CONFIDENCE BUILDING IN SUB-SAHARAN STOCK MARKETS
by Professor Stuart R. Cohn
(Article Reference: Document No.13, Chapter 2, November 2000)

Summary:

• Introduction
• Impediments to the Growth of Stock Exchanges
• Measures to Achieve Greater Public Confidence
• Cross-Listing of Securities
• Adoption of "Merit Review" Standards
• Increasing Media Understanding and Reporting on Business Matters
• Increasing the Enforcement Authority of Government Agencies
• Committing to Public Education as a Primary Responsibility of Government
• Enlarging the Capacity for Institutional Trading by Pension and Retirement Funds
• Encouraging Issuance of Preferred Shares and Corporate Notes by Private Companies
• Elimination of the Second Tier Labeling of Listed Companies
• Conclusion

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INTRODUCTION - Stock markets have been a growth industry in sub-Saharan Africa. Securities exchanges now exist in 16 sub-Saharan countries, including Botswana, Ghana, Kenya, Malawi, Mauritius, Mozambique, Namibia, Nigeria, South Africa, Sudan, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe. In 1998, Africa's first regional exchange, the Bourse Regionale des Valeurs Mobilieres (BRVM), opened in Abidjan, Ivory Coast, replacing the pre-existing Ivory Coast Exchange and creating a single exchange linking the French-speaking members of the West African Economic and Monetary Union (Benin, Burkina Faso, Cote D'Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo). The growth has not ended. Plans are in place for new exchanges in countries such as Gambia and Sierra Leone. Most of the exchanges are of recent vintage, with the exception of exchanges in Kenya (1954), Nigeria (1960), and much older exchanges in South Africa and Zimbabwe.

The dominant impetus for the recent creation of securities exchanges has been the privatisation programs that have swept across Africa. Privatisation has been the watchword and constant theme of the World Bank and IMF. Whether by prodding from international institutions, or stemming from the realization by governments that the time has come to undo the effects of the nationalizations of the 1960's and 1970's, privatisations are progressing across Africa. Privatisations are effected either by the government disposing of its 100% of its shares to public and institutional investors, as in the case of Uganda Clays Limited in 1999, or by government selling a portion of its equity ownership interest, as in the case of Kenya Airways in 1996. Whatever the amount or percentage of shares being sold by the government, the result is the same -- a shift in equity ownership from government to private hands.

Privatisation offerings attract a variety of investors, including domestic and foreign individuals, institutions (such as pension funds, insurance companies and banks), employee share ownership plans (ESOPs), and collective investment schemes such as unit trusts and mutual funds. None of such investors would be attracted to an offering without some assurance that there is a secondary market in which to dispose of the shares at a later date in order to cash in on market appreciation or to change investments. This is the requisite element of liquidity. An investment is liquid if a secondary market exists on which the investment is regularly traded. Without liquidity, few investors, if any, would be interested in buying shares of a company, whether a former parastatal or a private company seeking equity capital. Perhaps the company could sell debt instruments, such as debentures or bonds, as such instruments can be held until maturity or marketed to third parties on a negotiated basis. But equity shares have no maturity date and are not redeemable by the company. Holders of equity securities have no exit mechanism for their investment without an established secondary marketplace. Thus the stock exchanges. The exchanges provide the resale market, commonly known as a secondary market (as distinct from the primary market, which is the company issuance of shares to the public).

>> continuation: Impediments to the Growth of Stock Exchanges