversification and less dependency on stressed sectors of the markets in turmoil.
Cedric Mbeng Mezui: Senior Financial Economist, African Development Bank
Christian Schedling: Managing Partner at Concerto
Recent press reports have commented on the limitations of the stock markets in Francophone Africa, underlining their low levels of development compared to their Anglophone counterparts. These reports further draw some form of a causal link between language and financial sector development.
There is no doubt that the most dynamic African stock markets are located in the Anglophone countries. However, there is a need for a deeper analysis of the discourse that defines the relationship between the use of language (as a manifestation of the cultural environment) and the development of financial markets.
This article therefore presents a brief assessment of the African stock market highlighting their performance and the opportunities they offer.
About 94% of the world’s population live in countries with a functioning stock market. In Africa, although several countries have stock markets that have been established for the past fifteen years, these markets have experienced delays in gaining firm footholds in their countries most notably in DRC, Madagascar, Mauritania, Somalia, Eritrea, Guinea and Burundi. Despite these shortcomings, several of these countries have unveiled plans to establish stock exchanges, most often under the impetus of the Central Banks.
Not all existing African stock markets have the same levels of maturity. The table below presents an overview of the top 10 markets in Africa. The figures are based on the latest available data on capitalisation, liquidity and trading volume:
It is worth noting that the most developed stock market in terms of volume is Anglophone, a factor warranting further discussion.
Critical Drivers of Stock Market Development
If the determination of the growth of an economy depends on the efficiency of the stock exchange markets, then it is the decisions of policy makers and private sector initiatives that will further impact this development. Public policies promoting a market economy can provide a favourable environment for stock market growth and development, and most importantly, improve people’s living conditions.
The critical drivers of stock market development are that allow the deluding affects that are a consequence of supply and demand of the listed shares, ensuring the efficiency, liquidity and safety of the African stock markets. Smaller markets on the other hand, tend not to meet three essential criteria, frequently applied in comparative analyses, without presenting any structural risks. The three criteria are as follows:
- Level of primary market activity and the associated market capitalisation;
- Stock market index trends’ impact on market capitalisation; and
- Reasonable and predictable transaction costs in the secondary market.
However, market comparison analysis needs to be applied beyond volumetric factors, and should include criteria such as economic usefulness and/or the quality of service provisions. For example, when comparing the market activities in Ghana and the WAEMU – often cited as modern examples for developing Anglophone and Francophone markets - the following qualitative criteria must be incorporated in the analysis:
- Spread of Market capitalisation: 80% of Ghana’s market capitalisation is based on only 3 companies, compared to 15 in BRVM, therefore increasing the vulnerability of the GSE to only a few firms;
- The impact of the market on the underlying economy: The decision-making organs of the three largest listed companies in Ghana are not based in Ghana. These companies are also listed on international exchanges. This arrangement further increases the Ghanaian market’s vulnerability.
- Representativeness of the economy: WAEMU’s stock market falls short of reflecting and thus representing the sub-regional economies of which it is comprised, in terms of geography (31 out of 37 listed companies are Ivorian), size (the average company size on the market is approximately 150 billion FCFA (USD300 million) however the economic fabric is comprised of companies that are much smaller), and sector (no mining company is currently listed). Ghana’s economy is better represented on Accra’s stock market than on WAEMU’s, which is comprised of companies covering an array of business segments and varying company sizes;
- Market liquidity: Generally, the more liquid a market and the more shares that are distributed to private investors, the less volatile the market and the less susceptible it is to external shocks. In this regard, private investors should be preferred during the issue of new securities as well as on the secondary market. Additionally, to increase the allocation of shares to private investors, it is important to have regulations facilitating the lowering of the nominal value of shares.
Beyond the qualitative and volumetric analyses, should stock market efficiency not be the main concern for policy makers? Should the stock exchange be used as an institutional device or as a policy driver for economic growth?
Establishing a stock market enables for example:
- International issuers to increase their investments in a country; ·
- Manufacturing companies and non-financial commercial companies to increase their long-term funds at low costs and without currency risk;
- Governments to access capital by privatisation;
- Governments to diversify and expand financing opportunities without the currency risk faced when borrowing in foreign currencies.
African countries are increasingly issuing bonds on international and regional financial markets. A few notable examples:
- Senegal issued a bond on the WAEMU’s BRVM in 2012, raising the equivalent of USD 175 million over 7 years at 6.7%;
- Rwanda chose to issue its first bond in early 2013. The transaction worth USD 400 million over 10 years on the international markets at 6.625%.
In the face of limited fiscal resources and declining foreign aid, the reponses of Senegal and Rwanda could not have been more different:
- By issuing a bond on the regional financial market, while opening it to the international markets, Senegal raised funds and revitalized its markets. In addition, there is no currency risk and annual coupons payments will lead to a 54% supply to resident accounts, having a driving effect on the national economy;
- By issuing on the international markets, Rwanda secured a better rate than it would have obtained on the domestic markets, which would have amounted to nearly 20% of its national budget. However, this strategy is not without currency risks as it obliges the Rwandese government to settle nearly all coupons abroad without having a dynamic impact on its financial markets.
Without analysing the sustainability of public debt in a given country, we suggest that they should focus on elements that are less quantifiable but are nevertheless relevant, such as recycling the induced effects of a bond issue in their economy and consider currency risks. Stock markets can have an impact beyond the securities that are listed, as shown in the examples below:
- With funds from a bond issue, a government can improve the production and distribution of water and electricity, thus improving its economy and daily life of inhabitants;
- A situation where a commercial bank finances a company's investment and with a bond issue of similar duration, the company indirectly benefits from this stock market operation. In the absence of stock markets, commercial banks would only finance short term operations thus impeding on economic development;
- The quality of insurer offer improves thanks to more liquid backing products, the insured indirectly benefit from the stock market.
Analysing these concrete situations shows that African stock markets, even in their early stages of development, are far from being just imitations or reactions to international trends. In less than ten years existence, even the most modest of stock markets in Central Africa issued, a bond amounting to 500 billion XAF. The few public and private listed securities contributed in adjusting the technical provisions framework for the insurance companies in the sub-region.
African stock markets opportunities
The prospects for development of African stock markets are real, provided they establish operating rules that are adapted to the cultural, economic and financial reality that surrounds them.
In addition to national stock markets, some zones set up regional stock markets, in order to support their economic integration. Francophone stock markets are leaders in this regard, enabling wider securities markets for member countries with integrated economic, legal and monetary systems. This model has been applied in different ways:
- The WAEMU is a world leader in this regard, with a regional stock market bringing together 8 countries for the past fifteen years, built on a national framework that has been active since the mid-70s. Its existence allowed several countries to raise long-term local currency financing without having to pay for a national stock market. Its growth potential remains high;
- CAEMC faces a very different situation, due to the absence of a stock market tradition, and, paradoxically, to the existence of two stock markets for the past 10 years, one in Douala for Cameroon, the other in Libreville with regional outreach. This situation has hindered the growth of stock market activity in CAEMC; the circumstances surrounding the introduction of the Cameroonian market of the SIAT Gabon to be listed on the Libreville BVMAC is an example of this difficulty;
- The EAC is characterised by the existence of several stock markets – in Uganda, Tanzania, Kenya, Rwanda – as well as a proposed stock market in Burundi. Several companies are listed on multiple markets in the EAC – 7 out of the 15 companies in Uganda, for example, are Kenyan companies that are also listed in Nairobi.
These examples show that regional stock markets must be based on real economic and financial infrastructure, supported by a long tradition of trade and a strong will to unite. This would thus support the recent trend towards increased economic integration with an adequate and innovative joint financial infrastructure.
As we have seen, it appears that the Franc zone offers plenty of opportunities, including at the continental level, thus refuting the inability of the francophone countries to develop its financial activities.
Simplot KWENDA FEUTAT
 Pourquoi les bourses francophones déçoivent? (About francophone stock exchange low performances). Jeune Afrique, 8th March 2013 ; Afrique de l’Ouest : la stratégie de la BRVM en débat (Questioning BRVM, WAEMU regional stock exchange strategy). Jeune Afrique, 21st March 2012. La zone Franc dans un étau, entre blocages culturels et manque de volonté politique (Stock exchange: the Franc zone strangleholded between cultural locks and missing political will). Jeune Afrique, 11th January 2012.
 Source : One half-billion shareholders and counting : Determinants of individual share ownership around the world – P. Grout, W. Megginson, A. Zalewska – Septembre 2009
 AfDB Pocketbook 2012 and WFE Database. All figures are in USD.
 Tullow Oil Plc based in London is listed on the London Stock Exchange. Anglogold Ashanti Ltd is listed among others in South Africa, in the USA, in London, and in Australia. ETI based in Togo is listed at the BRVM and in Nigeria.
 Middle-sized companies in the printing and fruit juice sectors are being listed.