By Theonest Asiimwe

East Africa Researcher GLCSS

Discussion started this week to merge the three East African bourses to form a single stock exchange market called the East Africa Stock Exchange. Once this is achieved, three East African bourses, the Nairobi Stock Exchange (NSE), Dar es Salaam stock Exchange (DSE) and Uganda Securities Exchange (USE) will set up a single Depository System Corporation serving the whole of East African nations.
 

Meanwhile, the NSE has been branded with a new Automated Trading System (ATS).  It is linked to the electronic Central Depository System (CDS) that was launched in November 2004. This new ATS is sourced from Millennium Information Technologies (MIT) of Colombo, Sri Lanka. This is likely to create more confidence in Kenya’s capital market and shares and it is hoped that East African companies will be listed in 2008 on the NSE market.
 

Lack of entrepreneurial skills in East Africa affects the business sector and the development of capital markets, and only the NSE has registered progress ever since its launch 52 years ago. It has about 18 member firms and 49 listed companies. Its capitalization has risen by over 550 percent to about Kshs 728 billion from Kshs 112 billion since December 2002. Its 20-share index has also increased by over 260 percent to 4906.49 points during the same period.

 

In contrast, the contribution of DSE and USE to the Gross Domestic Product (GDP) is still insignificant. In some instances the two have been subsidized by the government in order to remain in operation. For example, the Tanzanian government has offered DSE a number of incentives ranging from preferential corporate and withholding tax on dividends for listed companies to abolition of capital gains tax arising from DSE equity trading.

 

Uganda’s stock exchange on the other hand is not well developed and few companies and individuals have invested in it. There are indications however that Ugandans are starting to realize the importance of trading in shares. Recent statistics show that between 7000 million to two million shares can be traded daily which is equivalent to a total turnover of between Shs 3.3 and 940 million.

The Great Lakes Centre for Strategic Studies (GLCSS) has discovered that stock exchanges in East Africa are hindered by at least four factors.

 

First of all, business people need to be educated about how the shares are traded. This is noticed in the small investor base and few products listed on the three stock exchange markets and oversubscription in certain products. This shows that it is difficult to introduce innovative products in the market.

 

Second, these stock exchange markets are not big enough to attract big foreign firms. They are not well developed and competitive and lack liquidity.

 

Third, they are urban based and thus local companies and individuals in the villages have no access to them. This is also associated with limited capital and in most cases their stock is in the form of commodities such as tea, coffee maize, cotton yet these stock exchange markets do not accept commodities.

 

Fourth, non-compliance with international standards hinders the development of East African stock exchanges because of investor reluctance and the increased risk factor. Therefore, other developing countries like China and Malaysia have been prime investors because they understand the realities of the developing marketplace.

 

The economic integration of the East African Community (EAC) will lead to the merger of East African businesses and this will produce larger markets and generate larger revenues.  In addition, this will offer the EAC a consolidated platform for European and United States trade talks.

Theonest Asiimwe at be reached at asiimwe@glcss.org.  GLCSS trains African journalists, offers an on-site internship to foreign African studies students, and manages an exchange program with journalists from the United Kingdom, the United States and Europe.

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