AFRICANGLOBE – Africa’s leading stock exchanges – South Africa’s Johannesburg Stock Exchange (JSE), Kenya’s Nairobi Securities Exchange and the Nigerian Stock Exchange – are coy about how competitive they are with each other. They speak respectfully about rival exchanges on the continent, and though they acknowledge a potential for conflict over listings and capital, they also point out that there is lots of room for cooperation. “Given that we operate in the stock exchange business, any other exchange – in Africa or further afield – is a potential competitor but also provides opportunities for working together for mutual benefit,” says Zeona Jacobs, Director of Issuer and Investor Relations at the JSE.
The Nigerian exchange plays a leading role in the integration of the Western African securities markets. One the other side of the continent, meanwhile, the Nairobi Securities Exchange plays a similar role in integrating the region’s economy into the global economy: the Kenyan government wants to position Nairobi as a financial services hub for East and Central Africa in accordance with the Kenya
Capital Market Master Plan. As part of this vision, the Nairobi Securities Exchange has recently entered into an agreement with the Somalia Stock Exchange Investment Corporation to explore establishing a securities-exchange business. It had signed similar agreements previously with the Uganda Securities Exchange and the Dar es Salaam Stock Exchange.
Donald Ouma, head of market and product development at the Nairobi Securities Exchange, says his exchange has been heavily involved in the development of other markets in the region. He notes that through the East African Securities Exchange Association, which the Nairobi exchange founded, the regulations and standards of all the East African stock exchanges have progressively been harmonised. The same goes for the JSE. “On this continent, where exchanges fulfill important roles in their local economies but are sometimes too small to attract the desired range of global investors, there is scope for cooperation with larger exchanges to give issuers access to more investors and wider pools of capital,” says Jacobs. Thanks to one such agreement, the Namibian Stock exchange uses the JSE’s trading platform.
The exchanges are strengthening their bonds with the smaller players just as international investors are starting to take a deeper interest in Africa. Looking at the economic growth numbers it is easy to see why more foreign money is making its way to the continent. The Institute of International Finance (IIF) says the annual average economic growth rate has been at 4.7 percent since 2007 for Africa. Though budget deficits remained a problem – excluding South Africa – external debt fell from 62 percent of GDP in 2003 to 17 percent in 2011. The IIF noted that “attractive yields” have led portfolio investors take a keen interest in Ghana, Kenya, Nigeria and South Africa. The report estimates that in 2011, inward portfolio investments totaled around $12.5 billion, more than half of which was directed towards South Africa.
In this climate of growing attention, foreign trading in equities on the JSE rose from $48 billion in 2009 to $59 billion in 2013. The Nigerian Stock Exchange saw offshore investors trade in shares to the value of $6.7 billion in 2013 – up from $5.8 billion in 2009. Foreign investors on the Nairobi Securities Exchange comprised 60 percent of all participants in 2012.
Considering their modest beginnings, it is almost startling that these exchanges are attracting such substantial capital follows. The JSE, for instance, was created on a roped-off street at the height of the gold rush in 1887. The Nairobi Securities Exchange was the brainchild of Francis Drummond, an estate agent. After forming Kenya’s first professional stock-brokerage in 1951, Drummond pushed for the creation of a securities market in 1954 while Kenya was still a colony. Back then, Asians and Africans were not allowed to own shares, and once the colonial era ended, the exchange went into a slump.
The JSE – A World-Class Act
Their humble starts however, have not been a hindrance – especially in the case of the JSE, which has become one of the leading exchanges in the world. When the World Economic Forum’s Global Competitiveness Report 2012-2013 ranked the JSE second-best for regulation of securities exchanges and the strength of its financial services, it did not come as much of a surprise.
Africa’s leading stock exchange has made a habit of outranking more prestigious bourses over the last few years. In 2012, for example, it was ranked first in auditing and reporting standards and the effectiveness of corporate boards and came in second in the protection of minority shareholders’ interests and the soundness of banks. “It’s one of the few institutions in South Africa that is actually world class,” says Absa Asset Management’s Chris Gilmour.
This success is no accident. Over the last 20 years, the JSE has put a lot of effort into building a reputation as one of the best regulated securities exchanges in the world. Its focus on corporate governance and efficient, transparent trading systems has led it to create safeguards that comfort South African and offshore investors.
It was not always this way. In the 1970s and 1980s, the JSE had poor oversight and, as a consequence, a poor reputation when it came to keeping investors safe. Today, its oversight and governance practices are second to none; it has taken extensive precautions to stay within the letter and spirit of the law. To prevent a conflict of interest – it plays the role of both regulator and commercial entity – the exchange has a representative of its regulator, the Financial Service Board (FSB), observe all board and board subcommittee meetings. It also has a Self-Regulatory Organisation Oversight Committee, comprised of three independent, non-executive board members, which regularly reviews the way the exchange executes its role as a regulator.
For the JSE, good governance is ethically sound but it is also good business. If investors doubt the integrity of the people running the exchange or have reason to fear the platform is discriminating against them, they could stop trading on the bourse. “The JSE has modernised and upgraded its infrastructure, services and governance to a point where we compare favourably with our international peers. That’s useful as a way to show investors and companies that the JSE is a stable, secure and credible environment in which to invest as well as raise capital,” says Jacobs.
The JSE is well aware of security threats and has invested heavily in a sophisticated surveillance system that tries to pick up suspect trades. In the last year, the JSE has reported two cases to the FSB – potentially a sign the surveillance is paying off, as this is a big drop from the 66 cases reported to the FSB in 1999.
This kind of oversight does not come cheap. Could the cost of carrying this oversight be too much for some listed companies? Not so, says Jacobs. “Our listing and corporate governance fees are competitive in comparison with exchanges we compare ourselves with, meaning that listed companies do not carry the cost of our governance structures. The structures we have in place are in line with global standards and the result of consultation with regulators, companies and all other stakeholders.”
Besides the work done by the JSE and the FSB, the government’s commitment to providing a sound legislative framework has also strengthened South Africa’s financial-oversight capacity. A good example is the pending Financial Markets Act, which, among other things, will make it more difficult to get away with insider trading or trading in shares based on knowledge that has not been made available to the public. It mandates brokers to report suspect trades. The new law will also enable the oversight of over the- counter securities – shares in privately held companies, which are not listed on the JSE.
Nigeria – Getting It Right
Though the JSE has made considerable improvements when it comes to governance and its trading platform over the last few years, the Nairobi Securities Exchange and the Nigerian Stock Exchange have been no slouches.
The Nigerian Stock Exchange, under the leadership of Oscar Onyema, has made huge strides since he took over in 2011 after leaving his job as a senior vice president and chief administrative officer of the American Stock Exchange.