The Regulation Of Financial Markets In The Southern African Region – Current Status And Developments

The success of the financial sector is a key component for economic development

The financial markets sector is one important area of public concern in Africa. The need for adequate regulation and supervision of Financial Markets as an important mechanism for the promotion of economic development in African countries cannot be overemphasized. Financial markets regulation remains a very sensitive and complex activity when it comes to governmental policy development, with relation to defining strategic options pertaining to financial regulation. This article reviews the current status of financial farkets, the legal and regulatory frameworks in the Southern African region, with a special focus on selected countries.

The topic under investigation relates to the regulation of financial markets by governments within the Southern African countries both at national and international levels. It attempts to grasp its rationale, objectives, approaches and the practical ways of defining a regulatory framework for a modern African financial market and system. At a time many experts are calling for liberalization of financial services in Africa, it is important to analyze what are the rationale, advantages and implications of financial markets regulation for Southern African countries under the light of new international instruments and standards, such as the Basle II Framework and the WTO Agreement on Financial Services of 1994, whose operational modalities are is still under negotiations on various key aspects.

This paper attempts to examine the institutional and regulatory framework for the financial markets operations in order to understand the underlying principles of financial markets regulation development; to develop a concise outline of financial markets regulation framework within the South African countries; and provide as much as possible a clear understanding of policy development, key issues and challenges relating to the regulation of financial markets in the Southern African region.
The terminology used in the financial markets jargon is considered to be highly technical and can some times be confusing. While we attempt to keep a non technical language through out this paper, it is quite impossible to avoid the specific concepts used in the financial profession. For some key concepts, a concise glossary of most of the technical words is provided at request by the author.

The Southern African region: geographic coverage and scope

The broad Southern African Region considered under the present study is defined with reference to the SADC membership, currently comprising 14 countries, i.e. Angola, Botswana, Congo (the Democratic Republic of), Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. However, our scope is limited by the criteria of readily available data, and the level of financial markets development in the countries under investigation. Angola and the Democratic Republic of Congo are emerging from long wars and are still rebuilding their economies and financial systems. Both have no formal financial market. Accurate and reliable data is very limited on their systems. The study covers a period of 10 years (1994-2004).

Background overview on Financial Markets

The regulation of Financial Markets, taken as a broad concept, is the process that encompasses regulation, (i.e. the establishment of specific rules of behaviour), the monitoring (i.e. observing whether the rules are respected) , the supervision (a more general observation of the behaviour of financial institutions and operators), and the enforcement (ensuring that the rules are complied with) of the established laws.

The ultimate economic function of financial markets is to mobilize and allocate resources through financial intermediation in order to accelerate the process of economic growth. This function is performed through two distinct but interrelated components of the financial markets, i.e. the money market and the capital market. It provides channels for transferring the excess funds of surplus units to deficits ones. They constitute the mechanism that link surplus and deficit units, attracting funds from savers in the surplus sector and channeling these to borrowers for the purposes of profitable investment.

For the purpose of providing a clear understanding of this topic, it is profitable to present a wide overview of a typical financial system and the place of the financial markets holds within this framework. As a practical illustration, we provide in a table of Annex I, the Conceptual Framework of a typical financial market system (the Case of South Africa).

Financial Systems and Financial Markets development

The financial system in the Southern African region consists of providers and users of financial services. The typical financial system consists of a variety of institutions, instruments and markets that facilitate the flow of financial resources between borrowers and lenders. The financial institutions include moneylenders, banks, insurance companies, leasing companies, venture capital funds, mutual funds and pension funds, brokerage houses, investment trusts and stock exchanges.

Financial instruments involved range from currency notes and coins, cheques, mortgages, corporate bills, bonds and stocks to futures, swaps and other complex derivatives. The markets for these instruments may be organized or may be informal. The users of the markets may be households, businesses and the government. Compared to those of developed countries (Europe, Asia and America), the typical financial markets in the Southern African region are characterized by the absence or a limited number and quality of the financial services providers, the absence of many of the instruments and the lack of depth in the markets.

Financial Markets typology and structure

The financial markets play a very important part in the economy of a country and the well-being of every person. They interact with other markets and have an influence on issues such as wealth, inflation and economic stability in a country. The financial markets have their own characteristics and to be able to regulate them or operate in them, it is important to comprehend these characteristics.

Classification of Financial Markets

Financial Markets can be classified into different categories depending on the characteristic of the market or instrument used to create categories. There exist two ultimate distinctions of financial markets. The primary market, i.e. for the sale of new markets, and the secondary market for already existing securities. The capital market, which is the market for the issue and trade of long-term securities, on one hand and the money market, i.e. the one of short-term securities, on the other hand,
In general terms, the money market is the market where liquid and short-term borrowing and lending take place. The lending of funds in this market constitutes short-term investments. In a certain sense all bank notes, current accounts, cheque accounts, etc. belong to the money market.
In financial market terms, the money market exists for the purpose of issuing and trading of short-term instruments, that is, instruments where the term remaining from the date when trading takes place to the date of redemption of the loan represented by die instrument (commonly referred to as the “term to maturity”), is of a short-term nature. In theory, this term for classification as a money market instrument is given as one year. In practice, however (especially in South Africa), instruments with a term to maturity of three years or less are normally classified as money market instruments although this is not a hard and fast rule.
For the purpose of regulation, the classical typology of Financial Markets recognizes the following major distinctions :

the inter-bank and credit markets
the Money Market ;
the Equity Market ;
the Foreign Exchange Market ;
the Bond Market (for Government bonds, Corporate bonds, Eurobond market, structured bonds, etc.) ;
the Derivatives Market: ( for Futures, Swaps and Options)
Apart from the above mentioned categories, an other important distinction is established between the domestic financial markets and the international financial markets.

The institutional framework for the regulation of Financial Markets.

A financial system cannot be effective without an adequate regulatory framework. For a financial system to be effective and promote healthy economic development, it is important to put in place a sound legal and institutional framework. Various strategies and approaches are generally considered by experts for the development of financial systems. Two major strategies commonly considered are the “evolutionary” and the “proactive” approaches. Other experts have made a distinction between the “go slow” versus the “big bang” approach.
The pro-active strategy provides legal, regulatory and prudential framework which accelerates financial market development through mechanisms, institutions and financial instruments set up for this purpose. This strategy is considered as the appropriate approach for African and other developing countries for three main reasons:

Inadequate neutral incentive environment and market forces that are insufficiently strong for financial markets to develop by themselves.
Lack of institution-building capacity to determine the pace and strength of financial markets development.
Need for flexibility to allow for the use of the most efficient institutional set-up, required training infrastructure and choice of technology that is most suited to the local conditions and level of development.
The Rationale, Principles and Objectives of Financial Markets Regulation
1. The necessity for a Financial Market Regulation

Why regulate Financial markets? This question is central to the subject under investigation in this paper and before we attempt to grasp the rationale and objectives of financial markets regulation, it is important to understand why such regulation should exist in the first place. The necessity for a financial market regulation finds its basis in the same principles applied to the financial sector in general. Borrowing and lending of money create certain risks, namely :
That the borrower will not be able to repay the money ;
That the lender is receiving a fixed rate on his investment while market rates fluctuate in such a way that the yield on his initial investment is now below current market related rates ;
That the value of the capital invested could decrease due to movements in the market. In order to clearly define the rights and obligations of investors, borrowers, operators and intermediaries involved in a financial system and who operate under contractual relationship, it is of the highest importance to develop a cohesive and comprehensive legal and regulatory framework.
The stakes involved in the running of a country’s financial markets are very high and it would be deeply irresponsible to apply the rule of “laisser-faire” in this very sensitive sector. In case some thing would go wrong or the financial system could undergo a serious crisis, it would result into a total collapse of the entire economy.

Such a framework should encourage discipline and timely enforcement of contracts, fostering responsibilities and prudent behaviour on both sides of the financial transaction. For a country’s market to develop and operate efficiently, the legislative and regulatory framework should incorporate rules on trading, intermediation, information disclosure as well as strict sanctions against defaulters and cheaters.

2. The Rationale of Financial Markets Regulation

The rationale underlying the financial market regulation is the general philosophy and ideological background pertaining to a specific country’s economic orientation, and the type of economic system adopted by the country’s leadership. At present, most of the countries covered by the study are characterized by a “market oriented ” economy. However, some of these countries have been under a centrally planned economy until the 1990s when they dramatically changed their economic orientation. It is the case of Tanzania, Mozambique and Angola. The changes were particularly due to persistent deficits in public budget and their inability to support the considerable burden of state owned companies unable to achieve the target economic performance. This new orientation facilitated the development of more diversified and active financial systems, leading to the creation of Financial markets in Tanzania and Mozambique. Financial Markets have their own unique characteristics and financial operators differ from one country to an other. The financial market framework should facilitate rather than impede the efficient operation of the financial system.
The Principles of Regulation
In theory, there is a distinction between general and specific principles. The following general principles are widely recognized for the formulation of an effective regulatory process:

Every regulatory arrangement should be related explicitly to one or more objectives identified;
All regulatory arrangements should be justified with respect to their cost-efficiency;
The cost of regulatory arrangements should be distributed equitably ;
All regulatory arrangements should be sufficiently flexible, in the sense of being amenable to changes in markets, competition and the evolution of the financial system ;
Regulatory arrangements should be practitioners- based.
Specific principles are identified as follows:

a. Principles related to the regulatory structure:
What is the adequate structure for financial markets regulation. One major issue in Financial markets regulation relates to the number of regulatory and supervisory agencies involved. The issue of the choice between a single regulatory authority or multiple specialized agencies is generally resolved according to the following principles:
there is a need to adopt a “functional” as well as an “institutional” approach ;
the coordination of regulation by different authorities and agencies will help to achieve consistency ;
there should be a presumption in favour of a limited number of regulatory agencies /authorities.
In practice, the institutional and functional approaches need to be employed in parallel because regulatory authorities are concerned with the soundness of institutions, as well as the way in which services are provided.

b. Principles related to the market efficiency :

These are principles designed to contribute to the promotion of a high level of efficiency in the provision of financial services. They are :
(a) the promotion of a maximum level of competition among market participants in the financial system, and (b) the securing of competitive neutrality between actual or potential suppliers of financial services. Competitiveness is likely to enhance market efficiency, which in turn causes the removal of restrictive practices that could impair trading in financial assets and the rationalization of market activity.
c. Principles related to market stability :

These principles are expected to contribute to the promotion of a high measure of stability in the financial system and an appropriate degree of safety and soundness in the financial institutions. There should be incentives for proper assessment and management of risk. It is necessary to impose acceptable minimum prudential standards to be observed in respect of risk management by all financial market participants.
d. Principles related to conflict conciliation :

Conflict conciliatory principles are designed to resolve potential conflicts arising between regulatory principles themselves. They would involve an integrated approach, aiming at the simultaneous achievement of regulatory objectives, and a target-instrument procedure for the selection of key regulatory instruments in order to facilitate the implementation of an integrated approach.
The Objectives of Financial Markets Regulation
For a Financial Markets system to perform to its highest capacity and level, regulation need to be both effective (i.e. to achieve its objectives) and efficient (i.e. to be cost effective in the use of its resources).

The economic dimension of a financial markets system requires that regulation should not impose unwarranted costs on the economy and consumers, nor impair the efficiency of financial markets. It is therefore necessary to consider a cost-benefits analysis exercise to assess the regulatory requirements.

The more complex a financial market is and more business operators increase, the regulatory process becomes more demanding and requires more specific objectives. Efficient financial regulation requires a multi-dimensional approach and a more optimizing process.

1. The overall objective of financial markets regulation:

The ultimate objective of financial markets regulation is to achieve the highest degree of economic efficiency and the best consumer protection in the economy.
2. Specific objectives:

The following Specific objectives can also be highlighted:
to secure the stability of the financial system.
It is important for a country’s economy to run smoothly and the financial sector must be protected against internal or external shocks which might be caused for instance by ineffective or inefficient trading clearing and settlement systems or a major lack of market liquidity ;

to ensure institutional safety and soundness.
The regulatory framework should be extremely cautious and avoid to impose obstacles or barriers that would impair the safety and soundness of financial institutions, which need to be profitable and have sufficient capital to cover their risk exposure and face global competition ;

to promote consumers’ protection:
It is crucial for a financial market to impose integrity, transparency and disclosure practices in the supply of financial services.

Concluding Remarks
In all Southern African countries, as it is in all countries of the world, the financial system is more regulated than any other industry. On the consumer protection grounds and others highlighted in this study, it is universally accepted that this should be so. Existing empirical evidence suggests that regulatory arrangements have a powerful impact on the size, structure and efficiency of financial systems, the business operations of financial institutions and markets, and on competitive conditions in the systems.

The success of a financial markets regulation depends basically on the capacity of the regulators to define the objectives of the regulation and also on the way the regulatory arrangements are related to their objectives.

Some of the countries in the Southern African Region which were able to promote a dynamic and effective regulatory framework, such as Botswana, Namibia, Mauritius, Zambia, Zimbabwe and in particular South Africa, are benefiting from the positive development of financial markets, with an unprecedented flow of capital from foreign investors.

However the financial systems in the region are still limited, in terms of the number of operators, quantity and quality of instruments and the depth of the systems. And there is still need to develop regulatory institutions, structures and mechanisms that can maximize the explicit objectives of regulation while minimizing the costs of services.

The author, is an International Consultant on Trade and Investment, Director of InterConsult Mozambique and is the Representative of Emerging Market Focus (Pty) in Mozambique. This insight paper is aimed at advising investors and business people involved in international trade by providing them with accurate legal data on the institutional and legal framework of Mozambique and the Southern African region.

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Let’s Adopt a Forward-Looking Financial Strategy

A forward-looking financial strategy is comprehensive and all-inclusive. By and large, such a comprehensive management involves obtaining the capital for the business and then how they are spent on the business’ numerous accomplishments which include recording statistical data to be examined to help assess a business’ financial health and up-to-date financial performance.

Theories and treatise on business and finance have highlighted the importance of finance in business and importance of financial education in the process of growth and development of the country. The significance of money and finance as an engine of economic growth and development has long been recognized in the economic and business literature. Financial resources are the important source of the wealth of nations. A country that doesn’t have enough resources and capacity and ability to develop the financial skills and required financial knowledge of its people and place them to operational use cannot move on the path of growth and development. It has long being recognized that apart from primary factors of production, financial capital serves as the main input to generate output/production. There is a positive and direct relationship between financial resource development and economic growth. Economic growth creates conditions for better finance which in turn offshoot economic growth and development.

In the present-day corporate world Financial Resource Development is to perform many interesting and therefore important functions. The twenty-first century is the era of digital and technological advancements and innovations and it will promote and encourage those people who respond to the language of money and finances in the first place and technology in the second place which depends on how rapidly and quickly we are trained and skilled in money, banking and finance, particularly international finance. In the contemporary digital age, we see that the graph of financial knowledge has increased like anything.

Successful countries are those countries who adopt sound and rational financial strategies and models which are the best guesses of the future (Rational expectations model) because such strategies are based on all available information. And such countries’ financial and banking knowledge is very high and work very hard to make themselves wealthy by educating their people and investing in the financial education of their people in one way or the other way. Advanced countries of the world are undoubtedly rich having very high financial knowledge. In order to survive and progress in this corporate/ financial world and enjoy a superior hand in the globalized society, the correct and suitable kind of financial knowledge is very important. The financial shocks, financial crunches, disturbances and crisis we see today is a consequence of how we have been able to manage the financial resources of the world in general and trading partners in particular.

Modern financial resources are becoming more and more multifaceted and therefore complex, and therefore, require the backup of an innovative and a forward-looking financial strategy taking into account not only past financial data but all available financial data. Financial knowledge and economic development both affect each other which means that financial knowledge affects economic development and economic development affects financial knowledge. And financial knowledge assists economic development and in turn economic development ensures the prolongation of financial knowledge.

It is high time is to invest in financial education so as to realize the importance of financial resources in economic development. Here, the role of human resource development is very important because Human Resource Development will ensure the proper management of financial resources which will act as the guidelines for the growth and development of the country.

A forward-looking financial strategy is a necessary tool to modernize, restructure and rev

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The Experience of Financial Markets Regulation in the Southern African Region – Part Two -

The State of Financial Markets in the Southern African Region

Up to the end of 1994, there were 14 stock exchanges in the entire African continent. These were Cairo (Egypt), Casablanca (Morocco), Tunis (Tunisia) in North Africa; Abidjan (Côte d’Ivoire), Accra (Ghana), and Lagos (Nigeria) in West Africa and Nairobi (Kenya) in Eastern Africa. In the Southern African region, they were Windhoeck (Namibia), Gaborone (Botswana), Johannesburg (South Africa), Port Louis (Mauritius), Lusaka (Zambia), Harare (Zimbabwe) and Mbabane (Swaziland). In 2005, most of other countries in Southern Africa have developed their own stocks exchange markets. They are Maputo (Mozambique), Dar-Es-Salam (Tanzania) and Luanda (Angola).

With the exception of the Johannesburg Stock Exchange, and at a different level, the Zimbabwe Stock Exchange and the Namibia Stock Exchange, these markets are too small in comparison to developed markets in Europe and North America, and also to other emerging markets in Asia and Latin America. At the end of 1994 there were about 1150 listed companies in the Africa markets put together. The market capitalization of the listed companies amounted to $240 billion for South Africa and about $25 billion for other African countries.

In the countries under review, stock markets are particularly small in comparison with their economies – with the ratio of market capitalization to GDP averaging 17.3 per cent. The limited supply of securities in the markets and the prevailing buy and hold attitudes of most investors have also contributed to low trading volume and turnover ratio. Turnover is poor with less than 10 percent of market capitalization traded annually on most stock exchanges. The low capitalization, low trading volume and turnover would suggest the embryonic nature of most stock markets in the region.

We have gathered considerable information on the current state of financial markets in Africa in general, and due to a limited time frame, it was not possible to collate, analyze and harmonize them. The format of this article cannot allow to take into consideration all the data. From the latest information, it becomes clear that with the ongoing reforms within the financial sectors in the countries under investigation, a lot of progress has been achieved in terms of regulatory and institutional capacity building. We could expect more results with the promotion of more open investment regulations, allowing more financial flows in the region.

The Experience of Financial Markets Regulation in the Southern African Countries

The financial systems of Southern African countries are characterized by high ownership structure resulting in oligopolistic practices which create privileged access to credit for large companies but limited access to smaller and emerging companies. The regulatory framework must take into account all the specific characteristics of these systems, and at the same time keep the general approach inherent to every regulatory instrument.

Financial systems in Southern Africa are also noted for their marked variations. Some systems, such as those in Mozambique, Angola and Tanzania were for a long period, dominantly government-owned, consisting mostly of the central bank and very few commercial banks. Up to date, Angola has not developed a money and capital market, and the informal money markets are used extensively. Other systems had mixed ownership comprising central banks, public, domestic, private and foreign private financial institutions. These can be further sub-divided into those with rich varieties of institutions such as are found in South Africa, Mauritius and Zimbabwe, and others with limited varieties of institutions as are found in Malawi, Zambia, Swaziland, etc.

Regulatory authorities in most of these countries have, over the years, adopted the policy of financial sector intervention in the hope of promoting economic development. Interest rate controls, directed credit to priority sectors, and securing bank loans at below market interest rates to finance their activities, later turned out to undermine the financial system instead of promoting economic growth.

For example, low lending rates encouraged less productive investments and discouraged savers from holding domestic financial assets. Directed credits to priority sectors often resulted in deliberate defaults on the belief that no court action could be taken against the defaulters. In some cases, subsidized credit hardly ever reached their intended beneficiaries.

There was also tendency to concentrate formal financial institutions in urban areas thereby making it difficult to provide credit to people in the rural areas. In some countries, private sector borrowing was largely crowded-out by public sector borrowing. Small firms often had much difficulty in obtaining funds from formal financial institutions to finance businesses. Finally, the tendency of governments of the region to finance public sector deficits through money creation resulted not only in inflation but also in negative real interest rates on deposits. These factors had adverse consequences for the financial sector. First, savers found it unrewarding to invest in financial assets. Second, it generated capital flight among those unable or unwilling to invest in real assets thereby limiting financial resources that would have been made available for financial intermediation. Coupled with this was the declining inflow of resources to African countries since the 1980s.

A viable financial market can serve to make the financial system more competitive and efficient. Without equity markets, companies have to rely on internal finance through retained earnings. Large and well established enterprises, in particular the local branches of multinationals, are in a privileged position because they can make investments from retained earnings and bank borrowing while new indigenous companies do not have easy access to finance. Without being subjected to the scrutiny of the marketplace, big firms get bigger.

The availability of reliable information would help investors to make comparisons of the performance and long term prospects of companies; corporations to make better investments and strategic decisions; and provide better statistics for economic policy makers. Although efficient equity markets force corporations to compete on an equal basis for the funds of investors, they can be blamed for favouring large firms, suffer from high volatility, and focus on short term financial return rather than long-term economic return.

In various countries where domestic bond markets exist, these are generally dominated by government treasury funding which crowds out the private sector needs for fixed interest rate funding. With minor exceptions, the international fixed rate bond markets have been closed to African corporations. Thus the development of an active market for equities could provide an alternative to the banking system.

The development of financial markets could help to strengthen corporate capital structure and efficient and competitive financial system. The capital structure of firms in Southern African countries where there are no viable equity markets are generally characterized by heavy reliance on internal finance and bank borrowings which tend to raise the debt/equity ratios. The undercapitalization of firms with high debt/equity ratios tends to lower the viability and solvency of both the corporate sector and the banking system especially during economic downturn.

Case studies in selected countries of Southern Africa

In all countries under study, both the historical background, the level of financial system development and the importance of financial markets structure and operations have considerably affected the nature of the regulatory framework. However, there are few countries whose objectives of financial market liberalization were the basis for the development of a modern regulatory system. Mauritius and Botswana are examples which, together with South Africa and Zimbabwe, have developed some of the most developed and diversified financial markets systems in Sub-Saharan Africa. There is no doubt that economic and financial conditions of the economies of individual Southern African countries have played significant roles in shaping their financial market’s regulatory framework.

1. Financial Markets in Botswana

An informal stock market was established in 1989, managed and operated by a private stockbroking firm (Stockbrokers Botswana limited). In 1995, a formal stock exchange was established under the Botswana Stock Exchange Act. The BSE performed remarkably well in terms of the level of capitalization, the value of the shares and the returns to the shares. The BSE contributed to the promotion of Botswana as a destination for international investment.

In 2004, the number of domestic companies listed was 18 while foreign companies listed were 7, and two in the venture capital market. The Bank of Botswana introduced its own paper, BoBCs, since 1991, for liquidity management purposes, and there is a growing secondary market for the instrument. In 1999, the Central Bank introduced an other instruments, the Repos (Re-purchase Agreements) and the National Saving Certificates with the objective to develop local money market and to encouraging savings. In 1998, the International financial Services Centre (IFSC) was established to promote world quality financial services.

2. Financial Markets in Mauritius

The Government of Mauritius has decided as a priority, to modernize and upgrading the financial system of Mauritius and recently took measures to strengthen the financial sector and to further integrate it with both the domestic economy and the global financial market.
Thanks to a well developed network of commercial domestic banks, offshore banks, non financial institutions and financial institutions, the financial system is one of the most vibrant in the Southern African region.

The Stock Exchange of Mauritius (SEM) started its operations in 1989, with only five listed companies. In 2004, more than 44 companies were listed, and the range of activities has expanded, state-of-art technology is being used in the dealings.

In September 2001, the settlement cycle on the SEM was reduced from five to three days, to be in line with major international stock markets. The short settlement cycle has since helped to improve liquidity and turnover on the market as investors are able to sell their securities three business days after buying the, thus reducing risks and bringing better integration to global markets through strict adherence to international standards.

3. Financial Markets in Mozambique

In 1978, all private banks operating in Mozambique were nationalized and merged into two state owned institutions, the Banco de Moçambique (Central Bank) and the Banco Popular de Desenvolvimento (BPD). After the adoption of a new economic orientation in 1992, the Government implemented an economic reform programme including the financial sector reform. Foreign banks were allowed to invest in Mozambique and the regulatory and commercial activities of the Central Bank BDM were separated. Banco de Moçambique assumed the Central Bank function while Banco Comercial de Moçambique BCM led the commercial banking sector.

The financial sector liberalisation policy allowed new institutions. Apart from the already operating Standard Bank, new banks licensed since 1992 or resulting from liquidation of existing institutions include the Banco Internacional de Moçambique, the Banco Comercial de investimentos, Banco de Fomento, Banco Austral, African Banking Corporation ABC, BMI, UCB, ICB, Novo Banco, etc. There are also investment banks, leasing companies and credit cooperatives. This increased number of financial and non financial institutions resulted in the development of an active financial sector.

In October 1999, the stock market of Mozambique (Bolsa de Valores de Moçambique BVM) was inaugurated. Its regulatory agency is the Central Bank BDM and its operations are still limited. With the technical support of the Johannesburg Securities Exchange JSE and the Lisbon Stock Exchange, plans are underway to develop an international financial services centre, including a state-of-the art information technology system.

4. Financial Markets in Namibia

The Namibian Stock exchange NSX is governed by the Stock Exchange Control Act of 1985. Amendments to the Act have been recently adopted in order to bring the national laws in line with international standards.

The NSX was established in October 1992 and is the most technically advanced bourses in Africa, and also one of few self regulated financial markets in Southern Africa. The Namibian Stock exchange Association, a self regulatory, non profit organization, is the custodian of the license to operate the NSX. It approves listing applications, licenses stockbrokers and operates the trading, clearing and settlement of the exchange. Since 1998, the NSX has used the most technically advanced management tools available on the continent, which enable better surveillance and detailed client protection.

5. Financial Markets in South Africa

The South African Financial Markets system is the most sophisticated and complex with the vibrant Johannesburg Securities Exchange (JSE), the Bond Exchange of South Africa (BESA) and the and the South Africa Futures Exchange (SAFEX).

The Johannesburg Stock Exchange JSE was established in November 1887. Currently, it is governed by the Stock Exchanges Control Act of 1985 [amended in 1998 and 2001]. The JSE is the largest stock exchange in Africa and has a market capitalization of more than 10 times that of all the other African markets combined. The JSE provides technical support and capacity building, skills and information to the following exchanges in the region: Namibia, Mozambique, Mauritius, Tanzania and others in Africa (Nigeria, Ghana, Egypt, Uganda and Kenya). Since 1999, the JSE harmonized its listing requirements with the stock markets of Botswana, Malawi, Namibia, Zambia and Zimbabwe.

The BESA was licensed in may 1996 under the Financial Markets Control Act of 1989 [amended in 1998], and the SAFEX was established in 2001 as a Financial Derivatives Market and agricultural Products division of the JSE.

In June 1996, the JSE introduced the fully automatic electronic trading system known as Johannesburg Equities Trading (JET) and since May 2002, is using the Stock Exchange Trading System (SETS).

6. Financial Markets in Swaziland

The Swaziland Stock Market (SSX) was established in 1990 to promote local investment opportunities. In 2002, five companies were listed. The SSX has developed new listing requirements in line with new international regulatory standards. A new security Bill has been approved in 2002, and should be in force by now. It will allow the licensing and regulation of all securities markets, operations and participants.

7. Financial Markets in Tanzania

The Dar-Es-Salaam Stock Exchange (DSE) was incorporated in September 1996 under the Capital Markets and Securities Act of 1994. Its operations however did not start until April 1998 with the listing of the first company. In October 2002, foreign companies were allowed to operate on the DSE. Its regulatory agency is the Capital markets and securities Authority (CMSA). Plans are underway to facilitate the securing of increased financial resources from global markets.

8. Financial Markets in Zambia

The Lusaka Stock Exchange (LuSE) was created in February 1994 under the 1993 securities Act. It is controlled by the Securities and Exchanges Commission (SEC). Its operations were boosted by the successful issue of the Zambian Breweries, which raised up to US $ 8.5 million to refinance a loan secured for the acquisition of the Northern Breweries in 1998. Most of the listings were the result of the country’s privatization program.

A Commodity Exchange, the Agricultural Credit Exchange was also established in 1994, as an initiative of the Zambia National Farmers’ Union, after the liberalization of the prices of agricultural commodities. The Exchange provides a centralized trading facility for buyers and sellers of commodities and inputs. It provides also updated prices and some market information for both local and international markets.

9. Financial Markets in Zimbabwe

The Zimbabwe Stock Exchange ZSE, is one of the oldest and most vibrant stock exchanges in Africa. It was established in 1890, but had sporadic trading until 1946. In 2002, it had 76 listed companies. The ZSE operates under the Stock exchanges act, which is being amended to take into consideration new technological requirements and to align its contents with international standards (improve the security of share trading, transparency, central depository system, etc.).

The ZSE is open to foreign investors, who can purchase up to 40 percent of the equity of listed company, a single investor can purchase a maximum of 10 percent of the shares on offer. Foreign investors can invest on the local money market up to a maximum of 25 percent per primary issue of government bonds and stocks, and a single investor can acquire a maximum of 5 percent. Foreign investors are however not allowed to purchase from the secondary market. These investments qualify for 100 percent dividend and interest remittance.

Financial Markets Regulation in Southern Africa: which way ahead ?

The major issue in financial market regulation lies in the fact that the legal and institutional framework of most countries is still inadequate to support modern financial processes. Examples of such inadequacy include outdated legal systems leading to poor enforcement of laws. The following challenges are very interesting for further research opportunities.

A cohesive and comprehensive legal framework is required under the proactive approach in order to use the contracts that clearly define the rights and obligations of all intervening operators. Such a framework should encourage discipline and timely enforcement of contracts, fostering responsibility and prudent behavior on both sides of the financial transactions. Prudent and efficient financial intermediation cannot operate without reliable information on borrowers, and some legislation on accounting and auditing standards, which also ensures honesty on the part of financial institutions, Similarly, for a country’s financial markets to develop and operate efficiently, legislation should fully incorporate rules of trading, intermediation, information disclosure, take-overs and mergers.

Because of the role of financial institutions and markets in the development of a sound financial system, additional legislation is normally needed for their operations to complement company law. These are prudential regulations, especially for banks and similar financial institutions that hold an important part of the money supply, create money and intermediate between savings and investment. Company law is an example of the kind of legislation needed. It not only governs the operations of business enterprises but also protects the interests of company stakeholders. Thus, public disclosure of information on the company’s activities should be made mandatory on company management in the appropriate section of the Companies Act. Such information, especially that relating to finance and accounting, should also be statutorily required to be subsequently verified and attested to by auditors.

Prudential regulations cover such issues as criteria for entry (listings), capital adequacy standard, asset diversification, limits on loans to individuals, permissible range of activities, asset classification and provisioning, portfolio concentration and enforcement powers, special accounting, auditing and disclosure standards adapted to the needs of the banks to ensure timely availability of accurate financial information and transparency. The objective is to enhance the safety and soundness of the financial system.

There is real need for an important legislation relating to financial markets which require not only favorable policies but also legal and institutional infrastructure to support their operations, prevent abuses and protect investors. Investors’ confidence is critical to the development of the markets. Brokers, underwriters, and other intermediaries who operate in these markets therefore have to follow laid down professional codes of conduct embodied in the legislation applicable to such institutions as finance and insurance companies, mutual funds and pension funds.

An other important issue is the independence of regulatory authority, their number and the option to establish self-regulatory agency. All these aspects should take into account the objectives and principles defined by the government, and also the specific development needs in the financial system.

A major challenge concerning the Financial Markets in the Southern African region is the harmonization of the national financial regulation and the compliance with international requirements, including the SADC criteria and the international standards set by international organizations such as the International Organization of securities Commissions (IOSCO), the International Accounting Standards Committee (IASC), the Basel Committee on Banking Supervision (BCBS) and the obligations resulting from the WTO Agreement on financial Services (GATS). These key international instruments are starting to be enforced and individual countries have to keep updating their financial markets regulations and upgrade the technical skills of their staff in charge of regulatory and supervisory operations.

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The author, is a lecturer and an International Consultant in Trade and Investment, Director of InterConsult Mozambique and is the Representative of Emerging Market Focus (Pty) in Mozambique. This insight paper is aimed at advising investors and business people involved in international trade by providing them with accurate legal data on the institut

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