Document Sample
					  AFRICAN UNION                      UNION AFRICAINE

                                     UNIÃO AFRICANA

Validation Workshop on the
Establishment of the Pan African Stock Exchange
Addis Ababa, Ethiopia
06 – 07 November 2008


              Department of Economic Affairs
                      October 2008
                                                Table of Contents
Table of Contents ............................................................ i
Executive Summary .......................................................... iv
   I Introduction: From regional stock exchanges to an African stock
market ........................................................................ 1
  I.III METHODOLOGY ................................................................................................... 4
  I.IV ORGANISATION OF THE STUDY ............................................................................ 5
 ............................................................................... 6
AFRICAN STOCK EXCHANGES............................................. 6
  1.1     THE IMPROVING MACRO- ECONOMIC CONTEXT IN AFRICA .................................... 6
  1.2     DEVELOPMENT OF THE FINANCIAL SECTOR .......................................................... 9
  ENVIRONMENT ............................................................................................................... 14
    1.4.1      Different legal systems .............................................................................. 15
       1.4.2     Regional attempts to harmonise business law and insurance activities 15      In the banking sector......................................................................... 16 In the stock exchange sector ................................................................. 17
    1.4.3      An unsuitable fiscal context ...................................................................... 19
    1.4.4      A divergent technological environment ................................................... 21
.............................................................................. 23
EXCHANGES ................................................................ 23
  2.1      GENERAL PRESENTATION OF AFRICAN STOCK EXCHANGES ................................ 23
     2.1.1      Structure of African stock exchanges........................................................ 23
     2.1.2      Players in the stock exchange ................................................................... 24 Issuers.................................................................................................... 24 Investors ................................................................................................ 25 Brokers .................................................................................................. 26 Central depository, clearing house and settlement bank ...................... 26
  EXCHANGES ................................................................................................................... 27
     2.2.1      Equity markets........................................................................................... 27 Capitalisation........................................................................................ 27 Number of listed companies .................................................................. 29 Volume of Transactions ........................................................................ 31    Liquidity ratio of the market or rotation rate ...................................... 31 Yield...................................................................................................... 32
     2.2.2       Bond markets........................................................................................... 33

                                                               i       Capitalisation........................................................................................ 34       Volume of trade or transactions ........................................................... 34
INTEGRATION OF AFRICAN STOCK MARKETS ........................ 36
 3.1      BRIEF STUDY OF STOCK EXCHANGE ASSOCIATIONS ............................................ 37
    3.1.1      Experiences of stock exchange integration in Africa................................ 38 Southern Africa ..................................................................................... 38 East Africa............................................................................................. 39 West Africa ............................................................................................ 40
    3.1.2      Experiences of stock exchange integration in the rest of the world ......... 41 ASEAN................................................................................................... 41    NOREX................................................................................................. 42 EURONEXT .......................................................................................... 42
 3.2.     MODELS SUGGESTED FOR THE PAN-AFRICAN STOCK EXCHANGE ....................... 43
    3.2.1      Option 1: National / regional stock exchanges and a Pan-African stock
    exchange 43 The realisation of this option requires overcoming challenges ............ 44
    3.2.2      Option 2: National/regional stock markets with an existing African
    Financial Market as a Continental Platform ............................................................ 45
    3.2.3      Option 3: Integrated transaction platform, while maintaining
    national/regional stock markets................................................................................ 46 Advantages of this model ...................................................................... 46 Disadvantages and costs of this model ................................................. 46
    3.2.4      Option 4: Integration through transaction on the Internet....................... 47 Advantages of this model ...................................................................... 47 Disadvantages and costs of this option................................................. 48
    3.2.5      Option 5: Gradual integration .................................................................. 48
 EXCHANGES IN AFRICA .................................................................................................. 49
    3.4.1      Legal and regulatory differences .............................................................. 50
    3.4.2      Multiplicity of regulators .......................................................................... 50
    3.4.3      Differentiation of products........................................................................ 50
    3.4.4      Variances in accounting standards and fiscal systems ............................. 50
    3.4.5      Information costs and prejudices of country of origin.............................. 51
    3.4.6      Fragmentation of trading, clearing and settlement systems ..................... 51
    3.4.7      Technological aspects ............................................................................... 51
    3.4.8      Governance ............................................................................................... 51
    3.4.9      Implementation of credible contractual engagements .............................. 52
    3.4.10      Lack of political will ................................................................................ 52
 3.5      WAY FORWARD ................................................................................................. 52
 3.6      CONCLUSIONS .................................................................................................... 55
    4.1.1     Harmonisation of the regulatory framework ............................................ 57
    4.1.2     Adapting to international standards ......................................................... 58
      4.1.3        Harmonisation of securities taxes............................................................. 58
      4.1.4        Lifting of exchange control and harmonisation of payment systems........ 58
      4.1.5        Incentive for the development of strong companies and a dynamic private
      sector       58
      4.1.6        Promotion campaigns ............................................................................... 59
Bibliography ................................................................. 61
                                                List of Tables
Table 1.1 Domestic Savings (% of GDP) ........................................................................... 8
Table 1.2 Foreign Direct Investment, net inflows (in millions of current $US )............... 10
Table 1.3 Opinion on the creation of a Pan African Stock Exchange .............................. 14
Table 2.1 Annual Market Capitalisation, 2002-2006 (US $ billion, end of period) ......... 29
Table 2.2 Number of listed companies, 2005-2006 .......................................................... 30
Table 2.3 Yield, 2002-2006 (in millions of US $, end of period)..................................... 33
Table 3.1 Preferences for various models of the Pan-African stock exchange................. 49
Table 4.1 Opinion on legislative reforms ......................................................................... 60

                                Executive Summary

Within the frame work of its mandate on the economic and financial integration of
the Continent, and pursuant to the decision of the Assembly of the African Union
in Khartoum, the Sudan, of January 2006, the African Union Commission carried
out this study on the feasibility of an African Stock exchange. Faced with the
dependency of African countries on external resources for financing their
investments and their development; confronted with a multitude of limited and
inefficient national stock markets, African leaders, in keeping with the
commitments made in Abuja in June 1991, requested the African Union
Commission to envisage the establishment of a continental stock market.

The substantial progress made in Africa since the beginning of the 21 st Century,
especially in the macroeconomic and financial reforms undertaken since the late
eighties, and an international economic situation characterized by the rise in the
prices of raw materials, has created the bases for the integration of African
financial markets in general and stock exchanges in particular.

At the end of 2006, the capitalization of all African stock exchanges, the main
indicator of trading activity, represented less than 2% of the world total, and was
equivalent to that of the 15 th world stock exchange. Apart from the JSE Limited,
which was the 19th world stock exchange in 2006, all the other African stock
exchanges are characterized by their low liquidity and the volume of transactions
they record.

In order to make up for the inadequacies observed in the functioning of the 23
existing stock markets, the managers of these institutions, through the African
Stock Exchange Association or their respective Regional Economic Community,
have already initiated reflections and actions for the integration of the stock
exchanges. In fact, the majority feel that financial integration, ensuring the
circulation of capital ar regional and continental level, will provide greater visibility
and a larger area of arbitrage- for those seeking capital; African, as well as,
foreign investors.

The study conducted by the Commission’s Economic Affairs Department, mainly
through a survey carried out in November and December 2007, by means of
questionnaires distributed throughout the Continent and discussions with the
different stakeholders concerned with stock market development confirmed the
high level of challenges to be addressed in order to establish close alliances
between existing stock exchanges and create a harmonized African stock

Taking into account the many challenges (political, institutional, legal, regulatory,
technical, economic, financial, fiscal, etc) and based on African and foreign
experiences in the harmonization and unification of stock exchanges, the African
Union Commission proposes five options for the integration of African stock
exchanges, some of which are variants of the same type of model: (i) Option 1:
national/regional stock exchanges and a Pan-African stock exchange; (ii) Option
2: national/regional stock exchanges with an existing African stock exchange as
a continental platform; (iii) Option 3: an integrated transaction platform, while
maintaining national / regional stock exchanges; (iv) Option 4: integration of
transactions through the internet; (v) Option 5: gradual integration.

To evaluate the detailed advantages and costs of each of these options, a
comprehensive study will undoubtedly be necessary. However , in order to
facilitate the realization of this additional study, bearing in mind the ultimate
objective of continental financial integration and the necessary pragmatism for
such a project, it important that institutional experts ( stock exchanges, regulatory
organizations) and the economic agents concerned, as well as African
governments, decide on 2 or 3 viable options on which this subsequent study can
be carried out.

On the whole, the integration of stock exchanges in Africa will be an extremely
long process requiring significant structural changes, the requisite technology
and infrastructure, appropriate legal, regulatory and accounting frameworks and
most importantly, the political will. Based on the results of the feasibility study, all
African stakeholders in the development of stock markets in particular, and
financial markets in general, should make credible recommendations for all
actors, that can be implemented according to a pace to be determined.

I Introduction: From regional stock exchanges to an African stock market

1.     During the 6th Summit of Heads of State and Government of the African
Union held in Khartoum (Sudan) in January 2006, it was resolved that the
proposal to set up a Pan-African Stock Exchange would be considered by the
African Union Commission and the conclusions of this study presented to a
subsequent summit. This decision was taken in the light of the Abuja Treaty
adopted in 1991, which plans on creating national and regional stock markets, as
well as the free flow of capital in order to promote economic development and
integration. This process is supported by projects underway or geared towards
setting up regional stock exchanges. The African Stock Exchanges Association
(ASEA) set up in 1993, also aims at the regional harmonisation and integration of
existing African stock exchanges.

2.     Stock exchanges have a reputation for encouraging greater economic
dynamism and producing higher levels of wealth by providing investors with the
opportunity to share the risks and profits of enterprises. Thus they improve
market mechanisms in order to raise and allocate scarce financial resources,
mobilize local capital, attract foreign direct investment and allocate resources to
projects likely to be beneficial to the economy.

3.      The stock exchange is an alternative for securing capital at a relatively low
cost in comparison with bank loans, and may help the government and private
sector to mobilize capital to finance a wide range of infrastructure thereby
satisfying social needs as well as growth, and jobs. Stock markets are perceived
as a tool for the promotion of the financial sector and the development of private
savings, thereby supporting the non-monetary funding of the economy and the
fight against inflation.

4.     In the wake of other studies previously carried out by the Organisation of
African Unity, notably during the Forum on the promotion of the integration and
development of financial markets (Grande Baie, Mauritius, 1997), the United
Nations Economic Commission for Africa (ECA), the African Stock Exchanges
Association and the International Monetary Fund 1, this study sets out to examine
the necessity, constraints and viability of an efficient financial market within
African countries and regions and to explore possible scenarios for setting up an
integrated stock market in Africa. This study is designed to establish an African
financial zone opened to economic operators on the continent and the world. It
has carried out an exhaustive analysis of all the technical aspects conditioning
any modern stock market, including the location, rules and regulations governing
such a market and its operators.

    IMF, Stock market development in Sub-Saharan Africa: Crit ical issues and challenges, WP/07/209
I.I    Comprehensive view of stock exchange development in Africa

5.      The number of African stock exchanges has more than doubled since the
beginning of the 1990s from about 10 (ten) to 23 (twenty three). The
Johannesburg Stock Exchange (JSE) is the first stock market ever set up in
Africa, in November 1807, against the backdrop of the discovery of gold. A
certain number of stock exchanges were set up in the wake of the independence
of African countries in the 1960s. The last stock market that has been launched
is the Stock Exchange of Central Africa (BMVAC), in August 2008 after having
been officially set up in 2003.

6.     It is also worthwhile to mention the existence of over-the-counter (OTC)
markets in some countries. This type of stock market is characterized by a limited
and select number of operators, who define on their own or through a financial
broker, rules governing their transactions, and appears more like a stage towards
the creation of a stock market open to the public. Historically, over-the-counter
markets have preceded the establishment of stock exchanges. Such a market
operates notably in The Gambia and Gabon and has just been set up in Rwanda
particularly for its bonds. It is also generally used after the explicit authorization of
the regulatory authority, in the stock markets of listed securities for some
operations often on non-traditional financial products such as by-products.

7.     To a greater extent, the creation of stock exchanges in Africa was done
under the impetus of the political will to mobilize national resources, notably as
part of privatisation programmes which concerns an important sector of public
enterprises, besides attracting foreign investors. Kenya and South Africa are
examples of countries where bond markets helped to finance infrastructure
development. Stock exchanges also seek to attract foreign investment.

8.     On the whole, African stock markets represent less than 2% of the world
market capitalisation, according to the 2006 data published by the International
Federation of Stock Exchanges. The JSE accounts for close to 75 % of the total
and is ranked on the 19th position in the world money market as concerns share
capital market value. The second stock market in Africa, Cairo and Alexandria
Stock Exchange, only represents 10 % of the African total. In general, the
performances of African stock markets are weak and their liquidity is limited.

9.     Many obstacles hamper the African stock market in particular and the
financial market in general, including: unfavourable macro-economic conditions
(unstable and high inflation, fiscal deficit, public indebtedness, etc.), a restricted
volume of demand and supply of financial products, a weak volume of
transactions, high taxes levied on financial operations, inadequate infrastructure,
narrow financial culture, poor economic governance, etc.

10.    It is therefore necessary to lift structural barriers and improve the general
business climate in order to ease the establishment of active African stock
markets. One way forward to develop stock exchange activities and improve
capital raising, especially at the domestic level for investment on the continent, is
to integrate existing national and regional stock markets.

I.II   Towards the integration of African financial markets

11.    As in other fields, the small size of African stock markets contributes to the
high cost of operations and hinders their efficiency. In the face of considerable
global need for investments in Africa and the concomitant existence of countries
with excess resources and countries lacking resources, the integration of
financial markets may lead to: a better mobilization of resources, available wit hin
and outside the continent (capital invested abroad and the savings of the
Diaspora), thanks to a wider choice of securities; a reduction of the interest rate;
a stronger level of investment and economic growth; etc.

12.    In the proposal on the creation of a Pan-African stock market by the
African Union in January 2006, it was indicated that the Pan-African Stock
Exchange is not designed « to replace local stock exchanges but to strengthen
their role on the local financial market, and spread the use of financial and
monetary securities throughout the continent owing to its promising financial and
economic resources”. Thus the shape of the integration at the continental level is
to be determined by the choice of the most efficient option and by imagining a
progressive solution taking into account the diversity of African economies.

13.    The advantages expected from setting -up this market at the continental
level are identical to those which prevailed for the launch of regional stock
markets but that have not, so far, been achieved by the latter: increase the depth
and the liquidity of the present financial market, attract higher volume of
resources towards investment, promote the modernization and efficiency of
financial operations, develop intra -continental trade and economic growth,
promote competition among enterprises on the one hand and between the
banking sectors and the non-banking financial sector on the other, benefit from
economies of scale and reduce the administrative burden of international
enterprises. With new information technologies and globalisation, the stock
exchange has lost the features of a fixed structure and basically gained the
shape of a mechanism based on transactions likely to emanate from any part of
the world.

14.    However, in financial matters where the commitment of operators, and the
protection of the public and stakeholders’ confidence are primordial, realism and
pragmatism should feed the process of evaluating and designing the project of
the Pan African stock market. It falls in line with a comprehensive project of
setting up African financial institutions (African Investment Bank, African Central
Bank and African Monetary Fund) that the African Union is promoting in a bid to
further the development of financial systems and African economies.

15.    Africa has already experienced the integration of stock markets, especially
in West, Central, Southern and East Africa. The results obtained fail to meet the
expectations. But this lacklustre performance is due to known problems that if
corrected could improve the situation.

16.   Faced with the size of African stock markets which on the whole are small-
barely 1% of global capitalization-and the inadequate liquidity of all the
consolidated African stock exchanges, many stakeholders (African and foreign
political and economic decision makers, experts and researchers, etc.) consider
a more advanced integration of existing stock markets as the way forward to be
explored rapidly and seriously. The President of the Association of African
Central Banks (AACB) at the end of a symposium on the theme “ Capital markets
and mobilization of resources for poverty reduction and growth “ stated that “the
integration of financial markets was crucial for Africa and that there was no need
for each country to develop its own Wall Street on the continent” 2

17.   This study thus sets out to examine the feasibility of a Pan African stock
exchange, likely to better ease up the free flow, and at low cost, of financial
resources from surplus economic agents of the continent and foreign investors
towards long term investment of dynamic African enterprises and the non
monetary financing of States. The macro-economic progress accomplished in
recent years in most countries, the commitment demonstrated by an increasing
number of African economic operators, including stock markets, to extend their
scope beyond their national borders, and the increasing will of Member States of
the African Union to speed up economic integration are driving forces to the
execution of this project.

I.III     Methodology

18.    In order to see through its mission, the African Union Commission carried
out a study on an African stock market in a bid to assess the need for such a
financial institution and the various options necessary for carrying out this project.
Based on the results of this study and the recommendations of Member States
on the options to be retained, a technical study shall be carried out subsequently.

19.     A questionnaire was thus forwarded by the Commission to present and
potential stakeholders. A mission was led in a number of member countries from
all the regions of the continent to seek advice from concerned institutions and
economic agents. Lastly, the Commission drew on the abundant existing
literature review on the development and progress of stock exchanges in Africa
and on national and continental economic data.

20.    As concerns the survey, questionnaires were sent to Ministries of Finance,
Central Banks of all the African countries, stock exchanges and regulators of
financial market, banking institutions, insurance companies and selected
employers’ associations.

21.   Over 130 questionnaires were sent, 39 were filled and returned,
representing 15 countries and covering 5 African regions including countries with
developed financial markets and those having underdeveloped financial markets.

22.     The questionnaire was subdivided into two parts: a part dealing with data
collection while the other probed participants on the development of stock
markets, the Pan-African Stock Exchange project and the necessary conditions
for the establishment of the latter.

    Dr Acquah, ABCA Sy mposium, Windhoek (Namibie), 2006
23.   Missions were conducted in all the countries hosting the headquarters of a
Regional Economic Community, apart from the Arab Maghreb Union (AMU). The
delegation met with the African Development Bank (ADB), operators of the
Tunisian Stock Market, and the Regional Stock Exchange “Bourse Régionale des
Valeurs Mobilières (BRVM)”, as well as the West African Economic and
Monetary Union - WAEMU) in Côte d’Ivoire.
24.   The combination of documentary research and data collected from actors
and countries should help to have:

       -      A comprehensive analysis of the issue of stock market
              development in Africa;
       -      A general view on lessons to draw from experiences within Africa
              and abroad;
       -      A proposal on possible recommendations to be studied by experts
              and then presented to the African Union authorities.

I.IV   Organisation of the Study

25.    The first chapter deals with an in-depth analysis of economic, financial and
overall environment for the development of the stock market. This part is
subdivided into 5 subparts that address the following issues: (1) the present
macro-economic framework in which African stock exchanges are operating; (2)
the financial context; (3) the legal and institutional environment; (4) the fiscal
framework; and (5) the technological context.

26.     The second chapter analyses the performances of African stock markets
in the light of variables like the liquidity and the pattern of stock market indices.
These performance indicators are thereafter compared among African stock
markets, on the one hand, and with stock exchanges of other emerging countries
in Asia and Latin America, on the other hand. This is followed by an assessment
of the financial and economic viability of African stock markets individually as well
as the Pan-African Stock Exchange as a whole.

27.   Chapter 3 studies the various options for the integration of African stock
markets by analysing the strengths, weaknesses, opportunities and threats
(SWOT analysis) for each of the options. Challenges relating to the
implementation are also addressed in this chapter.

28.    Chapter 4 makes recommendations on the most appropriate options to
integrate stock markets and relating to the plan of action, timing, and the
sequence by which the plan of action should be implemented


29.   Owing to the low investment and the need to boost economic growth,
considering the high indebtedness of African countries, low foreign direct
investments and the need to reduce the recourse to external funding, it is
important to mobilize more domestic resources. However, efforts to develop
savings and the financial sector, which hitherto has been dominated by banks,
and promote investment at the national level are stifled by the size of the
economies concerned. The regional and continental integration of these efforts
should produce better results.

30.    This chapter delves into macro-economic and financial variables and other
factors which influence the savings and investment behaviour: evolution and
structure of GDP, level and pattern of inflation and interest rates, evolution and
structure of savings and investment, evolution and components of money supply,
size of the banking sector and depth of the financial sector, flexibility of the
payment system, tax system, legal and institutional framework, etc. The level of
education, which also influences the development of the financial sector, shall
not be addressed in this study.

1.1     The improving macro-economic context in Africa

31.     The beginning of the new Millennium is marked by better economic
performances in practically all the African countries. Even though poverty has not
been eradicated, the percentage of the population living below the poverty line
fell from 47% in 1999 to 41% in 2004 3 due to the achievement of a high average
economic growth rate close to 5 % since 2000. Furthermore, real per capita
income has risen by 4.3 % between 1998 and 2006 4.

32.     Even if the average growth rate is not equally distributed on the continent;
and is still far from the 7 to 8% target which is likely to enable sustainable poverty
alleviation in Africa, an increasing number of countries are riding on that growth
path. In 2007, only 10% of African countries recorded a negative GDP growth
rate or a reduction lower than 3% as opposed to 18 per cent in 1998 5.

33.     It is worthy to note that the recovery of African economies is basically
supported by the mining and hydrocarbons sectors where the surge in product
prices has led to hikes in production and export prices. Nevertheless, a better
mastery of the main macro-economic aggregates especially the prices and public
deficits has helped to secure the remarkable participation of petroleum exporting
countries in the global economic growth. On the whole, countries of North Africa
and Southern Africa registered the highest results.

  UNCTAD, development in Africa, 2007
  ADB/ OCDE, Econo mic Prospects in Africa (EPA), 2007
  ADB/ OECD, supra
34.    With regard to inflation, Africa has accomplished laudable efforts but which
have to be followed up in order to improve the competitiveness of economies.
The average rate of inflation fell to 10% in the period 2004 - 2007 while being
higher than the 5 to 7% obtained in Latin America. The number of countries with
an inflation rate lower than 10% rose from 40% during the period 1998-2001 to
43% during the period 2002-2005.

35.     Regarding public finance, on the whole Africa has significantly reduced the
level of budget deficit since the beginning of the 21 st century. This progress is
basically due to the substantial surpluses recorded in petroleum producing
countries, the growth of the aid volume received and the extent of external debt
relief obtained from 2004 to 2006.

36.     Advanced repayments by some oil producing countries (Angola, Algeria,
etc.) the cancellation of the debt of countries benefiting from the Highly Indebted
Poor Countries (HIPC) Initiative contributed to a significant reduction of Africa’s
external debt from 110.6% of the GDP in 2005 to 7.7% in 2007 6.

37.    The foreign balance improved globally in Africa. The current balance of
payments, including grants, which has been in excess since 2003 (0.9%)
reached 4.7% in 2006 under the impulse of trade surpluses made by oil
producing countries 7. In 2007, the surplus reached 1.5%, thanks to the increase
of deficits recorded by importing countries and in spite of the increase in deficits
registered by oil exporting countries. Africa’s share in the exports of goods and
services only rose from 2.1% in 2002 to 2.9% in 2005 essentially due to the
present oil sales dynamics. However, it is lower than the 3.1% and 5.5% rates
reached in 1990 and 1975 8 respectively.

38.    On the whole the recent favourable trend of improved macro -economic
policies and performances and the high level of external capital flows have
induced the stabilization of exchange rates in most countries. Many African
countries have improved the convertibility of their currency among themselves
while the majority have refrained from resorting to multiple exchange rates and
have liberali zed their exchange rate system. This situation is nevertheless fragile
owing to the persisting dependence of Africa on commodity exports and the
present difficulties encountered by Africa in promoting the diversification of its
production base. The various trends analysed above, contributed to the increase
of domestic savings and investments to 26.3% of GDP and 21.4% in 2006 as
against 18.4% and 17.5% in 1990 9 respectively. In East and Pacific Asia, the rate
of investment on GDP reached an average of 35% in the period 1990-2003, and
the savings rate related to the GDP stood around the same figure. In African oil
producing countries, the rates are higher; 26% for the investment rate (19.6% for
non-oil producing countries) and 33.7% for the savings’ rate (6.6% for non-oil
producing countries).

  ADB/ OECD, EPA, 2007, op cit
  WTO, 2006
  ECA Econo mic Report, 2007 and 2008
Table 1.1 Domestic Savings (% of GDP)

Algeria                          36           47
Angola                           24           25
Benin                             6             6
Botswana                         47           50
Burkina Faso                      8             4
Burundi                          -6           -11
Cameroon                         20           19
Cape Verde                      -16           -16
Cent ral African Republic         9           10
Chad                              4           29
Comoros                          -4            -7
Congo, Republic of                4             5
Congo,. Democratic Rep.          46           50
Côte d’Ivoire                    20           21
Djibouti                         -3             6
Egypt                            13           15
Equatorial Guinea                20             ..
Eritrea                         -34           -45
Ethiopia                         10             6
Gabon                            38           45
Ghana                            11           10
Gambia                            7             7
Guinea                           17             8
Guinea-Bissau                   -10            -4
Kenya                            10           12
Lesotho                         -23           -13
Liberia                          -3            -1
Libya                            21           25
Madagascar                        9             8
Malawi                            4           -10
Mali                             11           11
Mauritania                       25           23
Mauritius                         ..            ..
Morocco                          18           19
Mozambique                       11           12
Namibia                          14           24
Niger                             4             6
Nigeria                          29           34
Rwanda                            0             1
Sao Tome and Principe           -13           -19
Senegal                          11             8
Seychelles                       22           17
Sierra Leone                     -8            -6
Somalia                           ..            ..
South Africa                     19           19
Sudan                            10           15
Swaziland                         2           16
Tanzania                          5           10
Togo                              1             4
Tunisia                          24           21
Uganda                            7             7
Zambia                            7           18
Source : ECA
39.    It is worth noting that these rates generally fluctuate relatively showing
their dependence on external factors like the variation in the prices of raw
materials and foreign direct investment. But since 2000, the recent trends in the
oil market and direct investment in new prospecting countries (Sao-Tomé and
Principe, Ghana, etc.) maintain them at a high and stable level.

40.     FDI remained relatively derisory in the global total in 2007 (2.3%)
amounting to 36 billion US dollars. This figure, equivalent to that achieved in
2006, double of that achieved in 2004, reflects a growth of the relative
attractiveness of African countries despite a concentration on a few sectors
including oil and mining products. However, Africa is far from the level of FDI
received in 2007 by Asia (18%) and Latin America (8.2%).

41.    Capital flight from Africa invested abroad on real or financial assets
constitute a substantial short fall in terms of savings and investments. For Sub-
Saharan Africa, studies carried out on different periods and groups assess them
between 2.6 % and 7 % of GDP that is, amounts varying from 3 to 13 billion US
dollars yearly. Apart from political and related reasons (instability, corruption, bad
governance, etc.), there are numerous causes that account for this financial
exodus which has been depriving Africa of important resources for its economic
and financial development: budget imbalances and high indebtedness, instability
of exchange, lack of diversification of financial products, search for better profit
and safety, etc. 10

42.      The recent general economic recovery and the improvement of savings
and investment augur well for a more sustainable development of the financial
sector in general and the activities of African stock markets in particular. The
narrowness and the low viability of most national and regional stock exchanges
tell for an initiative designed to regroup existing stock markets.

1.2     Development of the financial sector

43.     The positive macroeconomic performances came along with relatively
significant changes in the financial sector. The positive effects of changes in the
economic situation were further strengthened by the favourable impact of the
reform of the banking sector undertaken in the late 1980s, following the crises
that hit most banking systems in Africa.

44.      The reform of the financial sector, backed by international financial
institutions, generally entailed the privatisation of banks and insurance
companies considered to be sound and the liquidation of those that were
deemed unviable, as well as the absorption by the State of most of the moribund
bank credit. The non-banking financial sector in Africa remained limited. The
financial market is still underdeveloped and concentrated on share and bond
transactions while retirement funds and by-product markets are unheard of in

   ECA Econo mic Report, 2006; UNCTAD, Economic Develop ment in Africa, Mobilisation of domestic
resources and the development-oriented State, September 2007
most African countries. This state of affairs therefore limits the possibilities of
choice between financial products,
Table 1.2 Foreign Direct Investment, net inflows (in millions of current $US )
                                (1998-2001)    (2002-2005
Algeria                        612                 916
Angola                        1652                1331
Benin                           49                 49
Botswana                        53                 373
Burkina Faso                    11                 19
Burundi                          3                  0
Cameroon                       108                 210
Cape Verde                      26                 26
Cent ral African Rep.            4                  1
Chad                           156                 705
Comoros                          0                  1
Congo, Dem. Rep. of            199                 383
Congo, Rep. of                 204                 342
Cote d’Ivoire                  303                 232
Djibouti                         4                 20
Egypt                          972                1878
Equatorial Guinea              399                1320
Eritrea                         68                 11
Ethiopia                       204                 383
Gabon                          -35                 204
Gambia                          38                 43
Ghana                          167                 110
Guinea                          23                 77
Guinea-Bissau                    2                  5
Kenya                           35                 44
Lesotho                        166                 104
Liberia                        119                 194
Libya                            ..                 ..
Madagascar                      63                 16
Malawi                          29                  3
Mali                            54                 159
Mauritania                      33                 113
Mauritius                       75                 37
Morocco                         95                1183
Mozambique                     247                 259
Namibia                          ..                 ..
Niger                            8                 14
Nigeria                       1097                1942
Rwanda                           5                  6
Sao       Tome      and
                                 4                  2
Senegal                         80                 65
Seychelles                      49                 57
Sierra Leone                    12                 35
Somalia                          0                 11
South Africa                  2573                2119
Sudan                          427                1470
Swaziland                       93                 21
Tanzania                       405                 475
Togo                            45                 37
Tunisia                        552                 663
Uganda                         166                 217
Zambia                         138                 188
Zimbabwe                       133                 35

45.   However, the liquidity rate of the economy, made up of the ratio between
the money supply in circulation and the Gross Domestic Product (M2/GDP), a
key indicator of liquidity in the economy, increased from 22.3% 11 to 38.4% in
2006 (2006 ADB statistics). This rate is higher in Southern Africa, excluding
Zimbabwe whose statistics are not available, and Northern Africa, at 56.9% and
44.4% respectively. In countries having a stock exchange market and for the
most part found in these two regions, excluding Mozambique and Zimbabwe
whose statistics are not available, this rate stands at 40.1%.

46.    In spite of this significant increase, the financial sector continues to be
weak compared to developing countries in Asia with a rate higher than 120% in
2004 and that of Latin American countries and the Caribbeans (about 50% during
the same period12). Furthermore, the liquidity ratio is very variable, even in
regions where it is highest. This ratio is lowest in Equatorial Guinea (5.5%), and
highest in Mauritius Island (153.2%) as against 24.7 % for WAEMU countries for
instance which have the BRVM in common, 61.8 % in South Africa, 74.8% in
Djibouti and 93.1% in Egypt.13 On average, intermediate income countries have
an M2/GDP ratio more than twice that of low-income countries. In Sub-Saharan
Africa, over the period 2000-2004, this rate stood at 55.6% and 21.9%

47.      In Africa, money supply, made up of bank notes and currencies (fiduciary
money) and demand, savings and term deposits (bank money and quasi money)
is still made up of a considerable proportion of fiduciary money, about 25%. In
Latin America, this rate stands at 12%. A large fraction of bank deposits is made
up of demand deposits, more than 75% of the total in some countries, as against
term deposits, thereby limiting investment financing possibilities.

48.    According to the World Bank, non-bank financial savings are generally
limited and lower than 20% of total savings. In less developed countries, this rate
is very low. Only a few African countries with high intermediate income show
diversified savings patterns (South Africa, etc.). These products of savings are
mainly made up of insurance premiums, with a share not more than 1% of the
GDP in most of the countries and for the most part concentrated on automobile
risk and stocks and shares. The development of stock exchange markets will be
treated below under a separate topic.

49.    Generally speaking, the advent of micro finance has not really changed
the situation although it has allowed rural households and low-income urban
households to have access to financial transactions.

50.    It is worth adding that the payment systems in Africa, mainly in cash, are
generally less efficient, more onerous, and impedes the smooth conduct of
transactions, despite all the efforts being deployed in some regions to modernise
the system of payment.

   Catherine Patillo, IMF 2004: the Financial sector in sub-Saharan Africa: prob lems, challenges and reform
   ADB/OECD: supra. Referring to money in the broad sense/GDP
51.    Looking at another indicator of financial sector density, the ratio of loans to
the private sector over GDP, also shows that Africa is on the good path but that
the continent is still lagging behind compared to the rest of the developing world.
In deed, in 2005, this ratio stood at about 21% in Africa south of the Sahara as
against 30% in South Asia and 107% in high-income countries as against 19% in
200014. While low- income sub-Saharan African countries saw their ratio increase
from only an average 12.3% over the period 1990 – 1999 to 13.3% over the
period 2000-2004 (21% in low income countries out of Africa 15), intermediate
income countries, including South Africa, recorded an increase from 52.1% to
64%. Apart from South Africa, the performances of intermediate income
countries are quite modest.

52.    The same scenario between low and high-income countries also holds
true for Northern Africa, with national peculiarities depending on the level of loans
to the private sector. While the ratio of loans to the private sector over GDP in
2005 was 4.5%, 8.2% and 10.4% respectively in Algeria, Libya and Sudan, it was
51.2% in Egypt and 62.6% in Tunisia for the same year.16 However, a huge
fraction of loans to the private sector is used to finance routine transactions, with
a marginal fraction directed towards productive investments.

53.    The African financial system is also characterised by ever -high interest
rates as confirmed by the existence of interest margins (variation between debit
interest rate and credit interest rate) of 8% in Africa as against a world average of
4.8%17, with a bank intermediation margin that is higher in low income countries
than in intermediate income countries. This is a reflection of poor competition
within the banking system and the limited role of non-banking institutions.

54.    On the whole, the financial sector is still fragile. The percentage of poor
performing loans compared to total loans, an indicator of the soundness of a
financial system, is still high in Africa south of the Sahara, at 14.5%, with a 17.5%
rate for low income countries and 6.7% for intermediate income countries 18.

55.     The reforms that were undertaken in the financial sector mainly stem from
a change in the monetary policy applicable in African countries as from the mid
1990s. Particularly, under economic reforms supported by the World Bank and
the International Monetary Fund, these countries adopted some financial
liberalisation measures, notably: elimination of privileged debit interest rates and
a generalised placing of a ceiling on bank interest rates, deregulation of the
distribution of credits, authorisations for foreign banks to establish, etc.

56.      The putting in place of independent and professional banking supervisory
institutions also facilitated a more efficient and cautious control of the banking
sector. However, the relative weakness of the African financial sector compared
to other developing regions of the world calls for additional efforts to be made by
   IMF: Regional Econo mic Prospects (REP), Sub-Saharan Africa, October 2007
   World Ban k, Make Finance Work for Africa,
   IMF: International Financial Statistics, September 2007, authors’ estimates
   Partnership for Make Finance Work fo r Africa, 2007
   IMF, REP supra
States, in conjunction with the financial system, to promote a banking culture
within a large segment of the population, the diversification of the financial sector,
new financial instruments, and trigger a drop in interest rates.

57.    In Africa today, the rate of access to the formal and semi-formal financial
sector is particularly low at less than 20% as against 30% in East and Pacific
Asia.19, This is not enough to stimulate the development of the financial sector
especially in its modern dimensions such as the stock exchange market because
banking institutions constitute a key ingredient for embracing new financial

1.3      Opinions of stakeholders on the economic and financial situation

58.    Respondents to the survey and interviews conducted throughout the
continent on the feasibility of a pan-African stock exchange indicate that the high
level of inflation and inadequate interest rates are impediments to the
development of financial markets. 35.3% of the respondents consider weak
economic growth, low household incomes, low savings, and low investments as
obstacles to the emergence of financial markets. Lack of macroeconomic and
financial information, inadequate infrastructure, as well as crushing debt burdens
and the inadequate system of trade, are less mentioned as hindrances.

59.    As a confirmation of the points of view expressed above, respectively,
38.2% and 20.6% of the persons interviewed think that reforms supportive of
macroeconomic stability and the putting in place of a sound and fair taxation
system that is favourable for strong savings are needed for the establishment of
a pan-African stock exchange. Conversely, promoting economic integration or
macroeconomic convergence, creating a common currency and encouraging free
movement of goods are not seen as priorities. Yet, 47.1% of respondents
indicated that with a view to setting up a pan-African stock exchange market, the
creation of a common currency is a prerequisite.

60.    At this point, considering the narrowness of African economies taken
individually, and the variability of their economic and financial performances, a
long term viable stock market for investments and mobilization of capital can only
be envisaged at the continental level

61.    Indeed, the economic results and fina ncial solidity of the continent on the
whole are more sustainable than national and regional performances, given that
the weaknesses of each country are offset. Moreover, with regard to essential
variables, such as savings and investments, their global volume facilitates the
operation of an efficient financial market than their amount at the national and
even regional level. Liquidity ratio which varies amongst African countries and
low in most of them show how difficult it is to develop the financial sector in
African countries taken individually.

     WB, MFW4A
Table 1.3 Opinion on the creation of a Pan African Stock Exchange
                                                                                     No.   %
 For                                                                                 24    72.7
 Reasons for the creation of a Pan African
 Different stages of development but we can start with a few countries / Regio nal
 stock exchanges first                                                               4     16.7
 Mobilizat ion and imp roved allocation of financial resources/Economies of scale
 and cost efficiencies/More efficiency, liquid ity, transparency…                    17    70.8
 PA SE will inspire trust/Improvement of corporate governance                        2     8.3
 Will benefit issuers (listed companies and governments)                             7     29.2
 Will enhance opportunities for investors                                            2     8.3
 Pro motion of economic and financial integration                                    2     8.3
 Others                                                                              2     8.3
 Against                                                                             9     27.3
 Reasons against the creation of a Pan African
 Premature/Different stages of development                                           7     77.8
 Will be another competitor/ Co mmercial viab ility is doubtful                      2     22.2
 Others                                                                              1     11.1
 Total of respondents                                                                33    100.0
 No response                                                                         3
 Total                                                                               36
Source: AUC Survey

62.    On the whole, the creation of a Pan African stock exchange and beyond it,
the establishment of a financial market ensuring the flow of capital at the
continental level would provide better visibility and a wider scope of arbitrage to
those looking for capital and investors both African and foreign. The modest
performances of existing African stock exchanges should be an inducement to
actively explore avenues to integrate African national and regional stock

1.4       Analysis of the legal, institutional, fiscal regulatory and technical

63. In Africa, the legal, institutional, accounting, fiscal and technical environment
of financial operations in general and stock markets in particular is on the whole
archaic, are hardly favourable for their internal development and can hardly
attract foreign investors who do not have a lot of confidence in dispute resolution
mechanisms and in the stability of rules established both in the legal domain and
business tax system. The small proportion of foreign direct investment that Africa
receives is characteristic of the unfavourable business climate, which also affects
African economic operators. In some countries, it is difficult to know the norm
applicable for transactions or particular activities. Legal insecurity is considered
as one of the most serious impediments to attracting investors.

64.   Furthermore, the diversity of regulations in force and existing technologies
are major challenges to the integration of stock exchanges in Africa. Although
there are several initiatives designed to harmonise the business laws and

environment in some Regional Economic Communities, the level of conformity is
not adequate for the creation and blossoming of a Pan African stock market.

65.  The following section shall deal with the situation on the continent and
some experiences to harmonise the regulations and adapt present systems.

1.4.1 Different legal systems

66.     There are three major legal systems on the continent: civil law, common
law and religious law (sharia) systems. Civil law also known as continental or
Romano-Germanic laws is dominant and covers French-speaking countries as
well as some English-speaking and Arab countries (Côte d’Ivoire, Mali,
Botswana, Tunisia, Egypt, etc). Common Law is drawn up in Anglo-Saxon
countries prevails in English-speaking countries20, whereas religious law (sharia)
is characteristic of some countries in North Africa including Sudan, Libya, etc.
The following diagram presents African countries according to their legal
systems. The differences between the three systems reside in their origin and in
the manner of their implementation. In countries practicing civil law, the legal
system is based on one or many codifications adopted by lawmakers who
establish the major principles of law. In this case, the law is interpreted instead of
being drawn up or “made” by judges and only texts enacted and not
jurisprudence, defined as, are considered as force of law.

67.    In countries practicing common law, the legal system is drawn up
according to customs and is created and/or fine tuned by judges. Rulings are
given depending on the jurisprudence and affect the law applied on future cases.

68.    Where no legal declaration is binding, judges have the authority and the
obligation to “institute” the law by setting precedence.

69.    Religious law refers to a system using a religious text like the Koran as the
legal source.

1.4.2 Regional attempts to harmonise business law and insurance

70.     Harmonisation is a process by which different States adopt identical laws,
by bridging the gap between the rules. It often induces the creation of norms and
principles to be used as rules and guidelines as well as the elimination of
differences in the technical contents of norms. Harmonisation is generally carried
out by international treaties or it involves the adoption by some States of
regulatory principles of other States. It is not necessarily a unique or uniform set
of rules or the standardization of all the rules. There are various types: i)
complete/maximum, ii) partial/minimum, iii) hybrid, and iv) one set of rules.

  South Africa and Namibia use a blend of civ il law and co mmon law while the English speaking part of
Cameroon uses common law.
71.     There is no doubt that the unification of business law is one of the pre-
requisites to the creation of a Pan African stock exchange and the promotion of
investments in Africa. In this regard, in 1993, 14 (fourtee n) African countries of
the franc zone signed the treaty to set up the Organization for the Harmonisation
of Business Law in Africa (OHADA), in a bid to harmonise their business law
especially with the purpose of attracting more local and foreign investments. The
Comoros Island and Guinea have become OHADA members and the Democratic
Republic of Congo is planning to join and become the 17 th member. The activities
of this organization are not well known in English-speaking countries. However,
OHADA is making efforts to fill this loophole. Ghana is alleged to prepare to join
the bandwagon21 .

72.    Even if OHADA is a possible framework for the harmonisation of business
law in Africa, its legal principles that are clearly civil law oriented are nevertheless
likely to hamper its adoption by countries with different legal systems.
Furthermore, in 1992, franc zone member countries signed a treaty setting up an
organization in charge of regulating the insurance sector in their countries. The
Inter-African Conference on Insurance Markets (CIMA) is designed to enhance
cooperation in the insurance field, develop insurance and reinsurance companies
in relevant economies, etc.

73.    Many initiatives have been taken to move towards a common supervision
and harmonisation of rules governing banking and stock markets activities in
Regional Economic Communities (RECs) giving impetus to the creation of a Pan-
African Stock Market.         In the banking sector

74.     In the banking sector, a lot of progress has been made in the regional
supervision of activities. For instance, all the countries of the West African
Economic and Monetary Union (WAEMU) have the same legislation and have
set up a regional banking commission in charged of closely monitoring banking
activities in their region.

75.     Member States of the Economic and Monetary Community of Central
Africa (CEMAC) are governed by the same banking legislation and the Central
African Banking Commission (COBAC) is responsible for the sector’s supervision
in all the member States. In 1994, a Committee of Banking Supervisors of West
and Central Africa (CBSWCA) was set up. It is made up of officials in charge of
banking supervision of 12 countries and those of the two regional banking
commissions22. Furthermore, SADC Sub-committee of Banking Supervisors
(SSBS) was set up in 2004, following the dissolution of the East and Southern
African Banking Supervisors Group (ESAF). SSBS has the same objectives as
the CBSWCA mentioned above. It has already signed a Memorandum of
Understanding to include SADC finance and investment sector’s protocol.

21 m
   Burundi, DR Congo, Cap-Vert, Ghana, Guinée, The Gamb ia, Madagascar, Nigeria, Sierra Leone,
Soudan, Rwanda, CEMA C et UEM OA.
                                                 16           In the stock exchange sector

76.    Most African countries have set up regulation structures for financial
markets, or financial markets authorities, with different names (stock market
valuation Commissions, financial services Commissions, etc.)They are
responsible for establishing and adapting rules, granting licenses for the
management of stock market operations, and supervising trade transactions and
the activities of brokers. Such a structure generally sets the standards that
market players must observe with a view to protecting the interests and rights of
investors and listed companies.

77.      Considering that a properly defined regulatory system is the bedrock of
any efficient and transparent securities market, it is necessary to have strong
institutions with mission to harmonize the rules in order to make investors
confident and facilitate increased cross border economic activities.
Consequently, most African countries have already adhered to the 30 principles
of the International Organization of Securities Commissions (IOSCO) and which
are well accepted all over the world. Also, with regard to accounting, the
International Financial Accounting Standards (IFAS) provide guidelines on the
standards that African countries can apply.

78.    It has to be recalled that there are two types of quotation systems now
being used in financial markets: continuous scoring and fixing. On stock
exchanges based on continuous scoring, transactions can take place at any time
provided the order received reflects the current price. In a stock exchange based
on quotation fixing, purchase and sales orders are regularly placed side by side
following a periodicity earlier agreed upon before being compared, at a point in
time of the business day, on the basis of a price at which there is very little
disparity between the purchase and sales orders 25 .

79.    Just like the majority of the most powerful stock markets in the world,
many African financial markets operate on the model o f continuous transactions.
The continuous quotation of securities and the ensuing immediate nature of the
transactions seem to be a key factor for the investor who would like to quickly
make up his mind. Transactions are finalized within five business days after the
day of quotation.

80.     Continuous negotiation systems allow for greater transparency in price
fixing processes, and this is very important in reassuring investors who happen to
have very little knowledge when the stock market is still in its infa ncy.

81.     Despite the disparities between country systems, recent trends seem to
suggest that players of financial markets are increasingly involved in regional
activities and African companies are embracing trans -border stock quotation. For
example, AngloGold Ashanti, a Ghanaian company, has dual quotation on the
Ghana Stock Exchange (GSE) and the Johannesburg Stock Exchange Limited
(JSE Ltd), and Oando, registered in Nigeria, has adopted a similar practice on
the Nigeria Stock Exchange (NSE) and at the JSE Ltd.

     IDA, World Bank. Stock Exchange Develop ment, 1997
82.    Currently, there are various initiatives aimed at giving a regional dimension
to the supervision of stock exchanges. In West Africa, WAEMU is a fully
integrated bloc since the countries of this sub-region use the same currency, one
central bank and uniform rules and regulations for accounting and trade.
Furthermore, the West African Monetary Agency (WAMA) is working towards the
creation of a common currency and a common central bank for Gambia, Ghana,
Guinea, Liberia, Nigeria and Sierra Leon, which are all member countries of the
Economic Community of West African States.

83.    However, each of the three existing stock exchange markets within the
ECOWAS, that is to say the Nigerian Stock Exchange, the GSE, and the
Regional Stock Exchange (Bourse Régionale de Valeurs Mobilières - BRVM) has
its own regulatory body and different rules and systems but allows for
simultaneous quotation of companies of their respective territories. Examples
include the listing of Trust Bank of Gambia on the GSE and on the Over-The-
Counter, OTC, market of Gambia in 2002, and the recent cross-border listing of
Ecobank Transnational Inc, a company registered in Togo, on the GSE, the NSE,
and the BRVM.

84.     However, the experience of ECOWAS has shown that multiple listing is
not only possible but also cumbersome. Indeed, the mechanism is quite onerous
due to its costs and other expenses linked to the need to comply with various
rules and currencies and the dissemination of information. Also, differences were
noted on the listings of Ecobank securities between the three stock exchanges, a
situation which brings to the fore the problems of effective information flow. In
order to make up for these shortcomings, the Nigerian SE, the BRVM and the
GSE initiated discussions aimed at promoting greater cooperation and
harmonizing their rules.

85.    In Central Africa, a regional stock exchange, the Central African Stock
Exchange, (Bourse des Valeurs Mobilières d’Afrique Centrale - BVMAC), has
been created and established in Gabon. It covers the Economic and Monetary
Community of Central Africa (CEMAC), made up of Cameroon, the CAR, Congo,
Gabon, Equatorial Guinea, and Chad which also have in common harmonized
trade rules, a common currency (the CFA F), a common central bank (the Bank
of Central African States, BEAC). Another stock exchange, the Douala Stock
Exchange, has been created in Cameroon. Given that these two stock
exchanges are found in the same monetary zone and that their individual viability
is weak, some attempts are being made to merge them.

86.   A lot of progress has also be made in East Africa where the regulatory
bodies of the Nairobi Stock Exchange, the Dar es Salaam Stock Exchange and
the Uganda Stock Exchange, under the East African Community (EAC), signed a
memorandum of understanding in 1997 to establish an organization called the
East African Securities Regulatory Authorities (EASRA).

87.    Cross border listing in East Africa is also on the increase as brokers-
traders, money market managers and investment funds for ordinary stocks
develop their cross border activities. For example, the shares of East African

Breweries, Kenya Airways and Jubilee Holdings are negotiated on the three
stock exchanges mentioned above.

88.    Within the Southern African Development Community (SADC), a funding
and investment protocol has been signed and aims at encouraging the
harmonization of the funding and investment policies of Member States.
Furthermore, there is a Community of SADC Stock Exchanges (COSSE) with the
main goal of fostering cooperation between the stock exchanges of member
countries and developing a regional stock exchange.

89.     In fact, as of now, all SADC stock exchanges have already harmonized
their listing, negotiation and clearing standards within the framework of the
Committee of Insurance, Securities and Non-Bank Financial Institutions
Association (CISNA), COSSE, the Association of African Central Banks and the
Association of African Stock Exchanges. There are also initiatives aimed at
finalizing the harmonization of transaction systems, and discussions are
underway on the training of investors, a common certification test for brokers and
the cross-border listing of securities in SADC stock exchanges.

90.     In a nutshell, at the level of the continent, there is very little harmonization
of stock exchange regulations. It is necessary for African countries to create a
platform where this harmonization process can be initiated. To increase the
confidence the public has in financial markets, in general, and stock exchanges,
in particular, it is crucial to consolidate the terms of contracts and rule of law.

1.4.3 An unsuitable fiscal context

91.    In all the countries, the taxation of savings and securities has far reaching
implications on the development of financial markets. The tax administration in
Africa, characterized by inadequacy and bureaucracy, does not facilitate
economic and financial development. African taxation systems are also quite
often characterized by high levels of tax evasion and corruption.

92.     Tax regulations and high tax rates are often seen as obstacles to
economic activities in Africa. In South Africa, foreign companies are taxed up to
34%24. According to the AfDB a new company tax law has reduced company tax
in this country by 12 to 32% for industry and by 20 to 40% for the other sectors.

93.    Within the framework of a project to set up a common stock exchange
market, it is very important for the taxation policies of African countries,
especially on financial transactions, to be harmonized. We must avoid a situation
of disparities which may lead to tax competition between the countries as they
seek to attract foreign investors or investors from other African countries.

94.   The differences between taxation systems inhibit economic integration and
growth. However, most African regional communities are now tending towards
harmonizing their taxation systems. This is the case of WAEMU and CEMAC that
have harmonized their domestic consumption taxes during the 1990s.

     AfDB, 2006
95.    Another factor that can also influence investment decisions is the
availability of tax incentives. Countries granting tax incentives stand a better
chance of attracting investors than those with rigid taxation policies.

96.     Forty four per cent of the answers to the questionnaire of the AU
Commission survey on the pan-African stock exchange project mentioned
unfavourable tax systems as one of the major factors affecting the development
of financial markets in Africa. Seventy four per cent underscored the importance
of a harmonized tax system for a viable stock market. The officials who were
interviewed noted the absence of attractive taxation measures as a challenge for
most African countries to attract investments.

97.     Recent studies have equally confirmed that attracting foreign direct
investments through tax exemptions can have a great impact on low- income
countries now competing for export-based foreign investments. Consequently, it
is imperative for countries to harmonize their taxation policies thereby improving
their investment environment. It is advisable to adopt a tax rate that will boost the
economy while maintaining fiscal equilibrium.

98.    In the SADC region, a funding and investment protocol has been signed
by Member States to harmonize their funding and investment policies. By virtue
of the annex on taxation and related issues, the Member States have to adopt a
common approach on the treatment and application of tax incentives.

99.    Certainty, simplicity and fiscal stability should be able to reassure
investors about returns on investment. So, taxation systems should be
administered with transparency in order to increase the confidence of

100. However, fiscal coordination could be more attractive than fiscal
harmonization. Inter-jurisdictional tax equity is one of the main criteria for tax
coordination because it ensures uniformity in the assessment of companies and
tax withholding among countries. Tax coordination also ensures fairness and
neutrality for taxpayers.

  Major factors affecting the development of financial markets in Africa
                                                                                     Total of
                                                                          No       respondents   %      Weights
 Low per capita income                                                     22              36    61.1      15.7
 Lack of knowledge on financial assets and investment in stock exchange    27              36    75.0      19.3
 M istrust with respect to financial institutions                              9           36    25.0       6.4
 M istrust with respect to issuers (drawers)                                   7           36    19.4       5.0
 Lack of financial information                                             25              36    69.4      17.9
 Unfavourable tax systems                                                  16              36    44.4      11.4
 Legislation and regulatory framework not conducive                        23              36    63.9      16.4
 Others                                                                    11              36    30.6       7.9
Source: AUC Survey

1.4.4   A divergent technological environment

101. The technological context varies considerably from one African country to
another. While basic infrastructure (electricity, telephone, Internet, etc.) are hard
to come by in some countries, yet other countries are acquiring frontier
technology infrastructure.

102. Thus, in 2005, according to the ADB, electricity consumption varies from
10 kwh per year in Chad to 5 060 kwh in South Africa, with 23 countries
consuming less than 100 kwh and 12 countries consuming more than 1 000 kwh.
The same gap is found in 2006 in terms of telephone, fixed and mobile, with a
country with less than 20 subscribers per 1,000 inhabitants (Ethiopia) and
countries like South Africa and the Seychelles where the number of subscribers
for 1000 population is around 919 and 1058 respectively, most countries with a
figure lower than 250 subscribers despite the progress enabled by the cellular

103. In the same period, with regard to Internet access, there is a clear divide
between the 18 countries with fewer than 10 people connected per 1000
inhabitants (Sierra Leone, 1.7 connection; Niger, 2.9; Liberia, 0,3; Ethiopia, 2,
etc) and 6 countries with over 100 connections per 1000 inhabitants (Morocco,
197.7 connections, Mauritius, 255.6, Sao Tome, 187.1; Seychelles, 337.2; Africa
South, 105.6; Tunisia, 126.8). It should be noted in the figures provided above
that the countries better equipped for energy and telecommunications
infrastructure are those with the most active stock exchanges.

104. Transaction systems in developed stock exchange markets have improved
from the public outcry system where stocks were traded orally to automated
systems where transactions are computerised. There was a proliferation of
computer-based systems around the world to respond to increased competition
between stock exchange markets in terms of exactitude, error margins, and
quality of execution.

105. Today, African stock exchange markets still use the public outcry system,
even though most of them are gradually changing to computerize their
transactions in spite of the costs considered being excessive. This trend finds
justification in the observation that most stock markets recorded an increase in
turnover just after computerizing their transactions.

106. Many observers even think that the automation of transactions is
particularly important for an integrated market given the fact that most stock
markets recorded an increase in turnover just after adopting such systems.
Moreover, the automation of the trading system should be done simultaneously
with the introduction of a central securities depositor. Such a depository is
responsible for minimizing the risks involved in the holding and circulation of
securities and also reduces related errors and delays.

107. Automation would encourage capital flow through out the continent as it
would lead to a reduction in the costs and inefficiencies inherent in each stock
market, and would swell the volume of activities and liquidity. An automated
trading system would equally shorten the negotiation chain by reducing the
number of intermediaries and allowing investors to operate directly on stock
markets. Even more important is the confidence generated by automation as it
allows for very little manipulation.
Table 1.5
Negotiation system and settlement date of selected stock exchange markets in 2006

                                                 Trading system
          Stock Exchange
                                              System                Type

Botswana Stock Exchange                    Public outcry           Manual        T+4

Cairo & Alexandria Stock Exchanges              EFA               Automated      T+2

Dar Es Salaam Stock Exchange                    N/A               Automated      T+5

                                     Continuous auction sale
Ghana Stock Exchange                                               Manual        T+3

Johannesburg Stock Exchange Ltd              TradElect            Automated      T+5

Lusaka Stock Exchange                           N/A                Manual        T+3

Nairobi Stock Exchange                          N/A               Automated      T+5

Namibian Stock Exchange                         TALX              Automated      T+5

Nigerian Stock Exchange              Horiz ontal trading system   Automated      T+3

                                        Automated system
The Stock Exchange of Mauritius                                   Automated      T+3
                                            (SEMATS )

                                        Public auction sale
Uganda Securities Exchange                                         Manual        T+5
                                         system, manual

Zimbabwe Stock Exchange                    Public outcry           Manual        T+7
Source: ASEA Yearbook 2006


108. On the whole, African stock exchanges record mixed performances. Apart
from the Johannesburg Stock Exchange, which is modern and well known in the
world, most of the other stock exchanges are bugged down by numerous
problems including: low demand and supply of financial products, low volume of
trade, high taxes, poor macroeconomic conditions, lack of market infrastructure,

109. Generally, African stock markets are mainly dominated by equity markets
to which could be added some fledgling covered bond markets. Stock markets
for derivative instruments and other sophisticated products are not well
developed, and thus are rare in Africa.

2.1   General presentation of African stock exchanges

110. There are currently twenty-three stock exchanges on the African continent
geographically distributed as follows:

111. In Northern Africa, four stock exchanges: Algeria, Casablanca, Cairo and
Alexandria (CASE) and Tunis;

112. In West Africa, four stock exchanges: the BRVM which brings together
eight countries of the West African Economic and Monetary Union (WAEMU),
Cape Verde, Ghana and Nigeria;

113. In Central Africa, two stock exchanges: Douala and the BVMAC
regrouping the six countries of the Economic and Monetary Community of
Central Africa (CEMAC);

114. In Southern Africa, eight stock exchanges: Botswana, Johannesburg,
Malawi, Mozambique, Namibia, Swaziland, Zambia and Zimbabwe.

115. In East Africa, five stock exchanges: Nairobi, Mauritius Island, Kampala,
Tanzania and Sudan.

116. In this study, our analyses will be based on the securities and bond
markets, which are preponderant, even if in South Africa, the derivative
instruments market has made great strides in recent years. Given the lack of
data, this analysis will not take into account securities traded on over-the-counter
markets even if this type of trading is quite considerable on many stock markets,
especially Cairo and Alexandria.
2.1.1 Structure of African stock exchanges

117. To ensure the effective and efficient functioning of stock exchanges, their
regulatory authorities have, in keeping with international standards, adopted the
principle of net separation of the missions and responsibilities of the various
players. This choice is generally manifested in the creation of two distinct poles
of competence on each stock exchange: a public pole which acts as the stock
exchange regulatory and supervisory Authority with its main role being to
regulate and supervise the stock exchange, and a generally private pole with the
primary purpose of coordinating and organizing the stock exchange market.

118. The first pole acts as the representative of the State. It operates
independently. It protects the general interest of actors of the market, and
ensures the security and integrity of the stock exchange. In most countries, a
specific body is set up. In a few countries, this function is entrusted directly to a
department in the Ministry in charge of finance. The missions and functions of
the pole are broken down around the following elements:

         protecting savings invested in financial instruments and any other
          investment that may give rise to public invitations to save;
         providing complete and dependable information, in a fair manner, to all the
          stakeholders or investors;
         ensuring the proper functioning of stock exchanges and the smooth
          conduct of stock public sales;
         regulating and controlling all financial transactions relating to quoted
          companies (listing, capital increase, public sale or takeover, merger, etc.);
         developing an organized, fair and efficient stock exchange.

119. The second pole, commonly referred to as the stock exchange or
company market place, has a mission to organize and coordinate the activities of
the stock exchange. It is responsible, inter alia, for:

     listing of securities;
     quoting of securities;
     monitoring and controlling quotation sessions;
     disseminating/publishing of stock exchange information;
     setting rules to govern negotiations, clearing and settlement-delivery as
      well as the rules of good practice which brokers and dealers must respect
      in order to ensure transparency, impartiality and proper organization of the
      stock exchange.
2.1.2 Players in the stock exchange

120. The range of players is made up of issuers, brokers / dealers, and
investors both domestic and foreign.         Issuers

121. In terms their shares and bonds, issuers are mainly private companies.
With regard to bonds, other issuers are governments and supranational
authorities. Through privatisation programmes, governments have become key
stock exchange players by getting their securities listed. By listing treasury bills
governments have become major issuers of securities that could be traded on
the secondary market. Today, this has become a major stock exchange activity
that injects a lot of liquidity into the market.
                                           24              Investors

122. Stock exchange markets are mostly dominated by institutional investors
(insurance companies, pension schemes, common investment funds, etc.) Apart
from these investors, we also have private investors, banks, foreign companies
and foreign private investors.

123. In recent years, thanks to numerous reforms undertaken by authorities, an
increasing number of foreign investors are beginning to develop interest in
African stock exchange markets. In 2006, foreign capital investors in shares on
African financial markets stood at a net total of 10.5 billion dollars 26 . Most of it
was invested in the JSE Limited (10.4 billion), while Tunisia (33.8 million),
Mauritius Island (30.7 million) and Zambia (15.4 million) received modest shares
of these flows. Foreign investors are mainly made up of pension schemes,
common investment funds, and hedge funds. Among them, some are specialised
regional funds because they have a long-term objective and/or sufficient local
resources to overcome information differences.

124. On bond markets, investment are mainly realised by private or institutional
investors (insurance companies, pension schemes, banks), and foreign
companies. In 2006, investments by hedge funds and other debt funds increased
considerably. This flow of capital into the continent is however concentrated in
high yield countries that export raw materials (commodity products) and in those
with attractive macroeconomic prospects or rather open capital markets such as
Nigeria, Zambia, Malawi, Botswana and Ghana. The BRVM and, to a lesser
extent, Kenya and Uganda also received capital flows on the respective debt

125. An estimated total of one billion US dollars was invested in Nigeria in the
first semester of the year 2006, that is to say more than 5 times the total foreign
investment received in 2005. More moderately, the Zambian debt market
attracted some 250 million dollars while that of Tanzania received a little more
than 150 million dollars.27 The interest foreign investors have been showing in
Africa since 2006 stems from:

          the existence of abundant liquidity in the world, and the reduction of
           interest rate differences on government bonds between developing and
           emerging economies;

          the reduction of the risk allowance (for cessation of payment) on some
           State loans and the improvement of the creditworthiness of many
           countries thanks to their good macroeconomic performances and the

     Source :Amevi M. Atiopou, Marchés financiers azfricains 2002-2006, Afrology
27 Source : Voir    ci-dessus

          substantial reduction of their debt burden through the various debt relief
          initiatives for heavily indebted poor countries;

         the increase in commodity prices (oil, timber, minerals, etc.) which has led
          to an appreciation of the currencies of exporting countries;

         the considerable improvement of the accessibility of foreign investors to
          African markets. Consequently, many more African financial asset
          purchases can now be paid for through Euroclear, and this goes a long
          way to reduce the costs of transactions. Before 2006, of all the African
          currencies, only the South African Rand was paid for through Euroclear. In
          2006, seven other currencies joined the Euroclear system thanks to the
          leadership of the African Development Bank that issued bonds in these
          currencies, by making sure that the authorities concerned fulfilled
          Euroclear requirements28 .             Brokers

126. Brokers are mostly found around stock exchange firms that have been
able to develop securities trading services such as portfolio management, the
management of funds and securities underwriting activities. They have increased
their products through the creation consulting, research and data analysis
services. Many specialised services have developed to better meet the
increasing needs in assets management, especially of institutional investors such
as pension schemes, as well as to satisfy the counselling needs of companies.

127. In some countries, brokers and dealers or stock exchange firms are stock
exchange shareholders. In others, the shareholding of stock exchanges is more
diversified, including notably the State as well as financial and non financial
enterprises. In the first case, the ownership of the stock exchange is like that of a
credit union of some sort.             Central depository, clearing house and settlement bank

128. The chain for the conduct and finalisation of stock exchange transactions
also includes the activities of specific structures in charge of performing some
functions, notably that of facilitating the settlement and delivery of securities
between buyers and sellers, generally with brokers as intermediaries.

129. Hence, the clearinghouse has a role to ensure the circulation of securities
between brokers while the central depository keeps the securities and keeps
record of transactions relating to such securities. Increasingly, the circulation of
securities is done rather that in paper. In some stock exchange markets, these
different functions are entrusted to one and the same structure.

130. The function of settling transactions on securities is sometimes performed
by a particular operator who may be a central bank, a commercial bank, or

     Source: AfDB
another structure. Each broker/dealer has an obligation to open an account in the
settling bank.

2.2        Comparative      analysis   of   the   performances   of African   stock

131. We will examine the performances of African stock exchanges by referring
to the results recorded by share and bond markets since those of the other
financial products (right, derivative and final products, etc.) are rather

2.2.1 Equity markets

132. The analysis of performances on equities markets will be centred on the
results recorded by some key stock exchange indicators over the period 2002-
2006.            Capitalisation

133. Capitalisation measures the financial capacity of a stock exchange. It is
equal to the total of the products of stock exchange prices of listed securities and
the number of each of the shares listed. This indicator is used, inter alia, to
assess how safe the investment is through the stock exchange weight of the
companies listed.

134. From 2002 to 2006, the capitalisation of African stock markets increased
from 238.4 to 955.5 billion US dollars, i.e. a 75.1% increase made possible by
the growth of the number of stock markets, the relatively large size of the new
listed companies and the flow foreign investors on African markets such as South
Africa and Egypt 13.

135. In 2006, the JSE Limited accounted for nearly 75% of the capitalisation of
African stock markets, followed by CASE with 10%. Together, these two
exchanges constitute about 85% of the capitalization of African stock exchanges
but only 1.5% of the capitalization of the International Federation of Stock
Exchanges in which they are the only two African members.

136. However, the capitalisation of the smaller African stock markets increased
considerably between 2002 and 2006, the most notable variations have been
noticed in Ghana (+ 1,559%), in Zambia (1,196%) and in Ugandan (+1,085%).
For its part, Swaziland appeared the less dynamic with only 57%.

137. In 2004, according to the IMF 14, the overall capitalisation ratio compared to
the GDP stood at 36% for Africa as against 161.3%, 70.6% and 25.4% for
Malaysia, Thailand and Mexico respectively. Still in 2004, this ratio stood at
214.1% for the JSE Limited and 51.3% for CASE, figures which confirm the
relatively advanced level of these two financial markets.

     Pazis ma Corporation

138. North Africa, with four stock markets, had a capitalisation of 147 billion
dollars in 2006 compared to 37 billion dollars in 2002, that is to say a 297%
increase, lower than the average for the continent over the same period, which
was 379%. The Cairo and Alexandria Stock Exchange (CASE) represents 63.7%
of the capitalisation of that regio n. While that of Algiers is still insignificant (0.1%)
mainly due to the fact that it only went operational recently.

139. In West Africa, stock capitalisation on the three existing stock markets
increased significantly between 2002 and 2006, from 8 billion to 50 billion dollars.
This strong growth, 525%, is largely due to the dynamism of the Nigerian stock
exchange, the fourth most active stock exchange and largest of the continent in
2006 and whose capitalization is about 80% of the region. The BRVM, despite of
being regional, has a limited capitalization of 5% while the Stock Exchange of
Ghana contributes 15% of the entire region.

140. East African, with five stock markets, has a total stock capitalisation of 4
billion dollars in 2002 and 22 billion dollars in 2006, a 400% increase in five
years. This growth, exceeding the continental average, is largely due to
developments on the Kenyan market.

141. The Southern Africa region, if it concentrates relatively the largest number
of stocks in Africa, eight, is also the most active, that of South Africa. Thus, its
capitalization has increased from 188 billion in 2002 to 736 billion dollars in 2006
following an increase of 290%, a rate significantly below the continental average.
From other stocks in the region, only Malawi has a market capitalization greater
than $ 10 million in 2006 (12.29 million).

142. In the Central African region, with a listed company in 2006, the Douala
Stock Exchange has a capitalization of approximately 4 million U.S. dollars while
BVMAC has started operations in August 2008 with the listing of a government

Table 2.1 Annual Market Capitalisation, 2002-2006 (US $ billion, end of period)
     Stock Exchange            2002       2003      2004        2005       2006
Algeria                                -         0.14         0.14        0.09        0.10
Botswana                             1.49        1.94         2.33        2.43        3.94
Cote d’Ivoire (B RVM)                1.33        1.64         2.09        2.35        4.14
Egypt                               26.34       27.85        38.08       79.51       93.50
Ghana                                0.72        1.48        10.97       10.09       11.88
Kenya                                1.45        4.15         4.04        6.35       11.35
Malawi                               4.54        5.43         7.05        8.89       12.29
Mauritius                            1.35        1.96         2.4         2.66        3.54
Morocco                                9          13          25           27          49
Mozambique                             -           -            -           -         0.10
Namibia                              0.08        0.15         0.22        0.21       0.429
Nigeria                              5.89        9.67        14.50       22.48       34.06
South Africa                        182.00      260.75      442.52      549.31      711.23
Sudan                                0.75        0.81         2.06        3.12        4.62
Swaziland                            0.14        0.17         0.22        0.20        0.23
Tanzania                             0.74        0.67         0.66        2.00        0.47
Tunisia                              2.09        2.18         2.59        2.83        4.26
Uganda                               0.20        0.69         1.73        1.85        2.42
Zambia                               0.25        0.77         1.65        2.46        3.19
Zimbabwe                               -           -            -           -         4.76
Sources: Local stock markets and central banks, Bloomberg, S&P, Standard Bank, Arab Monetary Fund, Pazisma
Corporation          Number of listed companies

143. The number companies listed on African stock markets fell from 1 834 in
2002 to 1714 in 2006, that is a reduction of 120 companies over the five years.
This number is slightly higher than that of the total number of companies listed on
the financial markets in Malaysia Thailand (1 427) and is lower than the number
of companies listed in the London Stock Exchange (2 682) or the Madrid Stock
Exchange (3 223) in 2003.

144. In 2006, the CASE led with more than 603 enterprises listed, followed by
the JSE Limited with 401 companies. These two financial markets alone have
nearly 60% of the companies listed in Africa. Table 3.3 below shows the number
of companies listed on each African stock exchange in 2005 and 2006. It should
be noted that the number of companies listed dropped in the CASE from 744 in
2005 to 603 in 2006, that is a reduction of 141 companies and this accounts for
the trend observed. Five other financial markets witnessed a drop in the number
of companies listed as follows: Botswana (11), Nigeria (10), Nairobi (4) and
Algeria (1 out of 3 companies listed). Conversely, the JSE Limited (+13),

Casablanca Stock Exchange (+9) and Namibia Stock Exchange (+5) recorded an
increase in the number of companies lis ted over the same period.
Table 2.2 Number of listed companies, 2005-2006
Stock Exchange                                            2005                         2006
Algeria                                                   3                            2
Botswana                                                  28                           17
Cote d’Ivoire (BRVM)                                      39                           40
Egypt                                                     744                          603
Ghana                                                     30                           33
Kenya                                                     48                           44
Malawi                                                    10                           11
Mauritius                                                 38                           41
Morocco                                                   54                           63
Mozambique                                                2                            2
Namibia                                                   28                           33
Nigeria                                                   214                          204
South Africa                                              388                          401
Sudan                                                     49                           52
Swaziland                                                 6                            6
Tanzania                                                  8                            8
Tunisia                                                   45                           48
Uganda (Composite)                                        7                            8
Zambia                                                    14                           18
Zimbabwe                                                  79                           80
Sources: Local stock markets and central banks, Bloomberg, S&P, Standard Bank, Arab Monetary Fund, Pazisma

145. In 2006, three African stock markets (JSE Limited, CASE and Nigeria)
have more than 100 listed companies. These three stocks represent over 71% of
the total listed companies in Africa. Fourteen stocks have less than 50 titles
listed, while five have ten or less (Algeria, Uganda, Mozambique, Swaziland and

146. On the whole, African financial markets are thus quite small. If urgent
action is not taken to promote and merge these stock markets, their usefulness
for economic development will be insignificant.

                                                   30       Volume of Transactions

147. The volume of operations or transactions is the total number of deals
carried out on a stock exchange. Between 2002 and 2006, it moved from 86.4
billion US dollars to 368.3 billion US dollars, i.e. an overall increase of 76.5% for
the whole of Africa over this period. Johannesburg, Nairobi, Casablanca,
Namibia, Nigeria and Sudan are the only ones stock exchanges to have
experienced increases throughout that period. However, transactions on stock
exchanges in Africa have formed in 2006 only 0.5% of total transactions recorded
by the FIBV, confirming low overall liquidity of the stock market in Africa.

148. In 2006, the largest stock exchange in terms of traded shares was the JSE
Limited with transactions worth 311 billion dollars, accounting for 84.5% of the
continental total. It is followed, with 48.1 billion dollars by the CASE (13.3% of the
total). Lagos and Nairobi Stock Exchange lag behind with 3,4 billions and 1,4

149. All other African exchanges have each annual transactions amounting less
than one billion, some of them (Algeria, BRVM, Mozambique and Swaziland)
bring up the rear with less than one million dollars worth of transactions.

150. The volume of transactions compared to the GDP is low for a majority of
African stock markets. Although this ratio was 76.5% in South Africa in 2004, it
was only 7.5% in Egypt and less than 2% for most of them. The JSE is the only
one that can stand competition from stock markets in emerging countries, with
the 2004 ratio being 50.8% in Malaysia and 66.7% in Thailand.

151. For most of the stock markets of the continent, the volume of operations
increased overall in 2006 compared to 2002. However, only six financial markets
recorded a successive rise during the five years (JSE Limited, Nairobi,
Casablanca, Namibia, Nigeria and Sudan). In addition to these financial markets
are those of Tunis, Uganda and Egypt whose stock markets progressed during
four consecutive years, as from 2003. The volume of operations of the other
stock markets recorded rather inconsistent results.

152. With regard to volumes traded and stock exchange capitalization, there is
a close relationship between these two factors. This relationship between the
volume of operations and the stock market capitalisation represents the liquidity
of the financial market or the rate of rotation examined here below.       Liquidity ratio of the market or rotation rate

153. The rotation rate, ratio of the volume of transactions with the capital in
circulation or the number of securities open to the public, measures the degree of
liquidity of a security and gives a good indication on how easy it is for an investor
to enter and/or leave a market. In general, when an operator acquires a security,
he must be sure of the possibility of selling it when necessary. The higher the
liquidity ratio, the more cash there is on the financial market and the more this
can attract investors.
154. Going by the available data, it appears clearly that the African stock
exchanges have very little liquidity. Indeed, from 2002 to 2005, none of them
recorded a liquidity ratio higher than 50%, as against a liquidity ration varying
from 100 to 130% in 2003 for stock markets like Euronext, of Frankfurt or London
with the average being 66%. Nevertheless, the rotation rate of African stock
markets can compare with the financial markets of the new members of the
European Union that also have transitional economies, or Latin American stock
markets. In 2003, this rate was on the average 30%, close to those of several
small European or Latin America stock markets, i.e. 35%, 29% and 25%
respectively for Athens, Mexico City and Vienna, as against 1% for the
Luxemburg Stock Exchange.

155. It was only in 2006 that the CASE (Egypt) obtained a liquidity ratio of 52%.
The Johannesburg Stock Exchange comes second with 44%. The average ratio
during the period is 40% for JSE, 29% for Egypt, 17% for Morocco, 12% for
Tunisia, 10% for Nigeria, 7% for Kenya and 5% for Mauritius. Each of the other
stock markets of the continent has an average liquidity ratio less than or equal to
3.5%. Of these stock markets, at least five, including the BRVM have a ratio
lower than 1%.

156. These ratios, which are generally lower than 10%, indicate that only long-
term investments could be made on these stock markets as it is relatively difficult
for an investor to quickly buy and/or sell his securities there. Moreover, with the
exception of the JSE Limited and the CASE, African stock markets tend to be
expensive and saturated due to the very small number of share securities traded
there.      Yield

157. The yield of a share refers to the returns (paid or announced dividend and
other related emoluments) on invested share capital calculated using the selling
price of the said share. The yield determines the gain in terms of remuneration
on investment.

158. Generally, stock markets recorded high profits between 2002 and 2006.
That of the Malawi Stock Exchange was the highest in 2006 with a rate of
128.2%, followed by Mozambique (123.2%) and Morocco (87.2%). In 2006,
except for the Sudan Stock Exchange that had a negative yield, all the other 19
stock markets recorded returns on investment of between 3 and 128.2% in US
dollars and sixteen of them obtained yields higher than 10%. The cumulative
profit over the five years from 2002 to 2006 is higher than 100% for eleven
financial markets, including Egypt 928% and Zambia 526%.

Table 2.3 Yield, 2002-2006 (in millions of US $, end of period)
Stock Exchange                                 2002        2003       2004        2005         2006
Algeria                                        -           -          -           -            -
Botswana                                       31.8        22.4       20.6        -4.7         12.6
Cote d’Ivoire                                  13.55       23.31      24.39       11.92        10.6
Egypt                                          -1.80       75.27      120.60      151.67       7.57
Ghana                                          27.7        141.7      88          -30.5        2.9
Kenya                                          -1.2        111.5      4           46.6         47.6
Malawi                                         -35.6       -20.3      53.9        42.2         128.2
Mauritius                                      21.2        53.9       19.9        4.5          37.6
Morocco                                        -3.32       53.27      22.21       8.87         87.17
Mozambique                                     -           -          -           -            123.2
Namibia                                        -25.4       57.9       34.7        -3.6         16.53
Nigeria                                        3.6         51.7       28.2        2.3          36.34
South Africa                                   39.6        28.2       18          27.8         24.27
Sudan                                          -           -          -           0.50         -0.17
Swaziland                                      13.2        20.2       20.5        -11.5        14.55
Tanzania                                       -           -8.9       2.6         -12.2        13.4
Tunisia                                        -11.7       11.7       6.5         21.3         44.3
Uganda                                         -0.3        -2.7       15.4        -9.2         28.51
Zambia                                         -2.9        31.9       71.5        125.3        26.48
Zimbabwe                                       -58         25.7       58.8        138.00       14.1
Sources: Local stock exchanges and central banks, Bloomberg, S&P, Standard Bank, Arab Monetary Fund,
Pazism a Corporation

2.2.2            Bond markets

159. The second principal component of African stock exchanges is the bond
market. This market developed rapidly in recent years. Bonds are primarily
issued by states, with supranational or foreign financial institutions (IFC, ADB,
French Development Agency, etc), national financial institutions and non-
financial companies following far behind. Some analysts are of the opinion that
for African stock markets to develop, bonds should be issued to mobilise the
resources intended to finance basic integrating, industrial and social projects.

160. In the absence of a comprehensive table of statistical data on bond
markets, we will try to analyse the performances using the same indicators as

                                                   33      Capitalisation

161. On the whole, the levels of prices had a positive impact on bond
capitalisation in Africa. In North Africa, the CASE recorded a capitalisation of 63
billion Egyptian pounds in 2006 compared to 52 million in 2005, i.e. 11.7% of the
total stock market capitalisation distributed as follows: 10.9% for the State and
0.8% for private companies. In 2006, on the Tunisian stock exchange, the market
share of bonds stood at 0.9% of the total capitalisation of 4.6 billion dinars.

162. In West Africa, the BRVM recorded a strong capitalisation growth during
the last five years 2002-2006 as this aggregate on that regional stock exchange
moved from 158.1 billion CFA F in 2002 to more than 402.03 billion in 2006 i.e. a
60.7% rise. In Ghana, the bond market is dominated by the State with an
outstanding $ 260 million in 2006.

163. In East Africa, on the Kenyan stock exchange (NSE), the bond market
had an outstanding of 2.4 billion U.S. dollars in 2003.

164. In Southern Africa, the South African bond market, the largest in Africa,
had an outstanding of 737 billion rand or U.S. $ 105.5 at the end of 2006, far
ahead that of CASE, 11,269 billion dollars .      Volume of trade or transactions

165. The bond market of South Africa recorded an outstanding value of 2 024.9
billion U.S. dollars in 2007, after an increase of 25% over the year 2006. Bonds
issued by the private sector account for 30% of the total. Bond transactions on
the Stock Exchange of Namibia are more marginal, 161.8 million U.S. dollars. In
Egypt, the volume of bonds traded accounts for 5.9% of total transactions on the
CASE. In 2006 it rose to 11 billion Egyptian pounds after 8.9 billion in 2005, that
is to say an increase of 24%. This performance is mainly due to transactions on
bonds issued by the government in 2006 (360 million as against 161 million the
previous year). The amount of transactions requires the Nairobi Stock Exchange
increased by 697.9 million U.S. dollars in 2006 to 1 330.4 million in 2007. This
level of transaction far exceeds that seen in 2007 on the Exchange of Mauritius,
3.5 million.

166. As a conclusion, it can be said that constraints of size, volume of
operations and liquidity force African stock markets to function rather like closed
institutions where only some traders/dealers can handle the majority of
institutional investments needs. They thus find themselves isolated on the
international financial system because they happen to be of little interest to the
major managers of funds for whom the capacity to quickly move capital is of the

167. In addition, most of the countries have undertaken serious reforms to
boost the stock exchange sector. However, these reforms (instit uting or
strengthening the capacity of the structure responsible for regulating and

supervising activities and players; reviewing and adapting stock exchange and
accounting regulations to meet international standards; opening up markets to
foreign investors by reviewing the regulatory and fiscal framework; adopting the
electronic system of quotation and transactions; modernising clearing or payment
houses; reducing the time needed to settle transactions; harmonising the taxation
system of securities for regional stock markets; establishing a credit rating
agency; etc) are still inadequate if African capital markets are to develop fully,
trigger the issuance of new securities, be of interest to new national or regional
investors and really attract much more foreign investments which are very
necessary for the development of public infrastructure and private initiative.

168. Beyond the actions to be taken at the national level to increase the size,
volume of transactions and the liquidity of existing stock exc hanges, another
avenue worth exploring is regional or continental integration of these financial
markets in order to give them depth and liquidity. In this regard, the experiences
of the BRVM and the BVMAC as well as the merging of stock markets in other
parts of Africa are quite encouraging and thus go a long way to confirm the idea
that stock market integration or regionalisation is gradually taking root in the
continent and that only the nature of the process still has to be developed.


169. Recent attempts to consolidate stock markets around the world raised a
lot of debates and interest on the possible advantages to accrue from such an
initiative. Generally, these tendencies arise from the forces of globalisation,
which call for unity in order to reduce the cost of operations and increase their

170. It is therefore not surprising that the interest to grasp the advantages and
disadvantages of such alliances of stock markets is also gaining ground in Africa.
The need to set up a Pan-African stock exchange therefore stems from
successful experiences in other parts of the world as well as the motivation to
consolidate the splintered African financial markets with a view to helping them
enjoy the economies of scale, reduce costs and diversify their products, to
mention just a few points. On-going efforts, made particularly by the African
Securities Exchanges Association (ASEA), are an eloquent testimony of the
interest being shown in this endeavour. The main aim of this association, created
in 1993, is to provide a formal framework for mutual cooperation among stock
markets in Africa through various processes including information sharing and
providing assistance for the development of member stock exchanges.

171. A critical look at the existing literature indicates that Europe underwent
profound changes during the 1990s, implying the consolidation and integration of
stock exchanges. Similar trends were recorded in the Caribbean. Over recent
years, the Association of South East Asian Nations (ASEAN) also discussed the
need to carry out far-reaching reforms aimed at achieving financial integration,
including the integration of financial markets.

172. It is therefore imperative to carefully consider some of these experiences
and determine how they can be adopted and adapted to suit the African context.
It should be noted that although the pace for the integration of stock exchanges
in Africa has not been as fast as it was elsewhere, some associations of stock
exchanges have however been initiated, particularly during the 1990s. More
precisely, these associations were encouraged in fields such as technology
transfer, the harmonisation of rules and standards (including the quotation of
stock exchanges, clearing and settlement systems), and trans-border trade
activities, to mention only a few.

173. Thus, the creation of the African Stock Exchanges Association (ASEA),
the Committee of SADC Stock Exchanges (COSSE), the BRVM and the BVMAC,
and the signing of memorandums of understanding between stock exchanges in
other African regions are proof of the importance attached to the integration of
stock markets, even though it is done on very loose terms.

174. In the case of Europe, for example, the movement towards integrated
stock exchanges also began in the early 1990s, following the stiff competition
between traditional European financial markets and foreign stock markets. It is
worth noting that that the advent of the Euro played a big role in the process by
eliminating currency-related risks, so that investors can negotiate assets by
sector and not by country and be concerned more about liquidity.

175. Some big alliances took place in Europe, including the merger of the Paris,
Brussels and Amsterdam stock exchanges, which gave birth to Euronext, and the
integration of the stock exchanges in Scandinavian countries to create NOREX.
In the same vein, through parallel initiatives, Baltic countries also unified their
stock exchanges to form the OMX.

176. Several stock exchanges in South America also formed alliances with
other Latin American stock markets and with foreign stock exchanges. Caribbean
countries are also working towards creating a regional stock exchange. There
are currently seven stock markets in the region but three big ones (Barbados,
Jamaica and Trinidad and Tobago) could serve as the foundation for a regional
stock exchange.

177. Because of the above mentioned successful experiences, this chapter, as
earlier indicated, made use of some essential ingredients for consolidating and
merging stock exchanges to identify possible approaches to follow for setting up
a Pan-African stock exchange, including the costs, the advantages and hurdles
involved in the process.

3.1    Brief study of stock exchange associations

178. Before delving into an analysis of the various models that may be
suggested to guide decisions on the establishment of a Pan-African stock
exchange, it is important to quickly review the fundamental trends in regrouping
stock markets in Africa and in other parts of the world.

179. The experience gathered indicates that the formation of alliances and the
creation of networks within stock markets can be achieved through a myriad of
ways and means. The adopted mechanisms and models depend on the
operationality of existing stock exchanges and their capacity to put in place the
relevant networks, the degree of economic integration realised between the
countries concerned, the level of financial integration and the reasons justifying
the need to merge the stock markets concerned.

180. To a greater extent, the creation of links and the subsequent integration,
inter alia, call for profound reforms that can lead to the harmonisation of the
regulatory and legal frameworks necessary for the supervision of these stock
markets to be effective, including the technology transfer platforms with a view to
facilitating the efficient conduct of transactions. The latter point entails the putting
in place of physical infrastructure which is essential for linking up the stock
exchanges concerned as well as the adoption of a common set of rules and
standards listing of securities, clearing and settlement applicable to listed
companies or brokers/dealers.

181. The issues raised in the process for the consolidation of stock exchanges
justify the need to examine the various mechanisms and methods adopted, in
order to suggest possible models that the common stock exchange could draw

182. We will start by presenting some on-going experiences of stock exchange
integration in Africa before examining the various recent experiences of stock
market alliances in other parts of the world.

3.1.1 Experiences of stock exchange integration in Africa

183. African stock markets, which for the most part are a recent creation, have
for a few years now initiated moves to merge their activities, drawing lessons
from their limited viability and stimulated by the ASEA.      Southern Africa

184. Within the framework of the Southern African Development Community
(SADC), the Committee of SADC Stock Exchanges (COSSE) created in January
1997, initiated a strategy for the integration of the region’s stock markets through
automated negotiation systems by way of a common regional mechanism that is
accessible to all members. Also, COSSE has continued to promote the
harmonisation of the listing of securities, clearing and rules for the settlement of
transactions within the region.

185. In fact, all the stock exchanges in the SADC region have succeeded to
harmonise their listing rules by 2000, in accordance with the 13 principles of the
Johannesburg Stock Exchange. Today, national rules for the listing of securities
are identical within the region except for minor differences at the level of
accounting constraints and technical development.

186. At this juncture, it is necessary to note that the Namibia Stock Exchange is
today totally linked to the JSE Limited. The installation of the electronic trading
system of the JSE Limited in the Namibia Stock E xchange in November 1998,
through telecommunication links with the JSE Limited, was a major leap forward
towards harmonizing transactions within the region.

187. It should be noted that the JSE continues to offer not only the installation
of its transaction system but also technical assistance to the other stock markets
in the SADC region. As a matter of fact, these financial markets are always
reflecting on the best ways and means in which the JSE negotiation system
could be adopted as a regional platform as well as considering other
technological options for an integrated stock exchange network.

188. It is relevant to indicate that in 2003, the JSE Limited announced that it
had begun serious discussions with the Ghana, Namibia, Zambia and Zimbabwe
stock exchanges with the main aim being to establish a Pan-African council
under which major enterprises could conduct transactions on a virtual Pan-
African stock exchange. With such a structure, an eligible company could be
listed simultaneously on all the participating stock exchanges. As envisaged in
the project, the participating national stock exchanges would retain their
autonomy, as they will still be responsible for determining the regulations and the
type of sanctions to impose on their members and subscribers. At the same time,
the JSE Limited would be the supervisory authority of the new board of directors.
It shall immediately inform the national stock markets of any illegal practices.
Before the implementation of this structure, the other financial ma rkets outside
the SADC region must have harmonised their listing criteria with those of SADC.

189. It was expected that as soon as this alliance is finalised, other national
stock exchanges could join it and as such lay the groundwork of a Pan-African
stock exchange. The reason for making the JSE Limited the sole transaction
platform is to enable it enjoy economies of scale, reduce costs and improve
efficiency, at least in the short and medium terms, because this stock exchange
is the largest in Africa in terms of size and liquidity.

190. The lukewarm attitude being shown towards this project finds justification
in the fact that there is some fear it could lead to capital flight towards the JSE
Limited, thereby reducing the number of investors and issuers as well as the
volume of transactions in the other stock exchanges of the SADC region.

191. In the final analysis, the COSSE gives more importance to the adoption of
an automated and interconnected transactions system, as well as clearing and
settlement systems than the putting in place of a completely uniform, common
system for all the stock markets of the SADC region. This approach aimed at
harmonizing the rules, procedures and system is expected to help clear all
unwanted obstacles standing in the way o f integration.      East Africa

192. East African countries, especially Kenya, Uganda and Tanzania, have
equally taken steps to link up their stock exchanges by harmonising the listing of
securities, as well as clearing and settlement rules. These countries have been
joined recently by Rwanda with its Over-the-Counter Market.

193. To this end, many memorandums of understanding have been signed to
foster closer links. The Nairobi stock exchange is the flagship in this process
given its high level of development in the region. As such, it provided substantial
support to strengthening the capacity of the Dar-Es-Salaam Stock Exchange
(DSE) and to the Uganda Securities Exchange (USE) during their
commencement phases. Finally, the East African Securities Exchange has
agreed on a regional trading platform system that will commence May 2008.

194. The fact all these three countries are members of the East African
Community (EAC) and that they share a common colonial past as well as similar
legal framework makes it easier for the stock markets concerned to pull together.
The integration of the three stock exchanges concerned was achieved more
easily considering the good work done upstream in computerising their
transactions system and harmonising their regulatory and legislative frameworks.

195. This process is one of the most promising models of stock exchange
integration in the light of the above -mentioned favourable conditions. It therefore
becomes easy to see how sub-regional initiatives could be linked up to form a
regional stock exchange that would become the chief anchor for the Pan-African
stock exchange. The consolidation of regional stock exchanges on the continent
could be done later, when the appropriate conditions would have been put in
place. In fact, considering the complexity of and obstacles inherent with the
integration of stock exchanges, it should be noted that most of the officials
interviewed during the survey on this topic carried out by the African Union
Commission seem to be strongly in favour of concentrating efforts on regional
and sub-regional levels before thinking of establishing a continental stock
exchange.      West Africa

196. The regional stock exchange (BVRM) is a regional stock exchange made
up of eight member countries of the West African Economic and Monetary Union
(WAEMU). Created in 1998, it has its headquarters in Abidjan (Côte d’Ivoire) and
has branches in each of the countries. To a large extent, the BRVM is a private
company with a 13.4% equity investment by the 8 (eight) States mentioned

197. Transactions on the BVRM are carried out through a satellite network to
which each of the country branches is connected, where brokers and foreign
exchange dealers can place and deliver orders on the central platform in Abidjan.

198. Although the volume of transactions on the BRVM is still low and irregular,
the partnership between the participating countries subsists. The existence of a
common colonial heritage seen notably through homogeneous legal systems and
the use of a common currency, contributed to easily overcome some bottlenecks
that were also observed in other attempts to form regional stock exchanges.

199. Within the West African Monetary Zone (WAMZ), ECOWAS countries non-
members of the WAEMU recently started discussions on the creation of a
regional stock exchange to be born mainly out of the Ghana and Nigeria stock
exchanges that are already operational. A feasibility study on this project has
been finalized and its findings will soon be submitted to the relevant authorities of
the West African Monetary Institute (WAMI).

200. It is also worth mentioning that conciliation moves have been made
between ECOWAS stock exchanges, particularly the BRVM and the stock
exchanges in Ghana and Nigeria. Such moves are mainly aimed at facilitating
the development of cross quotation on the various stock exchanges of the region.
These operations have already been carried out but they are still limited to a few

3.1.2 Experiences of stock exchange integration in the rest of the world

201. With the globalisation of trade and the deregulation of international
financial transactions, a wave of stock market integrations took place in the late
1980s. To conclude, it should be noted that the integration mainly concerned
average size stock exchanges because in Europe the Frankfurt and London
stock exchanges are still autonomous after some attempts at merging with other
European stock markets or the New York Stock Exchange.      ASEAN

202. To support efforts aimed at integrating their economy, ASEAN countries
agreed on a two-component approach for the development of a regional stock
exchange. Component one is concerned with strengthening institutional capacity
in fields necessary for the development of stock markets, notably the legal
frameworks, and the harmonisation of rules and regulatory activities, and market

203. Component two is concerned with rationalising initiatives to foster greater
cross-border collaboration between the stock exchanges of the region. The man
priority areas include strengthening training networks, diversification of financial
products and of links between the stock markets, as well as the harmonisation of
stock exchange standards (including in securities listing, clearing a nd settlement

204. ASEAN is now examining the implementation of various proposals. The
different efforts can be brought under three domains. The first domain is aimed at
the harmonisation of transactions, of clearing and settlement rules, etc. Pursuant
to the Forum of ASEAN financial markets, stock exchange regulatory authorities
of the ASEAN region went beyond just improving the governance of their
respective stock exchanges and rules under which information from the various
stock markets may be disclosed. They are also working together to harmonise
standards on disclosure, proper representation of brokers from each country in
the respective stock markets, bookkeeping and professional qualifications. The
aim of such a process is to reduce the costs of products made by the issuers
who comply with a range of regulations and to increase liquidity and improve the
efficiency of transactions, clearing and settlement operations.

205. The second series of effort is hinged on improving access to the market by
improving negotiation links. These links are expected to help increase liquidity on
the various stock markets as well as provide a wider range of products to
investors in each country. In the same light, ASEAN governments and stock
exchanges have also set up a working group to explore the various types of
alliances and links within their structures. Their hope is that an integrated stock
market will be able to provide investors with many specific access points to
securities in the ASEAN region. Furthermore, a proposal has been made to
create a Pan-ASEAN clearinghouse similar to Euroclear. This initiative is
expected to improve transactions in real time to the mutual benefit of the
countries concerned.

206. The third domain of activities concerns commo n treatment. This term
refers to the lifting of restrictions on the capital account to see to it that all
obstacles to cross-border transactions are cleared, with a view to promoting
regional economic integration and reducing the costs of transactions. In keeping
with this objective, the ASEAN is also working towards instituting a harmonized
taxation system.       NOREX

207. The NOREX, Northern Stock Exchange, is a strategic alliance between
four Scandinavian stock markets: Copenhagen Stock Exchange, Iceland Stock
Exchange, Oslo and Stockholm Stock Exchanges. Together, these financial
markets cover 80% of the stock market and 90% of the bond market of
Scandinavian countries. NOREX has a common system for all transactions on
securities or shares. It seeks to harmonise the rules and criteria between stock
markets with regard to listing of securities and transactions.

208. This alliance is based on cooperation between independent stock
exchanges and operates following numerous principles including: (i) crossed
membership where member companies are encouraged to list their securities on
all NOREX stock exchanges; (ii) a single point of liquidity as the issuing
companies are encouraged to list their securities on only one NOREX member
stock exchange; (iii) a common negotiation system whereby NOREX stock
exchanges operate using a single system, the SAXESS, such that they can
benefit from the economies of scale; and (iv) a common regulatory framework for
transactions, listing of securities, licensing of brokers/dealers, membership and
authorisation to undertake regulatory changes.      EURONEXT

209. Euronext was created in September 2000, following the merger of the
Paris (SBF), Amsterdam and Brussels Stock Exchanges. It was created as a
result of strong demand from the market, in the backdrop of a favourable climate
for integration of the European stock market in particular and the financial market
in general, as well as to satisfy the increasing liquidity need and cost reduction
resulting from the introduction of the Euro. It has the biggest capital market in
Europe (a total of 51 %), that of raw materials and is first for options.

210. Although the jurisdictions and licences (approvals) of each stock market
are maintained, Euronext provides a single opening for operations for the three
stock exchanges. Transactions are centralised and a uniform negotiation
platform, the driving force for NSC transactions of the Paris Stock Exchange, is
thus used to determine a single price for each security. The shares are listed at
national level and companies can select their place of transaction among the tree
stock exchanges.

211. The three stock exchanges have become full-fledged branches of
Euronext NV, a Dutch portfolio company, and its names have been changed to
Euronext Paris, Euronext Brussels and Euronext Amsterdam. As a result of this
merger, Euronext NV is now 60 % owned by the former shareholders of SBF,
32% owned by the former AEX and the former purchasers of certificates of
participation issued by AEX, and 8 % owned by the former BXS.

212. Although the securities still remained listed in the initial market, all the
financial instruments are traded on a single platform, while listing on the market
and the rules of transactions will subsequently be harmonised, leading to a single
manual of rules. The issuers are subjected to the same rules of supervision and
control, information obligation and public bids set by regulators in the countries
where their securities are listed.

213. Thus, companies wishing to be listed on Euronext can opt to do so in any
one of the three stock exchanges. In determining their point of entry, they
automatically chose their country of origin as concerns regulations. The
jurisdiction wherein the listing agreement is signed determines the market
supervision department the regulator shall address in case of irregularity in

214. Participants in the market are subject to the supervision of the regulator of
the country from where they received their main (initial) licence. In spite of the
merger, the three stock exchanges have maintained their separate legal status
on regulations. Since its creation, Euronext has bought over the London
International Financial Futures Exchange, and has also merged with the Lisbon
Stock Exchange.

3.2.   Models suggested for the Pan-African stock exchange

215. The ideas and options for a Pan-African Stock Exchange proposed in this
study arise from discussions with various officials of the bodies concerned,
during missions carried out to some member countries of the African Union, as
well as answers provided in questionnaires sent out to countries of the Union.
This reflection has also tried to learn lessons from some experiences from the
field both in Africa and other parts of the world . The presentation of possible
options shall be accompanied by a succinct analysis of certain cost benefits
concerned with adopting them.

3.2.1 Option 1: National / regional stock exchanges and a Pan-African
      stock exchange

216. According to this model, national stock exchanges shall be used as
negotiation platforms for local investors and issuers, who are not capable of
being listed in more developed stock exchanges that have difficult and expensive
standards, while at the same time, there will be a Pan-African stock exchange
aimed at enabling big companies that want to raise huge amounts, to address
institutional and foreign investors, or investors with a broad financial base.

217. It should be emphasised that the Pan-African stock exchange should be
physically present in a country accepted by all participating countries. Besides its
status of place of conduct of all transactions, it will also play the role of regulatory
body. This option presupposes that all the stock markets concerned are
electronically interconnected.
218. In order to ensure that as soon as the Pan-African stock market is
instituted it serves all segments of the market, two different compartments would
be put in place. The main compartment shall cover the specific needs of large
companies that find that the present stock markets are too small to meet up with
their needs in terms of resources and diversified financial products. These
companies have to abide by more stringent standards. Apart from services
offered to African companies, the main compartment shall also accept large
international firms, including venture capital companies that wish to invest their
excess resources in Africa.

219. The other compartment shall serve small and medium companies. Thus
the conditions to take part in it shall be less stringent as compared to the main

220. As concern regulations, an independent regulatory institution, made up of
members of the various national and regional jurisdictions, could also be created
to ensure that regulations in force are respected and help in settling any conflicts
that may arise.

221. An expected advantage of this model remains the maintenance on the
continent of large companies that will be able to raise the volume of capital
desired at a competitive cost. This option shall therefore make it possible to avoid
the migration of these large companies to the financial markets of industrial
countries, as it was the case with the Anglo-American company that has
repositioned itself at the London Stock Exchange afte r leaving the JSE.

222. However, this model poses the problem of how to build an institution
responsible, inter alia, for regulating various stock exchanges. Moreover, it raises
the question of how to finance the infrastructure necessary for the liaison
between the stock markets belonging to the system, especially the automation of
transactions as well as clearing and settlement systems.      The realisation of this option requires overcoming challenges

223. The first challenge of this model presupposes that all the stock markets
are linked electronically, which is not the case for several stock markets that are
currently operational. In order to achieve this goal, huge investments are

224. The second challenge of this option is the harmonisation of various active
transaction systems. In effect, existing systems should be able to communicate
with one another before starting a Pan-African stock exchange project.

225. The third challenge concerns related risks, given the diverse legislative
and regulatory systems, currencies used, governance structures and institutional
frameworks in force.

226. The fourth challenge is that all African economies and stock exchanges
are at varying stages of development while the need to develop stock markets is
not well understood by all. Mention should also be given to the political
dimension surrounding this issue, translated by the reticence of some countries
to merge or support efforts to integrate stock markets, motivated for the most part
by the willingness to safeguard their sovereignty and take control of the process .

227. Answers given by most officials questioned in the survey carried out by the
African Union Commission seem to accept the idea of consolidating stock
markets at the regional level as opposed to continental integration. A Pan-African
stock exchange looked like an objective that is both ambitious and unrealistic for
3.2.2 Option 2: National/regional stock markets with an existing African
       Financial Market as a Continental Platform

228. This model contains several characteristics similar to the former, except
for the existing financial market chosen for its level of sophistication and its
predominant size in Africa, is proposed as a central platform of transactions for
other stock markets. The rules used by this market shall inspire the regulatory
standards applied to other stock markets. In order to have compatibility between
the various negotiation systems, the stock markets concerned should improve
their technology and harmonise their regulatory standards.

229. This model is a hybrid of the vertical and bottom – top approaches. By
linking stock markets that are currently operational to this stock market place that
should be the JSE, liquidity will increase and price fixing will improve. The
implementation of this option shall start at the SADC before developing towards
integration at continental level. Its main latent challenge is how to make the JSE
Ltd the platform of the Pan-African stock exchange. The realisation of this also
poses the problem of availability of funds for electronic installations.

230. It is also proposed that the JSE serves as a platform for transactions and
on the strength of its existing electronic technology, interested countries would
develop a flourishing market. The development of such an infrastructure for the
entire continent also has a very high financial cost.

231. The AU may also play an important role by contributing in setting up an
appropriate institutional body to regulate the market, in close collaboration with
regional economic communities. On the whole, an acceptable model for all
member countries must satisfy several conditions including: (i) protection of the
assets of various stock exchanges; (ii) strengthening the viability of existing stock
markets; (iii) creation of an opportunity for SME to raise capital, on the basis of
equity; and (iv) the generation of tangible benefits for the economies concerned.

232. This model presents a certain number of challenges including the
prevalence of different legal frameworks and the situation that most African
countries are at varying stages of development. However, as earlier mentioned,
some stock markets in the SADC region are reticent about the integration of
stock markets geared towards initiatives supported by the JSE. These stock
markets are hesitant to use the JSE as their transaction platform, for the fear that
their listed companies may eventually migrate to JSE.

233. Furthermore, it was observed that connecting their markets to the JSE will
require considerable financial resources that most of them do not have. However,
the alliance of African stock markets with the JSE will foster improvements in
overall liquidity, the volume of transactions, the clearing and settlement system,
and the adoption of international good practices.

3.2.3 Option 3: Integrated transaction platform, while maintaining
      national/regional stock markets

234. Another suggested option draws inspiration from the Euronext model that
allows for various stock markets to coexist alongside a continental stock
exchange. In this federal-type system, each stock market shall be regulated by
the national or regional supervisory agency and conserve its own legal statute.

235. Although companies may remain listed on their original stock markets, all
the securities shall be negotiated on a single integrated platform and listing and
transaction rules shall eventually be harmonised, resulting in a single manual
regulating the market. Issuers shall also be subjected to supervision and control
rules, information obligation and public bids determined by regulators in the stock
markets of the country where they are listed.

236. In practical terms, companies wishing to be listed on the stock market
would do that in all the stock markets that are operational. When determining
their point of entry, they would be automatically choosing their regulator.
Intermediaries may intervene in all the stock markets but will be also subjected to
the supervision of the regulator of the country where their main licence was
granted.       Advantages of this model

237. The first anticipated advantage of this option is that, in the African context,
the Euronext model shall make it possible to preserve some form of sovereignty
and conditions for the functioning of the local stock market.

238. Secondly, this model will contribute in creating a simple and flexible
regulatory environment for companies listed on the stock market, approved
intermediaries and the stocks themselves.

239. Thirdly, the institution of a single negotiation platform will increase liquidity,
transparency and improve price fixing.

240. Fourthly, this option will make it cheaper and easier to access through a
simple connection a wide range of securities in each of the stock markets, which
is not possible at the moment. Consequently, a Pan-African stock exchange
designed on this model shall stimulate activities and attract new and big potential
actors who do not consider the separated markets sufficient to place their capital.       Disadvantages and costs of this model

241. To maintain in activity small and /or non viable stock markets engenders
high costs and reduces synergy potentials that may be generated by the merger
of transaction platforms at continental level.

3.2.4 Option 4: Integration through transaction on the Internet

242. This model proposes the integration of African stock markets through
transboundary transactions using the Internet. It is based on the freedom given to
African investors to carry out stock operations on all African stock markets, in
their countries and out of their boundaries. This also presupposes therefore that
intermediaries can carry out transboundary transactions and clearing and

243. Stock markets are responsible to provide automated negotiation and
compensation systems as well as efficient Internet information sites on the

244. Like the other models, this option is also conditioned by the dismantling of
exchange control and convertibility of the currencies of interested countries. In
order to implement it, the stock exchanges involved have to sign a protocol
agreement on transboundary transactions. Intermediaries shall also have to be
linked by agreements, approved by the control authorities of each party
concerned, on the transactions, clearing and settlement.

245. Finally, stringent training of all the actors as well as control authorities
involved in transboundary transactions, in view of the legal and operational
requirements of various participating stock markets, is indispensable.      Advantages of this model

246. This model allows for streamlined harmonisation of regulations as well as
negotiation and settlement systems. Moreover, there is no obligation for the
transformation of existing stock markets but it favours a gradual development of
activities and liquidity on the basis of the development needs of the stock market.
247. On the whole, a transboundary transaction through the internet is an initial
means and process to achieving the long term integration of stock markets. The
implementation of this option shall not disrupt current practices of the various
stock markets, their rules, regulations or procedures.

248. Moreover, it does not require investments from intermediaries and central
filing systems. All that is important is an agreement between stakeholders in the
process, notably stock exchanges and stockbrokers and the setting up of
adequate information and communication infrastructures as well as training and
awareness programmes for participants in the market.

                                        47      Disadvantages and costs of this option

249. For stock exchanges that do not have established infrastructures, the
required investments are inevitable. Equipment fees benefiting intermediary
participants of various countries should be shared between them. However, the
setting up of this type of system does not seem to be easy and does not favour
the fast integration of African stock markets for it presupposes good knowledge
of various national and regional rules as well as the complex evolution of net
benefits made from the transactions realised.

3.2.5 Option 5: Gradual integration

250. This model promotes the idea that stock exchanges establish close
alliances to ensure that there is consolidation at the level of regional economic
communities and sub-regions. It also recommends a gradualist approach for the
creation of the Pan-African stock exchange.

251. This option is inspired by the OMX model adopted by the Baltic States,
where several stock markets are linked up and harmonised regulations and
standards allow for transboundary listing on each of the member stock
exchanges. The pre-existing stock exchanges are maintained to cater for
national sentiments and ensure that national or regional stock markets satisfy the
specific needs of each country involved.

252. According to this model, a Pan-African stock market may emerge later,
after significant progress has been made at regional and sub-regional levels.
This process of integration of stock exchanges should be guided by the private
sector instead of being rooted in political imperatives. Consequently, it is
proposed to concentrate efforts on encouraging the harmonisation of standards
at a regional level, by basing itself on international good practices, before getting
into a project to create a continental stock market. Thus, a big-bang type
approach is not recommended.

253. Prior to the start of the establishing phase of a Pan-African stock market, it
will be indispensable to examine progress made as prerequisites. This evaluation
should be about some key indicators such as the level of harmonisation of legal,
regulatory, fiscal and accounting frameworks, the degree of sharing activities,
clearing and settlement platforms, etc.

254. There are a number of ongoing initiatives between the existing stock
markets towards promoting harmonisation of the rules and standards in West
Africa, in Southern Africa and East Africa. This point therefore gives grounds on
the need for a model that is adapted to the regional context.

255. Serious obstacles still exist, provoked by the widespread use of many
different currencies, varying legal and accounting systems and transaction
platforms, as well as the lack of a strong political will to give impetus to the
changes required for the harmonisation of national regulations and systems.

3.3       Summary of benefits of the integration of African stock exchanges

256. The success of any consolidation or merger of companies depends on the
synergy created following the realisation of this operation. As concerns the
African stock exchange, the question is to know the extent of the integration of
their transactions, clearing and settlement systems (including the ensuing costs)
and to know how the credibility of this operation is viewed by issuers, investors
and intermediaries in the market.

257. Consolidation of the African stock markets will probably lead to non
negligible gains for the financial sector, participating companies and African
economies. In general, the integrated stock exchanges have had high scale
savings both at the level of its running and their transactions (Pagano, 1989;
Stein 2001). Operational economies of scale can emerge from the creation of
compatible transaction platforms while economies of scale of negotiation can be
realised from the strengthened liquidity and reduced fragmentations of the

258. The integration of stock exchanges has also facilitated the elimination of
redundant investments from various stock market participants. Given that
negotiation systems have similar baseline architectures, a merger of stock
exchanges or the sharing of a common platform improves overall efficiency. This
also benefits financial intermediaries who operate transboundary transactions. In
this regard, a consolidation of stock exchanges may lead to greater
standardisation of negotiation formats used by the financial sector.

Table 3.1 Preferences for various models of the Pan-African stock exchange
                                                                  Total    of
                                                             No   responses     %      Weighting
 Based on existing stock exchanges                           16       36        44,4   30,2
 Creation and connection of national stock exchanges         11       36        30,6   20,8
 Creation and connection of regional stock exchanges         16       36        44,4   30,2
 Single common supervisor for A frican financial markets     6        36        16,7   11,3
 Creation of a continental stock exchange independent from            36
 existing stock exchanges                                    3                  8,3    5,7
 Others                                                      1        36        2,8    1,9
Source: African Union Commission Survey

259. As concerns improving market liquidity, the compatibility of negotiation
platforms on the continent, by reducing transboundary operation costs, should
attract new issuers and investors and increase the volume of transactions. In
fact, when seller and buyers are few and they arrive sporadically to the market,
they may not meet immediately and huge price fluctuations may result (Pagano,

3.4       Summary of the challenges to overcome for the integration of stock
          exchanges in Africa

260. The assessment of the various options for integrating African stock
exchanges recommended above has shown that basic challenges are still there
to achieve this objective. We are going to give a brief analysis of these
challenges and possible means of overcoming them here below.

3.4.1 Legal and regulatory differences

261. The prevailing legal and regulatory differences in Africa are probably going
to obstruct the consolidation of existing stock exchanges and the project of
creating the Pan-African stock exchange. In the immediate, disparities between
national regulations discourage transboundary transactions for investors and
companies have to be familiar with the regulations of various countries. There
are for example significant differences in the requirements of listing as well as in
negotiation practice, even at regional level. Attempts at harmonising these
systems at continental level will certainly face serious difficulties.

3.4.2 Multiplicity of regulators

262. If market participants are faced with many regulators when operating in
various countries, they risk facing regulatory uncertainties and complexities, and
high costs directly when they have to co mply with various regulations, and
indirectly when they have to pay for services of several regulators at the same
time. These problems can be obvious in all areas that are subject to supervision
and for all market participants.

263. Legal and regulatory obstacles of all kinds may slow down integration,
including differences between sanction regimes, ownership restrictions for
foreigners, exigencies for the creation of local companies and restrictions
imposed on local issuers, to intermediaries and investors in providing
transboundary services.

3.4.3 Differentiation of products

264. Potential economies of scale offered by a Pan-African stock exchange
cannot necessarily mean that such a possibility represents the most efficient
structure as concerns differentiation of products. Investors and companies may
prefer to be served by a variety of stock exchanges that offer distinct products
targeting specific clients, instead of a single continental stock market.
Consequently, though it would reduce the number of independent operational
stock markets and thus improve their liquidity, consolidation may not produce
effective, efficient and credible results that satisfy all market participants.
Maintaining various stock exchanges, even if they operate below their optimum
capacity, may continue to serve their clientele.

3.4.4 Variances in accounting standards and fiscal systems

265. The diversity of accounting and fiscal systems is another obstacle. The
standards on information disclosures and accounting vary widely across the
continent, due for the most part to colonial heritage. A good example of this
situation is that the former English and French colonies still continue to have
different accounting systems for efforts aimed at encouraging their convergence
have been fruitless. Now, the divergences between the fiscal and accounting
systems may disrupt stock flow. In particular, accounting differences may hamper
the capacities of market participants to analyse and compare financial
statements, and thus to engage in stock market operations.

266. Tax payment is also unbalanced in Africa with various tax systems and
various tax collection mechanisms as well as the existence of bilateral treaties of
double taxing. Furthermore, several governments have adopted policies that give
priority to domestic investment by nationals often with favourable tax payments.
In some countries, pension funds and insurance companies are compelled to
lodge their resources in national financial instruments.

3.4.5 Information costs and prejudices of country of origin

 267. In Africa, the consolidation of stock exchanges may be slowed down by
high information costs associated to transboundary transactions. Investors, in
Africa and other regions of the third world, often think that cultural and linguistic
differences as well as geographical distances between local and foreign markets
make access to information on foreign capital more difficult and expensive to
obtain. In fact, information costs have been considered as an essential reason for
investors to be chauvinistic and to show notable preference for holding assets of
their country, in spite of the benefits of diversifying portfolios.

268. Among the points where there are high transaction costs are
transboundary listing, information dissemination, routing of orders, negotiation,
clearing and settlement.

3.4.6 Fragmentation of trading, clearing and settlement systems

 269. The diversity of negotiation, clearing and settlement systems also block
the integration of stock exchanges. This situation that is characteristic of Africa,
results in extremely high transaction costs and slows down effective connection
of existing stock markets.

3.4.7 Technological aspects

270. Of the many cooperation attempts initiated between stock markets, very
few have been concretely been implemented, and, amongst those that have
been implemented, most have failed. Several reasons explain this outcome,
especially technology. Often, more time and more resources are required to
conceive an appropriate technology for stock market connection infrastructures
that is often not understood or anticipated at the start. According to various
officials met during the survey on the Pan-African stock exchange, the question
of knowing who finances the required technology to ensure the link between
national stock exchanges has often been raised.

3.4.8 Governance

271. Governance influences the development and success of alliances that are
not neutral to the various stakeholders of the participating stock markets.
Governance structures of stock exchanges that collaborate among themselves
determine how the benefits obtained by the system will be shared. If these
stakeholders think that their interests may be in danger, they have the power to
change or block its execution.

272. Co-companies may also result in conflicts both within an institution and
between participating institutions and those that are supposed to work together.
The resolution of these conflicts may depend not only on contractual agreements
signed between the parties, but also on their relative negotiation power and on
the good will of public authorities.

3.4.9 Implementation of credible contractual engagements

273. The difficulty of creating credible contractual engagements between
partners is raised in the realisation of the project of a single Pan-African stock
market. In order to circumscribe this difficulty, such agreements should initially
appear to be beneficial to the participants and continue to be so in a changing
environment. If material circumstances vary, as is often the case, one or several
participatory entities can decide that the initial agreement is no longer
appropriate. However, more importantly, even if a participatory stock market can
be compelled to take an action that is deemed unfavourable, market participants
carrying out stock transactions would not be compelled to be in this alliance.

274. Thus, it is useless to compel an unwilling stock market to continue to
honour an initial participation agreement without active support from its clients
and members.

3.4.10       Lack of political will

275. The process of African integration remains problematic because of
insufficient commitment from high political authorities to implement action plans.
To a great extent, this problem is because Africa is still the most balkanised
continent on earth, especially because of the colonial heritage. Furthermore, the
apprehension of losing national sovereignty is another major challenge with
regard to abiding to regional commitments. From discussions held with
representatives of stock exchanges, these fears and the possible disappearance
of their institution are often raised as the main reasons for the difficulty of
consolidating stock exchanges.

3.5      Way forward

276. Considering the various possible options of integrating stock markets, it
will be interesting to look at the lessons that may be learnt from experiences in
Europe, the United States and ASEAN, to advance on the path towards a Pan-
African stock exchange.

277. Even if member countries of the African Union chose a different itinerary,
from that of these regions, it is a well-known fact that these stock markets have a
well-established practice in the field. Also, serious lessons can be learnt on how
to promote stock market integration in Africa and to lay solid foundation for the
creation of the Pan-African stock exchange.
278. Here below, we are attempting to briefly review some of the important
lessons and to define ways to be followed.

      The integration of the African stock market will be an extremely long
       process that will require significant structural changes, needed technology
       and infrastructure, appropriate legal, regulatory and accounting staff and
       most importantly the political will. Consequently, in order to progress,
       there is no need to reinvent the wheel. The best choice for African
       countries will be to open up to new and practical ideas while adapting
       them to their national or regional situation.

      Three lessons may be drawn, especially from the experience of the
       BRVM. Firstly, a long time is required to build a regionally integrated stock
       exchange. Secondly, the creation of a regional exchange means that the
       latter will be used by or will integrate other stock markets. The BRVM
       experience shows that the financial sector of countries involved remains
       fragmented and it seems that this regional stock market has raised many
       substantial benefits for the economies of the participatory countries.
       Thirdly, as concerns this last point, the viability of any regional or
       continental project should be carefully evaluated before it starts.
       Participants of the private sector, contrary to regulators, central banks or
       other public institutions, are urged to determine if expenses on a
       particular integration project is worth it, especially when they invest their
       own funds.

      Two simple lessons are obvious from the NOREX case. Firstly, it is
       possible to agree to successfully execute a regional cooperative project
       between stock markets within a relatively short period of time. Secondly,
       though it is difficult to measure it formally, the common culture of the
       Scandinavian countries seems to have been a significant factor in the
       success of the venture. A careful study of the African landscape gives us
       an image of diverse cultures, languages, political, legislative and
       economic systems, accounting and fiscal regulations, levels of
       development, etc. Initiatives aimed at creating the Pan-African stock
       exchange should take full account of this situation. The approach retained
       will be to initially concentrate integration efforts on countries with very
       close historical, cultural and economic ties like the East African
       Community, UEMOA, CEMAC, UMA and SADC.

      It seems premature to give the exact structure, the model, the establishing
       period or the viability of the Pan-African stock exchange. Nevertheless, we
       have attempted to propose in the foregoing some possible options. Many
       obstacles exist in all areas relating to the running of the regional or
       continental stock market: regulatory and legal disparities; differences
       between negotiation, clearing and settlement systems; attribution of
       exclusive negotiation rights for nationals or natives of a region. To forge
       ahead, African governments can play an important role in the
       transformation of existing stock exchanges. For example, they may
       facilitate the integration process by encouraging competition for
    transactions between stock exchanges instead of following protectionist
    strategies. Competition may be stimulated by ensuring that there is
    regulatory standardisation between markets and by enabling freer
    transactions according to various scenarios. The acquisition of modern
    technology is another crucial area, especially the adoption of automated
    negotiation systems by all the stock exchanges.

   If stock exchanges have to be co nsidered as a realistic option to
    strengthen integration of African financial markets, they have to come up
    with clear benefits to the companies concerned and to the economies in
    which they operate. The most tangible indicators of the economic benefits
    are related to profit and growth. Economic research proves that stock
    listing improves the probability of turnover increase and rise in the profits
    of listed companies as compared to those that are not. Thus, any attempt
    to create the Pan-African stock market should take into consideration the
    commercial and economic viability of the project proper.

   It is observed that the activity of stock markets in Africa is currently less
    effective partly because of information asymmetries that exist between key
    investors and those that are out of their pool of preference. These
    inefficiencies are further accentuated for small companies that are
    geographically removed and that have limited capacities in terms of level
    of sophistication. The lack of information on some aspects of stock
    markets (regulations, listing development, exchange rates, development of
    the financial situation and company strategies, allocation policies of
    investors, available financial instruments, documentary files on the life of
    and activities of companies, etc) can block regional integration. It is crucial
    to look into these bottlenecks if the Pan-African stock exchange has to be
    a reality.

   Without a convertible currency and the lifting of exchange control, the
    development of stock markets in particular and financial markets in
    general shall be reduced. It is also recommended that African
    governments make efforts to promote closer monetary integration in order
    to strengthen transboundary stock market transactions.

   Several lessons can also be learnt from the Euronext experience. Firstly, it
    is possible to merge big stock exchanges with each having strong
    traditions of national sovereignty and nurturing the ambition of becoming a
    powerful financial centre, when the governments involved are politically
    committed, as the European economic integration has shown. In the same
    vein, the leadership of the private sector in this process, as also shown
    from the alliances and mergers in Europe, is very important. Secondly, in
    order to carry on with successful mergers of stock exchanges, it is
    essential to have the support of all the supervisory authorities of the
    countries concerned. Thirdly, clarity and simplicity in the ownership
    structures of markets and regulator environments are attractive elements
    for participants of the market.

         Several conditions need to be met prior to the creation of an efficient
          regional or continental stock exchange. Firstly, there is need to create the
          regional connectivity by using state of the art technologies to improve on
          communication between intermediaries of stock holders and small
          investors. Secondly, it is urgent for countries to encourage the idea of
          creating a single negotiation platform in accordance with uniformed
          regulations. Thirdly, African countries have to encourage initiatives that
          aim at promoting transboundary clearing and settlement or the creation of
          links between central depositories of various stocks. Fourthly, the
          integration of African stock exchanges will continue to be rooted on
          progress made in harmonising legislation on stocks and shares, mainly
          the creation of a common regulatory body with real authority to supervise
          and regulate current stock markets, at least at regional level.

3.6       Conclusions

279. This chapter has reviewed efforts aimed at close alliances between
African stock exchanges. Successful integration experiences were presented
with the aim of engaging brainstorming on various possible options for the
creation of a Pan-African stock exchange.

280. We have also identified the possible forms that the Pan-African stock
exchange may take using the discussions we had with officials of various
institutions interested in this project and the responses of the related
questionnaire. But it is still very early to anticipate the exact structure or time limit
for the creation of the Pan-African stock market because of various obstacles
highlighted above.

281. Without any figured evaluation, this chapter has also attempted to highlight
some cost benefits related to each of the options or models, with the aim of
throwing light on certain challenges that may come up in the creation of the Pan-
African stock exchange. However, it should be underlined that, as integration
efforts will take root, national stock markets will benefit from economies of scale,
both in their operations and their transactions as mentioned above.

282. It has been demonstrated that although in a competitive environment
market forces converge toward efficient solutions, there is need for a dose of
public intervention (harmonisation of legal, regulatory and accounting systems;
promotion of negotiation systems, clearing and settlement, etc.) to foster faster

283. In order to forge ahead, African governments have to play an important
role in transforming present stock exchanges and the entire landscape where
they operate. In fact, it may for example facilitate the process by encouraging
competition within stock markets rather than waste time and money promoting
introvert policies that block efforts and undermine innovation. Competition may
be stimulated by harmonisation of rules and standards on the markets and by
allowing transboundary activities. The profits generated would certainly benefit
investors and companies in the form of improved financial services, fall in costs

of transaction and capital. Finally, progress made on these fronts will determine
how the Pan-African stock exchange may see the light of day.


284. The idea of a Pan-African stock exchange may on a first look seem
unrealistic, but it will make it possible to develop a long-term strategy for the
integration of African stock exchanges, the development of financial sector.
Furthermore, the experiences from other parts of the world show that though
there may be some hurdles on the way, what is determinant is the commitment of
countries and actors concerned in the realisation of set objectives. Besides, it is
possible to avoid errors committed in the countries studied with regards to the
integration process of the financial market in general and the stock market in

285. An analysis of the development of the macro-economic, institutional, fiscal
and technical context of African stock exchanges, their performances as well
their experiences in the integration of stock markets both in Africa and the rest of
the world lead us to the conclusion that unification of existing stock exchanges on
the continent foster the development of the stock market and beyond the
financing of investments and economic growth in Africa.

286. Given the limited size of all African stock exchanges put together, in 2006
capitalisation equities (955.5 thousand million US Dollars) below 2% of the total
of member stock markets of the FIBV and that of the Shanghai Stock exchange
(917.5 thousand million US Dollars), and equity transactions (368.3 thousand
million US Dollars) representing 0.5% of the total operations of FIBV member
stock markets (below those of the Indian National Stock Exchange, 422.6
thousand million), their merger wo uld foster the creation of synergy capable of
promoting the emergence of an efficient and useful stock market for the
economic development of the continent.

287. In all, the following key recommendations can be proposed for
examination by member states and African stock exchanges.

4.1   Choice of an option for integration of African stock exchanges

288. The feasibility study and the opinion shared by the majority on the
continent from the respondents of the Commission’ survey supports an
integration of African stock markets. On the variety of possible options, the one
on phased integration, starting with grouping per region, seems to be the most
appropriate. In this option, a single transaction platform shall be available in each
region and a light country office would be opened in each participating country. A
variant of this option is that of adding to each regional stock exchange a
continental platform opened to share negotiations of very large companies.

4.1.1 Harmonisation of the regulatory framework

289. The integration of capital markets involves the harmonisation of national
legislation and standards on company law and accounting regulations (laws and
regulations on public saving bid, publication of obligatory information by listed
companies, bankruptcy, issuance of licences to stock brokers, stock fraud and
insider dealings, etc.). The African Union should quickly launch a brainstorming
on the harmonisation of the regulatory framework of stock market activity,
drawing inspiration from the OHADA texts. These endeavours that have to
associate all stakeholders (States, stock exchanges, financial intermediaries,
non-financial private sector, etc) shall make it possible to determine the level of
harmonisation, total or partial, desired and thus the type of stock market
integration desired.

4.1.2 Adapting to international standards

290 Regulator committees in the REC and/or a taskforce under the aegis of
the AU Commission have to be set up to set minimum standards inspired by
IOSCO and international accounting standards and to better reflect the African
reality. These structures shall work together on the harmonisation of regulations
and accounting and financial standards.

        Nonetheless, international standards (IOSCO, IFAS, etc ) should not be
         adopted without restraint, for binding standards may turn out to be more
         costly than beneficial. Realism should dictate flexibility and gradualism for
         standards have developed with time and they evolve with financial
         innovations. Adequate institutional arrangements at the level of regional
         economic communities or the AU may be the way forward 15.

4.1.3 Harmonisation of securities taxes

291. In order to avoid fiscal competition between countries and to increase
attraction of issuers and investors, both African and foreign, for African stock
exchanges, member countries of the African Union have to adopt common
incentive measures. In the absence of setting uniform applicable rates, these
measures shall concern for example: reduction of tax rates on corporate benefits
to put them within a reduced bracket, especially for companies that accept to list
their securities on the stock market; partial exoneration from the tax on securities
revenues; tax rebate on the incomes of individual persons for a rate to be set by
stock investments, etc.

4.1.4 Lifting of exchange control and harmonisation of payment systems

292. Exchange control between African countries first, and later with the rest of
the world, has to be suppressed to allow for free flow of capital and their effici ent

4.1.5 Incentive for the development of strong companies and a dynamic
      private sector

293. National authorities have to take measures that will allow for increase of
the number of companies listed in the stock exchange by making their listing

15 There have been constraints in terms of resources and capacity in adopting international standards (e.g.
the IOSCO principles).

conditions attractive and by lifting major obstacle arising from the business
environment (administrative bottlenecks; mediocre transport infrastructures,
energy, etc.); and weakness of banking systems.

4.1.6 Promotion campaigns

 294. Here it requires concentrating efforts on the promotion of African stock
markets to local and foreign investors. A securities stock market should first and
foremost target local clientele made up of small shareholders and institutional
investors (insurance companies, pension funds, basket investment funds, banks,
etc.). If these investors are quite active on the markets, the volume of
transactions and ratio of liquidity shall increase. This in turn arouses interest in
foreign investors and encourages other companies to list their securities on the
stock market. The stock market culture should be developed in African people by
regularly organising targeted events (forums, conferences, training seminars,
etc.) that are given wide media coverage for identified segments including
schools and universities.

295. Finally, in order to effectively raise domestic funds required for its
development and as such reduce dependence on foreign funding, African
countries have to come out with individual development schemes of their
financial sector to resolutely engage in an integration process of their financial

296. As concerns stock exchanges whose existence is relatively discrete in
most African countries, only the gradual building of a continental market, through
the fast blotti ng-out of barriers to foster mobility of capital, can make it attain the
critical size that may attract African companies looking for diversification of their
source of funding and its cost, and African and foreign investors, looking for
diversification of portfolios and risks. If nothing is done quickly, African stock
exchanges shall continue to be marginalized, and in spite of the general
bulkiness of returns, the greatest financial investors will continue to ignore them

297. At a time when even the biggest financial world markets are pursuing
alliances, the actors concerned with stock market activities should not hesitate if
they want to stop the final nose dive of Africa from the rest of the world and
contribute to sustainable economic growth that supports the fight against poverty
on the continent.

Table 4.1 Opinion on legislative reforms
                                                              Number of    Total no. Of    %     Weights
                                                              responses   respondents
Legislative reforms                                                                                (%)

Protection of investors, putting in place of a well defined      14            34         41.2    29.8
regulatory framework for operators

Encouraging fiscal policies and benefits for companies           5             34         14.7    10.6
listed on the stock exchange

Harmonisation of commercial/fiscal legislations, and             15            34         44.1    31.9
rules and regulations

Suppression of exchange control                                  5             34         14.7    10.6

Appropriate laws against money laundering and funding            4             34         11.8     8.5

Sundry                                                           4             34         11.8     8.5
Source: AUC Survey


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                               Table 1: Number of responses by region
                                                                                       No       %
North Africa                                                                                3        8.3
West Africa                                                                                 6       16.7
Central Africa                                                                              3        8.3
East Africa                                                                                 8       22.2
S outhern Africa                                                                        16          44.4
Total                                                                                   36      100.0

                            Table 2: Number of responses by organization
                                                                                       No       %
S tock Exchange                                                                             6       16.7
Capital Market Authority                                                                    7       19.4
Ministries of Finance                                                                       2        5.6
Central Banks                                                                           15          41.7
Regional Economic Communities                                                               2        5.6
Others                                                                                      4       11.1
Total                                                                                   36      100.0

                   Table 3: Opinion on the creation of a Pan African S tock Exchange
                                                                                       No       %
For                                                                                     24          72.7
Reasons for the creation of a Pan African
Different stages of development but we can start with a few countries / Regional
S Es first                                                                                  4       16.7
Mobilization and improved allocation of financial resources/Economies of scale
and cost efficiencies/More efficiency, liquidity, transparency…                         17          70.8
PA S E will inspire trust/Improvement of corporate governance                               2        8.3
Will benefit issuers (listed companies and governments)                                     7       29.2
Will enhance opportunities for investors                                                    2        8.3
Promotion of economic and financial integration                                             2        8.3
Others                                                                                      2        8.3
Against                                                                                     9       27.3
Reasons against the creation of a Pan African
Premature/Different stages of development                                                   7       77.8
Will be another competitor/Commercial viability is doubtful                                 2       22.2
Others                                                                                      1       11.1
Total of respondents                                                                    33      100.0
No response                                                                                 3
Total                                                                                   36

                   Table 4: Opinion on the creation of a Pan African S tock Exchange, by region
                                                                                     For          Against       Resp.
                                                                                           3                0
                                  North Africa                                                                     3
                                                                                   100.0%            0.0%
                                                                                           3                2
West Africa                                                                                                        5
                                                                                    60.0%           40.0%
                                                                                           3                0
Central Africa                                                                                                     3
                                                                                   100.0%            0.0%
                                                                                           5                1
East Africa                                                                                                        6
                                                                                    83.3%           16.7%
                                                                                        10                  6
S outhern Africa                                                                                                  16
                                                                                    62.5%           37.5%

          Table 5: Opinion on the creation of a Pan African S tock Exchange, by type of organization
                                                                                     For          Against       Resp.
                                                                                           4                2
S tock Exchanges                                                                                                   6
                                                                                    66.7%           33.3%
                                                                                           5                1
Capital Market Authorities                                                                                         6
                                                                                    83.3%           16.7%
                                                                                           1                0
Ministries of Finance                                                                                              1
                                                                                   100.0%            0.0%
                                                                                           8                6
Central Banks                                                                                                     14
                                                                                    57.1%           42.9%
                                                                                           2                0
Regional Economic Communities                                                                                      2
                                                                                   100.0%            0.0%
                                                                                           4                0
Others                                                                                                             4
                                                                                   100.0%            0.0%

               Table 6: Major factors affecting the development of financial markets in Africa
                                                                                             Total of
                                                                                  No       respondents   %      Weights
Low per capita income                                                                22            36    61.1      15.7
Lack of knowledge on financial assets and investment in stock exchange               27            36    75.0      19.3
Mistrust with respect to financial institutions                                       9            36    25.0       6.4
Mistrust with respect to issuers (drawers)                                            7            36    19.4       5.0
Lack of financial information                                                        25            36    69.4      17.9
Unfavourable tax systems                                                             16            36    44.4      11.4
Legislation and regulatory framework not conducive                                   23            36    63.9      16.4
Others                                                                               11            36    30.6       7.9

          Table 7: Major macroeconomic constraints affecting the devel opment of financial markets in Africa
                                                                                           Total of
                                                                                 No      respondents    %       Weights
Low economic growth/Low household income/low saving and investment                   14            36    38.9      19.4
Industrial tissue not developed/Majority of companies are S MEs                       2            36     5.6       2.8
Agriculture and tourism are inadequately represented                                  1            36     2.8       1.4
Poor social and economic context /Poor investment climate: High Inflation,
Inadequate interest rates, Corruption and Lack of good governance, Political
instability, Unattractive fiscal policies                                            23            36    63.9      31.9
Lack of macroeconomic and financial information                                       4            36    11.1       5.6
Lack of infrastructure                                                                6            36    16.7       8.3
Currency convertibility and volatility of exchange rates                              4            36    11.1       5.6
High levels of indebtedness                                                           6            36    16.7       8.3
Others                                                                               12            36    33.3      16.7

                     Table 8: Reforms necessary for the establishment of the African stock exchange
                                                                                             Total of
                                                                                   No      respondents   %      Weights
Institutional reforms
Establishment of regulatory and surveillance authority, and dispute resolution
mechanisms                                                                            8            36    22.2      23.5
Establishment of trading, clearing and settlement infrastructure                      4            36    11.1      11.8
Establishment of rating agency                                                        2            36     5.6       5.9
Depository of securities                                                              2            36     5.6       5.9
Regional S E first                                                                    1            36     2.8       2.9
Others                                                                               17            36    47.2      50.0
Macroeconomic reforms
Promotion of African economic integration/Macroeconomic convergence                   4            36    11.1      10.3
Establishment of a sound and equitable fiscal framework/Policies that
encourage saving (tax concessions)                                                    9            36    25.0      23.1

Establishment of accounting practices adapted to the environment                    2           36     5.6       5.1
Freedom of trade/Expansion of markets, products and good trading systems            2           36     5.6       5.1
Macro-economic stability (inflation and interest rates...)                      14              36    38.9      35.9
Others                                                                              8           36    22.2      20.5
Legislative reforms
Protection of investors/Establishment of a well-defined regulatory framework
for market operators (regulatory framework for trading, settlement and
depository of securities)                                                       14              36    38.9      29.2
Encouraging policies, and fiscal advantages for listed companies                    6           36    16.7      12.5
Harmonization of (business/commercial/fiscal) laws, regulations and rules       15              36    41.7      31.3
Removing exchange controls                                                          5           36    13.9      10.4
Appropriate legislation with respect to anti-money laundry and terrorist
financing                                                                           4           36    11.1       8.3
Others                                                                              4           36    11.1       8.3
Financial reforms
Definition of a trading currency/Address currency converti+C91bility
problem/Creation of an African Central Bank and a single currency                   2           36     5.6       9.1
Definition of a trading system                                                      1           36     2.8       4.5
Establishment of standards to comply with capital requirements                      1           36     2.8       4.5
S tatutory requirement for result disclosure                                        1           36     2.8       4.5
Harmonization and standardization of financial reporting, accounting and
auditing requirements (adoption of international best practices)                    4           36    11.1      18.2
Others                                                                          13              36    36.1      59.1
Other reforms
Sensitization programs/Training and education programs                              5           36    13.9      33.3
Establishment of regional S E before the PA S E/Proper sequencing                   3           36     8.3      20.0
Dependent on the type of model                                                      1           36     2.8       6.7
Others                                                                              6           36    16.7      40.0

                                             Table 9: Most preferable model
                                                                                          Total of
                                                                               No       respondents   %      Weights
Based on existing stock exchanges                                               16              36    44.4      30.2
Creation and connection of national stock exchanges                             11              36    30.6      20.8
Creation and connection of regional stock exchanges                             16              36    44.4      30.2
Single common supervisory structure for African financial markets                   6           36    16.7      11.3
Creation of a continental stock exchange independent from the existing stock
exchanges                                                                           3           36     8.3       5.7
Others                                                                              1           36     2.8       1.9

                 Table 10: Opinion on the creation of a special compartment for S MEs
                                                                                         No           %
For                                                                                        22             71.0
Against                                                                                       9           29.0
Total of respondents                                                                       31           100.0
No response                                                                                   5
Total                                                                                      36

                             Table 11: Eligibility criteria of listing at the African stock exchange
                                                                                                    Total of
                                                                                           No     respondents    %      Weights
Clear and guaranteed reporting of results for many fiscal years (Profitability
track record)                                                                              15              36    41.7      30.6
Minimum market capitalization                                                              15              36    41.7      30.6
Minimum years in operation                                                                    7            36    19.4      14.3
Others                                                                                     12              36    33.3      24.5
Minimum market capitalization                                                              13              36    36.1      26.0
Minimum years in operation                                                                    5            36    13.9      10.0
Profitability track record                                                                    7            36    19.4      14.0
Credit rating report of the issuer/Guaranteed security/Type of issuer                      16              36    44.4      32.0
Others                                                                                        9            36    25.0      18.0
Legal enforceability of agreements                                                            4            36    11.1      13.8
S tandardization of contracts                                                                 4            36    11.1      13.8
Historical performance                                                                        6            36    16.7      20.7
Credit rating report on the assets in reference                                               6            36    16.7      20.7
Others                                                                                        9            36    25.0      31.0

                                           Table 12: Impacts on African economies
                                                                                                    Total of
                                                                                         No       respondents    %      Weights
At continental level
Enhances the continent's profile                                                           10              36    27.8      21.3
Enhances the cooperation among the African economies                                       10              36    27.8      21.3
Increases access to long term, cost effective capital                                      21              36    58.3      44.7
Opportunities for mergers                                                                     2            36     5.6       4.3
Others                                                                                        4            36    11.1       8.5
At national level
Provision of cost effective, long term capital                                            18           36    50.0      50.0
Enhances intra-trade among African economies                                                  4        36    11.1      11.1
Reduces the reliance on donor funding                                                         2        36     5.6       5.6
Economic de velopment/Reduces poverty/Create jobs                                             6        36    16.7      16.7
Others                                                                                        6        36    16.7      16.7
On companies
Enhances the profiles of companies listed, including marketing of their
products and services/Enhances companies' competitiveness                                 11           36    30.6      28.9
Access to long term, cost effective capital                                               18           36    50.0      47.4
Better transparency                                                                           5        36    13.9      13.2
Others                                                                                        4        36    11.1      10.5
On investors
Increased investment opportunities/Diversification of investment portfolio                26           36    72.2      86.7
Economies of scale                                                                            2        36     5.6       6.7
Others                                                                                        2        36     5.6       6.7
On issuers
Enhances the profile of issuers including marketing of their products and
services                                                                                      2        36     5.6       6.5
Increased opportunities for resource mobilization/Access to long term, cost
effective capital                                                                         20           36    55.6      64.5
Economies of scale                                                                            6        36    16.7      19.4
Transparency and good governance                                                              1        36     2.8       3.2
Others                                                                                        2        36     5.6       6.5

                         Table 13: Importance of the following for a viable continental stock exchange
                                                                                                 Total of
                                                                                       No      respondents   %      Weights
Suitable legal framework                                                                  30           36    83.3      18.9
Independent private financial institution                                                 17           36    47.2      10.7
Favourable harmonized tax system                                                          26           36    72.2      16.4
Creation of a continental supervisory body                                                19           36    52.8      11.9
S taff training                                                                           20           36    55.6      12.6
Public sensitization                                                                      22           36    61.1      13.8
Creation of a continental rating agency                                                   21           36    58.3      13.2
Others                                                                                        4        36    11.1       2.5

                       Table 14: Opinion on the creation of an electronic stock market
                                                                                         No        %
Yes                                                                                       30        100.0
No                                                                                            0        0.0

Total of respondents                                                                    30           100.0
No response                                                                                6
Total                                                                                   36

                               Table 15: Reasons for the creation of an electronic stock market
                                                                                                 Total of
                                                                                      No       respondents    %      Weights
Greater transparency                                                                    24              30    80.0      25.5
Reduction of risks                                                                      22              30    73.3      23.4
Maximization of transactions volume                                                     23              30    76.7      24.5
Greater participation of institutional and foreign investors                            25              30    83.3      26.6

                      Table 16: Roles of Member S tates in the development of the African stock exchange
                                                                                                Total of
                                                                                       No     respondents     %      Weights
Sensitizing issuers                                                                        3            36     8.3       5.9
Encouraging cross border listing and trading                                               2            36     5.6       3.9
Modernizing trading and settlement infrastructure                                          7            36    19.4      13.7
Harmonizing regulations to facilitate the creation of the PA S E                        10              36    27.8      19.6
Active participation in the market/Regulating role                                      17              36    47.2      33.3
Others                                                                                  12              36    33.3      23.5

   Table 17: Opinion on whether RECs must be the engine of the development of the African stock
                                                                                      No           %
Agree                                                                                   25             80.6
S omewhat agree                                                                            6           19.4
Disagree                                                                                   0            0.0
Total of respondents                                                                    31           100.0
No response                                                                                5
Total                                                                                   36

                                                      Table 18: Reasons
                                                                                                 Total of
                                                                                      No       respondents    %      Weights
Better to start with regional structures and informal interactions between
countries within regions/There are ongoing initiatives to establi sh regional
stock exchanges                                                                         21              31    67.7      87.5
To minimize fears and suspicions among African countries                                   1            31     3.2       4.2

NS E should be the driving force                                                     1            31      3.2       4.2
Others                                                                               1            31      3.2       4.2

                 Table 19: Importance the following for the establishment of an African stock exchange
                                                                                             Total of
                                                                                   No      respondents   %      Weights
Harmonization of regulatory rules                                                   26            36     72.2      11.5
S tandardization of communication infrastructure                                    24            36     66.7      10.6
Improvement, harmonization and integration of national payment systems              26            36     72.2      11.5
Improvement of socio-policy framework                                               18            36     50.0       8.0
Harmonization of accounting standards                                               27            36     75.0      11.9
S tandardization of taxation of financial assets                                    22            36     61.1       9.7
S tandardization of rules on FDI                                                    17            36     47.2       7.5
Harmonization of national corporate rules                                           20            36     55.6       8.8
Autonomy of the stock exchange                                                      24            36     66.7      10.6
Creation of a common African currency                                               16            36     44.4       7.1
Others                                                                               6            36     16.7       2.7