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.

The Pan-African e-network-creating a Continental African Stock Exchange

India, in February 2009, launched a joint project with the African Union (AU), named the Pan-African e-network. The goal of the project is to link, via satellite and fibre-optic cable, medical and educational institutions in AU member states, with similar institutions in India. The purpose is to connect tele-medical and tele-educational partners, through internet and communication infrastructure, in order to provide expertise and support from India to Universities and Hospitals in Africa. In addition to the e-network development, this past week, the National Stock Exchange of India (NSE) announced that similar technology, indeed the same infrastructure, would allow them to create a Pan-African stock exchange. Such an exchange would link all exchanges in Africa as well as open them up to companies and investment from India. The NSE is preparing the blueprint for this plan with the stated hope to further India’s economic involvement with Africa.

This is not the first attempt to further the discussion concerning the need for a Pan-African exchange, but it truly is a fascinating plot twist- perhaps with a real possibility of success. It does, however, need to be seen in light of other efforts across the continent to make exchanges viable through co-operation. No-one can accurately predict the success of any of these efforts, except perhaps World Bank economists with their magical powers. What we can predict, with some certainty, is that the entrance of a fresh, new player on the pitch means an infusion of energy that changes the dynamics of the match.

There are frequent discussions about the lack of liquidity, proper legal and banking infrastructure, and regulation on some African exchanges and how that situation could be rectified through the creation of regional exchanges or ultimately the creation of a Pan-African Stock Exchange. At the 2008 African Stock Exchange Association (ASEA) meeting in Kampala, Uganda, this was mentioned and some of it was discussed in detail. Let’s consider the different levels of cooperation between exchanges in Africa in light of India’s new plans. To begin with and most recently, South Africa has developed its own response to the need for cooperation with the creation of the Africa board.

The Africa board trades equity and was established by the Johannesburg Stock Exchange (JSE) Trades are executed on and through the JSE. There is a common sense feel to the Africa board. The JSE is in a strong position, as an established exchange in a politically and economically stable country, to provide access for companies Africa-wide to list and for foreign investors to invest. The JSE also has an established dispute resolution scheme should problems arise; although it is unclear if the Africa board has access to this scheme. So why then is not every exchange on the continent jump on the Africa board train?

Well, why was there a Boston stock exchange for so many years before it was acquired by NASDAQ? Why was there a Philadelphia stock exchange for hundreds of years? Both were smaller than New York, less liquid as well. These smaller exchanges were necessary because they were local. For many years, companies who could not make the listing requirement for the NYSE found a home on these smaller exchanges. Many of these companies are local-run by folks who grew up in the area and built their businesses until they went public. Listing on the exchange was an achievement. It symbolised reaching the next economic level. Now the business could seek funding from investors and not just borrow from the bank or family. The company was now also identified by where it was listed. A relationship exists between the exchange and the company. Both of their identities are intertwined. This creates a community and that is something valuable and not always easy to quantify or relinquish easily. Beyond the local there exists the national as well.

Exchanges, particularly in countries with only 1, represent more than just vehicles for raising funds. They can be national symbols. They represent an achievement-the arrival of the nation to a more sophisticated level of economic functioning. For emerging markets it is an entrance to the global economy. The US comparisons are old, ancient in fact, examples and African exchanges tend to follow their own paths, as every exchange does. On the other hand, we do not need to hold African exchanges to drastically different standards. There may be legitimate reasons why countries do not want to cross-list or be absorbed in to one large continental exchange. Indeed, there are clear articulated reasons.

The African Union (AU) recently completed a survey of members gauging opinions concerning a Pan-African stock exchange. Only 29 member states completed the questionnaire but those who did had some opposition to the idea. The primary concern was the lack of standardised exchange rules and regulatory schemes. Other concerns raised were the fact that some AU member countries just are not interested in exchanges. Many resources would have to be allocated to a Pan-African exchange that might not represent each and every nation’s interests. One might bear in mind how effective the AU has been, in general, when contemplating the creation of another Pan-African institution.

On the other hand there has been success with other forms of cooperation between exchanges in Africa. For example the regional exchanges in West Africa. Also, there already exist examples of cross-listings between exchanges in Africa. Additionally, the East African Exchanges are planning a regional exchange (Kenya, Uganda, and Tanzania). The developments in East Africa have been slow but they are making progress. Finally, there are Memos of Understanding (MOU) among exchanges creating uniform listing requirements making it easier for companies to list across their borders. As cooperation already takes place, there is no reason not to endeavour to reach for broader cooperation.

I do think that a Pan-African exchange is an ideal. It would be the ultimate financial intermediation vehicle. There is, however, no precedent for it. That does not make it impossible and certainly technological advances have helped many emerging exchanges leapfrog the historically typical development of exchanges. There is however, just so little cooperation in other areas on the African continent. Exchanges are not built to overcome all political and social obstacles which exist in a society. We have seen this recently with the global economic crisis. Exchanges react and must be reassured. Right?

Heck no! Africa defies the odds all of the time, despite what the BBC says, every day, all day long. I am exceedingly excited about the NSE’s blueprint for the exchange, even if they are just doing it to compete with China. I also believe that life is a journey, not a destination. The e-network, and the thinking that goes in to the planning of a Pan-African exchange, alters what we think is possible, regardless if it happens right away or even at all.

---

Namibian Stock Exchange and the JSE is one example.

http://www.panafricanenetwork.com/index.jsp

See, Mwenda, Kenneth, The dynamics of market integration: African stock exchanges in the new millennium, (Brown Walker, USA, 2000)

http://www.africabusinesswire.com/articles/capital-markets/new-pan-african-stock-exchange-lists-a-namibian-financial-services-company

http://www.jse.co.za/Africa_Board/ab_about_us.jsp

http://www.independent.co.ug/index.php/business/business-news/54-business-news/590-au-exchange-rejected

http://www.brvm.org/fr/index.htm