March is East African Exchange month!

I am in London where an African Securities Conference run by Securities Africa is currently on. It is primarily an event for institutional investors to meet with exchange executives and an opportunity to showcase the African Stock Exchange Association (ASEA). I am not in London to attend this auspicious event, however. Instead, I am trying to save my thesis which is stagnating in a sea of academic red-tape and out-of-sight,out-of-mindness. My pain and anguish does have its rewards.

I am staying in my old diggs on Bow Rd, across from the Bow Rd tube. There is a nifty Tesco Express nearby so I am enjoying some affordable South African, Shiraz and the sounds of East London. The Mile End library of Queen Mary has been completely modernized and is a joy to sit and work in even when it is swarmed with undergraduates. Maybe secretly I delay finishing my PhD so I can make these little trips......not likely. If and when they start paying attention to me at QM, I will finish and come back and attend the theatre instead of visiting the LIBRARY!!!

This Securities Africa conference has allowed the new ASEA Presdient, Sunil Benimadhu, to announce a new (hopefully realised) direction for ASEA as an organisation to promote African exchanges and also inform investors....and researchers....about member African Exchanges. Sunil is the CEO of the Stock Exchange of Mauritius and seems to have a positive vision about what ASEA can do for exchanges.

He suggests that ASEA do the following:

• provide a pan-African (member) stock exchange index to serve as a benchmark
• revamp the ASEA webiste so it is up to date and actual informs!
• serve as a mouthpiece for African exchanges in cluding African governments and regional bodies such as the AU, World Bank

Let's hope all of the above happens and these guys from Mauritius are the ones to get it done!!

Nairobi Stock Exchange

The NSE has purchased a Broker Back Office system worth $880k (USD) from Chella Software of India, which will allow the CMA and the NSE to offer online trading that can also be monitored. This goes a long way to resolving the Nyaga-like broker problem that plagued the NSE in 2008 and forced the closure of several brokers who had fraudulent back-office dealings. (see this blogs very first post) The back office is the heart of any brokerage firm because it clears trades and ensures that funds pass smoothly from client to broke and vice versa. Without a credible back office no broker and no Exchange has the integrity needed to cultivate investor confidence. The CMA-Kenya also established an anti-fraud unit. I need to look at that and will write a separate blog post on it later.

Additionally, the NSE claims that its online trading will draw funds from the Kenyan diaspora and from tech-savy Kenyan youth with discretionary funds. This is huge and a move in the right direction. Online trading is what facilitated a massive increase in retail share ownership in the US. This is not always a good thing if the technology and trading do not also come with instructions. The NSE will also have to provide loads of EDUCATION for these new investors so that the stream continues and does not wither and die on the vine due to terrible miscalculations all of which are aviodable with a little instruction on investment 101's.

Uganda Securities Exchange

Also in March, the USE announced that trading will be exteded to 5 days a week from 3. This baby step is also huge. Order flow should become more continuous if brokers can place them each day rather than every other day. The USE has only 14 listed companies but cross-lists on the NSE as well. This is a positive move, not as mometous as online trading but significant nonetheless. Much like the USE, this move is friendly and measured.

Me likey!!

I am so jazzed to paying attention to this space again. It was wrong to ignore it for so long! I enjoy being back in London. This city is World class and dare-I-say-it, so much nicer than New York. (shocking!!)

http://www.africancapitalmarketsnews.com/

www.securitiesafrica.com

www.africansea.org

Nyaga Stockbrokers UPDATE

This is very old news and I should have written about it sooner BUT here it is now. The Capital Markets Authority Kenya, in their 2009 Annual Report discussed some of the remedies they designed after the failure of Nyaga Stockbrokers. If you recall, this firm essentially went in to receivership in 2008 with the CMA in charge and lots of investors lost money. At the same time several other stockbrokers in Kenya went bust.

The CMA Kenya got busy and make changes to its own rules and even compensated investors out of the Investor Compensation Fund. It was the first time that the CMA utilized the fund to compensate the investors who lost monies when Nyaga Stock Brokers went under statutory CMA Kenya management. By the end of 2009, those investors with claims of Kshs 50,000 and below were compensated.

Honestly, this is how things should be working at all CMA's. I think it a real step forward in terms of confidence in the markets. Now, how all the new Constitution and political stuff affects the markets is another thing. It never seems to be all working in the same direction at the same time. Never mind, I applaud the CMA Kenya for stepping up and improving investor confidence in the Nairobi Stock Exchange and the capital markets in Kenya.

1) Capital Markets Authority Kenya Annual Report 2009

Stronger

Work it harder, make it better,

Do it faster, Make us stronger

Kanye West

The Rwanda Stock Exchange (RSE) is the newest stock exchange in East Africa. The regulator and operator of the exchange is the Capital Market Advisory Council (CMAC). So far transactions on the exchange have been limited so that extensive substantive rules have been unnecessary. Officials are now looking around for rules that will help develop a robust regulatory structure. The question is what will guide this search for appropriate rules?

There is a limited universe of possible legal families to choose from. There are Common law, Romanistic, Germanic, People’s Republic of China, and the list goes on. Or things could be simplified in to Common law or Civil law families. This makes sense for East Africa due to its colonial past but it is incredibly simplistic. The Republic of Rwanda gained its independence from Belgium in 1962. Most of its laws have a tradition of civil law and customary law. However, law reform in the 1990’s created a hybrid of civil and common law. It is the fact of a legal hybrid that I find fascinating.

I see legal hybrids throughout East African financial services law. It is not just a civil-common law hybrids. There is a combination of something else that I have no better word for than African law. It is law with a different focus. Under African law, securities regulation is a continuum. Not all rules are intended to do the same things. How rules function will depend on the context in which they work. The context can be the historical development of the exchange, the economic history of the country as well as the sophistication of the public in financial matters. Certainly, all of the usual things, such as banking and legal infrastructure, play their part in the effectiveness of rules. They might even play a part in choice of rules. Ultimately, no matter what, the rules have got to be fit for purpose.

Exchanges serve various functions, as do the rules that govern them. Exchanges raise money by selling debt or equity. They can sell to the public in general or the world at large. The purpose of the rules may be to regulate the issuance of the securities and debt. Rules can help raise investor confidence in a market making it more credible. The RSE is in an excellent position to choose rules that achieve the most positive goals. It is also in a position to avoid others mistakes.

Currently, the RSE is looking at other East African exchanges for examples of rules that work. Rules from the Nairobi Stock Exchange (NSE) are under consideration. As discussed in this blog already, Muzungu on Africa 5 May 2009, Nairobi has had its share of difficulties. These problems were primarily in the area of broker regulation. This is all well-known in the region. Additionally, the director of the Rwanda CMAC is a former head of the NSE, Mr. Robert Mathu. He knows the NSE rules and how well they work. Moreover, rules are meaningless if they are not enforced. It could very well be that Nairobi has excellent rules that could serve as the standard for any exchange in the region. Without an authoritative enforcement regime these rules cannot prevent fraud on the market or malfeasance by brokers. That may point to a problematic exchange culture.* A problematic exchange culture could make rules toothless or could prevent effective rules from being adopted.

The East African Community hopes to create a regional exchange. For the most part, the NSE is the cornerstone of that collaborative effort. The NSE has the largest market capitalisation and it is electronic. It's rules may serve as the standard for the regional exchange. Before that happens some critical analysis of their effectiveness needs to occur. In the meantime, the RSE should pick and choose the rules as it likes and sees fit, for the purpose the new bourse can put them to. For certain, when it is all over there will be some new legal hybrids regulating securities in East Africa.

See

http://www.theeastafrican.co.ke/business/-/2560/602398/-/5km1koz/-/index.html

http://news.bbc.co.uk/2/hi/business/7220603.stm

K. Zweigert & H. Kötz, An Introduction to Comparative Law (Clarenden, Oxford, 1998)

*I do not like using the C word. (corruption) I find it to be a lightening rod and the West gets lost in this word. Of course, it does exist and not only on the continent of Africa.