EAC Stockbrokers Adopt Compulsory Certification Training

Both the East African Securities Regulatory Authorities (EASRA) and the East African Stock Exchanges Association (EASEA) have agreed that professional Capital Market employees will be required to take a certification course, whose curriculum the two bodies have agreed on. The certification aims to standardise qualification requirements for key market activities in the EAC such as trading, asset management, and investment banking. Since certification is being implemented at a regional level, it should be standardised and ideally recognised globally, which allows a graduate to work anywhere. In this regard, the EAC Common Market Protocol under Part D on Free Movement of Persons and Labour, provides provisions on Harmonisation and Mutual Recognition of Academic and Professional Qualifications (Article 11) and hence an advantage of the certification training is that certified staff in the EAC can work in other EAC stock exchanges.

This is also important because the EAC Common Market Protocol (CMP) provides for the Free Movement of Capital in Part G Articles 24-28. Certification is therefore also important with regard to regional integration and capital account liberalisation. The CMP provisions provide for the elimination of Restrictions on the Free Movement of Of Capital which are reflected in Annex VI (Schedule on the Removal of Restrictions on the Free Movement of Capital). The Schedule contains commitments in equity and portfolio investments, bank transactions, repatriation of proceeds from sale of assets and other transfers and payments relating to investment flows.

Formal certification procedures will also help the market players to have a clear understanding of market regulations and the requisite qualifications to perform their responsibilities. It is acknowledged that a lack of properly qualified staff and fraudulent trading of customers’ shares was blamed for the collapse of Kenyan stock brokerage firms between 2007 and 2010.

Scheduled courses under the programme include fundamental securities, market participants training, officers and directors course. The certification course was agreed upon during an EASRA consultative meeting that was held in Bujumbura, Burundi, in March however, rules on frequency of training, examinations and those to be exempted based on other courses taken are yet to be finalised.

There are, however, other programmes in the region that have been running on a voluntary basis and without certification such as those run by the Securities Industry Training Institute, which is based in Kampala.

The most outstanding achievement in terms of EAC capital markets integration so far has been the cross listing initiative that has made it possible for seven, five and three companies to cross list from the NSE to the USE, DSE and RSE respectively. A road map for the integration of the EAC capital markets has also been developed to guide the integration process in the EAC capital markets industry in light of the EAC Common Market Protocol and in preparation for the proposed East African Monetary Union.

Related information can be found on Business Day

Fragility of African Stock Exchanges

Reuters Africa

One of the biggest obstacles to investing in African stock markets is the paucity of listed companies and the limited number of shares traded on them. So the prospect of two fairly major delistings is not a particularly comfortable one for African exchanges at a time they are trying to encourage more companies to list and to capitalise on the growing investor appetite for Africa.

Bharti Airtel is delisting its Lusaka-listed Celtel Zambia unit – the second biggest company by market capitalization on the Zambian stock exchange – following a mandatory offer to buy out minority shareholders.

Meanwhile, Greek Coke bottler Coca-Cola Hellenic – the world’s second biggest Coke bottler – plans to buy out the Nigerian Bottling Company and turn it into a wholly-owned subsidiary in a $126 million deal. It already owned two-thirds of the shares.

In neither case is there a suggestion the parent company will not be planning to pump in more investment – quite the opposite in fact as Africa is increasingly seen as a place to get above average returns and with excellent growth prospects.  But taking the companies off the stock exchanges removes the chance for other investors to get that direct exposure to the African opportunities.

There was a chance South African retailer Massmart could disappear from the bourse too after WalMart announced a buyout plan, but the U.S. giant now intends to keep the Johannesburg listing – so Massmart investors can keep their participation in the expected growth it sees in Africa.

Overall it hasn’t been a bad year for African stock exchange listings given that we’ve seen Nigeria’s Dangote Cement – the biggest firm in sub-Saharan Africa outside South Africa – float its shares in a listing which valued it at $14 billion at the time (now nearer $12 billion).  That said, the free float – the proportion of shares held by investors likely to trade – is only just over 5 percent.

African stock exchanges certainly have their work cut out to encourage more companies to see them as the best place for raising finance. Questions have long been raised over whether Africa needs so many small national exchanges and whether it might not be to everyone’s advantage to have listings on fewer, bigger markets.

See previous post here.

EAC Common Market: A Historic Launch

1st July 2010 marks the commencement of the operationalisation of the East African Community (EAC) Common Market, following the completion of the ratification of the Protocol on the Common Market, a complex process towards transforming the region into a Common Market. Below is an excerpt of a recent speech by The EAC Secretary General, AMB. Juma V. Mwapachu on the occassion of the launch (emphasis added):

"A New Milestone

In this context, it is important that the citizens of the East African Community Partner States and the economic players in the EAC region have a clear understanding of what the 1st of July holds and portends. 

Yes, the date is a historic one and is deservedly celebratory. Achieving successful negotiations leading up to the adoption of the Common Market Protocol, its approval by EAC Heads of State and its ratification in record time is a milestone for the EAC. No other Regional Economic Community in Africa has achieved such milestone. 

It is a milestone that epitomises strong political will and firm commitment by all the EAC stakeholders in deepening and widening integration. Yet what we have achieved so far is only the basic legal framework that outlines what needs to be done and implemented for the Common Market to make meaning and have impact in transforming the lives of the East African Community citizens. 

Hard Work Begins

Thus, 1st July 2010 for the EAC Common Market, means entry of the critical phase when the Partner States, which, pursuant to the Treaty establishing the EAC are the principal implementers of EAC programmes, must begin to determine how the four freedoms encapsulated in the Common Market Protocol should resolutely be put into effect. It also marks the beginning of serious work at the EAC executive organ level, notably the Council of Ministers, in determining what regional-based interventions can and should be undertaken to speed up the process of getting the four freedoms to take force, mainly through a legislative process. 

It is important to note though that the EAC region has, in the past decade, seen a number of policy and legal measures being effected at Partner States’ level that are within the ambit of the Common Market Protocol. These measures will understandably make life easier in getting a fuller and quick implementation of the Common Market Protocol provisions. A number of examples can be adduced, particularly in the field of services, an area which, in other Economic Community regions, including the European Union, have posed serious challenges at the implementation level.

Some Common Market Freedoms Already in Place

Examples in this regard span a wide range of services: banking and finance (including insurance and brokerage); distribution (retail in particular); transport and logistics; telecoms (notably mobile telephony); air transport; tourism (hotels and lodges, tour operators); education (primary, secondary and tertiary); energy; professional services (accounting and auditing, management consultancy and other knowledge services); ICT (plus broadband internet); media (print, radio and TV); and music. In other words, the EAC economies have seen significant cross-border services intensify, benefitting from bold economic liberalisation policies and measures effected in all the five EAC Partner States. 

Immediate Challenges in Services Sector

The entry of the Common Market Protocol will thus provide a fillip and impetus to an already thriving cross-border services industry. The impetus will largely lie in creating the empowering conditions at the level of the Partner States for the services sector to be scaled up and made more robust and buoyant. A few examples can be mentioned first, the case of air transport which is yet to be fully liberalised within the framework of the Yamoussoukro Decision. The EAC region needs not only a “free skies” agreement but also deeper liberalisation of air transport operations to bring down costs of passenger and cargo transportation which are currently too high. 

Second, the securities market is yet to be “regionalised” and the capital account is yet to be sufficiently liberalised by Tanzania to enable Tanzanians participate outside the present framework of cross-listing of market shares at national level. Removal of restrictions on capital flows should serve as a catalyst for capital market development and the provision of long term and risk capital most needed to spur economic development. At the EAC level, there are definitive programmes on-going towards the promotion of a regional capital markets regime and institutions. 

Third, the regulatory framework for cross-border television broadcasting is still stringent; it needs to be further liberalised to promote greater offerings by competing regional networks. Fourth, whilst there is significant cross-border tertiary education access, tuition fees, even in public universities, are yet to be harmonised in spite of decisions having been taken at the EAC level requiring charging of similar fee rates. 

Fourth, the cross-cutting challenge of work permits which underlie the effectiveness of the services sector needs to be frontally addressed. You cannot realise the full benefits of free movement of professionals under the services sector when labour market policies and laws stand in the way of such freedom. A starting point in leveraging this freedom could be to eliminate the requirement of work permits for citizens of EAC Partner States who have professional qualifications and who seek to set up their own businesses in fields such as law, medicine, engineering, accounting and auditing, architecture etc. 

Making Free Movement of Labour Work

Turning to the aspect of free movement of labour, a key freedom in promoting human capacity in the EAC region for social and economic transformation, it is important that the EAC Partner States quickly work out the modalities for enabling such freedom to take effect. An initial word of appreciation to Rwanda and Kenya is deserved for leading the elimination of work permits, at a bilateral level, between them. In the case of Rwanda, the elimination of work permits is extended to all citizens of EAC Partner States. An important element in the process of elimination of work permits, wholly or partially, is the conclusion of the Mutual Recognition of Academic and Professional Qualifications. 

The EAC, through its institution, the Inter-University Council of East Africa, has reached an advanced stage in setting up a mechanism through quality assurance that will form the basis for determining such mutual recognition. A related issue is mutual recognition of accreditation of higher education institutions which would remove the regulatory requirement of tertiary education institutions moving across borders applying for fresh accreditation. It should also be mentioned that the EAC is working towards the harmonisation of social security benefits in order to support the free movement of labour. EAC Partner States are already at advanced negotiating stage in this area.

Free Movement of Persons

It is notable that to most ordinary citizens of the EAC Partner States the 1st of July infers the free movement of persons in the region from this date. This is one issue that the Partner States will have to offer elaborate explanations. Suffice to state that citizens of the EAC region have enjoyed free movement across their borders for years. 

The national passports and the East African passport travel documents are accepted and respected at border points without a visa requirement and six months’ stay each time of entry is offered without hassle. This free movement will be further facilitated when all the five Partner States introduce Third Generation (Machine Readable) identity cards. Only Rwanda has such an ID in use. Kenya is about to introduce one in July this year. Tanzania and Uganda are in the process of introducing such IDs as well. Burundi will follow. 

Conclusion

The EAC Common Market is finally here. It ushers in a higher level of integration beyond trade in goods which the Customs Union caters for, with positive impact on the economies of the Partner States as reflected by growing intra-regional trade in the past five years. The broad economic space which the services sector will unleash will trigger the expansion of economic activities and jobs in the region. 

Cross-border capital movements will also spur the growth of industrialisation driven by an expanding and more productive agricultural sector. East Africans have every right to be proud of the stage of integration the EAC has reached. But it is upon them to exploit all available opportunities to make the Common Market work for them and for the better livelihoods of all citizens of the EAC. We can do it; let us together make it happen".

EAC Secretariat

Arusha, Tanzania

Sub-Saharan African Stock Markets

According to the IMF SSA Regional Economic Outlook 2010, the number of stock markets in SSA countries has risen from 5 in 1989 to 16 today and the market value, (market capitalization) has nearly doubled to 153 percent of GDP, before dropping to 83 percent of GDP in 2008 as a result of the global financial crisis.  While foreign capital flows have helped stimulate this growth, in most cases the markets remain too small and illiquid to attract significant foreign investment.

For instance, except for South Africa and Nigeria, the stock markets have few listed  companies.   South Africa has about 401 listed companies on its stock exchange while Nigeria has 202.  The next largest stock market according to the Report is in Kenya with about 51 companies. Meanwhile Malaysia has 1076 listed companies and Thailand 476.   Most other African countries have few listed companies, and at about 20 percent of GDP in 2008 (excluding South Africa), average market capitalization is lower than in most emerging markets.

Such low business volumes make it difficult to support a local market with its own trading system, market analysis, and brokers. The small size and lack of liquidity also deters foreign investors since the exposure of foreign institutional investors is typically negligible until a market reaches about $50 billion in size or $10 billion in shares traded annually.

Recommended reforms to increase stock market capitalization in SSA include:

     (a)  Improvements to the legal and accounting framework;

     (b)  Improved private sector evaluation capabilities;

     (c)  Increased public sector regulatory oversight;

     (d)  Appropriate sequencing of reforms;

     (e)  Good-quality institutions, such as rule of law, democratic accountability, and limited corruption, are important to reduce risk.

     (f)  The development of regional markets as a way to promote cost efficiency and overcome small market size.  

On the last recommendation, I should note that the Ivory Coast-based Bourse Regionale des Valeurs Mobilieres (BRVM) is the world's first regional stock exchange which serves the eight African members of the West African Monetary Union:  Benin, Burkina Faso, Guinea Bissau, Cote d' Ivoire, Mali, Niger, Senegal and Togo. It is now entirely electronic with market offices maintained in each country.