Progress Towards East African Regional Capital Markets Integration

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Progress Towards East African Regional Capital
Markets Integration
Presentation at the World Bank Seminar on
Making Finance Work for Africa 5th March 2007
Nairobi, Kenya
By Japheth Katto Chief Executive Officer Capital
Markets Authority, Uganda
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Presentation Outline

• Progress in Capital Markets Integration
• A Cross Regional Comparison of Stock Markets Size
• Challenges
• Way Forward
• Immediate Priorities
• Medium-Term Priorities
• Conclusion

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East African Integration An Illusion or
Possibility?

• A regional stock market is likely to fail if the
  political reason for its establishment outweighs
  its commercial motivation
• Africa is the least likely candidate for
  regional integration of stock exchanges

Hooper, V., (2002). A World of Regional Stock
Exchanges, School of Banking and Finance,
University of New South Wales Working Paper.
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Progress on Capital Markets Integration
Harmonized Features

• Common English legal system
• Legal Regulatory Framework
• Disclosure Requirements,
• Corporate Bond Guidelines,
• Collective Investment Schemes
• Corporate Governance Guidelines
• Compliance with International Financial Reporting
  Standards (IFRS)
• Common market structure (3-tier)
• Cross border listings(3 companies so far)

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Progress on Capital Markets Integration
Unharmonized Features

• Trading, Clearance and Settlement Systems
• Compliance with International Organization of
  Securities Commissions (IOSCO) principles
• Certification program for Market practitioners
• Domestic investor status for all East Africans
• Harmonization of tax rates, incentives and
  incidences

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Cross Regional Comparison of Stock Markets Size
Source ASEA Year Book 2005, www.world-exchanges.o
rg
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Cross Regional Comparison of Stock Markets Size
Source ASEA Year Book 2005, www.world-exchanges.o
rg
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Challenges

• Tax policies not fully harmonized
• Foreign Investment polices not fully harmonized
• Lack of depth and liquidity in the stock markets
• Disparities in trading, clearing and settlement
  infrastructure
• Insufficient capacity and skills
• Lack of a fully harmonized legal and regulatory
  regime
• Lack of Political will especially in the passing
  of legislation necessary for integration
• Multiplicity of regional blocks (map illustrates)
  

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Immediate Priorities

• Promotion of cross-border trading, free flow of
  capital across borders is essential.
• Consider adopting a Single-Passport System for
  market practitioners as is the case in the EU.
• Expedite the passing of laws e.g. The Ugandan CDS
  Act
• Establish a CDS Automated Trading System in
  Uganda
• Treat EAC investors as nationals in all three
  countries, both in the trading of securities and
  the taxation of investment income.
• Reform of the long-term savings sector (Pensions
  Life Insurance)

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Medium-Term Priorities

• Have a single currency in place
• Regulatory authorities should consider adopting
  principles of mutual recognition as is the case
  in the EU
• Companies law should be modernized to eliminate
  current problems of duplication and overlap with
  securities laws.
• Develop investment banking and underwriting
  particularly in Tanzania and Uganda.

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Key Areas for Donor Assistance

• Implementation of the Regional Certification
  program
• Technical assistance to build capacity to
  implement both regional and national reforms
• A Study to provide a road map for the regional
  integration of the EA markets

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Conclusion

• The success of regional integration will depend
  on finding solutions to key country-level
  problems.
• Consistent and assured political backing of the
  EAC authorities will be crucial for capital
  market integration to materialize.
• The observed diversity in the member countries
  could be a source of regional strength as they
  can capitalize on complementarities.
• Stakeholder consultations are vital at every
  stage of the integration process
• Overall, significant progress has been made
  towards EA integration so far.

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QUOTE

• There is a strong view among various observers
  and stakeholders that effort should be made to
  promote an integrated regional capital market
  given that, on an individual country basis, the
  investor base is too narrow and small to support
  the emergence of a truly dynamic capital market
  in any of the three countries
• Mr. Godfrey Tumusiime,
• Director General, East African Development Bank
• 7th November 2003

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THANK YOU

• ASANTE SANA