There are 40 securities exchanges on the African continent, and that number is increasing. While that might sound positive, the fact is that many of the exchanges are too small to be significant. We discuss proposals to improve efficiency.
The situation is absurd: Many exchanges in Africa, even the bigger ones, are very small when seen in an international context. We counted 40 exchanges in 29 African countries, including in places like Malawi, Eswatini or Sudan.
Many of these exchanges are too small to be significant. On Somalia’s stock exchange, for example, there are just seven companies listed. The Cape Verde Stock Exchange has a market cap – i.e. the sum of the valuation of all companies traded there – of just USD 75 million.
And the number of exchanges keeps growing. Just in the last few years, two new exchanges have been launched in the southern part of the continent, namely the Victoria Falls Stock Exchange in Zimbabwe and the Cape Town Stock Exchange in South Africa. Even Ethiopia wants to establish its own exchange, which is odd given that the country considers itself socialist.
National status symbols
So how did we get to this absurd situation? In the past, emerging markets like those in Africa were keen to establish institutions that they believed would improve their status internationally. This meant say opening an airport or a stock exchange. How else can one explain why small countries like Eswatini, Sudan, South Sudan or even the Seychelles are affording an exchange and the infrastructure that goes with it, including a regulator and a clearing house?
While the market cap of Africa’s bigger exchanges is nothing to sneeze at, they are small when compared with international bourses. According to figures from the African Securities Exchanges Association (ASEA), Nigeria’s bourse has a market cap of USD 52.6 billion. It is followed by the Egyptian Stock Exchange (USD 41.3 billion) and the Nairobi Securities Exchange (USD 18.9 billion). The second-largest exchange in Africa in terms of market cap is that of Casablanca with USD 67 billion.
But even the continent’s leading bourse, the Johannesburg Stock Exchange (JSE) is no longer that competitive internationally. A few years ago, the JSE was one of the world’s 20 biggest exchanges as measured by market cap. It has since been dropped from that list.
Liquidity is the key
Indeed, national pride is not a criterion paid attention to by investors and market players. Instead, they are really only interested in one thing, and that is the liquidity that an exchange can offer. For if an investor cannot sell a security at a fair price, that investor will be put in a very tight spot.
Liquidity is especially key for mutual funds. For it can often happen that a fund manager must sell shares or bonds even though they would rather hold them out of conviction. This is because they must generate cash to meet sudden redemptions from investors and thereby reduce the fund’s size.
Simplification and cost-effectiveness are other things that investors want. Instead of buying shares in companies on ten different exchanges, they prefer to buy shares in ten different companies on just one exchange. For whenever investors do buy shares on a certain exchange, they have to deal with the regulation in that jurisdiction and find a broker and a clearing house for the transaction. Should these things prove too time consuming and costly, investors will take a pass and go to those exchanges which they know well and which are more efficient.
Africa’s exchanges should consolidate
The fragmented nature of Africa’s exchange landscape makes the continent less attractive than it ought to be for investors and for companies. When selling stock or bonds on an exchange, a company wants to be sure that it will reach a wide array of investors, including private and institutional ones from Africa and from abroad. Only then will such a public offer prove successful.
We therefore feel strongly that Africa’s exchanges should overcome their national pride and think about consolidating to gain in importance. Indeed, an “African super exchange,” would, in our view, be an ideal solution and more effective than a federation comprising the various national (and small) exchanges.