Promoting Regional Financial Market Integration

Opening Address

By Patrick Asea
Director, Economic and Social Policy Division
Economic Commission for Africa (ECA),
at the Inaugural sub-Regional Meeting of the African Capital Markets Development Program, African Capital Markets Development Workshop

Johannesburg, South Africa
October 27, 2003

Mr. Paul Harris, Chairman of Rand Merchant Bank,

Distinguished participants,

It is a great honor for me to open this inaugural sub-regional Meeting of the Economic Commission for Africa's Capital Market Development Program. I am particularly pleased to welcome such a distinguished group of policymakers, renowned academics, senior government officials, security market regulators, CEOs of stock exchanges and other top private sector executives from Eastern and Southern Africa.

We, at the Economic Commission for Africa, feel privileged to be co-sponsoring this event with Rand Merchant Bank---a leader in the financial services industry. RMB has contributed considerable human and financial resources and its vast expertise in capital markets to the successful organization of this meeting. We look forward to continuing this close collaboration as we work together to build a strong and vibrant African Capital Market.

Ladies and Gentlemen,

You have a busy schedule ahead of you over the next three days in which you will cover a large number of important themes. From my perspective, let me just offer some observations.

We need to be ambitious.

We must pursue capital market development that creates in each country a diverse and competitive financial services industry that fosters innovation and growth of national economics as they become increasingly integrated in the global economy. This integration itself offers substantial opportunities for expanding the range of financial products and services available in African countries.

We must focus on building capital markets, which provide new means for companies to strengthen and diversify their financing structure, reduce financing costs and better manage financial and other risk

We must not forget that the prerequisite for capital markets to flourish is that governments need to create a deep and liquid government bond markets.

How can we best achieve these ambitious goals?

We at the Economic Commission for Africa, believe that the answer lies in regional capital market integration.

Regional capital market integration means that investors can buy and sell securities in any African stock market without restriction. That all types of participants in capital markets can offer their services throughout Africa without restriction. It means that identical securities are traded at essentially the same price across markets after adjustment for foreign exchange.

What does capital market integration mean? Why should we care?

For the retail investor---you and I ----capital market integration will lead to lower prices for all financial services as competition lowers transactions costs and allows larger regional firms to exploit economies of scale and scope.

For institutional investors---capital market integration will lead to enhanced risk-return frontiers for investors who previously faced restricted opportunities, but who can now diversify their investments to a greater extent than before.

For securities regulators---capital market integration will lead to more efficient, more liquid and broader securities markets.

For corporations---the life blood of capital markets--- you can expect capital market integration to lead to cheaper financing alternatives given the lower transaction costs

For governments---capital market integration will lead to a more efficient allocation of capital arising from the fact that savings can flow more easily and cheaply to investment and because barriers will have been dismantled.

Ladies and gentlemen, there is something in it for everyone ----but the reality is sobering.

The reality is that today most African equity markets still work according to a blue print laid out in 19^th century Europe. Most African stock exchanges feature call markets with open outcry dealing, where publicly licensed single capacity intermediaries convey the order of their customers and are compensated via statutorily fixed commissions. In most African countries stock exchanges are closed membership organizations with high barriers to potential entrants. Each stock exchange tends to operate in isolation form the other, is sheltered from competition by national regulations and especially by barriers to capital mobility and high costs of travel and telecommunications.

Ladies and gentlemen changing this reality will require confronting immense challenges such as:

Doing away with domestic or regional monopolistic and oligopolistic practices which create barriers to entry and higher than warranted costs

Doing away with multiple regulators. Market participants who are subject to multiple regulators are likely to face regulatory uncertainties, complexities, and increased costs both directly and in having to comply with multiple regulatory regimes and indirectly in having to pay for the many regulators

Harmonizing legislation. Differences in bankruptcy regimes, restrictions on ownership by non-nationals, the imposition of national rules to protect national industries, requirements to establish local companies, restrictions on issuers, intermediaries and investors in providing cross-border services.

Despite the immense challenges facing Africa we can turn to the experience of some sub-regional groups and learn what works and what doesn't in promoting capital market integration.

Exactly thirty years ago---in 1973----the seven French-speaking countries of the West African Economic and Monetary Union (UEMOA) signed a treaty creating of a regional financial market.

Twenty years later, a sub-regional stock exchange was finally established with BCEAO---the regional central bank--- mandated to lead the project. After extensive negotiations between member countries a regulator called the Regional Council for Public Savings and Financial markets was established in 1997 and in 1998 the regional stock exchange---BRVM was opened. Today BVRM has branches in each UEMOA country and its headquarters in Abidjan, Cote D'Ivoire. Although the bourse is majority owned by the private sector, the member states own 13.4% of the capital.

Trading on the BVRM is computerized with satellite links, which allow brokers to transmit orders from any of the member countries to the central site in Abidjan, to check and interact with the order book and to see information about the market and the central depository. The exchange has 15 brokerage firms. Trading takes place on three days of the week and all orders are filled at a price set at a fixing once a day. Trades are cleared and settled at the Depositaire Central/Banque de Reglement SA. Initially 35 companies were quoted on the BRVM but this has grown steadily. Current capitalization is just over 872 Billion CFA or US$1.4 billion. The average value of transactions at each trading session is about $500,000

At least three lessons can be learnt form the experience of BVRM. First, it can take a very long time to build a regionally integrated exchange. Second, the fact that a regionally integrated exchange is established does not mean that it will be used effectively or that it will integrate the markets. Third, the sustainability and success of any regional project must be very carefully assessed before the project is undertaken. Private sector participation, as opposed to just regulators, central banks and other public instituitions normally has the best incentive to determine whether the expenditure on a particular integration scheme for market infrastructure is worthwhile.

With these few observations let me hope that have inspired you to reach practical workable recommendations to spur the development of capital markets in Africa.

Let me conclude by assuring you that the issues that you will be discussing are vital to the realization of the full economic potential of Africa. For these reasons the ECA is strongly committed to collaborating with all of you in promoting the success of the African Capital Market Development Program.

I THANK YOU .