Paradigm Shift

Problems Inhibiting Investments In African Capital Markets

In a nutshell, it would appear that African capital markets have not passed the emergent stage for so long due to the poor flow of investment funds into the continent, in addition to the low investment culture of Africans. However, there are certain problems that tend to inhibit investment in African capital markets that should give them the leverage necessary for growth and development. In a well researched paper on the issue, Adetunji (1997: 21 – 23) argues that investment in African capital markets is inhibited by several factors. The first factor is the negative perception of the continent by the outside world as a continent of conflicts, wars, coups, instability, disease, poverty and misery.

The second factor is the small size of African capital markets with less than 2,000 listed companies with a total market capitalization of US$300 billion which is only 0.22 per cent of global market capitalization. Not only are the markets small, they are also shallow and illiquid with turnover ratios averaging about 12 per cent.

Thirdly, very little is known about African capital markets in the global financial system except for the South African market. Information about the operational character and investment opportunities in African markets is very poorly organized, documented and disseminated to potential investors both within and outside Africa.

Fourthly, operational infrastructure, in terms of clearing and settlement periods, is still below the IOSCO Group of 30 recommendations of T+7. Automation in clearing and settlement has only been recently introduced in some of the markets. Furthermore, some markets are still plagued by inefficient and archaic telecommunications and postal systems making delivery of stock certificates, dividend warrants and notice of general meetings of stockholders to investors very cumbersome and slow.

Fifthly, the legal and regulatory environments in many markets are still very weak and lack transparency. “International confidence in securities markets can be built and sustained if, among other things, securities laws adequately protect investors and the disclosure and accounting standards are within internationally recognized standards.” At the moment, these remain suspect and thus impede the development of African capital markets.

In the sixth place, transactions costs on African stock exchanges are among the highest in the world. The variety of fees charged which include stock flotation costs, stamp duties, brokerage fees, stock exchange fees, regulatory fees and compensation fund fees, all aggregate to make African capital markets unattractive to foreign investors.

Lastly, the macro-economic environment of most African countries remains largely unstable. High inflation and exchange rates as well as unpredictable interest rate regimes have tended to expose capital investments to unmanageable risks, as real returns are usually heavily eroded by these factors. “African markets basically lack depth and breadth with most of them trading only in traditional instruments. The level of awareness by the populace is low while not much is known about our markets by outsiders” (Adetunji, 1997:23). With these problems, African capital markets will remain essentially emerging for some time to come unless the identified inhibitors are removed and facilitators/activators are introduced quickly.

Professor Esosa Bob Osaze, Ph. D
Director, Securities and Exchange Commission (SEC)
Abuja, Nigeria.