Tuesday, December 16, 2008

Uganda: Capital Market Players Moot a Continental Bourse

Sylvia Juuko, The New Vision [Uganda], 10/12/2008

THE approval of the Uganda Securities Exchange's central depository system (CDS) law by parliament in November could not have come at a better time.

After a lengthy four-year wait, the bill was approved in a month when the bourse was celebrating its 10th anniversary.

The introduction of CDS, a system by which trades are cleared electronically without use of paper certificates, is expected to speed up transaction times and boost activity at the bourse, according to the bourse' chief Simon Rutega.

"The CDS will provide such services like immobilisation of share certificates into electronic shares accounts, electronic book entry movement of shares, pledging of shares as collateral will eliminate considerable settlement bottlenecks and pave way for electronic trading at the exchange," Rutega says.

The USE currently uses a manual system for trading and clearing with settlement taking about 5-6 days. While the infrastructure is in place the CDS couldn't be launched in the absence pf an enabling law.

This is one of the hurdles the 10-year bourse has had to jump during its trading history. Set up in 1998, the USE has contributed to the development of Uganda's financial sector through mobilization of funds, creating a large investor base and contributing to the lowering of interest rates.

Over the last 10 years, sh1.8 trillion has been raised from the market through equities, government securities and corporate bond issuance.

From the maiden listing of the East African Development Bank (EADB) bond, the bourse has grown to trade 10 equity listings, 6 corporate bonds and 30 government bonds.

Subsequently, the bourse has raised sh103b from equities, sh90b from corporate bonds and over sh1.7 trillion from government bonds.

The six local equities listed include Uganda Clays Ltd (UCL), British American Tobacco (BATU), Bank of Baroda (BOBU), Dfcu bank, New Vision (NVL) and Stanbic bank (SBU). The stock market also benefited from cross-listing from the Nairobi stock exchange that includes Kenya Airways (KA), Jubilee Insurance and East African Breweries Ltd (EABL) and most recently the Kenya commercial bank.

The USE has also posted growth in total market capitalization to sh6.4 trillion from sh2.3b following the listing of UCL. Market capitalization is the aggregate value of the stock that is obtained by multiplying the number of shares and the market price.

The approval of the legislation paves way for integration of the stock exchanges in the East Africa region.

Rutega reckons the integration would create more scale in the markets, increase economies of scale and reduce the costs of managing trading, clearing and settlement infrastructure in the East African region.

Jimnah Mbaru, founding chairman of the African Securities Exchange association (ASEA) agrees.

"We have signed an MOU between Uganda, Kenya and Rwanda to merge. This should happen in the course of 2009. After that Tanzania will come on board after it gets rid of exchange rate controls," he says.

Mbaru said meetings like the 12th ASEA meeting that was held in Kampala with participants from 27 African countries to highlight the importance of capital markets in driving transformation in Africa.

He suggests that a bigger market will only serve to launch the USE to a global arena.

"The merger will set the stage for a vibrant stock market in the region. We expect to have a minimum of one million investors regularly in the bourses. This will internationalize some of the smaller markets like Rwanda and Uganda," he states.

Mbaru's vision is not only to have regional bourses but a continental bourse in the next five years. This vision of a continental bourse underpins the formation of ASEA.

"We are looking at several stages of integration with mergers to get strong regional bourses in East, Southern and West Africa.

The final phase will see an evolution in which the strongest exchange will emerge as a dominant one, JSE will probably emerge as the dominant one in Africa with most funds raised from there. This is a model which the US has where New York stock exchange emerged the most dominant," Mbaru explained.

He believes that investors in the stock market will benefit from a wide array of equites if the merger is actualized.

The continent is however still grappling with issues of corporate governance which he says will be solved by strong regulation.

"We need laws that are close to the commercial banking type of regulation. The regulators need to vet the managers of market players and also ensure that these companies are well capitalized. That is how we can ensure there is confidence."

He warns that capital markets development is a long term process that requires lots of energy, commitment and government and private sector.