African bourses fail to take stock of inherent divisions of economy
For an extended period reaching well into the post-independence era of indigenous political self-determination, most African countries lacked their own stock exchange. In 1992, there were only 12 bourses across the continent, the oldest being SA’s Johannesburg Stock Exchange (JSE), founded in 1887. By 2015, the number had risen to 20.
A number of factors explain the dearth of stock exchanges.
For centuries, African territories were subject to colonial authorities, for whom growing capital markets was not a priority. More recently, African governments assuming power during the decolonisation project preferred central planning, a socialist agenda hostile to the proliferation of capitalist structures and institutions.
Furthermore, the commitment to privatisation has been weak, constrained by strong left-wing lobbying, rent-seeking and low political will, and the stock market rationale has been undermined by pessimism.
Some conservative economic theorists believed it was counterproductive for developing and less developed economies to establish stock exchanges as they were unlikely to be competitive in the international market and would, thus, drain the fiscus. It can be inferred, then, that the modest growth of bourses in Africa is in major part attributable to a lack of political and economic will and, in some instances, ideological chauvinism.
However, the conservative status quo faltered when structural reforms led to momentous developments in the industry. The entrenchment of globalisation in the late 20th century, especially through the liberalisation of trade and the acceleration of the reach of capital markets triggered the growth of stock exchanges in Africa, particularly after 1992. Several factors were pivotal.
First, there was an acceptance of the need to support the development of bourses. In contrast to the pessimism of earlier decades, it was generally conceded that the history of stock markets in developing economies was not as dismal as ideological conservatives had made it out to be.
What pessimism remained was eroded by the relative success in the unfolding process of capital market liberalisation of middle-income economies such as Turkey, South Korea and Australia. Moreover, the success of the newly industrialising Asian economies demonstrated the role the government could play in determining economic policy trajectory by deregulating capital markets.
Buoyed by this, international financial multilateral and development organisations began to channel development aid to emerging markets, including Africa, with an express mandate to create stock exchanges.
African governments, in turn, began to invest national economic development funds in policy geared towards capital market liberalisation and the establishment of indigenous stock exchanges.
Among others, the creation of bourses in Botswana (1989), Swaziland (1990), Zambia (1994), Uganda (1998), Tanzania (1998) and Mozambique (2008) is testimony to new investment-policy thinking about the role of bourses in Africa and financial assistance from international development partners.
Although the development of bourses is on an upward trajectory, they remain beset by challenges. Generally, with the exception of the JSE, African bourses are small relative to their national economies. In addition, African stock markets are illiquid and are dominated by a few major stocks, they have little product range, are poorly regulated and are manacled by short trading hours.
The major concern, however, is that there is little participation by black Africans in stock trading.
Instead, a pervasive tradition favours investing according to the prism of age-old African practices, in particular by buying biological assets such as livestock and agricultural commodities and participating in traditional saving strategies.
Most traditionally minded African investors have a limited awareness of capital markets and little knowledge of stock exchanges. African bourses have responded by engaging in awareness campaigns, but participation remains low because of an enduring attachment to traditional saving practices, as well as low levels of trust in capital markets and capitalist institutions. As a result, the major retail investors in domestic African stock exchanges are confined to the new elite, which replaced the colonial ruling class. This replacement was effected through a post-colonial wealth redistribution strategy that fostered limited privatisation and merely transferred assets from the colonial establishment to a new social elite
Similarly, trading activities have been dominated by foreign investors seeking high yields.
Thus, an analysis of the evolution of stock exchanges in Africa suggests that capital markets are structured in a way that excludes the bulk of potential black African investors.
SA is a case in point, where less than 10% of investors on the JSE are black. An inquiry by Trevor Chandler and Associates (2011) revealed that black participation in equity investment was a mere 8% in 2010.
The situation is subject to much controversy, but it is evident that the formal investment setting is largely an exclusive market whose evolution has resulted in the marginalisation of a population, mostly rural, that continues to engage in informal saving strategies.
What this means is that poor people at the margins of African society are not participating in the modern investment market, particularly the stock market, and that most participants in the informal savings market end up being estranged from the formal financial investment sector.
The marginalised are chiefly black women and poor men in the backwaters of the formal economy whose vulnerability in society is heightened by their being undereducated and underemployed. It is evident that the informal savings sector is overlooked and enjoys no strong or meaningful links with the formal investment market.
These shortcomings can be remedied through changing the attitude, investment behaviour and reach of the market economy, deepening popular knowledge of the equity investment market, fostering an appreciation of the scope of free enterprise in transforming informal saving groups into formal investment funds, adopting beneficial stock investment decisions and prudently allocating investment capital.
These are the liberal market economy principles that can help Africa grow tall.
Dagada is a policy fellow at the Institute of Race Relations (@IRR_SouthAfrica)