Integrated capital markets plan hits new headwinds

By James Anyanzwa

Kenya: The dream of having a unified capital market in the East African Community appears to be getting more and more elusive day by day.

It has now emerged that less developed securities exchanges in the region have developed cold feet over the proposed move, saying they fear a loss of control and ownership of investments.

The structure of the proposed market and its modalities of operation are also yet to be agreed upon.

Mr Robert Mathu, the executive director of the Capital Markets Authority of Rwanda, said regional securities exchanges should be left to decide on their own what they want rather than be bombarded with directives.

“Some of these exchanges are owned by the private sector. We want to provide an environment where the private sector can thrive and where decisions can be made independently,” he told Business Beat last week.

“We are moving step by step towards an integrated capital market, but we must recognise that these are private companies that have to agree, because their markets are at different levels of development.”

Mr Mathu added major milestones in the integration process are also yet to be achieved.

The creation of a unified securities exchange has been in the pipeline for years.

In 1997, studies were conducted to establish possible models for integration of EAC capital markets. The recommendations were to establish a single regional institution that would serve all five partner states.

The benefits

The institution is expected to facilitate the transfer of funds and securities across EAC borders. Listed companies would also be able to seek investors in any part of the region, while market intermediaries would be able to offer and deliver their services in each of the five EAC countries.

The integration of East African capital markets, which is in line with the provisions of the EAC Common Market Protocol, would provide for the free movement of capital in the region.

It is also expected to promote faster growth of the region’s stock markets, enhance their global competitiveness and reduce operating costs.

However, the project has been overwhelmed by a myriad of challenges, including the nature of the region’s capital markets that are of different sizes.

Hurdles

The delay in the automation of the Uganda Securities Exchange and sluggish pace of demutualisation have also slowed progress towards a unified market.

Other cross-cutting regional challenges include low levels of financial literacy, and in particular low awareness about capital markets; a small savings pool; lack of a diversified investor base, with institutional investors being largely dominant; poorly developed retail segments of the markets; and a lack of diversified product offerings.

There are also concerns over a lack of, or few, listings from the private sector, shallow debt markets, varying tax and other policy regimes across the EAC, low liquidity, varying levels of market and infrastructure development, different skill levels among market participants, and high transaction costs across borders.

But there are some strides being made towards attaining integration.

The Nairobi, Uganda, Dar es Salaam and Rwanda capital markets have established a working relationship and operate under the umbrella of the East African Securities Exchanges Association (EASEA).

Further, the Nairobi Securities Exchange installed an electronic trading board, the first in the community, and was soon followed by the Dar es Salaam Stock Exchange.

So far, seven Kenyan companies have cross-listed on the Uganda Securities Exchange, five on the DSE and two on the Rwanda Stock Exchange.

Only one Ugandan company — sole power distributor Umeme Ltd — has cross-listed on the NSE.

Kenyan equities already cross-listed are East Africa Breweries, Jubilee Holdings, Kenya Airways, Kenya Commercial Bank, Equity Bank, Nation Media Group and Centum Investments.

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