The Four Pillars Of Exchange Market Growth

Ambassador from Zambia, Nicholas Kabaso on developing capital markets.


With the complex nature of global business, economic activities remain highly interdependent, with no single economic activity existing on its own. Cultures and societies remain highly fluid in their response to social economic development. In the same light business houses world over continue to frequently revisit the way they do business with many embracing advances in information and technology.

On the afternoon of 4 October, I was privileged to be among delegates attending a Breakout Session with the Johannesburg Stock Exchange (JSE) on the development of capital markets. During the Session, one of the delegates asked a question about how we can develop our capital markets (i.e. exchange markets). I thought it was a good question, which went on to spark an intelligent discussion so I want to share a few thoughts in relation.

To start with the exchange market, like any other market, is highly reactive. This implies that its existence is solely dependent on the availability of financial players who as a whole are seeking to satisfy their financial aspirations. That being said, the full maturity of the exchange markets is dependent on a lot of external factors, which by and large would be said to be stimulants to its growth.


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                (Delegates and Ambassadors outside the Johannesburg Stock Exchange)

At present Africa’s largest exchange market is the JSE, which stands as the largest exchange both in terms of liquidity levels as well as in the number of listed entities. However, we need to underscore the fact that for JSE to rise to the stature of the big five it was a process of economic growth not merely a onetime event. I have categorised what I call the four pillars of exchange market growth to provide context to this blog. The four pillars include:

1. Sustainable Economic Growth

There is a strong positive correlation that shows sustained economic growth coupled with robust security exchange controls leads to growth in the exchange markets. Economic growth measured as a compound of variables such as households’ consumption, private investments, fiscal policy and net exports has knock on effects to the growth of markets. If these respective players increase their levels of output, the economy will ideally grow. As these individual players seek to increase their output it results in the sophistication of their financial needs. For example, as households’ output increases some will seek to save while others of little means will seek to borrow. Business houses may want to switch their less urgent resources to more urgent ones and others may be seeking to merely expand their business catchment. Many other players will merely be seeking to gamble. And in these aspirations one element that underlines all of these players’ behaviour is uncertainties or risk and so therein lays the businesses to underwrite. This simplistic view helps to explain the sort of financial sophistication that will ensue as the economy grows with increased and varied economic activities. And it is such complexity of financial needs that opens the window of growth for the exchange markets.

Compared to the Republic of South Africa whose total GDP was reported to be $524 billion as at 2010 and ranked the biggest economy in Africa, the Zambian GDP was captured at only $20 billion. Notice that the economic output well speaks to the rate of capitalisation in the JSE and that of LuSE. Because of our lower economic output which reflects in part the contribution of various players, it mirrors the level of financial activities on the bourse. Additionally, the number of listed entities will vary with the levels of economic output. It’s against this background that investment managers in various institutional houses such as pension funds, compensation and investment houses remain heavily incapacitated with existing investment options at their disposal. This has resulted into pooling of funds amid high demand resulting into expensive monies being created. Therefore, allowing for a sustained linkage of economic activities is crucial for both up stream with suppliers and sub contractors and downstream with the distribution and marketing channels who are all crowned by the financial markets.


2. Corporate Governance

Granted it is not wrong to pride oneself in the growth of his or her business entity, more often than not, such pride overcrowds the bigger picture for good corporate governance e.g. running an entity with unqualified family members or relatives, inconsistency in submitting annual returns or lack of adequate corporate disclosures in the published reports. Additionally, lack of rigorous corporate governance monitoring tools by the authorities registering these entities has had an adverse toll on the growth of the exchange markets. Worse yet, it has also made it almost impossible to track those in the informal sector who at present remain the rising stars in our economy. Therefore, there is need for the government through its various agencies to employ monitoring mechanisms for corporate governance in all registered entities including small and emerging businesses. Additional capacity building will be required for the small entrepreneurs to allow them set up business on well grounded structures.


3. Corporate social responsibility

Closely related to the second pillar is the CSR piece. At present being socially responsible has been seen as a way of saving face with the general public. However, current schools of thought around being socially responsible have moved from the conventional approach of only seeking to provide handouts, to improving and sustaining the communities’ livelihood. The drive being, to provide more sustainable socio-economic projects. Thus, all business houses should seek solutions to the needs of communities which won't only help the communities but provide added market opportunities for their business growth. For instance, enhancing rural and peri urban outreach for ICTs, increasing financial literacy for people, etc. These humble community outreach activities will provide potential market for enhanced business growth which subsequently sustains all various business linkages. This will in turn force the expansion of businesses capitalisation to capture such markets that would have ensued.

Doubtlessly, CSR programs that are aimed at social entrepreneurship have been seen to be resource optimising in terms of capital, labour, volunteer work and time.

4. Retail education/awareness

Capital markets are renowned for big ticket deals, this however, does not mean to say that small pocket sized players like you and me cannot interact on the exchange market. Currently millions of trades weekly are traded on the exchange for those buying and selling stocks. Nevertheless, the volume of retail participation week on week leaves much to be desired. Therefore, various brokering firms the Stock and the Securities Exchange must increase the level of awareness of why the markets exist and how all of us can find our place on the market. Additional efforts must be included in secondary school curriculum to give young people an early exposure to the existence of the exchange market.

In conclusion let me end by restating Kofi Annan’s words that "change is a process and not an event". For growth to take place in our capital markets all of us need to realise how important our role is and, irrespective of our pocket size, we all are important elements in the whole financial value chain. On the other hand, investment managers need to stick to investment ethics and look at the bigger market picture in their decisions and thus avert precipitating market crisis.