Developing efficient financial markets – and in so doing, boosting access to finance – is one of the aims of the African Development Bank’s (AfDB) Financial Sector Development Policy and Strategy for 2014 to 2019.

In this policy document, AfDB recognises that ‘efficient financial markets and institutions capable of mobilising domestic savings and allocating scarce capital where returns are highest are a prerequisite for private sector development’.

According to AfDB: ‘Stock markets are still small, illiquid, and poorly capitalised (10% of GDP in sub-Saharan Africa), but now have greater potential due to unprecedented private equity activity in Africa as domestic and international corporate institutional investors are investing more cash in African markets.

‘Many regional economic communities (RECs) are co-ordinating and harmonising their financial regulatory and supervisory frameworks to ease capital flows and lower transaction costs.’

As a member of the African Securities Exchanges Association (ASEA), the Johan-nesburg Stock Exchange (JSE) – Africa’s largest stock exchange with a market capitalisation of ZAR12.01 trillion (just less than US$1 trillion) as at the beginning of June – supports initiatives that promote collaboration and the development of capital markets across Africa, according to Donna Oosthuyse, director of capital markets at the JSE.

‘More instruments mean more investors, which leads to increased liquidity that in turn will spur more listings. As African exchanges, we need to work together in forums like ASEA to ensure that we maximise investor interest in Africa for the long term,’ says Oosthuyse.

AfDB identifies 122 interventions currently occurring in capital markets, funded predominantly by multilateral development banks and financial institutions. This compares with 667 interventions concerning access to finance, and 264 regarding banking.

According to its research, more than 135 active capital markets projects are currently being implemented across the continent by geographic region and REC, focused on, among others, deepening the domestic debt market and developing local currency.

‘As African exchanges, we need to work together in forums like ASEA to ensure that we maximise investor interest in Africa for the long term’

Alongside expanding access to financial services, AfDB identifies the development of diverse financial instruments as a critical means of deepening financial markets and so mobilising savings, and term finance.

It recently obtained observer member status at the ASEA, which it hailed as a commitment to deepening Africa’s financial systems in line with its Financial Sector Development Strategy.

Similarly, Oosthuyse believes that the best and fastest way to grow Africa’s markets is to increase the investable instruments available.

‘We are working with Southern, East and West Africa to cross list instruments like ETFs [exchange traded funds] and other equity and debt instruments. By working together in this way, exchanges can offer investment opportunities from our respective markets to investors who otherwise may not have easy access to them. This will promote financial integration as well,’ she says.

For example, the Botswana Stock Exchange (BSE) was the first exchange outside of the JSE to list the NewGold ETF in 2010, according to its deputy CEO Thapelo Tsheole.

‘The initiative to import liquidity into the BSE by cross-listing ETFs was borne out of the fact that the BSE cannot afford to be an equity specialist exchange,’ he says.

In order to boost collaboration and financial integration, listing requirements need to be in place to facilitate the listing of diverse financial instruments and inward listings.

‘It is also useful when markets subscribe to supranational standards such as IOSCO [the International Organisation of Securities Commissions] and regulations to promote collective investment schemes. This in particular facilitates cross-listings and products such as ETFs,’ says Oosthuyse.

In the past four years, the BSE has introduced three ETF instruments, most recently the NewPlat ETF in 2014. The conceptualisation of ETFs began in 2008, according to Tsheole, reflecting the time it takes for a product to comply with domestic regulations, garner awareness and eventually list, he says.

‘The BSE intends to leverage from its experience in ETFs to introduce more ETFs tracking various asset classes,’ says Tsheole.

Tsheole notes that before introducing an instrument, alongside fulfilling a number of regulatory requirements, adequate domestic awareness needs to be created for local investors to participate.

‘This involves road shows to asset managers, media briefings and also mass publications and presentations to retail investors.

‘History has shown us that new products have always attracted local and foreign interest, and this is why these products continue to remain listed on the BSE, with trading volumes increasing year on year,’ he says.

ETFs are particularly useful for increasing investor participation on an exchange, as they generally carry lower fees than actively managed products and are just as liquid.

As part of its development, the Nigerian Stock Exchange (NSE) recently announced a strategic partnership with MSCI, a US-based provider of investment indexes and equity portfolio analysis tools, to develop and market a co-branded family of indexes for the Nigerian equity markets.

‘Existing and future indexes will be co-branded as the MSCI/NSE Indexes, including the flagship NSE 30 Index and NSE 50 Index, which will become the MSCI/NSE 30 Index and the MSCI/NSE 50 Index, respectively,’ the NSE said in a statement.

The SSE aims to explore how exchanges can enhance corporate transparency and performance on environmental, social and governance issues

Future indexes will be launched based on client demand and used as a basis for index-linked products for investors seeking exposure to Nigerian capital markets.

‘MSCI is very proud to establish a strategic relationship with the Nigerian Stock Exchange, and we look forward to working with them to raise the profile of these indexes around the world,’ says Baer Pettit, MD and head of MSCI’s product group.

In March this year Kenya’s Nairobi Securities Exchange joined the NSE, Egyptian Exchange and JSE to become the fourth African member of the UN’s Sustainable Stock Exchanges (SSE), launched by UN secretary general Ban Ki-moon in 2009.

The SSE has 18 members, including the New York Stock Exchange (NYSE), London Stock Exchange (LSE) and Bombay Stock Exchange.

‘Kenya is the biggest economy in East and Central Africa and a critically important market for promoting sustainable development practices in the region,’ says James Zhan, director of the investment and enterprise division at the UN Conference on Trade and Development – one of the co-convenors of the SSE initiative.

The initiative aims to explore how exchanges can enhance corporate transparency and performance on environmental, social and governance issues.

That East Africa’s largest stock exchange is now a member of the SSE highlights something of the development of African exchanges and their increasing recognition in the global sphere. Enhanced governance and regulation is crucial to boosting investor interest and introducing diverse instruments.

According to Oosthuyse: ‘Regulatory reform and financial innovation typically lead to more active participation in capital markets. We would all like to have more instruments available to trade, in order to give our investors more choice.’

In the WEF 2014 Global Competitiveness report, the JSE was named the best-regulated exchange in the world, out of 144 countries, for the fifth consecutive year.

‘Many of our markets have liquidity constraints, which stem from not enough issues and investors, both retail and institu-tional, buying and holding. Public exchanges play a vital role in this by providing a venue for issuers to issue and for investors to invest. Transparent price discoveries of instruments, as well as certainty of clearing and settlement are among the factors that play an important role,’ she says.

Tsheole suggests that the BSE plays a crucial part in keeping contractual savings in the economy by, for example, listing offshore instruments so that funds can obtain offshore exposure without having to invest elsewhere. ‘This way we are able to create value domestically, improve liquidity and depth of the market, and compete adequately with peer markets,’ he says.

While foreign capital inflows into African economies are positive, they are also notoriously volatile and it is therefore important to maintain a balance between local and foreign investor bases, says AfDB.

Oosthuyse agrees that an exchange should fulfil a very important part in building a country’s economy.

‘We should leverage off each other’s strengths in order to efficiently offer our markets as platforms to service both issuers and investors. We should be making more use of technology in order to connect our markets,’ she says.

By Hanna Barry
Image: Gallo/Getty