In East Africa, regulators at a crossroads over falling share prices

Wednesday July 31 2019

A staffer walks past an electronic board displaying market data during a trading session at the Nairobi Securities Exchange. PHOTO | REUTERS


East African capital markets regulators are scratching their heads in an attempt to find a viable solution to the downward trends that have hit regional stockmarkets, keeping new companies at bay while driving off investors from what was once seen as the most profitable investment venture.

Despite various innovations to entice investors and attract new companies to the market, regional stockmarkets continue to face declining share prices and market capitalisation, low trade volumes and a scarcity of initial public offerings.

A study carried out by the Capital Markets Authority of Kenya whose findings were released last year shows that there is emerging stiff competition from quick return vehicles including real estate, mobile money products and sports gambling.

“The value of our market has remained stagnant for a long time and there are fears among potential issuers that coming to the market at this time they will not realise their full value,” said Job Kihumba, executive director in-charge of corporate finance at Standard Investment Bank.

It is also argued that East Africa runs some of the most expensive stockmarkets in Africa due to high brokerage fees, clearing and settlement fees, and other charges, with the cost of trading shares on the continent being considerably higher than in developed markets.

Persistent declines


Market data shows that all the regional stockmarkets —Kenya, Uganda, Tanzania and Rwanda — recorded persistent declines over the past two years.

In the past one year (July 2018-July 2019) the Dar es Salaam stock Exchange All Share index declined by 17.1 per cent, Nairobi Securities Exchange All Share Index declined by 13.67 per cent, Rwanda Stock Exchange All Share Index fell by 3.68 per cent while Ugandan Securities Exchange All Share index declined by 12.83 per cent.
In Kenya, for example, most listed companies are not performing well, with those in sectors such as banking, insurance, manufacturing, energy, investments and commercial and services issuing profit warnings.

Firms such as Deacons and ARM were suspended from trading due to the poor financial showing while Atlas African Industries Ltd was delisted from the NSE in April this year.

Attempts by the Kenyan market regulator and the NSE to introduce new investment products on the bourse have failed to ignite excitement among investors.

Lukewarm interest

Investors have particularly shown lukewarm interest in collective investment schemes asset backed securities, exchange traded funds, global depositary notes and receipts and the recently launched derivatives market.

Kenya introduced Exchange traded funds in 2015 but the product has only attracted one listing (New Gold ETF issuer).

In Tanzania, the government has tried to introduce tax incentives to encourage stockmarket investments and allow companies to list on the DSE.

For instance, the country has abolished capital gains tax on trading of listed securities and reduced corporate tax to 25 per cent from 30 per cent for a period of three years for companies that issue at least 35 per cent of their shares to the public.

However, the move by the government to compel telcos and mining companies to offer at least 25 per cent and 30 per cent of their shares to the public respectively appears to have complicated the situation.

The DSE saw the value of listed shares (Market capitalisation) decline by 1.94 per cent in the 12 months’ period to June 2017, with some key counters whose share prices were affected including CRDB, Acacia, DCB and Swiss, according to the Capital Markets and Securities Authority annual report for 2016/2017.

Among listed commercial banks, DCB Bank and Mwalimu Commercial Bank sustained losses in 2016 while CRDB’s profit declined by about 43 per cent in 2016.

The banking sector experienced an increase in non-performing loans and liquidity problems following the withdrawal of the government’s deposits from commercial banks to the Central Bank.

In Uganda, the Capital Markets Authority has embarked on campaigns to improve public education for issuers and investors through face to face presentations. During the 2017/2018 fiscal year a total of 14,763 individuals had been reached.

However, equity turnover at the USE fell by 38.9 per cent in the financial year 2017/18 to Ush 73.05 billion ($19 million) from the previous year’s Ush 119.64 billion ($32 million), while average turnover per session dropped to Ush304.39 million ($81,561) per session from Ush 504.83 million ($135,269) in the same period.

Share volume dropped 47.11 per cent to 591 million from 1.11 billion largely to the exit of many foreign institutional investors witnessed on key counters such as Umeme Ltd, due to the uncertainty on its contract renewal with government of Uganda.

Interest rate

According to the Capital Markets Authority of Uganda interest rate increases registered in US financial markets and strong gains posted by its equities segment in the period under review also led to substantial capital outflows from developing and emerging markets.

In Rwanda, the government in 2016 introduced an initiative to boost the saving culture among Rwandans through the capital market dubbed “RNIT Iterambere Fund.”

The fund allows investors to combine their savings in a diversified portfolio of investments in debt and equity through a “One Application – One Amount.”

In 2017, the RSE Shares Index declined 16 per cent to 119.32 at the end of June while the market capitalisation dropped two per cent to Rwf2.74 trillion ($3 billion) over the same period.