“The challenges facing Africa’s capital markets are significant. However, Africa’s long-term economic success is intrinsically linked to the successful development of its capital markets, and strengthening them is essential if Africa is to fulfil its vast potential.”
So said Bill Mills, regional CEO for Europe, the Middle East and Africa at banking group Citi, during a recent investment summit.
Mills noted that more robust capital markets, which include stock and bond markets, will further encourage economic growth on the continent.
Currently Africa’s capital markets are skewed towards South Africa, Egypt, Morocco and Nigeria. “South Africa represents almost 80% of the region’s stock exchange market cap and more than 50% of the government and corporate issued bonds,” said Mills.
According to Mills, there is significant potential for African countries to expand their capital markets. He suggested the following 10 measures that could be implemented to boost the continent’s capital markets:
1. Develop well-functioning capital markets regulatory, compliance and risk-monitoring systems: Empirical evidence has shown that a well-functioning stock market, along with well-designed institutions and regulatory systems, fosters economic growth. Improvements in the regulatory and economic environments in some African countries have led to improvements in the liquidity and capitalisation of their stock markets.
2. Enforce disclosure rules, accounting standards and enforceability of contracts: To improve transparency and boost investor confidence.
3. Increase privatisation of state-owned entities: Privatisations could provide promise for private equity as well as helping with increasing the number of listed shares on exchanges should the IPO option be chosen.
4. Move to automated systems across all markets: It is important for African stock exchanges to promptly adapt to automation and electronic systems. Automation not only minimizes inefficiencies associated with manual systems, it also reduces the costs of transacting, increases trading activity, liquidity in the stock markets and speeds up operations.
5. Demutualise the stock exchanges to improve governance from separate ownership: Demutualisation has become a global trend. In Africa, demutualisation can help deter undue government influence. In certain stock markets where demutualisation occurred, there was a noted improvement in liquidity and foreign investment.
6. Increased focus on pension fund reforms: Often investor participation is directly or indirectly through pension plans, insurance policies, mutual funds, etc. Reform for these vehicles will assist in increasing institutional demand for investments and improve the savings rates across the region.
7. Introduce measures that enable growth from informal sectors into stock and bond markets: Provide incentives and assistance to grow the large number of small, medium and micro enterprises (SMMEs) to, at some stage, list on the stock exchanges or be considered for private equity investments.
8. Attract capital flows and encourage foreign participation: Africa has been attracting positive attention driven particularly by improved regulatory, good economic fundamentals and empowering private initiative.
9. Develop a comprehensive capital market database to foster investment analysis and academic research: Enable the capital markets to adopt best research practices that will lead to increased investor attention to the region.
10. Increase education of the public regarding the benefits of investing in capital markets: To increase retail investing on stock markets and also assist in increasing the number of unlisted companies that look to stock and bond markets for growth.