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Financial Education: The Key to the Development of African Stock Markets

15.05.2018Emmanuel Zamblé, Expert-Consultant in Capital Markets

In recent decades, there has been a rapid increase in the number of stock exchanges on the African continent. In 1990, there were only eight stock exchanges (three in North Africa, and an additional five in the sub-Saharan region). That number grew to 18 by 2000, and finally to 29 today—including two regional stock exchanges in Abidjan and Libreville. Following these consistent developments, each region of the continent now has at least one stock market, and should expect a corresponding boost to their respective economies. Unfortunately, the growing number of stock exchanges in the African region has not yielded the expected results.

Indeed, with the exception of the Johannesburg Stock Exchange, Namibian Stock Exchange, Malawi Stock Exchange and Casablanca Stock Exchange—which, with a total market capitalization of USD 1,302 billion, 119.655 billion, 14.620 billion and 68.398 billion respectively individually represent more 50% of the GDP of their countries. The 25 other stock exchanges of the continent still continue to play a modest role in their economies.

Moreover, when analyzing the number of companies listed on the stock market, we realize that there is little enthusiasm on the part of African securities issuers. Of the 29 stock exchanges, only 3 are currently home to more than 100 companies. These include Johannesburg Stock Exchange Limited (377 listed companies), Egypt Stock Exchange (222 listed companies) and Nigerian Stock Exchange (172 listed companies).

At the regional level, the development of stock exchanges has yielded different results.

The Southern African region currently boasts nine stock exchanges: The Malawi Stock Exchange, Johannesburg Stock Exchange Limited, Dar es Salam Stock Exchange, Lusaka Stock Exchange, Namibian Stock Exchange, Stock Exchange of Mauritius, Botswana Stock Exchange, Swaziland Stock Exchange and Zimbabwe Stock Exchange. With a total market capitalization of USD 1,460.524 billion as of December 31, 2017, Southern Africa which accounts 86% of the continent’s market capitalization, leads the continent in terms of capital market development. Excluding South Africa, the region's market capitalization, while remaining the largest, would be reduced to only USD 158.52 billion.

Four stock exchanges currently operate in North Africa. These include the Casablanca Stock Exchange, Egypt Stock Exchange, Tunis Stock Exchange, Algiers Stock Exchange, and Libyan Stock Market. This region of Africa has a total market capitalization of USD 124.431 billion, which represents 7.35% of that of the continent.

West Africa has five stock exchanges: The Nigerian Stock Exchange, Ghana Stock Exchange, Regional Stock Exchange, Bolsa de Valores de Cabo Verde, and the Sierra Leone Stock Exchange. Its market capitalization is USD 69.90 billion (4.13%).

East Africa has the largest number of stock exchanges after Southern Africa. Its eight markets include the Nairobi Securities Exchange, Uganda Securities Exchange, Rwanda Stock Exchange, Bolsa de Valores of Mozambique, Seychelles Securities Exchange, Somalia Stock Exchange, Khartoum Stock Exchange, and the ALTX East Africa Exchange. It has a market capitalization of USD 37.745 billion (2.23%).

Central Africa has two stock exchanges; however, recent developments indicate that they will soon merge into a single market. These are the Securities Exchange of Central Africa and the Douala Stock Exchange. The stock market capitalization of this region amounts to USD 0.414 billion (0.02%).

Total market capitalization of African stock exchanges by Region

Sources: Stock Exchanges Websites; African Securities Exchange Association

Regarding the listed companies of the aforementioned stock exchanges, their number also varies from one sub-region to another.

Southern Africa possesses the largest number of listed companies, with 669 companies appearing across its nine stock exchanges—however, when we remove South Africa from our calculus, the number of listed companies in the sub-region drops to 292 and ranks second after North Africa, which has 392 listed companies. The West African sub-region has 265 listed companies, while East Africa and Central Africa have 190 and 4 listed companies, respectively.

Number of listed companies by region

Sources: Stock Exchanges Websites; African Securities Exchange Association

An analysis of this situation reveals that the majority of African stock exchanges are small, and therefore their contribution to the development of the state economy remains marginal; despite numerous legal, regulatory, and operational reforms made to revitalize and develop financial markets throughout Africa. In view of these circumstances, it should not be surprising to note that transaction volumes in these markets are also low.

One of the main causes of this sluggishness in the African financial sector is the inadequacy of stock culture in the region. This is reflected by, among other things, the reluctance of companies to use the stock market as a preferred route for financing their investments, the non-spontaneity of the dissemination of financial information, and the scarcity of growth capital transactions to be carried out through the stock market. The lack of a stock market culture is also expressed by the mistrust of many economic operators who still consider that the stock market is the ‘territory of specialists and especially rich.’ These actors therefore prefer to use their savings for other purposes, such as real estate and trade, rather than in stocks and bonds, which they are less familiar with.

The stock market problem can also sometimes arise in the form of an open competition between the banking sector and the financial market: Some banks consider long-term finance to be their sole purview, and perceive the stock market as a permanent competitor, despite having complementary roles in reality.

The remedy to these challenges is financial education.

There is a mounting, urgent need for regular educational campaigns with savers and company executives to help them deepen their understanding of how the stock market, financial products, and investment risks all interact. Similarly, money managers, advisers and, financial intermediaries should be included in any proposed financial market training programs. This would avoid any confusion with regards to the respective roles of commercial banks and the stock market in financial transactions such as public offerings. The training received by market players could spur adoption of good practices, build self-confidence in the investment decision process, and reinforce trust in their work, reassuring both domestic and foreign investors.

Our main objective is to make every African an informed speaker for the development of his country or even the continent. To do this, African stock market authorities should focus primarily on local investors. This has the advantage of protecting domestic markets against speculation from foreign capital flows. Of course, if investors are active enough in those stock markets, trading volumes and liquidity ratios will improve. In turn, this would attract foreign investors and encourage other companies to get listed on the stock exchange.

It should also be noted that no reform will lead to concrete, permanent developments of African stock markets without involving the majority of Africans. We can only achieve that by voluntarily accepting the daunting task of educating the public about money and financial market. Education must therefore be a cornerstone in any financial development strategies if African stock market leaders are to succeed in their goals.

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About the Author

Emmanuel Zamblé has been a consultant in the capital markets industry for more than fifteen years. He has conducted studies on initiatives for bond markets development in ECOWAS, CEMAC and AMU (Arab Maghreb Union) regions, on behalf of international financial institutions. He began his career in 1992 at the Abidjan Stock Exchange (BVA) as a Senior Account Manager, Head of Public Offering and Quotation; in 1998, after having contributed to setting up the WAEMU Regional Stock Exchange (BRVM), he held the position of Director of Operations and Financial Information until 2011. Additionally, to presenting and delivering a number of international seminars and conferences, Mr. Zamblé also contributes to the training of African financial executives.

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