A Liberalized Stock Market Good for Africa

Published on 4th April 2006

“Shake this-my hand Mr. CEO…I am rushing to another board meeting, to meet other CEOs” runs a popular advert depicting an ordinary Kenyan’s ownership of many companies through shares. According to a United Nations Development Programme report on African Stock Markets, the continent has over 20 active stock exchanges. The report laments lack of wider dissemination of information on these markets, implementation of electronic trading systems and impediments to institutional development. Many entrepreneurs in Africa have not discovered capital markets as a possible route for capital-raising.

The long queues witnessed when shares were floated to the public by leading Kenya Electricity Generating company (KenGen) illustrates the fact that Kenyans are willing to invest in their country. The excitement caused by this venture among the public raises questions as to whether the capital constraints to businesses locally are due to poor policy or lack of credit.

One of the youngest financial experts with K-REP Bank, Michael Musau, argues that one need not be a millionaire to buy shares in large companies. Africans ought to be innovative and form clubs; associations and groups based on trust that can enable them raise funds and buy shares. Such groups are already in operation in countries such as Ghana where young people pool together resources over a period of time and buy shares from large businesses. The ongoing KenGen offer has drawn individuals from all walks of life because of its low prices, but still Kenyans can do better by investing in stocks than simply concentrating on traditional benevolence societies and merry go-rounds to purchase household items.

Africans are focused on investing in ‘visible’ wealth such as land and real estate, yet investing in the stock market is an exit from the traditional way of viewing wealth. This will not only assist businesses to accumulate much needed capital, but also expose them to the discipline of the market forces. At the same time, the focus on land as the only viable investment will reduce hence lowering the cultural pressure attached to it.

According to the Kenyan Capital Markets Eligibility requirements, for a company to be listed at the Nairobi Stock Exchange, it must among other factors have net assets immediately before public offer of not less than Ksh 20 million. The minimum authorized, issued and fully paid capital should be Ksh 20 million. This of course are regulations that were put in place to ensure that the Nairobi Stock Exchange meets international standards while securing the investments of individual shareholders. The requirements seem to be silent on medium sized or small businesses. There have been complaints that the stock market is monopolized by a few individual businesses that have been on the forefront of setting up tough entry measures.

Studies show that the majority of Kenyan entrepreneurs are locked up in the micro and small enterprises partly due to the inability to mobilize financial capital. Can the policy makers reform the law to permit parallel stock markets that target such groups? It will be easier for the public to invest in such groups as long as they meet the other non monetary eligibility requirements. Stock brokers could engage in over the counter trading, mobilize stocks for medium sized businesses and assist entrepreneurs to clear cash flow headache.

Kenya should develop three levels of stock markets; the existing stock market, for big companies, medium level market, and low level market complete with graduation eligibility to the next level. The same can be said for the rest of Africa, the next step would be to open up such markets to allow Africans from all over the continent to trade in stocks in whichever country. There are many positive side effects from such a venture, for instance land grabbing, hurried buildings that do not meet architectural standards will reduce because many people will find other ways to invest their money.  Businesses will be assured of capital and the resultant investment diversification will promote efficiency, competitiveness and sustainability of businesses.

The public response to the KenGen Initial Public Offer is a sure indicator that Kenyans are very keen to offload the task of doing business from the government to the business sector. Share application forms were being filled in restaurants, offices a clear demonstration that the government ought to open up the locked investment potential in state owned enterprises.  The real economic impact of the rush for shares may not be computed at the moment, but one clear point is that it raised foreigners’ interest to invest in Kenya. Kenyans downplayed the current political wave and exhibited confidence in investing in KenGen. Even Tanzanians were curious to purchase shares in Kenya.

We must urgently figure out how we can use a reformed stock market to finance projects that can turn poverty into history. We can turn the traditional ‘Harambee’ (fundraising) into a stock investment system for low income earners. For instance by turning disasters plaguing this country into business ventures such as drought (water companies) and diseases (pharmaceutical companies), and famine (agri-businesses) among others, ordinary citizens can engage in a modified ‘Harambee’ to make them buy shares that will yield returns when the businesses realize profits.

While making a presentation on the subject of private sector in East Africa, a young business entrepreneur asked me, “Why do many people always think that the private sector must be big companies, what about us, who own cleaning agencies, and sell items by the roadside?” Whenever experts discuss the private sector, they ignore the non formal and medium sized businesses hence denying local entrepreneurs an opportunity to expand into bigger markets. According to a study carried out in 2002 by Peter Kimuyu and Arne Bigsten, 86.4 per cent of people in the Micro business are Africans, 11.9 per cent are Asians and only 1.7% is European. The reverse happens in large business, 8.9 per cent are Africans, 88.2 per cent are Asian and 2.9 per cent are European.  

It is very clear therefore that to get ordinary Kenyans graduating into engaging in big business, the law must be reformed to fit into their pocket, that is, parallel stock markets must be allowed to thrive to enable other businesses to enjoy the benefits of the stock market. By so doing, the ordinary citizens will also get economically empowered to enjoy the benefits of privatization and put in check the argument that privatization will only benefit the politically connected.

The Capital Markets Authority must go out of its way to publicize and educate Kenyans about investing in stocks and shares. The government on its part must ensure that the markets are well regulated and the rule of law strictly observed. Whereas recent studies indicate that the private sector is still somewhat not confident in the local court system, employing the power of the media and shareholders could serve as the most efficient way to deal with errant businesses. Liberalize the stock market sector and get capital for local entrepreneurs.

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