Why Africa is struggling to grow its capital markets

NSE Market watch board during ringing of the bell ceremony at Nairobi Securities Exchange, September 4, 2019. [File, Standard]

For the first time on the continent, capital markets executives will be congregating in Nairobi for the inaugural Africa Capital Week this August. 

The idea is to bring together all stock exchanges on the continent to discuss how to grow the capital markets. 

Kenya, however, aims to use this meeting to leverage its positions in East Africa and sub-Saharan Africa and to rally support for the entry of a US-based exchange, the National Association of Securities Dealers Automated Quotations (NASDAQ). 

The end goal is to have Kenya's capital market and, by extension, make the Nairobi Securities Exchange (NSE) the entry point for investors in NASDAQ who seek to invest on the continent. 

Such a system, as noted during a meeting on the upcoming August-September gathering, does not exist.

And, this is just one of the challenges crippling the continent's stock markets. Players in this space argue that there is no linkage between different exchanges across jurisdictions. 

Without this link, an investor who is interested in a business venture in Uganda, and is currently in Kenya, has to start the process of getting their foot across the border afresh. 

But different stock exchanges have different rules and regulations. This makes the process even more difficult. 

This is worsened by the fact that the continent does not have a common currency. "As long as we do not have a common currency for Africa, international investors become very careful. Therefore, our capital markets do not receive the attention we yearn for," said Capital Markets Authority Chief Executive Wycliffe Shamiah during the meeting. 

Shamiah says sometimes when you look at different jurisdictions, their legal framework is inconsistent with regulatory requirements. 

"On one hand, at the national level you are looking for these developments, but certain laws, especially taxation, would hamper the interest we expect to see," he says. 

He insists that when it comes to investments, African countries should not be in competition but collaborate.  He says the continent must find a way to speak in one voice 

"Unless we have these discussions, we will continue looking at our jurisdictions at the national level, and we will see competition - not a unified market - and we will remain very unattractive," he says. 

Kenya Association of Stockbrokers and Investment Banks Chief Executive Willie Njoroge speaks of the same access challenge. "How can an investor in this room be able to invest in Dangote shares in Nigeria?" he poses.

He says the solution is to have a one African market where all investors can open an account and trade. 

"That is ideal, but it is long-term," he says. The other option, he says, is to have an African exchange linkage, which will enable different exchanges to continue with their operations but be linked to each other. 

On this, he says, the Africa Stockbrokers and Securities Dealers Association, which he heads as the President, has made considerable progress. 

"A workable solution would also be the creation of an omnibus account. That, if you are a Kenyan and you want to buy shares in South Africa Breweries, you don't need to go to South Africa to open a CDS account. You come to your omnibus account, which pretty much works the way Ziidi is doing for local investors, then you own securities in other jurisdictions," he explains.

Yet for those interested in the African market, there is also the fear associated with politics. 

Shamiah says even with political goodwill, due to the high-octane politics on the continent, sometimes foreign investors harbour the fear of losing their capital. This has given the continent a low confidence perspective among foreign investors. 

It is one factor he insists must be addressed in order to win more international investors. 

Further, the continent needs to package well some of the investments or development projects it has. 

"We need to have a pipeline of bankable projects. You may have a lot of interest in attracting investors, but you haven't packaged whatever projects you have in a form they can invest in," he says. 

In some way, says Nairobi International Financial Centre Chief Executive Daniel Mainda, Kenya has made some progress in attracting foreign capital into the country. 

Steps to reform the capital markets, he says, and the push for a Sovereign Wealth Fund and the National Infrastructure Fund, are some of these efforts that are strategically giving Kenya an edge on the continent. 

Mainda says the key goal is to ensure Kenya is not just a transit market for capital. "How can we be able to structure funds in Kenya for that money to sit here? We don't want to be a drop-off market," he says. 

He says the government has a target to have mobilised capital in excess of Sh250 billion ($2 billion) by 2028. The plan is to have such a solid capital pool mimicking markets like Norway, which boasts of over Sh250 trillion ($2 trillion).

Considering South Africa is said to control 75 per cent of the continent's capital markets, Mainda says his goal is for Kenya to claim just 45 per cent for it to be a regional force.

Africa's market capitalisation stands at Sh208 trillion ($1.6 trillion), with much of it concentrated on the Johannesburg Stock Exchange. 

Kenya's market capitalisation has sustained between Sh2.8 trillion and Sh3.4 trillion in the last year. 

The listing of the Kenya Pipeline Company and the upcoming Family Bank have reignited interest in the Nairobi bourse. 

"As we operationalise Nairobi International Financial Centre, National Infrastructure Fund and Sovereign Wealth Fund, with new energy on the capital markets and NSE, with all these things in place, there is no excuse for us not to be where we ought to be," he says.