1. AFRICAN UNION UNION AFRICAINE
UNIÃO AFRICANA
REPORT OF THE FEASIBILITY STUDY ON THE
ESTABLISHMENT OF THE PAN AFRICAN STOCK EXCHANGE
Department of Economic Affairs
December 2008

2. Table of Contents
Table of Contents..............................................................i
Executive Summary........................................................... iv
I Introduction: From regional stock exchanges to an African stock
market......................................................................... 1
I.I COMPREHENSIVE VIEW OF STOCK EXCHANGE DEVELOPMENT IN AFRICA ...................2
I.II TOWARDS THE INTEGRATION OF AFRICAN FINANCIAL MARKETS..............................3
I.III METHODOLOGY.........................................................................................................4
I.IV ORGANISATION OF THE STUDY.................................................................................5
CHAPTER 1: ANALYSIS OF THE CONTEXT OF THE INTEGRATION . 6
OFAFRICAN STOCK EXCHANGES...........................................6
1.1 THE IMPROVING MACRO-ECONOMIC CONTEXT IN AFRICA.........................................6
1.2 DEVELOPMENT OF THE FINANCIAL SECTOR............................................................. 10
1.3 OPINIONS OF STAKEHOLDERS ON THE ECONOMIC AND FINANCIAL SITUATION.......14
1.4 ANALYSIS OF THE LEGAL, INSTITUTIONAL, FISCAL REGULATORY AND TECHNICAL
ENVIRONMENT ...........................................................................................................15
1.4.1 Different legal systems..................................................................................... 16
1.4.2 Regional attempts to harmonise business law and insurance activities........16
1.4.2.1 In the banking sector.................................................................................17
1.4.2.2 In the stock exchange sector .....................................................................17
1.4.3 An unsuitable fiscal context..............................................................................20
1.4.4 A divergent technological environment...........................................................21
CHAPTER 2: ANALYZING THE PERFORMANCES OF EXISTING STOCK
................................................................................23
EXCHANGES .............................................................. 23
2.1 GENERAL PRESENTATION OF AFRICAN STOCK EXCHANGES ....................................24
2.1.1 Structure of African stock exchanges............................................................... 24
2.1.2 Players in the stock exchange...........................................................................25
2.1.2.1 Issuers........................................................................................................ 25
2.1.2.2 Investors.....................................................................................................26
2.1.2.3 Brokers.......................................................................................................27
2.1.2.4 Central depository, clearing house and settlement bank............................27
2.2 COMPARATIVE ANALYSIS OF THE PERFORMANCES OF AFRICAN STOCK EXCHANGES
........................................................................................................................................28
2.2.1 Equity markets..................................................................................................28
2.2.1.1 Capitalisation............................................................................................. 28
2.2.1.2 Number of listed companies ..................................................................... 30
2.2.1.3 Volume of Transactions.............................................................................32
2.2.1.4 Liquidity ratio of the market or rotation rate............................................32
2.2.1.5 Yield..........................................................................................................33
2.2.2 Bond markets..................................................................................................34
i

3. 2.2.2.1 Capitalisation ............................................................................................ 35
2.2.2.2 Volume of trade or transactions.................................................................35
CHAPTER 3: EXAMINING THE VARIOUS OPTIONS FOR THE .......37
INTEGRATION OF AFRICAN STOCK MARKETS.....................37
3.1 BRIEF STUDY OF STOCK EXCHANGE ASSOCIATIONS .................................................38
3.1.1 Experiences of stock exchange integration in Africa....................................... 39
3.1.1.1 Southern Africa..........................................................................................39
3.1.1.2Arab Maghreb Union.................................................................................. 40
3.1.1.5 East African Community (EAC)................................................................42
3.1.1.6 West Africa................................................................................................ 42
3.1.2 Experiences of stock exchange integration in the rest of the world.................43
3.1.2.1 ASEAN...................................................................................................... 43
...............................................................................44
3.1.2.2 NOREX.....................................................................................................44
3.1.2.3 EURONEXT .............................................................................................45
3.2. MODELS SUGGESTED FOR THE PAN-AFRICAN STOCK EXCHANGE ..........................46
3.2.1 Option 1: National / regional stock exchanges and a Pan-African stock
exchange ...................................................................................................................46
3.2.1.1 The realisation of this option requires overcoming challenges.................47
3.2.2 Option 2: National/regional stock markets with an existing African Financial
Market as a Continental Platform.............................................................................47
3.2.3Option 3: Integrated transaction platform, while maintaining
national/regional stock markets................................................................................ 48
3.2.3.1 Advantages of this model...........................................................................49
3.2.3.2 Disadvantages and costs of this model...................................................... 49
3.2.4 Option 4: Integration through transaction on the Internet.............................. 49
3.2.4.1 Advantages of this model...........................................................................50
3.2.4.2 Disadvantages and costs of this option...................................................... 50
3.2.5 Option 5: Gradual integration ........................................................................ 50
3.3 SUMMARY OF BENEFITS OF THE INTEGRATION OF AFRICAN STOCK EXCHANGES . 51
3.4 SUMMARY OF THE CHALLENGES TO OVERCOME FOR THE INTEGRATION OF STOCK
EXCHANGES IN AFRICA ................................................................................................ 52
3.4.1 Legal and regulatory differences......................................................................52
3.4.2 Multiplicity of regulators..................................................................................52
3.4.3 Differentiation of products............................................................................... 53
3.4.4 Variances in accounting standards and fiscal systems.................................... 53
3.4.5 Information costs and prejudices of country of origin..................................... 53
3.4.6Fragmentation of trading, clearing and settlement systems............................. 54
.................................................................................................................................. 54
3.4.7 Technological aspects...................................................................................... 54
......................................................................................................................................54
3.4.8 Governance.......................................................................................................54
3.4.9 Implementation of credible contractual engagements..................................... 54
3.4.10 Lack of political will......................................................................................55
3.5 WAY FORWARD ......................................................................................................55
3.6 CONCLUSIONS ..........................................................................................................57
ii

4. CHAPTER 4: GENERAL CONCLUSIONS AND RECOMMENDATIONS...59
4.1 CHOICE OF AN OPTION FOR INTEGRATION OF AFRICAN STOCK EXCHANGES ..........59
4.1.1 Harmonisation of the regulatory framework....................................................59
4.1.2 Adapting to international standards.................................................................60
4.1.3 Harmonisation of securities taxes.................................................................... 60
4.1.4 Lifting of exchange control and harmonisation of payment systems ..............60
4.1.5 Incentive for the development of strong companies and a dynamic private
sector......................................................................................................................... 60
4.1.6 Promotion campaigns.......................................................................................61
Bibliography ................................................................ 63
APPENDIX: RECAP TABLE OF THE FINDINGS OF THE SURVEY ......65
List of Tables
Table 1.1 Domestic Savings (% of GDP).................................... 8
Table 1.2 Foreign Direct Investment, net inflows (in millions of current
$US).......................................................................... 11
Table 1.3 Opinion on the creation of a Pan African Stock Exchange . . .14
Table 2.1 Annual Market Capitalisation, 2002-2006 (US $ billion, end
of period).....................................................................30
Table 2.2 Number of listed companies, 2005-2006 .....................31
Table 2.3 Yield, 2002-2006 (in millions of US $, end of period) .......34
Table 3.1 Preferences for various models of the Pan-African stock
exchange..................................................................... 52
Table 4.1 Opinion on legislative reforms .................................62
iii

5. Executive Summary
Within the frame work of its mandate on the economic and financial integration of
the Continent, and pursuant to the decision of the Assembly of the African Union
in Khartoum, the Sudan, of January 2006, the African Union Commission carried
out this study on the feasibility of an African Stock exchange. Faced with the
dependency of African countries on external resources for financing their
investments and their development; confronted with a multitude of limited and
inefficient national stock markets, African leaders, in keeping with the
commitments made in Abuja in June 1991, requested the African Union
Commission to envisage the establishment of a continental stock market.
The substantial progress made in Africa since the beginning of the 21st Century,
especially in the macroeconomic and financial reforms undertaken since the late
eighties, and an international economic situation characterized by the rise in the
prices of raw materials, has created the bases for the integration of African
financial markets in general and stock exchanges in particular.
At the end of 2006, the capitalization of all African stock exchanges, the main
indicator of trading activity, represented less than 2% of the world total, and was
equivalent to that of the 15th world stock exchange. Apart from the JSE Limited,
which was the 19th world stock exchange in 2006, all the other African stock
exchanges are characterized by their low liquidity and the volume of transactions
they record.
In order to make up for the inadequacies observed in the functioning of the 23
existing stock markets, the managers of these institutions, through the African
Stock Exchange Association or their respective Regional Economic Community,
have already initiated reflections and actions for the integration of the stock
exchanges. In fact, the majority feel that financial integration, ensuring the
circulation of capital at regional and continental level, will provide greater visibility
and a larger area of arbitrage for those seeking capital; African, as well as,
foreign investors.
The study conducted by the Commission’s Economic Affairs Department, mainly
through a survey carried out in November and December 2007, by means of
questionnaires distributed throughout the Continent and discussions with the
different stakeholders concerned with stock market development confirmed the
high level of challenges to be addressed in order to establish close alliances
between existing stock exchanges and create a harmonized African stock
exchange.
Taking into account the many challenges (political, institutional, legal, regulatory,
technical, economic, financial, fiscal, etc) and based on African and foreign
experiences in the harmonization and unification of stock exchanges, the African
Union Commission proposes five options for the integration of African stock
exchanges, some of which are variants of the same type of model: (i) Option 1:
national/regional stock exchanges and a Pan-African stock exchange; (ii) Option
2: national/regional stock exchanges with an existing African stock exchange as
iv

6. a continental platform; (iii) Option 3: an integrated transaction platform, while
maintaining national / regional stock exchanges; (iv) Option 4: integration of
transactions through the internet; (v) Option 5: gradual integration.
To evaluate the detailed advantages and costs of each of these options, a
comprehensive study will undoubtedly be necessary. However, in order to
facilitate the realization of this additional study, bearing in mind the ultimate
objective of continental financial integration and the necessary pragmatism for
such a project, it important that institutional experts ( stock exchanges, regulatory
organizations) and the economic agents concerned, as well as African
governments, decide on 2 or 3 viable options on which this subsequent study
can be carried out.
On the whole, the integration of stock exchanges in Africa will be an extremely
long process requiring significant structural changes, the requisite technology
and infrastructure, appropriate legal, regulatory and accounting frameworks and
most importantly, the political will. Based on the results of the feasibility study, all
African stakeholders in the development of stock markets in particular, and
financial markets in general, should make credible recommendations for all
actors, that can be implemented according to a pace to be determined.
v

7. I Introduction: From regional stock exchanges to an African stock market
1. During the 6th Summit of Heads of State and Government of the African
Union held in Khartoum (Sudan) in January 2006, it was resolved that the
proposal to set up a Pan-African Stock Exchange would be considered by the
African Union Commission and the conclusions of this study presented to a
subsequent summit. This decision was taken in the light of the Abuja Treaty
adopted in 1991, which plans on creating national and regional stock markets, as
well as the free flow of capital in order to promote economic development and
integration. This process is supported by projects underway or geared towards
setting up regional stock exchanges. The African Stock Exchanges Association
(ASEA) set up in 1993, also aims at the regional harmonisation and integration of
existing African stock exchanges.
2. Stock exchanges have a reputation for encouraging greater economic
dynamism and producing higher levels of wealth by providing investors with the
opportunity to share the risks and profits of enterprises. Thus they improve
market mechanisms in order to raise and allocate scarce financial resources,
mobilize local capital, attract foreign direct investment and allocate resources to
projects likely to be beneficial to the economy.
3. The stock exchange is an alternative for securing capital at a relatively low
cost in comparison with bank loans, and may help the government and private
sector to mobilize capital to finance a wide range of infrastructure thereby
satisfying social needs as well as growth, and jobs. Stock markets are perceived
as a tool for the promotion of the financial sector and the development of private
savings, thereby supporting the non-monetary funding of the economy and the
fight against inflation.
4. In the wake of other studies previously carried out by the Organisation of
African Unity, notably during the Forum on the promotion of the integration and
development of financial markets (Grande Baie, Mauritius, 1997), the United
Nations Economic Commission for Africa (ECA), the African Stock Exchanges
Association and the International Monetary Fund1, this study sets out to examine
the necessity, constraints and viability of an efficient financial market within
African countries and regions and to explore possible scenarios for setting up an
integrated stock market in Africa. This study is designed to establish an African
financial zone opened to economic operators on the continent and the world. It
has carried out an exhaustive analysis of all the technical aspects conditioning
any modern stock market, including the location, rules and regulations governing
such a market and its operators.
1
IMF, Stock market development in Sub-Saharan Africa: Critical issues and challenges, WP/07/209
1

8. I.I Comprehensive view of stock exchange development in Africa
5. The number of African stock exchanges has more than doubled since the
beginning of the 1990s from about 10 (ten) to 23 (twenty three). The
Johannesburg Stock Exchange (JSE) is the first stock market ever set up in
Africa, in November 1807, against the backdrop of the discovery of gold. A
certain number of stock exchanges were set up in the wake of the independence
of African countries in the 1960s. The last stock market that has been launched
is the Stock Exchange of Central Africa (BMVAC), in August 2008 after having
been officially set up in 2003.
6. It is also worthwhile to mention the existence of over-the-counter (OTC)
markets in some countries. This type of stock market is characterized by a limited
and select number of operators, who define on their own or through a financial
broker, rules governing their transactions, and appears more like a stage towards
the creation of a stock market open to the public. Historically, over-the-counter
markets have preceded the establishment of stock exchanges. Such a market
operates notably in The Gambia and Gabon and has just been set up in Rwanda
particularly for its bonds. It is also generally used after the explicit authorization of
the regulatory authority, in the stock markets of listed securities for some
operations often on non-traditional financial products such as by-products.
7. To a greater extent, the creation of stock exchanges in Africa was done
under the impetus of the political will to mobilize national resources, notably as
part of privatisation programmes which concerns an important sector of public
enterprises, besides attracting foreign investors. Kenya and South Africa are
examples of countries where bond markets helped to finance infrastructure
development. Stock exchanges also seek to attract foreign investment.
8. On the whole, African stock markets represent less than 2% of the world
market capitalisation, according to the 2006 data published by the International
Federation of Stock Exchanges. The JSE accounts for close to 75 % of the total
and is ranked on the 19th position in the world money market as concerns share
capital market value. The second stock market in Africa, Cairo and Alexandria
Stock Exchange, only represents 10 % of the African total. In general, the
performances of African stock markets are weak and their liquidity is limited.
9. Many obstacles hamper the African stock market in particular and the
financial market in general, including: unfavourable macro-economic conditions
(unstable and high inflation, fiscal deficit, public indebtedness, etc.), a restricted
volume of demand and supply of financial products, a weak volume of
transactions, high taxes levied on financial operations, inadequate infrastructure,
narrow financial culture, poor economic governance, etc.
10. It is therefore necessary to lift structural barriers and improve the general
business climate in order to ease the establishment of active African stock
markets. One way forward to develop stock exchange activities and improve
capital raising, especially at the domestic level for investment on the continent, is
to integrate existing national and regional stock markets.
2

9. I.II Towards the integration of African financial markets
11. As in other fields, the small size of African stock markets contributes to the
high cost of operations and hinders their efficiency. In the face of considerable
global need for investments in Africa and the concomitant existence of countries
with excess resources and countries lacking resources, the integration of
financial markets may lead to: a better mobilization of resources, available within
and outside the continent (capital invested abroad and the savings of the
Diaspora), thanks to a wider choice of securities; a reduction of the interest rate;
a stronger level of investment and economic growth; etc.
12. In the proposal on the creation of a Pan-African stock market by the
African Union in January 2006, it was indicated that the Pan-African Stock
Exchange is not designed « to replace local stock exchanges but to strengthen
their role on the local financial market, and spread the use of financial and
monetary securities throughout the continent owing to its promising financial and
economic resources”. Thus the shape of the integration at the continental level is
to be determined by the choice of the most efficient option and by imagining a
progressive solution taking into account the diversity of African economies.
13. The advantages expected from setting-up this market at the continental
level are identical to those which prevailed for the launch of regional stock
markets but that have not, so far, been achieved by the latter: increase the depth
and the liquidity of the present financial market, attract higher volume of
resources towards investment, promote the modernization and efficiency of
financial operations, develop intra-continental trade and economic growth,
promote competition among enterprises on the one hand and between the
banking sectors and the non-banking financial sector on the other, benefit from
economies of scale and reduce the administrative burden of international
enterprises. With new information technologies and globalisation, the stock
exchange has lost the features of a fixed structure and basically gained the
shape of a mechanism based on transactions likely to emanate from any part of
the world.
14. However, in financial matters where the commitment of operators, and the
protection of the public and stakeholders’ confidence are primordial, realism and
pragmatism should feed the process of evaluating and designing the project of
the Pan African stock market. It falls in line with a comprehensive project of
setting up African financial institutions (African Investment Bank, African Central
Bank and African Monetary Fund) that the African Union is promoting in a bid to
further the development of financial systems and African economies.
15. Africa has already experienced the integration of stock markets, especially
in West, Central, Southern and East Africa. The results obtained fail to meet the
expectations. But this lacklustre performance is due to known problems that if
corrected could improve the situation.
16. Faced with the size of African stock markets which on the whole are small-
barely 1% of global capitalization-and the inadequate liquidity of all the
3

10. consolidated African stock exchanges, many stakeholders (African and foreign
political and economic decision makers, experts and researchers, etc.) consider
a more advanced integration of existing stock markets as the way forward to be
explored rapidly and seriously. The President of the Association of African
Central Banks (AACB) at the end of a symposium on the theme “ Capital markets
and mobilization of resources for poverty reduction and growth “ stated that “the
integration of financial markets was crucial for Africa and that there was no need
for each country to develop its own Wall Street on the continent”2
17. This study thus sets out to examine the feasibility of a Pan African stock
exchange, likely to better ease up the free flow, and at low cost, of financial
resources from surplus economic agents of the continent and foreign investors
towards long term investment of dynamic African enterprises and the non
monetary financing of States. The macro-economic progress accomplished in
recent years in most countries, the commitment demonstrated by an increasing
number of African economic operators, including stock markets, to extend their
scope beyond their national borders, and the increasing will of Member States of
the African Union to speed up economic integration are driving forces to the
execution of this project.
I.III Methodology
18. In order to see through its mission, the African Union Commission carried
out a study on an African stock market in a bid to assess the need for such a
financial institution and the various options necessary for carrying out this project.
Based on the results of this study and the recommendations of Member States
on the options to be retained, a technical study shall be carried out subsequently.
19. A questionnaire was thus forwarded by the Commission to present and
potential stakeholders. A mission was led in a number of member countries from
all the regions of the continent to seek advice from concerned institutions and
economic agents. Lastly, the Commission drew on the abundant existing
literature review on the development and progress of stock exchanges in Africa
and on national and continental economic data.
20. As concerns the survey, questionnaires were sent to Ministries of Finance,
Central Banks of all the African countries, stock exchanges and regulators of
financial market, banking institutions, insurance companies and selected
employers’ associations.
21. Over 130 questionnaires were sent, 39 were filled and returned,
representing 15 countries and covering 5 African regions including countries with
developed financial markets and those having underdeveloped financial markets.
22. The questionnaire was subdivided into two parts: a part dealing with data
collection while the other probed participants on the development of stock
markets, the Pan-African Stock Exchange project and the necessary conditions
for the establishment of the latter.
2
Dr Acquah, ABCA Symposium, Windhoek (Namibie), 2006
4

11. 23. Missions were conducted in all the countries hosting the headquarters of a
Regional Economic Community, apart from the Arab Maghreb Union (AMU). The
delegation met with the African Development Bank (ADB), operators of the
Tunisian Stock Market, and the Regional Stock Exchange “Bourse Régionale
des Valeurs Mobilières (BRVM)”, as well as the West African Economic and
Monetary Union - WAEMU) in Côte d’Ivoire.
24. The combination of documentary research and data collected from actors
and countries should help to have:
- A comprehensive analysis of the issue of stock market
development in Africa;
- A general view on lessons to draw from experiences within Africa
and abroad;
- A proposal on possible recommendations to be studied by experts
and then presented to the African Union authorities.
I.IV Organisation of the Study
25. The first chapter deals with an in-depth analysis of economic, financial and
overall environment for the development of the stock market. This part is
subdivided into 5 subparts that address the following issues: (1) the present
macro-economic framework in which African stock exchanges are operating; (2)
the financial context; (3) the legal and institutional environment; (4) the fiscal
framework; and (5) the technological context.
26. The second chapter analyses the performances of African stock markets
in the light of variables like the liquidity and the pattern of stock market indices.
These performance indicators are thereafter compared among African stock
markets, on the one hand, and with stock exchanges of other emerging countries
in Asia and Latin America, on the other hand. This is followed by an assessment
of the financial and economic viability of African stock markets individually as well
as the Pan-African Stock Exchange as a whole.
27. Chapter 3 studies the various options for the integration of African stock
markets by analysing the strengths, weaknesses, opportunities and threats
(SWOT analysis) for each of the options. Challenges relating to the
implementation are also addressed in this chapter.
28. Chapter 4 makes recommendations on the most appropriate options to
integrate stock markets and relating to the plan of action, timing, and the
sequence by which the plan of action should be implemented
5

12. CHAPTER 1: ANALYSIS OF THE CONTEXT OF THE INTEGRATION
OFAFRICAN STOCK EXCHANGES
29. Owing to the low investment and the need to boost economic growth,
considering the high indebtedness of African countries, low foreign direct
investments and the need to reduce the recourse to external funding, it is
important to mobilize more domestic resources. However, efforts to develop
savings and the financial sector, which hitherto has been dominated by banks,
and promote investment at the national level are stifled by the size of the
economies concerned. The regional and continental integration of these efforts
should produce better results.
30. This chapter delves into macro-economic and financial variables and other
factors which influence the savings and investment behaviour: evolution and
structure of GDP, level and pattern of inflation and interest rates, evolution and
structure of savings and investment, evolution and components of money supply,
size of the banking sector and depth of the financial sector, flexibility of the
payment system, tax system, legal and institutional framework, etc. The level of
education, which also influences the development of the financial sector, shall
not be addressed in this study.
1.1 The improving macro-economic context in Africa
31. The beginning of the new Millennium is marked by better economic
performances in practically all the African countries. Even though poverty has not
been eradicated, the percentage of the population living below the poverty line
fell from 47% in 1999 to 41% in 20043 due to the achievement of a high average
economic growth rate close to 5 % since 2000. Furthermore, real per capita
income has risen by 4.3 % between 1998 and 20064.
32. Even if the average growth rate is not equally distributed on the continent;
and is still far from the 7 to 8% target which is likely to enable sustainable poverty
alleviation in Africa, an increasing number of countries are riding on that growth
path. In 2007, only 10% of African countries recorded a negative GDP growth
rate or a reduction lower than 3% as opposed to 18 per cent in 19985.
33. It is worthy to note that the recovery of African economies is basically
supported by the mining and hydrocarbons sectors where the surge in product
prices has led to hikes in production and export prices. Nevertheless, a better
mastery of the main macro-economic aggregates especially the prices and public
deficits has helped to secure the remarkable participation of petroleum exporting
countries in the global economic growth. On the whole, countries of North Africa
and Southern Africa registered the highest results.
34. With regard to inflation, Africa has accomplished laudable efforts but which
have to be followed up in order to improve the competitiveness of economies.
3
UNCTAD, development in Africa, 2007
4
ADB/OCDE, Economic Prospects in Africa (EPA), 2007
5
ADB/OECD, supra
6

13. The average rate of inflation fell to 10% in the period 2004 - 2007 while being
higher than the 5 to 7% obtained in Latin America. The number of countries with
an inflation rate lower than 10% rose from 40% during the period 1998-2001 to
43% during the period 2002-2005.
35. Regarding public finance, on the whole Africa has significantly reduced the
level of budget deficit since the beginning of the 21st century. This progress is
basically due to the substantial surpluses recorded in petroleum producing
countries, the growth of the aid volume received and the extent of external debt
relief obtained from 2004 to 2006.
36. Advanced repayments by some oil producing countries (Angola, Algeria,
etc.) the cancellation of the debt of countries benefiting from the Highly Indebted
Poor Countries (HIPC) Initiative contributed to a significant reduction of Africa’s
external debt from 110.6% of the GDP in 2005 to 7.7% in 20076.
37. The foreign balance improved globally in Africa. The current balance of
payments, including grants, which has been in excess since 2003 (0.9%)
reached 4.7% in 2006 under the impulse of trade surpluses made by oil
producing countries7. In 2007, the surplus reached 1.5%, thanks to the increase
of deficits recorded by importing countries and in spite of the increase in deficits
registered by oil exporting countries. Africa’s share in the exports of goods and
services only rose from 2.1% in 2002 to 2.9% in 2005 essentially due to the
present oil sales dynamics. However, it is lower than the 3.1% and 5.5% rates
reached in 1990 and 1975 8 respectively.
38. On the whole the recent favourable trend of improved macro-economic
policies and performances and the high level of external capital flows have
induced the stabilization of exchange rates in most countries. Many African
countries have improved the convertibility of their currency among themselves
while the majority have refrained from resorting to multiple exchange rates and
have liberalized their exchange rate system. This situation is nevertheless fragile
owing to the persisting dependence of Africa on commodity exports and the
present difficulties encountered by Africa in promoting the diversification of its
production base. The various trends analysed above, contributed to the increase
of domestic savings and investments to 26.3% of GDP and 21.4% in 2006 as
against 18.4% and 17.5% in 19909 respectively. In East and Pacific Asia, the rate
of investment on GDP reached an average of 35% in the period 1990-2003, and
the savings rate related to the GDP stood around the same figure. In African oil
producing countries, the rates are higher; 26% for the investment rate (19.6% for
non-oil producing countries) and 33.7% for the savings’ rate (6.6% for non-oil
producing countries).
6
ADB/OECD, EPA, 2007, op cit
7
Ibid
8
WTO, 2006
9
ECA Economic Report, 2007 and 2008
7

14. Table 1.1 Domestic Savings (% of GDP)
(2002-2005)
(1
998-2001)
Algeria 36 47
Angola 24 25
Benin 6 6
Botswana 47 50
Burkina Faso 8 4
Burundi -6 -11
Cameroon 20 19
Cape Verde -16 -16
Central African Republic 9 10
Chad 4 29
Comoros -4 -7
Congo, Republic of 4 5
Congo,. Democratic Rep. 46 50
Côte d’Ivoire 20 21
Djibouti -3 6
Egypt 13 15
Equatorial Guinea 20 ..
Eritrea -34 -45
Ethiopia 10 6
Gabon 38 45
Ghana 11 10
Gambia 7 7
Guinea 17 8
Guinea-Bissau -10 -4
Kenya 10 12
Lesotho -23 -13
Liberia -3 -1
Libya 21 25
Madagascar 9 8
Malawi 4 -10
Mali 11 11
Mauritania 25 23
Mauritius .. ..
Morocco 18 19
Mozambique 11 12
Namibia 14 24
Niger 4 6
Nigeria 29 34
Rwanda 0 1
Sao Tome and Principe -13 -19
Senegal 11 8
Seychelles 22 17
Sierra Leone -8 -6
Somalia .. ..
South Africa 19 19
Sudan 10 15
Swaziland 2 16
Tanzania 5 10
Togo 1 4
Tunisia 24 21
Uganda 7 7
Zambia 7 18
8

15. Source : ECA
9

16. 39. It is worth noting that these rates generally fluctuate relatively showing
their dependence on external factors like the variation in the prices of raw
materials and foreign direct investment. But since 2000, the recent trends in the
oil market and direct investment in new prospecting countries (Sao-Tomé and
Principe, Ghana, etc.) maintain them at a high and stable level.
40. FDI remained relatively derisory in the global total in 2007 (2.3%)
amounting to 36 billion US dollars. This figure, equivalent to that achieved in
2006, double of that achieved in 2004, reflects a growth of the relative
attractiveness of African countries despite a concentration on a few sectors
including oil and mining products. However, Africa is far from the level of FDI
received in 2007 by Asia (18%) and Latin America (8.2%).
41. Capital flight from Africa invested abroad on real or financial assets
constitute a substantial short fall in terms of savings and investments. For Sub-
Saharan Africa, studies carried out on different periods and groups assess them
between 2.6 % and 7 % of GDP that is, amounts varying from 3 to 13 billion US
dollars yearly. Apart from political and related reasons (instability, corruption, bad
governance, etc.), there are numerous causes that account for this financial
exodus which has been depriving Africa of important resources for its economic
and financial development: budget imbalances and high indebtedness, instability
of exchange, lack of diversification of financial products, search for better profit
and safety, etc.10
42. The recent general economic recovery and the improvement of savings
and investment augur well for a more sustainable development of the financial
sector in general and the activities of African stock markets in particular. The
narrowness and the low viability of most national and regional stock exchanges
tell for an initiative designed to regroup existing stock markets.
1.2 Development of the financial sector
43. The positive macroeconomic performances came along with relatively
significant changes in the financial sector. The positive effects of changes in the
economic situation were further strengthened by the favourable impact of the
reform of the banking sector undertaken in the late 1980s, following the crises
that hit most banking systems in Africa.
44. The reform of the financial sector, backed by international financial
institutions, generally entailed the privatisation of banks and insurance
companies considered to be sound and the liquidation of those that were
deemed unviable, as well as the absorption by the State of most of the moribund
bank credit. The non-banking financial sector in Africa remained limited. The
financial market is still underdeveloped and concentrated on share and bond
transactions while retirement funds and by-product markets are unheard of in
10
ECA Economic Report, 2006; UNCTAD, Economic Development in Africa, Mobilisation of domestic
resources and the development-oriented State, September 2007
10

17. most African countries. This state of affairs therefore limits the possibilities of
choice between financial products,
Table 1.2 Foreign Direct Investment, net inflows (in millions of current $US)
(1998-2001) (2002-2005
Algeria 612 916
Angola 1652 1331
Benin 49 49
Botswana 53 373
Burkina Faso 11 19
Burundi 3 0
Cameroon 108 210
Cape Verde 26 26
Central African Rep. 4 1
Chad 156 705
Comoros 0 1
Congo, Dem. Rep. of 199 383
Congo, Rep. of 204 342
Cote d’Ivoire 303 232
Djibouti 4 20
Egypt 972 1878
Equatorial Guinea 399 1320
Eritrea 68 11
Ethiopia 204 383
Gabon -35 204
Gambia 38 43
Ghana 167 110
Guinea 23 77
Guinea-Bissau 2 5
Kenya 35 44
Lesotho 166 104
Liberia 119 194
Libya .. ..
Madagascar 63 16
Malawi 29 3
Mali 54 159
Mauritania 33 113
Mauritius 75 37
Morocco 95 1183
Mozambique 247 259
Namibia .. ..
Niger 8 14
Nigeria 1097 1942
Rwanda 5 6
Sao Tome and
4 2
Principe
Senegal 80 65
Seychelles 49 57
Sierra Leone 12 35
Somalia 0 11
South Africa 2573 2119
Sudan 427 1470
Swaziland 93 21
Tanzania 405 475
Togo 45 37
Tunisia 552 663
Uganda 166 217
Zambia 138 188
Zimbabwe 133 35
11

18. 45. However, the liquidity rate of the economy, made up of the ratio between
the money supply in circulation and the Gross Domestic Product (M2/GDP), a
key indicator of liquidity in the economy, increased from 22.3%11 to 38.4% in
2006 (2006 ADB statistics). This rate is higher in Southern Africa, excluding
Zimbabwe whose statistics are not available, and Northern Africa, at 56.9% and
44.4% respectively. In countries having a stock exchange market and for the
most part found in these two regions, excluding Mozambique and Zimbabwe
whose statistics are not available, this rate stands at 40.1%.
46. In spite of this significant increase, the financial sector continues to be
weak compared to developing countries in Asia with a rate higher than 120% in
2004 and that of Latin American countries and the Caribbeans (about 50% during
the same period12). Furthermore, the liquidity ratio is very variable, even in
regions where it is highest. This ratio is lowest in Equatorial Guinea (5.5%), and
highest in Mauritius Island (153.2%) as against 24.7 % for WAEMU countries for
instance which have the BRVM in common, 61.8 % in South Africa, 74.8% in
Djibouti and 93.1% in Egypt.13 On average, intermediate income countries have
an M2/GDP ratio more than twice that of low-income countries. In Sub-Saharan
Africa, over the period 2000-2004, this rate stood at 55.6% and 21.9%
respectively.
47. In Africa, money supply, made up of bank notes and currencies (fiduciary
money) and demand, savings and term deposits (bank money and quasi money)
is still made up of a considerable proportion of fiduciary money, about 25%. In
Latin America, this rate stands at 12%. A large fraction of bank deposits is made
up of demand deposits, more than 75% of the total in some countries, as against
term deposits, thereby limiting investment financing possibilities.
48. According to the World Bank, non-bank financial savings are generally
limited and lower than 20% of total savings. In less developed countries, this rate
is very low. Only a few African countries with high intermediate income show
diversified savings patterns (South Africa, etc.). These products of savings are
mainly made up of insurance premiums, with a share not more than 1% of the
GDP in most of the countries and for the most part concentrated on automobile
risk and stocks and shares. The development of stock exchange markets will be
treated below under a separate topic.
49. Generally speaking, the advent of micro finance has not really changed
the situation although it has allowed rural households and low-income urban
households to have access to financial transactions.
50. It is worth adding that the payment systems in Africa, mainly in cash, are
generally less efficient, more onerous, and impedes the smooth conduct of
transactions, despite all the efforts being deployed in some regions to modernise
the system of payment.
11
CERUDEB, CIRAD
12
Catherine Patillo, IMF 2004: the Financial sector in sub-Saharan Africa: problems, challenges and reform
strategies
13
ADB/OECD: supra. Referring to money in the broad sense/GDP
12

19. 51. Looking at another indicator of financial sector density, the ratio of loans to
the private sector over GDP, also shows that Africa is on the good path but that
the continent is still lagging behind compared to the rest of the developing world.
In deed, in 2005, this ratio stood at about 21% in Africa south of the Sahara as
against 30% in South Asia and 107% in high-income countries as against 19% in
200014. While low- income sub-Saharan African countries saw their ratio increase
from only an average 12.3% over the period 1990 – 1999 to 13.3% over the
period 2000-2004 (21% in low income countries out of Africa15), intermediate
income countries, including South Africa, recorded an increase from 52.1% to
64%. Apart from South Africa, the performances of intermediate income
countries are quite modest.
52. The same scenario between low and high-income countries also holds
true for Northern Africa, with national peculiarities depending on the level of loans
to the private sector. While the ratio of loans to the private sector over GDP in
2005 was 4.5%, 8.2% and 10.4% respectively in Algeria, Libya and Sudan, it was
51.2% in Egypt and 62.6% in Tunisia for the same year.16 However, a huge
fraction of loans to the private sector is used to finance routine transactions, with
a marginal fraction directed towards productive investments.
53. The African financial system is also characterised by ever-high interest
rates as confirmed by the existence of interest margins (variation between debit
interest rate and credit interest rate) of 8% in Africa as against a world average of
4.8%17, with a bank intermediation margin that is higher in low income countries
than in intermediate income countries. This is a reflection of poor competition
within the banking system and the limited role of non-banking institutions.
54. On the whole, the financial sector is still fragile. The percentage of poor
performing loans compared to total loans, an indicator of the soundness of a
financial system, is still high in Africa south of the Sahara, at 14.5%, with a 17.5%
rate for low income countries and 6.7% for intermediate income countries18.
55. The reforms that were undertaken in the financial sector mainly stem from
a change in the monetary policy applicable in African countries as from the mid
1990s. Particularly, under economic reforms supported by the World Bank and
the International Monetary Fund, these countries adopted some financial
liberalisation measures, notably: elimination of privileged debit interest rates and
a generalised placing of a ceiling on bank interest rates, deregulation of the
distribution of credits, authorisations for foreign banks to establish, etc.
56. The putting in place of independent and professional banking supervisory
institutions also facilitated a more efficient and cautious control of the banking
sector. However, the relative weakness of the African financial sector compared
to other developing regions of the world calls for additional efforts to be made by
States, in conjunction with the financial system, to promote a banking culture
14
IMF: Regional Economic Prospects (REP), Sub-Saharan Africa, October 2007
15
World Bank, Make Finance Work for Africa,
16
IMF: International Financial Statistics, September 2007, authors’ estimates
17
Partnership for Make Finance Work for Africa, 2007
18
IMF, REP supra
13

20. within a large segment of the population, the diversification of the financial sector,
new financial instruments, and trigger a drop in interest rates.
57. In Africa today, the rate of access to the formal and semi-formal financial
sector is particularly low at less than 20% as against 30% in East and Pacific
Asia.19, This is not enough to stimulate the development of the financial sector
especially in its modern dimensions such as the stock exchange market because
banking institutions constitute a key ingredient for embracing new financial
products.
1.3 Opinions of stakeholders on the economic and financial situation
58. Respondents to the survey and interviews conducted throughout the
continent on the feasibility of a pan-African stock exchange indicate that the high
level of inflation and inadequate interest rates are impediments to the
development of financial markets. 35.3% of the respondents consider weak
economic growth, low household incomes, low savings, and low investments as
obstacles to the emergence of financial markets. Lack of macroeconomic and
financial information, inadequate infrastructure, as well as crushing debt burdens
and the inadequate system of trade, are less mentioned as hindrances.
59. As a confirmation of the points of view expressed above, respectively,
38.2% and 20.6% of the persons interviewed think that reforms supportive of
macroeconomic stability and the putting in place of a sound and fair taxation
system that is favourable for strong savings are needed for the establishment of
a pan-African stock exchange. Conversely, promoting economic integration or
macroeconomic convergence, creating a common currency and encouraging free
movement of goods are not seen as priorities. Yet, 47.1% of respondents
indicated that with a view to setting up a pan-African stock exchange market, the
creation of a common currency is a prerequisite.
60. At this point, considering the narrowness of African economies taken
individually, and the variability of their economic and financial performances, a
long term viable stock market for investments and mobilization of capital can only
be envisaged at the continental level
61. Indeed, the economic results and financial solidity of the continent on the
whole are more sustainable than national and regional performances, given that
the weaknesses of each country are offset. Moreover, with regard to essential
variables, such as savings and investments, their global volume facilitates the
operation of an efficient financial market than their amount at the national and
even regional level. Liquidity ratio which varies amongst African countries and
low in most of them show how difficult it is to develop the financial sector in
African countries taken individually.
Table 1.3 Opinion on the creation of a Pan African Stock Exchange
No. %
19
WB, MFW4A
14

21. For 24 72.7
Reasons for the creation of a Pan African
Different stages of development but we can start with a few countries / Regional
stock exchanges first 4 16.7
Mobilization and improved allocation of financial resources/Economies of scale
and cost efficiencies/More efficiency, liquidity, transparency… 17 70.8
PA SE will inspire trust/Improvement of corporate governance 2 8.3
Will benefit issuers (listed companies and governments) 7 29.2
Will enhance opportunities for investors 2 8.3
Promotion of economic and financial integration 2 8.3
Others 2 8.3
Against 9 27.3
Reasons against the creation of a Pan African
Premature/Different stages of development 7 77.8
Will be another competitor/Commercial viability is doubtful 2 22.2
Others 1 11.1
Total of respondents 33 100.0
No response 3
Total 36
Source: AUC Survey
62. On the whole, the creation of a Pan African stock exchange and beyond it,
the establishment of a financial market ensuring the flow of capital at the
continental level would provide better visibility and a wider scope of arbitrage to
those looking for capital and investors both African and foreign. The modest
performances of existing African stock exchanges should be an inducement to
actively explore avenues to integrate African national and regional stock
exchanges.
1.4 Analysis of the legal, institutional, fiscal regulatory and technical
environment
63. In Africa, the legal, institutional, accounting, fiscal and technical environment
of financial operations in general and stock markets in particular is on the whole
archaic, are hardly favourable for their internal development and can hardly
attract foreign investors who do not have a lot of confidence in dispute resolution
mechanisms and in the stability of rules established both in the legal domain and
business tax system. The small proportion of foreign direct investment that Africa
receives is characteristic of the unfavourable business climate, which also affects
African economic operators. In some countries, it is difficult to know the norm
applicable for transactions or particular activities. Legal insecurity is considered
as one of the most serious impediments to attracting investors.
64. Furthermore, the diversity of regulations in force and existing technologies
are major challenges to the integration of stock exchanges in Africa. Although
there are several initiatives designed to harmonise the business laws and
environment in some Regional Economic Communities, the level of conformity is
not adequate for the creation and blossoming of a Pan African stock market.
15

22. 65. The following section shall deal with the situation on the continent and
some experiences to harmonise the regulations and adapt present systems.
1.4.1 Different legal systems
66. There are three major legal systems on the continent: civil law, common
law and religious law (sharia) systems. Civil law also known as continental or
Romano-Germanic laws is dominant and covers French-speaking countries as
well as some English-speaking and Arab countries (Côte d’Ivoire, Mali,
Botswana, Tunisia, Egypt, etc). Common Law is drawn up in Anglo-Saxon
countries prevails in English-speaking countries20, whereas religious law (sharia)
is characteristic of some countries in North Africa including Sudan, Libya, etc.
The following diagram presents African countries according to their legal
systems. The differences between the three systems reside in their origin and in
the manner of their implementation. In countries practicing civil law, the legal
system is based on one or many codifications adopted by lawmakers who
establish the major principles of law. In this case, the law is interpreted instead of
being drawn up or “made” by judges and only texts enacted and not
jurisprudence, defined as, are considered as force of law.
67. In countries practicing common law, the legal system is drawn up
according to customs and is created and/or fine tuned by judges. Rulings are
given depending on the jurisprudence and affect the law applied on future cases.
68. Where no legal declaration is binding, judges have the authority and the
obligation to “institute” the law by setting precedence.
69. Religious law refers to a system using a religious text like the Koran as the
legal source.
1.4.2 Regional attempts to harmonise business law and insurance
activities
70. Harmonisation is a process by which different States adopt identical laws,
by bridging the gap between the rules. It often induces the creation of norms and
principles to be used as rules and guidelines as well as the elimination of
differences in the technical contents of norms. Harmonisation is generally carried
out by international treaties or it involves the adoption by some States of
regulatory principles of other States. It is not necessarily a unique or uniform set
of rules or the standardization of all the rules. There are various types: i)
complete/maximum, ii) partial/minimum, iii) hybrid, and iv) one set of rules.
20
South Africa and Namibia use a blend of civil law and common law while the English speaking part of
Cameroon uses common law.
16

23. 71. There is no doubt that the unification of business law is one of the pre-
requisites to the creation of a Pan African stock exchange and the promotion of
investments in Africa. In this regard, in 1993, 14 (fourteen) African countries of
the franc zone signed the treaty to set up the Organization for the Harmonisation
of Business Law in Africa (OHADA), in a bid to harmonise their business law
especially with the purpose of attracting more local and foreign investments. The
Comoros Island and Guinea have become OHADA members and the Democratic
Republic of Congo is planning to join and become the 17th member. The activities
of this organization are not well known in English-speaking countries. However,
OHADA is making efforts to fill this loophole. Ghana is alleged to prepare to join
the bandwagon21.
72. Even if OHADA is a possible framework for the harmonisation of business
law in Africa, its legal principles that are clearly civil law oriented are nevertheless
likely to hamper its adoption by countries with different legal systems.
Furthermore, in 1992, franc zone member countries signed a treaty setting up an
organization in charge of regulating the insurance sector in their countries. The
Inter-African Conference on Insurance Markets (CIMA) is designed to enhance
cooperation in the insurance field, develop insurance and reinsurance companies
in relevant economies, etc.
73. Many initiatives have been taken to move towards a common supervision
and harmonisation of rules governing banking and stock markets activities in
Regional Economic Communities (RECs) giving impetus to the creation of a Pan-
African Stock Market.
1.4.2.1 In the banking sector
74. In the banking sector, a lot of progress has been made in the regional
supervision of activities. For instance, all the countries of the West African
Economic and Monetary Union (WAEMU) have the same legislation and have
set up a regional banking commission in charged of closely monitoring banking
activities in their region.
75. Member States of the Economic and Monetary Community of Central
Africa (CEMAC) are governed by the same banking legislation and the Central
African Banking Commission (COBAC) is responsible for the sector’s supervision
in all the member States. In 1994, a Committee of Banking Supervisors of West
and Central Africa (CBSWCA) was set up. It is made up of officials in charge of
banking supervision of 12 countries and those of the two regional banking
commissions22. Furthermore, SADC Sub-committee of Banking Supervisors
(SSBS) was set up in 2004, following the dissolution of the East and Southern
African Banking Supervisors Group (ESAF). SSBS has the same objectives as
the CBSWCA mentioned above. It has already signed a Memorandum of
Understanding to include SADC finance and investment sector’s protocol.
1.4.2.2 In the stock exchange sector
2
1 www.OHADA.com
22
Burundi, DR Congo, Cap-Vert, Ghana, Guinée, The Gambia, Madagascar, Nigeria, Sierra Leone,
Soudan, Rwanda, CEMAC et UEMOA.
17

24. 76. Most African countries have set up regulation structures for financial
markets, or financial markets authorities, with different names (stock market
valuation Commissions, financial services Commissions, etc.)They are
responsible for establishing and adapting rules, granting licenses for the
management of stock market operations, and supervising trade transactions and
the activities of brokers. Such a structure generally sets the standards that
market players must observe with a view to protecting the interests and rights of
investors and listed companies.
77. Considering that a properly defined regulatory system is the bedrock of
any efficient and transparent securities market, it is necessary to have strong
institutions with mission to harmonize the rules in order to make investors
confident and facilitate increased cross border economic activities.
Consequently, most African countries have already adhered to the 30 principles
of the International Organization of Securities Commissions (IOSCO) and which
are well accepted all over the world. Also, with regard to accounting, the
International Financial Accounting Standards (IFAS) provide guidelines on the
standards that African countries can apply.
78. It has to be recalled that there are two types of quotation systems now
being used in financial markets: continuous scoring and fixing. On stock
exchanges based on continuous scoring, transactions can take place at any time
provided the order received reflects the current price. In a stock exchange based
on quotation fixing, purchase and sales orders are regularly placed side by side
following a periodicity earlier agreed upon before being compared, at a point in
time of the business day, on the basis of a price at which there is very little
disparity between the purchase and sales orders25.
79. Just like the majority of the most powerful stock markets in the world,
many African financial markets operate on the model of continuous transactions.
The continuous quotation of securities and the ensuing immediate nature of the
transactions seem to be a key factor for the investor who would like to quickly
make up his mind. Transactions are finalized within five business days after the
day of quotation.
80. Continuous negotiation systems allow for greater transparency in price
fixing processes, and this is very important in reassuring investors who happen to
have very little knowledge when the stock market is still in its infancy.
81. Despite the disparities between country systems, recent trends seem to
suggest that players of financial markets are increasingly involved in regional
activities and African companies are embracing trans-border stock quotation. For
example, AngloGold Ashanti, a Ghanaian company, has dual quotation on the
Ghana Stock Exchange (GSE) and the Johannesburg Stock Exchange Limited
(JSE Ltd), and Oando, registered in Nigeria, has adopted a similar practice on
the Nigeria Stock Exchange (NSE) and at the JSE Ltd.
82. Currently, there are various initiatives aimed at giving a regional dimension
to the supervision of stock exchanges. In West Africa, WAEMU is a fully
25
IDA, World Bank. Stock Exchange Development, 1997
18

25. integrated bloc since the countries of this sub-region use the same currency, one
central bank and uniform rules and regulations for accounting and trade.
Furthermore, the West African Monetary Agency (WAMA) is working towards the
creation of a common currency and a common central bank for Gambia, Ghana,
Guinea, Liberia, Nigeria and Sierra Leon, which are all member countries of the
Economic Community of West African States.
83. However, each of the three existing stock exchange markets within the
ECOWAS, that is to say the Nigerian Stock Exchange, the GSE, and the
Regional Stock Exchange (Bourse Régionale de Valeurs Mobilières - BRVM) has
its own regulatory body and different rules and systems but allows for
simultaneous quotation of companies of their respective territories. Examples
include the listing of Trust Bank of Gambia on the GSE and on the Over-The-
Counter, OTC, market of Gambia in 2002, and the recent cross-border listing of
Ecobank Transnational Inc, a company registered in Togo, on the GSE, the NSE,
and the BRVM.
84. However, the experience of ECOWAS has shown that multiple listing is
not only possible but also cumbersome. Indeed, the mechanism is quite onerous
due to its costs and other expenses linked to the need to comply with various
rules and currencies and the dissemination of information. Also, differences were
noted on the listings of Ecobank securities between the three stock exchanges, a
situation which brings to the fore the problems of effective information flow. In
order to make up for these shortcomings, the Nigerian SE, the BRVM and the
GSE initiated discussions aimed at promoting greater cooperation and
harmonizing their rules.
85. In Central Africa, a regional stock exchange, the Central African Stock
Exchange, (Bourse des Valeurs Mobilières d’Afrique Centrale - BVMAC), has
been created and established in Gabon. It covers the Economic and Monetary
Community of Central Africa (CEMAC), made up of Cameroon, the CAR, Congo,
Gabon, Equatorial Guinea, and Chad which also have in common harmonized
trade rules, a common currency (the CFA F), a common central bank (the Bank
of Central African States, BEAC). Another stock exchange, the Douala Stock
Exchange, has been created in Cameroon. Given that these two stock
exchanges are found in the same monetary zone and that their individual viability
is weak, some attempts are being made to merge them.
86. A lot of progress has also be made in East Africa where the regulatory
bodies of the Nairobi Stock Exchange, the Dar es Salaam Stock Exchange and
the Uganda Stock Exchange, under the East African Community (EAC), signed a
memorandum of understanding in 1997 to establish an organization called the
East African Securities Regulatory Authorities (EASRA).
87. Cross border listing in East Africa is also on the increase as brokers-
traders, money market managers and investment funds for ordinary stocks
develop their cross border activities. For example, the shares of East African
Breweries, Kenya Airways and Jubilee Holdings are negotiated on the three
stock exchanges mentioned above.
19

26. 88. Within the Southern African Development Community (SADC), a funding
and investment protocol has been signed and aims at encouraging the
harmonization of the funding and investment policies of Member States.
Furthermore, there is a Community of SADC Stock Exchanges (COSSE) with the
main goal of fostering cooperation between the stock exchanges of member
countries and developing a regional stock exchange.
89. In fact, as of now, all SADC stock exchanges have already harmonized
their listing, negotiation and clearing standards within the framework of the
Committee of Insurance, Securities and Non-Bank Financial Institutions
Association (CISNA), COSSE, the Association of African Central Banks and the
Association of African Stock Exchanges. There are also initiatives aimed at
finalizing the harmonization of transaction systems, and discussions are
underway on the training of investors, a common certification test for brokers and
the cross-border listing of securities in SADC stock exchanges.
90. In a nutshell, at the level of the continent, there is very little harmonization
of stock exchange regulations. It is necessary for African countries to create a
platform where this harmonization process can be initiated. To increase the
confidence the public has in financial markets, in general, and stock exchanges,
in particular, it is crucial to consolidate the terms of contracts and rule of law.
1.4.3 An unsuitable fiscal context
91. In all the countries, the taxation of savings and securities has far reaching
implications on the development of financial markets. The tax administration in
Africa, characterized by inadequacy and bureaucracy, does not facilitate
economic and financial development. African taxation systems are also quite
often characterized by high levels of tax evasion and corruption.
92. Tax regulations and high tax rates are often seen as obstacles to
economic activities in Africa. In South Africa, foreign companies are taxed up to
34%24. According to the AfDB a new company tax law has reduced company tax
in this country by 12 to 32% for industry and by 20 to 40% for the other sectors.
93. Within the framework of a project to set up a common stock exchange
market, it is very important for the taxation policies of African countries,
especially on financial transactions, to be harmonized. We must avoid a situation
of disparities which may lead to tax competition between the countries as they
seek to attract foreign investors or investors from other African countries.
94. The differences between taxation systems inhibit economic integration and
growth. However, most African regional communities are now tending towards
harmonizing their taxation systems. This is the case of WAEMU and CEMAC that
have harmonized their domestic consumption taxes during the 1990s.
95. Another factor that can also influence investment decisions is the
availability of tax incentives. Countries granting tax incentives stand a better
chance of attracting investors than those with rigid taxation policies.
24
AfDB, 2006
20

27. 96. Forty four per cent of the answers to the questionnaire of the AU
Commission survey on the pan-African stock exchange project mentioned
unfavourable tax systems as one of the major factors affecting the development
of financial markets in Africa. Seventy four per cent underscored the importance
of a harmonized tax system for a viable stock market. The officials who were
interviewed noted the absence of attractive taxation measures as a challenge for
most African countries to attract investments.
97. Recent studies have equally confirmed that attracting foreign direct
investments through tax exemptions can have a great impact on low- income
countries now competing for export-based foreign investments. Consequently, it
is imperative for countries to harmonize their taxation policies thereby improving
their investment environment. It is advisable to adopt a tax rate that will boost the
economy while maintaining fiscal equilibrium.
98. In the SADC region, a funding and investment protocol has been signed
by Member States to harmonize their funding and investment policies. By virtue
of the annex on taxation and related issues, the Member States have to adopt a
common approach on the treatment and application of tax incentives.
99. Certainty, simplicity and fiscal stability should be able to reassure
investors about returns on investment. So, taxation systems should be
administered with transparency in order to increase the confidence of
businesses.
100. However, fiscal coordination could be more attractive than fiscal
harmonization. Inter-jurisdictional tax equity is one of the main criteria for tax
coordination because it ensures uniformity in the assessment of companies and
tax withholding among countries. Tax coordination also ensures fairness and
neutrality for taxpayers.
Table1.4
Major factors affecting the development of financial markets in Africa
Total of
No respondents % Weights
Low per capita income 22 36 61.1 15.7
Lack of knowledge on financial assets and investment in stock exchange 27 36 75.0 19.3
Mistrust with respect to financial institutions 9 36 25.0 6.4
Mistrust with respect to issuers (drawers) 7 36 19.4 5.0
Lack of financial information 25 36 69.4 17.9
Unfavourable tax systems 16 36 44.4 11.4
Legislation and regulatory framework not conducive 23 36 63.9 16.4
Others 11 36 30.6 7.9
Source: AUC Survey
1.4.4 A divergent technological environment
101. The technological context varies considerably from one African country to
another. While basic infrastructure (electricity, telephone, Internet, etc.) are hard
21

28. to come by in some countries, yet other countries are acquiring frontier
technology infrastructure.
102. Thus, in 2005, according to the ADB, electricity consumption varies from
10 kwh per year in Chad to 5 060 kwh in South Africa, with 23 countries
consuming less than 100 kwh and 12 countries consuming more than 1 000 kwh.
The same gap is found in 2006 in terms of telephone, fixed and mobile, with a
country with less than 20 subscribers per 1,000 inhabitants (Ethiopia) and
countries like South Africa and the Seychelles where the number of subscribers
for 1000 population is around 919 and 1058 respectively, most countries with a
figure lower than 250 subscribers despite the progress enabled by the cellular
phone.
103. In the same period, with regard to Internet access, there is a clear divide
between the 18 countries with fewer than 10 people connected per 1000
inhabitants (Sierra Leone, 1.7 connection; Niger, 2.9; Liberia, 0,3; Ethiopia, 2,
etc) and 6 countries with over 100 connections per 1000 inhabitants (Morocco,
197.7 connections, Mauritius, 255.6, Sao Tome, 187.1; Seychelles, 337.2; Africa
South, 105.6; Tunisia, 126.8). It should be noted in the figures provided above
that the countries better equipped for energy and telecommunications
infrastructure are those with the most active stock exchanges.
104. Transaction systems in developed stock exchange markets have improved
from the public outcry system where stocks were traded orally to automated
systems where transactions are computerised. There was a proliferation of
computer-based systems around the world to respond to increased competition
between stock exchange markets in terms of exactitude, error margins, and
quality of execution.
105. Today, African stock exchange markets still use the public outcry system,
even though most of them are gradually changing to computerize their
transactions in spite of the costs considered being excessive. This trend finds
justification in the observation that most stock markets recorded an increase in
turnover just after computerizing their transactions.
106. Many observers even think that the automation of transactions is
particularly important for an integrated market given the fact that most stock
markets recorded an increase in turnover just after adopting such systems.
Moreover, the automation of the trading system should be done simultaneously
with the introduction of a central securities depositor. Such a depository is
responsible for minimizing the risks involved in the holding and circulation of
securities and also reduces related errors and delays.
107. Automation would encourage capital flow through out the continent as it
would lead to a reduction in the costs and inefficiencies inherent in each stock
market, and would swell the volume of activities and liquidity. An automated
trading system would equally shorten the negotiation chain by reducing the
number of intermediaries and allowing investors to operate directly on stock
markets. Even more important is the confidence generated by automation as it
allows for very little manipulation.
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29. Table 1.5
Negotiation system and settlement date of selected stock exchange markets in 2006
Trading system
Settlement
Stock Exchange
date
System Type
Botswana Stock Exchange Public outcry Manual T+4
Cairo & Alexandria Stock Exchanges EFA Automated T+2
Dar Es Salaam Stock Exchange N/A Automated T+5
Continuous auction sale
Ghana Stock Exchange Manual T+3
system
Johannesburg Stock Exchange Ltd TradElect Automated T+5
Lusaka Stock Exchange N/A Manual T+3
Nairobi Stock Exchange N/A Automated T+5
Namibian Stock Exchange TALX Automated T+5
Nigerian Stock Exchange Horizontal trading system Automated T+3
Automated system
The Stock Exchange of Mauritius Automated T+3
(SEMATS)
Public auction sale
Uganda Securities Exchange Manual T+5
system, manual
Zimbabwe Stock Exchange Public outcry Manual T+7
Source: ASEA Yearbook 2006
CHAPTER 2: ANALYZING THE PERFORMANCES OF EXISTING STOCK
EXCHANGES
23

30. 108. On the whole, African stock exchanges record mixed performances. Apart
from the Johannesburg Stock Exchange, which is modern and well known in the
world, most of the other stock exchanges are bugged down by numerous
problems including: low demand and supply of financial products, low volume of
trade, high taxes, poor macroeconomic conditions, lack of market infrastructure,
etc.
109. Generally, African stock markets are mainly dominated by equity markets
to which could be added some fledgling covered bond markets. Stock markets
for derivative instruments and other sophisticated products are not well
developed, and thus are rare in Africa.
2.1 General presentation of African stock exchanges
110. There are currently twenty-three stock exchanges on the African continent
geographically distributed as follows:
111. In Northern Africa, four stock exchanges: Algeria, Casablanca, Cairo and
Alexandria (CASE) and Tunis;
112. In West Africa, four stock exchanges: the BRVM which brings together
eight countries of the West African Economic and Monetary Union (WAEMU),
Cape Verde, Ghana and Nigeria;
113. In Central Africa, two stock exchanges: Douala and the BVMAC
regrouping the six countries of the Economic and Monetary Community of
Central Africa (CEMAC);
114. In Southern Africa, eight stock exchanges: Botswana, Johannesburg,
Malawi, Mozambique, Namibia, Swaziland, Zambia and Zimbabwe.
115. In East Africa, five stock exchanges: Nairobi, Mauritius Island, Kampala,
Tanzania and Sudan.
116. In this study, our analyses will be based on the securities and bond
markets, which are preponderant, even if in South Africa, the derivative
instruments market has made great strides in recent years. Given the lack of
data, this analysis will not take into account securities traded on over-the-counter
markets even if this type of trading is quite considerable on many stock markets,
especially Cairo and Alexandria.
2.1.1 Structure of African stock exchanges
117. To ensure the effective and efficient functioning of stock exchanges, their
regulatory authorities have, in keeping with international standards, adopted the
principle of net separation of the missions and responsibilities of the various
players. This choice is generally manifested in the creation of two distinct poles
of competence on each stock exchange: a public pole which acts as the stock
exchange regulatory and supervisory Authority with its main role being to
24

31. regulate and supervise the stock exchange, and a generally private pole with the
primary purpose of coordinating and organizing the stock exchange market.
118. The first pole acts as the representative of the State. It operates
independently. It protects the general interest of actors of the market, and
ensures the security and integrity of the stock exchange. In most countries, a
specific body is set up. In a few countries, this function is entrusted directly to a
department in the Ministry in charge of finance. The missions and functions of
the pole are broken down around the following elements:
• protecting savings invested in financial instruments and any other
investment that may give rise to public invitations to save;
• providing complete and dependable information, in a fair manner, to all the
stakeholders or investors;
• ensuring the proper functioning of stock exchanges and the smooth
conduct of stock public sales;
• regulating and controlling all financial transactions relating to quoted
companies (listing, capital increase, public sale or takeover, merger, etc.);
and
• developing an organized, fair and efficient stock exchange.
119. The second pole, commonly referred to as the stock exchange or
company market place, has a mission to organize and coordinate the activities of
the stock exchange. It is responsible, inter alia, for:
• listing of securities;
• quoting of securities;
• monitoring and controlling quotation sessions;
• disseminating/publishing of stock exchange information;
• setting rules to govern negotiations, clearing and settlement-delivery as
well as the rules of good practice which brokers and dealers must respect
in order to ensure transparency, impartiality and proper organization of the
stock exchange.
2.1.2 Players in the stock exchange
120. The range of players is made up of issuers, brokers / dealers, and
investors both domestic and foreign.
2.1.2.1 Issuers
121. In terms their shares and bonds, issuers are mainly private companies.
With regard to bonds, other issuers are governments and supranational
authorities. Through privatisation programmes, governments have become key
stock exchange players by getting their securities listed. By listing treasury bills
governments have become major issuers of securities that could be traded on
the secondary market. Today, this has become a major stock exchange activity
that injects a lot of liquidity into the market.
25

32. 2.1.2.2 Investors
122. Stock exchange markets are mostly dominated by institutional investors
(insurance companies, pension schemes, common investment funds, etc.) Apart
from these investors, we also have private investors, banks, foreign companies
and foreign private investors.
123. In recent years, thanks to numerous reforms undertaken by authorities, an
increasing number of foreign investors are beginning to develop interest in
African stock exchange markets. In 2006, foreign capital investors in shares on
African financial markets stood at a net total of 10.5 billion dollars126. Most of it
was invested in the JSE Limited (10.4 billion), while Tunisia (33.8 million),
Mauritius Island (30.7 million) and Zambia (15.4 million) received modest shares
of these flows. Foreign investors are mainly made up of pension schemes,
common investment funds, and hedge funds. Among them, some are specialised
regional funds because they have a long-term objective and/or sufficient local
resources to overcome information differences.
124. On bond markets, investment are mainly realised by private or institutional
investors (insurance companies, pension schemes, banks), and foreign
companies. In 2006, investments by hedge funds and other debt funds increased
considerably. This flow of capital into the continent is however concentrated in
high yield countries that export raw materials (commodity products) and in those
with attractive macroeconomic prospects or rather open capital markets such as
Nigeria, Zambia, Malawi, Botswana and Ghana. The BRVM and, to a lesser
extent, Kenya and Uganda also received capital flows on the respective debt
funds.
125. An estimated total of one billion US dollars was invested in Nigeria in the
first semester of the year 2006, that is to say more than 5 times the total foreign
investment received in 2005. More moderately, the Zambian debt market
attracted some 250 million dollars while that of Tanzania received a little more
than 150 million dollars.27The interest foreign investors have been showing in
Africa since 2006 stems from:
• the existence of abundant liquidity in the world, and the reduction of
interest rate differences on government bonds between developing and
emerging economies;
• the reduction of the risk allowance (for cessation of payment) on some
State loans and the improvement of the creditworthiness of many
countries thanks to their good macroeconomic performances and the
substantial reduction of their debt burden through the various debt relief
initiatives for heavily indebted poor countries;
126
Source :Amevi M. Atiopou, Marchés financiers azfricains 2002-2006, Afrology
27 Source : Voir ci-dessus
2
26

33. • the increase in commodity prices (oil, timber, minerals, etc.) which has led
to an appreciation of the currencies of exporting countries;
• the considerable improvement of the accessibility of foreign investors to
African markets. Consequently, many more African financial asset
purchases can now be paid for through Euroclear, and this goes a long
way to reduce the costs of transactions. Before 2006, of all the African
currencies, only the South African Rand was paid for through Euroclear. In
2006, seven other currencies joined the Euroclear system thanks to the
leadership of the African Development Bank that issued bonds in these
currencies, by making sure that the authorities concerned fulfilled
Euroclear requirements28.
2.1.2.3 Brokers
126. Brokers are mostly found around stock exchange firms that have been
able to develop securities trading services such as portfolio management, the
management of funds and securities underwriting activities. They have increased
their products through the creation consulting, research and data analysis
services. Many specialised services have developed to better meet the
increasing needs in assets management, especially of institutional investors such
as pension schemes, as well as to satisfy the counselling needs of companies.
127. In some countries, brokers and dealers or stock exchange firms are stock
exchange shareholders. In others, the shareholding of stock exchanges is more
diversified, including notably the State as well as financial and non financial
enterprises. In the first case, the ownership of the stock exchange is like that of a
credit union of some sort.
2.1.2.4 Central depository, clearing house and settlement bank
128. The chain for the conduct and finalisation of stock exchange transactions
also includes the activities of specific structures in charge of performing some
functions, notably that of facilitating the settlement and delivery of securities
between buyers and sellers, generally with brokers as intermediaries.
129. Hence, the clearinghouse has a role to ensure the circulation of securities
between brokers while the central depository keeps the securities and keeps
record of transactions relating to such securities. Increasingly, the circulation of
securities is done rather that in paper. In some stock exchange markets, these
different functions are entrusted to one and the same structure.
130. The function of settling transactions on securities is sometimes performed
by a particular operator who may be a central bank, a commercial bank, or
another structure. Each broker/dealer has an obligation to open an account in the
settling bank.
28
Source: AfDB
27

34. 2.2 Comparative analysis of the performances of African stock
exchanges
131. We will examine the performances of African stock exchanges by referring
to the results recorded by share and bond markets since those of the other
financial products (right, derivative and final products, etc.) are rather
insignificant.
2.2.1 Equity markets
132. The analysis of performances on equities markets will be centred on the
results recorded by some key stock exchange indicators over the period 2002-
2006.
2.2.1.1 Capitalisation
133. Capitalisation measures the financial capacity of a stock exchange. It is
equal to the total of the products of stock exchange prices of listed securities and
the number of each of the shares listed. This indicator is used, inter alia, to
assess how safe the investment is through the stock exchange weight of the
companies listed.
134. From 2002 to 2006, the capitalisation of African stock markets increased
from 238.4 to 955.5 billion US dollars, i.e. a 75.1% increase made possible by
the growth of the number of stock markets, the relatively large size of the new
listed companies and the flow foreign investors on African markets such as South
Africa and Egypt13.
135. In 2006, the JSE Limited accounted for nearly 75% of the capitalisation of
African stock markets, followed by CASE with 10%. Together, these two
exchanges constitute about 85% of the capitalization of African stock exchanges
but only 1.5% of the capitalization of the International Federation of Stock
Exchanges in which they are the only two African members.
136. However, the capitalisation of the smaller African stock markets increased
considerably between 2002 and 2006, the most notable variations have been
noticed in Ghana (+ 1,559%), in Zambia (1,196%) and in Ugandan (+1,085%).
For its part, Swaziland appeared the less dynamic with only 57%.
137. In 2004, according to the IMF14, the overall capitalisation ratio compared to
the GDP stood at 36% for Africa as against 161.3%, 70.6% and 25.4% for
Malaysia, Thailand and Mexico respectively. Still in 2004, this ratio stood at
214.1% for the JSE Limited and 51.3% for CASE, figures which confirm the
relatively advanced level of these two financial markets.
138. North Africa, with four stock markets, had a capitalisation of 147 billion
dollars in 2006 compared to 37 billion dollars in 2002, that is to say a 297%
increase, lower than the average for the continent over the same period, which
13
Pazisma Corporation
14
28

35. was 379%. The Cairo and Alexandria Stock Exchange (CASE) represents 63.7%
of the capitalisation of that region. While that of Algiers is still insignificant (0.1%)
mainly due to the fact that it only went operational recently.
139. In West Africa, stock capitalisation on the three existing stock markets
increased significantly between 2002 and 2006, from 8 billion to 50 billion dollars.
This strong growth, 525%, is largely due to the dynamism of the Nigerian stock
exchange, the fourth most active stock exchange and largest of the continent in
2006 and whose capitalization is about 80% of the region. The BRVM, despite of
being regional, has a limited capitalization of 5% while the Stock Exchange of
Ghana contributes 15% of the entire region.
140. East African, with five stock markets, has a total stock capitalisation of 4
billion dollars in 2002 and 22 billion dollars in 2006, a 400% increase in five
years. This growth, exceeding the continental average, is largely due to
developments on the Kenyan market.
141. The Southern Africa region, if it concentrates relatively the largest number
of stocks in Africa, eight, is also the most active, that of South Africa. Thus, its
capitalization has increased from 188 billion in 2002 to 736 billion dollars in 2006
following an increase of 290%, a rate significantly below the continental average.
From other stocks in the region, only Malawi has a market capitalization greater
than $ 10 million in 2006 (12.29 million).
142. In the Central African region, with a listed company in 2006, the Douala
Stock Exchange has a capitalization of approximately 4 million U.S. dollars while
BVMAC has started operations in August 2008 with the listing of a government
bond.
29