Sunday, May 10, 2009

The Pan-African e-network-creating a Continental African Stock Exchange

India, in February 2009, launched a joint project with the African Union (AU), named the Pan-African e-network. The goal of the project is to link, via satellite and fibre-optic cable, medical and educational institutions in AU member states, with similar institutions in India. The purpose is to connect tele-medical and tele-educational partners, through internet and communication infrastructure, in order to provide expertise and support from India to Universities and Hospitals in Africa. In addition to the e-network development, this past week, the National Stock Exchange of India (NSE) announced that similar technology, indeed the same infrastructure, would allow them to create a Pan-African stock exchange. Such an exchange would link all exchanges in Africa as well as open them up to companies and investment from India. The NSE is preparing the blueprint for this plan with the stated hope to further India’s economic involvement with Africa.

This is not the first attempt to further the discussion concerning the need for a Pan-African exchange, but it truly is a fascinating plot twist- perhaps with a real possibility of success. It does, however, need to be seen in light of other efforts across the continent to make exchanges viable through co-operation. No-one can accurately predict the success of any of these efforts, except perhaps World Bank economists with their magical powers. What we can predict, with some certainty, is that the entrance of a fresh, new player on the pitch means an infusion of energy that changes the dynamics of the match.

There are frequent discussions about the lack of liquidity, proper legal and banking infrastructure, and regulation on some African exchanges and how that situation could be rectified through the creation of regional exchanges or ultimately the creation of a Pan-African Stock Exchange. At the 2008 African Stock Exchange Association (ASEA) meeting in Kampala, Uganda, this was mentioned and some of it was discussed in detail. Let’s consider the different levels of cooperation between exchanges in Africa in light of India’s new plans. To begin with and most recently, South Africa has developed its own response to the need for cooperation with the creation of the Africa board.

The Africa board trades equity and was established by the Johannesburg Stock Exchange (JSE) Trades are executed on and through the JSE. There is a common sense feel to the Africa board. The JSE is in a strong position, as an established exchange in a politically and economically stable country, to provide access for companies Africa-wide to list and for foreign investors to invest. The JSE also has an established dispute resolution scheme should problems arise; although it is unclear if the Africa board has access to this scheme. So why then is not every exchange on the continent jump on the Africa board train?

Well, why was there a Boston stock exchange for so many years before it was acquired by NASDAQ? Why was there a Philadelphia stock exchange for hundreds of years? Both were smaller than New York, less liquid as well. These smaller exchanges were necessary because they were local. For many years, companies who could not make the listing requirement for the NYSE found a home on these smaller exchanges. Many of these companies are local-run by folks who grew up in the area and built their businesses until they went public. Listing on the exchange was an achievement. It symbolised reaching the next economic level. Now the business could seek funding from investors and not just borrow from the bank or family. The company was now also identified by where it was listed. A relationship exists between the exchange and the company. Both of their identities are intertwined. This creates a community and that is something valuable and not always easy to quantify or relinquish easily. Beyond the local there exists the national as well.

Exchanges, particularly in countries with only 1, represent more than just vehicles for raising funds. They can be national symbols. They represent an achievement-the arrival of the nation to a more sophisticated level of economic functioning. For emerging markets it is an entrance to the global economy. The US comparisons are old, ancient in fact, examples and African exchanges tend to follow their own paths, as every exchange does. On the other hand, we do not need to hold African exchanges to drastically different standards. There may be legitimate reasons why countries do not want to cross-list or be absorbed in to one large continental exchange. Indeed, there are clear articulated reasons.

The African Union (AU) recently completed a survey of members gauging opinions concerning a Pan-African stock exchange. Only 29 member states completed the questionnaire but those who did had some opposition to the idea. The primary concern was the lack of standardised exchange rules and regulatory schemes. Other concerns raised were the fact that some AU member countries just are not interested in exchanges. Many resources would have to be allocated to a Pan-African exchange that might not represent each and every nation’s interests. One might bear in mind how effective the AU has been, in general, when contemplating the creation of another Pan-African institution.

On the other hand there has been success with other forms of cooperation between exchanges in Africa. For example the regional exchanges in West Africa. Also, there already exist examples of cross-listings between exchanges in Africa. Additionally, the East African Exchanges are planning a regional exchange (Kenya, Uganda, and Tanzania). The developments in East Africa have been slow but they are making progress. Finally, there are Memos of Understanding (MOU) among exchanges creating uniform listing requirements making it easier for companies to list across their borders. As cooperation already takes place, there is no reason not to endeavour to reach for broader cooperation.

I do think that a Pan-African exchange is an ideal. It would be the ultimate financial intermediation vehicle. There is, however, no precedent for it. That does not make it impossible and certainly technological advances have helped many emerging exchanges leapfrog the historically typical development of exchanges. There is however, just so little cooperation in other areas on the African continent. Exchanges are not built to overcome all political and social obstacles which exist in a society. We have seen this recently with the global economic crisis. Exchanges react and must be reassured. Right?

Heck no! Africa defies the odds all of the time, despite what the BBC says, every day, all day long. I am exceedingly excited about the NSE’s blueprint for the exchange, even if they are just doing it to compete with China. I also believe that life is a journey, not a destination. The e-network, and the thinking that goes in to the planning of a Pan-African exchange, alters what we think is possible, regardless if it happens right away or even at all.

Namibian Stock Exchange and the JSE is one example.

See, Mwenda, Kenneth, The dynamics of market integration: African stock exchanges in the new millennium, (Brown Walker, USA, 2000)

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