“We are encouraging….companies from other jurisdictions to look at Kenya as a possible area for raising capital because the markets in Kenya at the moment are fairly liquid and deep, so it’s a win-win situation for everyone involved,” said Chris Mwabesa, CEO of the Nairobi Stock Exchange, when announcing that plans are underway to integrate the three East African security markets. This is to achieve the much desired regional bloc following the re-establishment of the East Africa Community (EAC).

Integration of the capital markets means that investors will buy and sell securities in any East African stock market without restriction; participants in capital markets will freely offer their services throughout East Africa and that identical securities will trade at essentially the same price across markets after foreign exchange adjustments.

The EAC treaty signed in November 1999, provided for the establishment of a Customs Union, a Common Market, a Monetary Union and ultimately a Political Federation. Only the capital market has achieved minimal integration to date, with two Kenyan firms – East Africa Breweries and Kenya Airways – having been listed in the three stock markets.

The prosperity of these two cross border companies shows that this should be encouraged. However,  it will  not only lead to lower prices for all financial services, but also  enhance risk-return frontiers for investors who previously faced restricted opportunities. They will now diversify their investments to a greater extent. Capital market integration will also lead to more efficient, more liquid and broader securities' markets.

Generally, such a capital market will allow residents of the three countries to pool risks, impose discipline upon governments, and allow countries with very little domestic savings to borrow abroad so that they can pursue growth policies. For corporations it will lead to cheaper financing alternatives given the lower transaction costs. 

However, pricing disparity has threatened to bring an imbalance in the integrated security market. With 48 companies listed, the Nairobi Stock Exchange (NSE) is relatively small, but robust compared to the  Uganda Security Exchange (USE) and Dar es Salaam Stock Exchange (DSE), which has less than 10 firms listed. The NSE operates five days a week while the USE and DSE operate for three days. This will lead to historical prices being used and may give false information or cause an information imbalance in the market.  

All the three stock markets need to be demutualised first for easier integration. This means doing away with domestic or regional monopolistic and oligopolistic practices which create barriers to entry and higher than warranted costs. The currently cross listed companies have to comply with all the three securities markets regulations. They are thus likely to face regulatory uncertainties, complexities, and increased costs both directly and in having to comply with multiple regulatory regimes and indirectly in having to pay for the many regulators. Harmonizing legislation will also have to be considered, for example, differences in bankruptcy regimes, restrictions on ownership by non-nationals, the imposition of national rules to protect national industries, requirements to establish local companies, restrictions on issuers, intermediaries and investors in providing cross-border services. 

If carried out in the right pace and in a pragmatic way, this will improve the cash flow, efficiency and competitiveness of the East Africa stock market. In this case the right pace should be really slow, with a lot of monitoring and evaluation. Too rapid a move to fully integrate will merely create a larger stagnation of cash and cash equivalents in the market. This will not in any way offer prospect to economic growth. A properly planned and enacted integrated security market will improve the allocation of savings and investments thus increasing the markets liquidity.

Country-specific institutions and economic conditions must be taken into account before undertaking this integration strategy, especially to developing countries such as Kenya, Uganda and Tanzania. For example; thirty three years ago---the seven French-speaking countries of the West African Economic and Monetary Union (UEMOA) signed a treaty to create a regional financial market. Twenty years later, a sub-regional stock exchange was finally established. After extensive analysis and negotiations, the regional stock exchange---BRVM was opened in 1998 . Today, BVRM has branches in each of the UEMOA countries and its headquarters is in Abidjan, Cote D'Ivoire. Current capitalization is just over US$1.4 billion and the average value of transactions at each trading session is about $500,000.

It should be noted that before pursuing such an integrated regional capital market, several factors have to be noted. Firstly, it should be known that it can take a very long time to build a regionally integrated stock exchange market. Secondly, it does not mean that since a regionally integrated exchange is established it will be used effectively or that it will integrate the markets. Lastly, the sustainability and success of any regional project must be carefully assessed before the project is undertaken.

Private sector participation, as opposed to just regulators, central banks and other public institutions normally has the best incentive to determine whether the expenditure on a particular integration scheme for market infrastructure is worth investing in. However, it must not be forgotten that the prerequisite for capital markets to flourish is that the governments need to create a deep and liquid bonds market that will encourage investment.

It’s therefore important that an integrated capital market is pursued carefully and a diverse and competitive financial service industry that fosters innovation and growth of national economies is considered in each country. This integration itself should offer substantial opportunities for expanding the range of financial products and services available in East African countries.