Paradigm Shift

Need For Consolidation

Whether capital markets/stock exchanges are consolidated or harmonized, there are tremendous benefits to be reaped including :

  • a reduction in the duplication in regulatory efforts
  • assurance of minimum regulatory standards
  • simplification of market participant compliance
  • single rule book, system, information technology and trading platform
  • scale economies
  • expansion of the range of financial instruments traded
  • expansion of distribution networks and the addition of new revenue streams which boost profits
  • accessibility to international investors
  • lower prices and transaction costs
  • greater market efficiency
  • more efficient allocation of resources
  • greater international exposure
  • industry transformation
  • support for economic integration and intra regional trade

This is not to suggest that there are no costs associated with integration. The costs include :

  • slow pace of achieving jurisdictional consensus
  • compliance with multiple regulatory regimes still required
  • protectionism through anti-competitive regulations
  • transaction costs; and
  • regulatory costs.

In addition, there may be several barriers to consolidation. Some of the potential problems are :

  • convertibility of various currencies
  • existence of regional and domestic monopolies
  • high transaction costs
  • accounting and taxation difference
  • legislative and regulatory impediments
  • differences in historical antecedents and cultural evolution
  • information technology compatibility
  • corporate governance issues

As Alemayehu (2000:14) succinctly put it “regardless of the difficulties, regionalization should remain a serious alternative to address many of the structural, legal and institutional constraints that many of the less developed emerging markets are facing in their drive to become major players in the mobilization of domestic savings and investment as well as in attracting foreign portfolio investment” (Alemayehu, 2000:14).

Hence, the Association of Stock Exchanges in Africa (ASEA) at its November 2000 Conference in Abuja affirmed, inter alia, that “regional integration of African stock markets will enable African stock markets take advantage of associated economies of scale to improve on their liquidity, expand product range, create liquidity and attract more foreign investment”. There is thus the imperative to discourage stock exchange proliferation in Africa and promote the integration of existing small markets.

In terms of size, development and trading experience, all stock markets in West Africa should merge around the Nigerian Stock Exchange which is the second largest in Africa. Similarly, all stock markets in North Africa should come together around the Cairo bourse. In any case, the two exchanges in Cairo and Alexandria have just been merged to form one larger and more efficient Egyptian Stock Exchange for reasons of scale economies after almost 103 years of living apart. In East and Central Africa, all the stock exchanges need to coalesce around the Nairobi Stock Exchange; while those in Southern Africa should merge with the Johannesburg Stock Exchange. This way, Africa can begin to make some serious impact on global investment flows through these four large exchanges in Lagos, Cairo, Nairobi and Johannesburg.  All other existing markets would then become trading floors with direct on-line, real-time linkages with the main bourses. However for integration to work there are certain conditions sine qua non; there must be strongly political support there must be transparency, comparability and reliability of information one approved prospectus in one country must be accepted in others financial reports must conform to International Accounting Standard (IAS) and International Financial Reporting Standards (IFRS)there must be convergence on common underlying principles; and there must be one set of accounting standards.

Integration now is the name of the game and this conforms with the vision of the African Union. The millennium is for information technology-driven mega businesses and financial intermediaries and not for ego-driven, independent-minded village blacksmiths who are certainly treading the slippery road to extinction.

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