The Experience of Financial Markets Regulation in the Southern African Region – Part Two –


The State of Financial Markets in the Southern Africa Region

Until the end of 1994, there were 14 stock exchanges across the African continent. These were Cairo (Egypt), Casablanca (Morocco), Tunis (Tunisia) in North Africa; Abidjan (Cote d & # 39; Ivoire), Accra (Ghana) and Lagos (Nigeria) in West Africa and Nairobi (Kenya) in East Africa. In the Southern Africa region it was Windhoeck (Namibia), Gaborone (Botswana), Johannesburg (South Africa), Port Louis (Mauritius), Lusaka (Zambia), Harare (Zimbabwe) and Mbabane (Swaziland). In 2005, most of the rest of Southern Africa developed their own stock markets. These are Maputo (Mozambique), Dar-Es-Salam (Tanzania) and Luanda (Angola).

With the exception of the Johannesburg Stock Exchange, and on a different tier, the Zimbabwe Stock Exchange and the Namibia Stock Exchange, these markets are too small compared to the developed markets of Europe and Europe and Europe. North America, as well as other emerging markets in Asia and Latin America. At the end of 1994, there were around 1150 companies listed on the African markets combined. The market capitalization of listed companies was $ 240 billion for South Africa and around $ 25 billion for other African countries.

In the countries examined, stock markets are particularly small relative to their economies – with a market capitalization-to-GDP ratio averaging 17.3%. The limited supply of securities in the markets and the dominant buy and hold attitudes of most investors also contributed to the low trading volume and turnover rate. Turnover is low with less than 10 percent of the market cap traded annually on most exchanges. The small capitalization, low trading volume and turnover rate suggest the embryonic nature of most of the stock markets in the region.

We have gathered considerable information on the current state of the financial markets in Africa in general, and due to a limited time frame it has not been possible to collate, analyze and harmonize them. The format of this article does not take into account all the data. From the latest information, it is clear that with the ongoing reforms in the financial sectors of the countries studied, much progress has been made in terms of strengthening regulatory and institutional capacities. We might expect more results with the promotion of more open investment regulations, allowing more financial flows to the region.

The experience of regulating financial markets in Southern African countries

The financial systems of Southern African countries are characterized by a high ownership structure which results in oligopolistic practices that create privileged access to credit for large firms but limited access to emerging small firms. The regulatory framework must take into account all the specific characteristics of these systems, while retaining the general approach inherent in any regulatory instrument.

Financial systems in Southern Africa are also known for their marked variations. Some systems, such as those in Mozambique, Angola, and Tanzania, have long been state owned, mostly the central bank and very few commercial banks. Angola has not developed a money and financial market to date, and informal money markets are widely used. Other systems had mixed ownership including central banks, public, domestic, private and foreign private financial institutions. These can be further subdivided into those that have rich varieties of institutions as found in South Africa, Mauritius and Zimbabwe, and others with limited varieties of institutions like one. found in Malawi, Zambia, Swaziland, etc.

The regulatory authorities of most of these countries have, over the years, adopted the policy of financial sector intervention in the hope of promoting economic development. Controlling interest rates, directing credit to priority sectors, and securing bank loans at below-market interest rates to fund their operations subsequently proved to undermine the system. financial instead of promoting economic growth.

For example, low lending rates have encouraged less productive investments and discouraged savers from holding domestic financial assets. Credit directed to priority sectors often resulted in deliberate defaults, believing that no legal action could be taken against defaults. In some cases, the subsidized credits hardly ever reached their intended beneficiaries.

There was also a tendency to concentrate formal financial institutions in urban areas, which made it difficult to provide credit to people in rural areas. In some countries, private sector borrowing has been largely crowded out by public sector borrowing. Small businesses often have great difficulty in obtaining funds from formal financial institutions to finance businesses. Finally, the tendency of governments in the region to finance public sector deficits through the creation of money has resulted not only in inflation, but also in negative real interest rates on deposits. These factors have had negative consequences for the financial sector. First, savers have found it unrewarding to invest in financial assets. Second, it caused capital flight among those who were unable or unwilling to invest in real assets, thereby limiting the financial resources that would have been made available for financial intermediation. Added to this was the decrease in the inflow of resources to African countries since the 1980s.

A functioning financial market can help make the financial system more competitive and efficient. Without the stock markets, companies must rely on internal funding through retained earnings. Large, established companies, especially local branches of multinationals, are in a privileged position as they can make investments from retained earnings and bank loans while new indigenous businesses do not have easy access to finance. Without being subjected to the scrutiny of the market, big companies are getting bigger.

The availability of reliable information would help investors compare the performance and long-term prospects of companies; businesses to make better investments and to make strategic decisions; and provide better statistics to economic decision makers. While efficient stock markets force companies to compete on a level playing field for investor funds, they can be criticized for favoring large companies, suffering from high volatility and focusing on return. short-term financial performance rather than long-term economic performance.

In various countries where domestic bond markets exist, these are generally dominated by financing from the public treasury which crowds out private sector needs for fixed interest rate financing. With few exceptions, international fixed rate bond markets have been closed to African companies. Thus, the development of an active equity market could be an alternative to the banking system.

The development of financial markets could help strengthen the capital structure of enterprises and an efficient and competitive financial system. The capital structure of companies in Southern African countries where there are no viable stock markets is generally characterized by a heavy reliance on internal financing and bank loans which tend to increase debt / debt ratios. own funds. The undercapitalization of companies with high debt-to-equity ratios tends to reduce the viability and solvency of the corporate sector and the banking system, particularly in times of economic downturn.

Case studies in selected southern African countries

In all the countries studied, both the historical context, the level of development of the financial system and the importance of the structure and operations of the financial markets significantly affected the nature of the regulatory framework. However, there are few countries whose goals of liberalizing financial markets have been the basis for the development of a modern regulatory system. Mauritius and Botswana are examples which, along with South Africa and Zimbabwe, have developed some of the most developed and diverse financial market systems in sub-Saharan Africa. There is no doubt that the economic and financial conditions of the economies of each country in Southern Africa have played an important role in shaping the regulatory framework for their financial market.

1. Financial markets in Botswana

An informal stock market was established in 1989, managed and operated by a private brokerage firm (Stockbrokers Botswana Limited). In 1995, an official stock exchange was established under the Botswana Stock Exchange Act. The ESB has performed remarkably well in terms of capitalization level, stock value, and stock performance. The ESB has helped promote Botswana as a destination for international investment.

In 2004, the number of domestic listed companies was 18, while foreign listed companies were 7 and two in the venture capital market. The Bank of Botswana has introduced its own paper, BoBCs, since 1991, for liquidity management purposes, and there is a growing secondary market for the instrument. In 1999, the Central Bank introduced other instruments, repos (repurchase agreements) and national savings certificates with the aim of developing the local money market and encouraging the local money market. saving. In 1998, the International Financial Services Center (IFSC) was established to promote world-class financial services.

2. Financial markets in Mauritius

The Government of Mauritius has made it a priority to modernize and modernize the financial system of Mauritius and has recently taken steps to strengthen the financial sector and to further integrate it into both the national economy and the financial market. global.

Thanks to a well-developed network of domestic commercial banks, offshore banks, non-financial institutions and financial institutions, the financial system is one of the most dynamic in the region of the region. Southern Africa.

The Mauritius Stock Exchange (SEM) began operations in 1989, with only five companies listed. In 2004, more than 44 companies were listed, and the business line has widened, advanced technology is used in transactions.

In September 2001, the SEM settlement cycle was shortened from five to three days, to be in line with the major international stock exchanges. The short settlement cycle has since helped improve liquidity and turnover in the market, with investors being able to sell their securities three business days after purchase, thereby reducing risk and improving performance. Integration into global markets through strict adherence to international standards.

3. Financial markets in Mozambique

In 1978, all private banks operating in Mozambique were nationalized and merged into two public institutions, the Banco de Moçambique (Central Bank) and the Banco Popular de Desenvolvimento (BPD). Following the adoption of a new economic orientation in 1992, the government implemented an economic reform program including financial sector reform. Foreign banks were allowed to invest in Mozambique and the regulatory and commercial activities of the BDM Central Bank were separated. Banco de Moçambique assumed the function of Central Bank while Banco Comercial de Moçambique BCM led the commercial banking sector.

The policy of liberalizing the financial sector has enabled new institutions. In addition to the already operational Standard Bank, new banks licensed since 1992 or resulting from the liquidation of existing institutions include Banco Internacional de Moçambique, Banco Comercial de investimentos, Banco de Fomento, Banco Austral, l & # 39; African Banking Corporation ABC, BMI, UCB, ICB, Novo Banco, etc. There are also investment banks, leasing companies, and credit unions. This increase in the number of financial and non-financial institutions has resulted in the development of an active financial sector.

In October 1999, the Mozambique Stock Exchange (Bolsa de Valores de Moçambique BVM) was inaugurated. Its regulatory agency is the BDM Central Bank and its operations are still limited. With technical support from the Johannesburg Securities Exchange JSE and the Lisbon Stock Exchange, plans are underway to develop an international financial services center, including an advanced computer system.

4. Financial markets in Namibia

The Namibian NSX Stock Exchange is governed by the Stock Exchange Supervision Act 1985. Recently, amendments to the law have been adopted to bring national laws into line with international standards.

NSX was established in October 1992 and is the most technically advanced exchange in Africa, as well as one of the few self-regulated financial markets in Southern Africa. The Namibian Stock Exchange Association, a non-profit, self-regulatory organization, is the licensee of the NSX to operate. It approves listing applications, licenses stockbrokers, and handles the trading, clearing, and settlement of the exchange. Since 1998, NSX has utilized the most technically advanced management tools available on the continent, which enable enhanced monitoring and detailed customer protection.

5. Financial markets in South Africa

The South African financial market system is the most sophisticated and complex with the vibrant Johannesburg Securities Exchange (JSE), the Bond Exchange of South Africa (BESA) and the South Africa Futures Exchange (SAFEX).

The Johannesburg Stock Exchange JSE was established in November 1887. Currently, it is governed by the Stock Exchange Supervision Act of 1985 (amended in 1998 and 2001). The JSE is Africa's largest stock exchange and has a market capitalization more than 10 times that of all other African markets combined. The JSE provides technical support and capacity building, skills and information to the following exchanges in the region: Namibia, Mozambique, Mauritius, Tanzania and others in Africa (Nigeria, Ghana, Egypt, Uganda and Kenya). Since 1999, the JSE has harmonized its listing requirements with the stock markets of Botswana, Malawi, Namibia, Zambia and Zimbabwe.

BESA was licensed in May 1996 under the Financial Market Supervision Act 1989 (amended 1998), and SAFEX was established in 2001 as the Financial Derivatives and Agricultural Products Market Division of the JSE.

In June 1996, the JSE introduced the fully automatic electronic trading system known as Johannesburg Equities Trading (JET) and, since May 2002, has used the Stock Exchange Trading System (SETS).

6. Financial markets in Swaziland

The Swaziland Stock Market (SSX) was established in 1990 to promote local investment opportunities. In 2002, five companies were listed. The SSX has developed new registration requirements in line with new international regulatory standards. A new security bill was approved in 2002 and is expected to be in force now. It will enable the licensing and regulation of all securities markets, transactions and participants.

7. Financial markets in Tanzania

The Dar-Es-Salaam Stock Exchange (DSE) was incorporated in September 1996 under the Capital Markets and Securities Act of 1994. However, its operations did not begin until April 1998 with the listing of the first society. In October 2002, foreign companies were allowed to operate on the DSE. Its regulatory agency is the Financial Markets and Securities Authority (CMSA). Plans are underway to facilitate obtaining increased financial resources in global markets.

8. Financial markets in Zambia

The Lusaka Stock Exchange (LuSE) was established in February 1994 under the Securities Act 1993. It is controlled by the Securities and Exchanges Commission (SEC). Its business was boosted by the successful issue of Zambian Breweries, which raised up to $ 8.5 million to refinance a secured loan for the acquisition of Northern Breweries in 1998. Most of the registrations were the result of the country's privatization program.

Commodity Exchange, the Agricultural Credit Exchange was also established in 1994, on the initiative of the National Farmers Union of Zambia, after the liberalization of agricultural commodity prices. The Exchange provides a centralized trading facility for buyers and sellers of commodities and inputs. It also provides updated prices and market information for local and international markets.

9. Financial markets in Zimbabwe

The Zimbabwe ZSE Stock Exchange is one of the oldest and most dynamic stock exchanges in Africa. It was established in 1890, but had sporadic activities until 1946. By 2002 it had 76 listed companies. The ZSE operates within the framework of the Stock Exchange Law, which is being amended to take into account new technological requirements and align its content with international standards (improving the security of stock exchanges, transparency, central deposit system, etc.).

The ZSE is open to foreign investors, who can buy up to 40 percent of the capital of a listed company, a single investor can buy a maximum of 10 percent of the shares offered. Foreign investors can invest in the local money market up to a maximum of 25% per main issue of government bonds and stocks, and a single investor can acquire a maximum of 5. %. Foreign investors, however, are not allowed to buy on the secondary market. These investments are eligible for 100% dividend and interest payment.

Financial Market Regulation in Southern Africa: What Way Forward?

The major problem with regulating financial markets is that the legal and institutional framework in most countries is still insufficient to support modern financial processes. Examples of such shortcomings include outdated legal systems that lead to poor law enforcement. The following challenges are very interesting for other research opportunities.

A coherent and comprehensive legal framework is needed as part of the proactive approach in order to use contracts which clearly define the rights and obligations of all intervening operators. Such a framework should encourage discipline and swift execution of contracts, encouraging responsibility and prudent behavior on both sides of financial transactions. Prudent and efficient financial intermediation cannot work without reliable information on borrowers and legislation on accounting and auditing standards, which also ensures the honesty of financial institutions. In a country's financial markets develop and operate efficiently, legislation must fully incorporate rules for trading, intermediation, information disclosure, takeovers and mergers.

Due to the role of financial institutions and markets in developing a healthy financial system, additional legislation is normally needed for their operations to complement company law. These are prudential regulations, especially for banks and similar financial institutions which hold a large share of the money supply, create money and intermediary between saving and investing. Company law is an example of the type of legislation needed. It not only governs the operations of business enterprises, but also protects the interests of the stakeholders of the business. Thus, the public disclosure of information about the activities of the company should be made mandatory for the management of the company in the appropriate section of the company law. This information, especially that relating to finance and accounting, should also be legally required to be verified and subsequently attested by the auditors.

Prudential regulations cover issues such as entry criteria (quotations), capital adequacy standard, asset diversification, limits on loans to individuals, permitted range of activities , asset classification and provisioning, portfolio concentration and enforcement powers, special accounting, auditing and disclosure standards tailored to bank needs to ensure timely availability of business 39; Accurate financial information and transparency. The aim is to improve the safety and soundness of the financial system.

There is a real need for substantive financial market legislation that requires not only favorable policies, but also legal and institutional infrastructure to support their operations, prevent abuse and protect investors. Investor confidence is essential for market development. Brokers, underwriters and other intermediaries who operate in these markets must therefore follow the professional codes of conduct defined in the legislation applicable to institutions such as finance and insurance companies, mutual funds and mutual funds. pension.

Another important issue is the independence of regulatory authorities, their number and the possibility of creating a self-regulatory agency. All these aspects should take into account the objectives and principles defined by the government, as well as the specific development needs of the financial system.

A major challenge regarding financial markets in the Southern Africa region is the harmonization of national financial regulation and compliance with international requirements, including SADC criteria and international standards set by organizations international organizations such as the International Organization of Securities Commissions (IOSCO). , the International Accounting Standards Committee (IASC), the Basel Committee on Banking Supervision (BCBS) and the obligations under the WTO Agreement on Financial Services (GATS). These key international instruments are starting to be applied, and individual countries need to continue updating their financial market regulations and improving the technical skills of their staff in charge of regulatory and supervisory operations.


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