East African Journal of Science and Technology, Vol.5, Issue 1, 2015

THE CHALLENGES OF EMERGING MARKETS IN AFRICA, A CASE OF STOCK EXCHANGE Wilson KAZARWA The Independent Institute of Lay Adventists of , Box 6392, Kigali Rwanda

E-mail:     ,    Abstract A number of studies previously carried out indicate that capital market development of any economy is synonymous with the growth and economic development, and almost every African country has put an effort to establish a stock market, including Rwanda. This study focuses on the challenges faced by emerging stock markets in Africa, a case study of Rwanda Stock Exchange. The main objectives of this study include establishing the types of securities traded, rules governing the market, challenges facing the market and the suggested recommendations to counter these challenges. A population comprising of five listed companies and the Capital Market Authority were considered and in each case, one respondent was selected using purposive sampling technique. Although this research used more of secondary data that was obtained through literature review, primary data was also collected using an interview guide. The study has found that currently, the types of securities traded include three government bonds and one corporate bond, and from five companies that have listed and cross-listed on the market. The study established that rules are provided and well adhered to and challenges facing the market include among others the general public which is not fully knowledgeable about trading in stocks, coupled with less skilled investment experts and lacking long-term credit, all this reduce profitability and thus limit the chances of listing stocks onto the stock market. It has been suggested that public education through various mediums like television stations, newspapers, radio stations and public conferences with the general public, among others, be increased. Key words: capital markets, challenges, emerging, Rwanda, stock exchange, e.t.c. 1. Introduction The capital markets in emerging markets have seen considerable development since Capital markets have been seen as very the early 1990s.The market capitalization of significant components of the financial emerging market countries has more than sector of any economy. They are also doubled over the past few decades growing considered as playing a vital role in the from less than $2 trillion before 1995 to mobilization of capital in many of the about $8 trillion in 2009. As a percentage of emerging economies. world market capitalization, emerging

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markets are now more than 12 percent and are steadily growing (Standard and Poor, Charles (2003:2), however, argues that 2012). emerging capital markets in Africa have fewer market participants, less sophisticated The drive towards the establishment of stock and less skilled investment analysts. The markets in African countries during the past author adds that their characteristics raise few decades may also be linked to other questions as to the markets capability to important developments in the global mobilize funds and allocate resources economy. The financial markets of many efficiently as well as their ability to endure advanced countries have undergone in their financial intermediation roles for tremendous changes and became foreign and domestic capital. increasingly integrated. These changes have resulted from the operation of a number of Analyzed generally, African capital markets interrelated factors (Cosh et al, 1992). have remained under-developed and they Stock market development has been central have largely not achieved their intended to the domestic financial liberalization objective. According to Samuel Kamndaya programs of most African countries. It (2010), many African markets are still seems any program of financial immature and the market capitalization is liberalization in Africa is incomplete without mostly dominated by a few firms. He adds the establishment and development of stock that Africa has to attract international markets. investors in order to grow their capital markets and move them to the next level in As Pardy (1992) puts it, securities markets the years to come. This, however, will have an important role to play in financial require most African countries to have liberalization and deepening. The author massive economic, political and business contends that apart from providing a means reforms in order to win investors' of diversifying risk for both capital raisers confidence. and investors, securities markets could play other roles. For example, they are a Further, firms in Africa still find it quite mechanism for capital allocation and difficult raising capital for growth and corporate monitoring, and a means for development. Demirgùc-Kunt (1992) government to exercise market-based rather observes that firms rely mostly on internal than direct fiscal and monetary policies. resources and informal credit markets for financing. Commercial banks are the main Most African countries have shifted their financial institutions. The author argues that attention to the capital markets for a number the loan contracts of commercial banks are of reasons. Firstly, capital markets are a generally short term, and formal direct credit useful tool for privatization programs. markets for long term debt or equity do not Secondly, there is a growing dissatisfaction exist, thereby constraining both corporate with the bank-based finance which until and economic growth. recently was fraught with government

controls, the growing awareness of the need Charles (2003:3) contends that a company for a more integrated approach to financial which has used its overdrafts to finance the sector development, the resource purchase of say, fixed assets will not be able mobilization, and finally the promotion of to repay its overdraft on demand and will be investment and economic growth among in breach of its banking terms. The author other reasons.

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adds that the interest rate on overdrafts can guiding the development of the capital change quickly and significantly, causing (stock) market in Rwanda. When it started, it pressure on the company’s profitability. had admitted 7 members to operate in the Rwanda OTC market (CMAC, 2009). This trend continues to make it quite Currently, there are three categories of difficult for firms in the developing membership and these are Stockbrokers, countries to secure long term credit required Dealers and Sponsors. The stockbrokers buy to finance business growth and expansion. and sell both on their own behalf and on This is so because most commercial banks behalf of the investing public. Dealers trade would prefer to lend to the already with their own funds while sponsors provide established customers with strong collateral advisory services to companies looking for and additional guarantee, which requirement ways of raising Capital. most of these firms may not meet. The According to Wikipedia, initially the failure to expand and increase business exchange market only sold bonds - one portfolios also reduces these firms’ offered by the country's central bank; the profitability, thus limiting the number of and one by the firms listing on the securities markets. Commercial Bank of Rwanda. Later in 2009, equities began to be listed on the Prior to 1989, there were just five stock exchange. By January 2010, the only cross- markets in sub-Saharan Africa and three in listed equity on the exchange was the North Africa. Today, there are more than 20 Commercial Bank (KCB) Ltd which was stock exchanges, (Benimadhu, 2010). listed on the Nairobi Stock Exchange, and According to Nkontchou (2013), there are cross-listed on Dar-Es-Salaam Stock 23 domestic and 2 regional stock markets Exchange and Securities Exchange. operating across the African continent today and the number of listed companies is 2000. The capital market in Rwanda comes at a Thus, the average number of listed time when the economy is growing fairly companies in each African stock market is steady and there is need to raise capital both 80. Rwanda as one of the newest stock for firms and for economic growth. markets has a far less average of listed However, there are still only a few listed companies than the sub-Saharan African companies, five in total and there is average. generally a slow growth of the stock market. This study therefore seeks to establish the In Rwanda, the idea of the capital market challenges that are affecting the establishment started in 2005. The capital development of the stock market in Rwanda market started as Rwanda-Over-The- and to suggest ways and means of boosting Counter (OTC) market in January 31, 2008, the capital market in Rwanda. and later grew to be a Rwanda Stock The main objective of the study is to analyze Exchange (RSE) in January 2011. The RSE the challenges that affect the development of is operated under the jurisdiction of the stock market in Rwanda. Rwanda’s Capital Market Authority (CMA), previously known as Capital Markets  To document the types of securities Advisory Council (CMAC), which reports to and volumes traded in the Rwanda the Ministry of Finance and Economic Over-The-Counter market. Planning (MINECOFIN).  To analyze challenges facing both The Capital Market Authority of Rwanda the market (OTC) and to establish was established with the main objective of

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reasons why companies are reluctant interview guide was employed to collect to list on the market. primary data while secondary data was  To establish the strategies obtained by reviewing literature. For data undertaken by CMA to promote and processing, analysis and interpretation, develop capital markets in Rwanda. editing and tabulation were the means used. In order to guide this study, the 3. Results and Discussion following research questions were formulated as follows: The main findings of this study were made based on the specific objectives of this  What are the types of securities and research study. According to CMA, the volumes traded on the Rwanda Stock types of securities traded include three Exchange market? government bonds; one being short term and the other two medium term, having a total  What are the specific challenges that face value of eighteen and a half billion prevent companies from listing and (18,500,000,000) Rwanda francs, and a one affect the market development? ten-year corporate bond from I & M bank. Further, the companies that have listed and  What are the strategies put forward cross-listed their shares include, Bank of by CMA for the development of a Kigali, BRALIRWA Ltd, and the cross- vibrant Rwandan capital market? listings are Kenya Commercial Bank (KCB) The study focused on Rwanda stock market Ltd, Uchumi Super market Ltd and the (NMG). headquarters and all five listed companies on Rwanda Stock Exchange were included The study established that various rules are in the study. The study was conducted in provided and well adhered to and challenges Kigali city because all the listed companies facing the market include among others the and those eligible for listing have their general public which is not fully headquarters in the capital city. The study knowledgeable about trading in stocks. On period covered the beginning of the market the issue of companies being reluctant to list in 2008 to date- 2014. and trade on the market, it was found that a 2. Method number of companies are small and do not meet the minimum listing requirements This study is more of qualitative in nature especially the financial statements of three and a case study approach was adopted. A consecutive years. Another important issue sample of six respondents were selected on is that there are only a few skilled and the basis of purposive sampling procedure experienced investment analysts in the from a population of all five listed region. This results in dependence on short companies namely, BRALIRWA Ltd, Bank term bank loans. This inaccessibility to long- of Kigali, Kenya Commercial Bank (KCB) term credit reduces corporate profitability, Ltd, the Nation Media Group (NMG) and thus limiting the number of companies that Uchumi Super Markets Ltd, and the Capital would wish to list stocks onto the stock Market Authority (CMA). To obtain data market. about challenges facing RSE and reasons It was further established in this study that why many companies are not listing on the stock market, the researcher used the CMA lack of awareness is one of the major challenges faced by Rwanda Stock staff and secondary data sources. An Exchange. Respondents explained that the

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public has not yet understood the benefits The strategies established by CMA are of the stock market and that most people embedded in a five-year strategic plan for do not even know what a stock market is the development of the capital market in all about. Higher listing requirements were Rwanda. This follows the strategic priorities also noted as a critical challenge especially of: on the requirement of having at least three- years consecutive financial statements well  The public education and awareness audited. The other problems cited that targeted at least 2000 investors included having a limited number of by the end of the year 2009. The investment analysts, low demand for CMA has established inter-university securities, high transaction costs, poor competitions on capital markets and infrastructural facilities and low volumes its impact on the economy, which is of transactions. There was also an issue of a strategy, intended to improve companies that are either partly or wholly awareness among the educated, and owned by foreigners or by families who the general public at large. are not interested in making their  The legal framework which has two businesses publicly owned. pieces of legislations; one is This study came up with a number of responsible for establishing the suggestions that are intended to boost the capital market authority and the stock market of Rwanda as follows: second is a law that regulates capital markets and it was approved by the  There should be continued public cabinet of Rwanda. education through various mediums like television stations, newspapers,  Capacity building through training radio stations and public conferences the market participants, investors and with the general public, so as to the general public to ensure that create more awareness and increase people understand the meaning and its acceptability. operations of capital markets.  It is further suggested that CMA  The listing process which is already should work with consultancy firms on-going and to encourage more in advising and encouraging foreign companies for cross listing. companies to regularly prepare financial statements in a manner that The study found out that the targeted complies with the acceptable number of investors of about 2000 by accounting/ auditing principles. This the year 2009 was not realized. CMA will position most firms to meet one Executive Director argued that of the most demanding requirements investment in capital markets is long to be eligible for listing. term and that it involves public  It was found out through this study education and then waiting for the that CMA and the government of educated to make investment decisions. Rwanda have plans to include even There are two listed local companies so small and medium enterprises far and three cross-listed companies. (SMEs) on the stock market before the year 2014 ends.

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4. Conclusion and it is hoped that in the course of the years ahead, more companies will keep This section examined conclusion made on listing on to the market. based on the findings of the study. It is worth noting that emerging capital 5. Policy Recommendations markets, like Rwanda Stock Exchange are always confronted with a number of A number of recommendations spring from challenges ranging from a lack of the findings of the study, ranging from awareness, to a failure to meet the education about and promotion of the listing requirements among other exchange to streamlining transactions and factors in most cases. encouraging the development of investment trusts and funds. More sound The capital market in Rwanda is young macroeconomic policies are also needed. and in an emerging economy whereby The recommendations are: most companies are family owned and the accounting and auditing systems 1. Mount an intensive education and hardly meet international standards. promotion campaign: The greatest This study established that in Rwanda, challenge to the Rwanda Stock Market is to Accounting Law was published in the improve the level of knowledge of the local year 2010. In such a situation, hardly investors. A programme of continuous can many companies meet the listing education for the investor, the intermediary, requirements that a young stock market the issuer and the regulator is extremely needs to put in place in order to ensure important for the successful development of investors that their investments are the Rwanda stock market. This education secured. Further, big companies may campaign should involve the development of not wish to undertake all the required financial journalists and improvements in stringent procedures for participating in the quality of financial market publications. such a small market; they do not Financial education should be strengthened consider their effort worth the expected in the secondary schools and particularly in benefits. the universities. As markets become more sophisticated, It was suggested that measures to encourage more firms for listing be put there is increasing need for investment advisors and other personnel who are in place and such measures included; intensifying public education and capable of analyzing complex financial concepts such as options and other awareness programs, a revision on the prevailing listing requirements and derivatives. More and more radio and television programs should be used to reach putting in place a tax levy or reduction more people explaining financial on foreign companies for cross-listing. investments in securities in both English and The strategies undertaken by CMA Kinyarwanda and Swahili languages, to which include a legal framework that is supplement the inter-varsity competitions on already in place; there is also public capital market and its impact on the education and awareness and economy, in increasing the general public encouraging foreign companies for awareness on capital market and its impact. cross-listing. It was established that half a dozen companies have shown 2. Provide fiscal incentives: There is need to interest in listing onto the stock market provide incentives for firms who may want

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to list on to Rwanda Stock Exchange. One local and foreign investors will feel much such incentive is differential taxation in protected and freely commit more of their favor of listed companies. Such an incentive financial resources to the RSE. will help increase the number of listing companies on the exchange and improve 6. Regularly review primary and secondary liquidity of the market. market regulations: Primary market regulatory activities on new issues including 3. Provide incentives for market research: disclosure, accounting and listing standards Greater access to quality research on must be reviewed periodically to conform to information useful for investment analysis changing international standards. Secondary can be expensive. The introduction of market activities, such as surveillance and research cost reimbursement packages to supervision of dealers to maintain high brokerage and other intermediaries standards, must be monitored to boost providing such services will improve the investor confidence. availability of investment information, which will in turn make the market more 7. Encourage the development of efficient. investment trusts and funds: The fact that most of the investors on the RSE are small 4. Follow prudent macroeconomic policies: investors and also unsophisticated points to There is need for the government of Rwanda the need to encourage brokerage managers to consistently follow prudent to develop funds and unit trusts, including macroeconomic policies. High interest and pension funds and index funds. inflation rates, budget deficits, etc., may not only create financial instability, but also feed 8. Nurture a progressive and sound uncertainty, which affects stock market banking system: The banking sector is vital development. to the development of the capital markets. A progressive and sound banking system is 5. Integrate the Rwanda Stock Exchange required to quicken the development of the with the regional and international financial market. financial system: Rwanda Stock Exchange is already a member of Africa Stock 9. Improve the communication Exchanges Association (ASEA) and plans infrastructure: There is need for the are ongoing for the establishment of East government to continue the already started Africa bourse, integrating the four East measures of improving the physical African stock markets, that is, the Nairobi infrastructure, particularly the Stock Exchange in Kenya, the Dar-Es Salaam telecommunication infrastructure, which is Stock Exchange in and the Uganda the pivot around which business on the Securities Exchange in Uganda. financial market revolves and improves.

Because of the current trend of integration 10. Encourage additional cross-listing: and globalization of economies, the There is a positive spillover effect of the management of the Rwanda Stock Exchange regional cross-listing of KCB Group, Nation must aim at continued integration with other Media Group, and Uchumi Super markets to international capital markets. Once the Rwanda RSE. Other well managed and succeeded in this direction, the regulatory qualified firms must therefore be encouraged authorities must enforce the various regulations on securities. If this is done, both http://www.eajscience.com ISSN: 2227-1902(Online version) [email protected] 263 East African Journal of Science and Technology, Vol.5, Issue 1, 2015  

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