JAMES VASHIRI ASSIGNMENT Project

UNIVERSITY OF ZIMBABWE FACULTY OF COMMERCE DEPARTMENT OF BUSINESS STUDIES
EVALUATION OF THE ROLES AND EFFECTIVENESS OF THE ZIMBABWE STOCK EXCHANGE (ZSE)
COMPILED BY: JAMES VASHIRI R101557A
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR BUSINESS STUDIES HONORS DEGREE IN MARKETING-HBBS 4 (MARKETING) BY THE UNIVERSITY OF ZIMBABWE
SUPERVISOR: MR. JD NHAVIRA
HARARE, ZIMBABWE
2013
Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE)
Dedications I would like to dedicate this research work to my beloved mother, Vinah Mubasa; brothers and sisters, Lovemore, David, Partson, Gibson, Ever and Ester. I appreciate your unconditional love and support. Proverbs 1 V 7 God bless you.
Vashiri James R101557A
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Acknowledgements I would like extend my sincere gratitude and appreciation to the following people for the contributions that they have made to make this research possible: This study could not have been completed without the generous support and contribution of many individuals and institutions. My respect and gratitude will go to Mr. Mutungwazi, my supervisor for his guidance throughout this project. I would like to appreciate the support, commitment, dedication, determination and patience that he demonstrated being my supervisor during my research process. I am also thankful to my lecturers, fellow students and colleagues for their support and ideas. Above all, glory be to God to whom I owe everything.
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Abstract This study sought to evaluate the effectiveness of Zimbabwe Stock Exchange in accomplishing its roles in Capital Markets in Zimbabwe, specifically in supporting small business enterprises raising capital. Roles and functions of stock exchanges around the world were explored (literature review) to use as benchmark in appraising our own bourse (ZSE). The research attempted to answer the following question: Does the ZSE adequately support small business enterprises raise capital. The research was motivated by the fact that small to medium enterprises are having difficulties in raising capital through the ZSE despite the fact they are major driver to economic growth constituting % of Zimbabwe GDP. In gathering the necessary information to complete the report both primary data and secondary data were employed. Primary data was gathered by means of the questionnaire and personal interviews. Secondary data was gathered from textbooks, various websites and reports from previous research on the topic. Desk research was useful in building important issues concerning the Zimbabwean capital market (ZSE) and its effectiveness in performing functions of capital markets. Field research was used in in-depth analysis of the problem from experts of the financial market from various financial institutions. Major findings were that the ZSE is not effective with some of the functions of capital markets not even performed. Recommendations on findings included relaxing some regulations that govern the ZSE especially the indigenization Act, adopting codes on corporate governance best practice as part of listing requirements and setting up a central depository system that enables electronic trading.
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Table of Contents
Release Form ....................................................................... Error! Bookmark not defined. The Approved Form............................................................. Error! Bookmark not defined. Dedications ......................................................................................................................... ii Acknowledgements ............................................................................................................ iii Abstract .............................................................................................................................. iv List of Abbreviations and Acronyms .................................................................................. x CHAPTER I ...................................................................................................................... 13 1.0 INTRODUCTION ............................................................................................ 13
1.1 Introduction ......................................................................................................... 13 1.2 Background of the study ..................................................................................... 13 1.4 Research objectives ............................................................................................. 18 1.5 Research Questions ............................................................................................. 18 1.6 Statement of Hypotheses ..................................................................................... 19 1.7 Importance of the study ...................................................................................... 19 1.8 Assumptions of the study .................................................................................... 20 1.9 Scope of the Study .............................................................................................. 21 1.10 Time budget ...................................................................................................... 21 1.11 Monetary Budget .............................................................................................. 21 1.12 Limitations ........................................................................................................ 22 1.13 Summary ........................................................................................................... 23 CHAPTER II..................................................................................................................... 24 2.0 LITERATURE REVIEW ....................................................................................... 24 2.1 Introduction ......................................................................................................... 24 2.2 Definition of Stock Exchanges ........................................................................... 25 2.3 History of Stock Exchanges ................................................................................ 26 2.3.1 History of the Zimbabwe Stock Exchange ...................................................... 27 2.4 Stock Market participants and trading ................................................................ 29 Vashiri James R101557A Page v
Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE) 2.5 ZSE functions...................................................................................................... 30 2.5.1 Remark 1 .......................................................................................................... 30 2.6 Importance of Stock Exchanges .......................................................................... 31 2.6.1Raising capital for businesses: .......................................................................... 31 2.6.2 Mobilizing saving for investment .................................................................... 32 2.6.3 Facilitating company growth ........................................................................... 32 2.6.4 2.6.5 Redistribution of wealth ............................................................................ 33 Corporate governance ............................................................................... 33
2.6.6 Creating investment opportunity for small investors ....................................... 34 2.6.7Government capital- raising for development projects ..................................... 34 2.6.8 Barometer of the economy ............................................................................... 35 2.6.8.1 Remark 2 ....................................................................................................... 35 2.7 2.8 Listing requirements of the ZSE ................................................................... 36 Trading and Settlement ................................................................................. 37
2.9 Performance and Size of the Market ................................................................... 37 2.9.1 Remark 3 .......................................................................................................... 39 2.9.2 Regulation of the Stock Exchange ................................................................... 42 2.9.3 Regulation of the ZSE ...................................................................................... 43 2.9.4 Regulation affecting foreign investors ............................................................. 43 2.10 Summary ........................................................................................................... 44 CHAPTER III ................................................................................................................... 45 3.0 RESEARCH METHODOLOGY ............................................................................ 45 3.1 Introduction ......................................................................................................... 45 3.2 Definition of Case Study ..................................................................................... 46 3.2.1 Design of Case Study ....................................................................................... 47 3.2.2 Rationale for Case Study Approach ................................................................. 48 3.3 Data Collection ................................................................................................... 50 3.3.1 Primary Data .................................................................................................... 50 3.3.1.1 Questionnaires: ............................................................................................. 50 3.3.1.2 Telephone interviews: ....................................................................................... 52 3.3.1.3 Personal Interviews ....................................................................................... 53
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Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE) 3.3.2 Secondary Data ................................................................................................ 54 3.3.3 Justification for the use of Secondary Data...................................................... 55 3.4 Sampling ............................................................................................................. 55 3.4.1 Population Identification .................................................................................. 57 3.4.2 Purposive Sampling ......................................................................................... 57 3.4.3 Sample Size...................................................................................................... 58 3.5 Data Analysis Plan .............................................................................................. 58 3.6 Summary ............................................................................................................. 59 CHAPTER IV ................................................................................................................... 60 4.0 DATA PRESENTATION AND ANALYSIS OF RESULTS ................................ 60 4.1 Introduction ......................................................................................................... 60 4.2 Response Rate ..................................................................................................... 60 4.3 Typography of Respondents ............................................................................... 62 4.3.1 Respondent Field ............................................................................................. 62 4.3.2 Position of Employment .................................................................................. 63 4.4 Comparison of Sample Percentage with Expected ............................................. 63 4.5 Data Presentation ................................................................................................ 64 4.5.1.0 Questionnaire Response Review................................................................... 65 4.5.1.1 What class of companies does your company fall? ...................................... 65 4.5.1.2 How long have you been in your profession? ............................................... 66 4.5.3 Corporate governance is now one of the key considerations by investors. Do you agree? ................................................................................................................. 67 4.5.4 Does the ZSE promote investment for small investors? .................................. 68 4.5.5 Does the ZSE promote growth for small to medium enterprises? ................... 68 4.5.6 Is the Zimbabwean Capital Markets properly regulated? ................................ 69 4.5.7 How significant is the capital raising ability of the ZSE? ................................ 69 4.5.8 What do you think should be done for the ZSE to be more effective in accomplishing its roles? ............................................................................................ 70 4.5.9 What recommendations do you expect this study to provide for the benefit of stock market development in Zimbabwe? ................................................................ 71 4.5.10 How effective is the ZSE in promoting economic growth and development? .................................................................................................................................. 71
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Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE) 4.5.11 Can companies rely on the ZSE for capital raising for project development? .................................................................................................................................. 71 4.5.12 Has there been any change for the better in terms of the effectiveness of the ZSE since the introduction of the multicurrency regime? ........................................ 72 4.6 Interviews............................................................................................................ 72 4.7 Discussion and Interpretation of Findings .......................................................... 72 4.8 Data Presentation and Analysis Summary .......................................................... 74 CHAPTER V .................................................................................................................... 74 5.0 CONCLUSIONS AND RECOMMENDATIONS ................................................. 74 5.1 Introduction ......................................................................................................... 74 5.2 Summary of Findings .......................................................................................... 75 5.3.1 Does the ZSE promote Corporate Governance for listed companies? ............. 77 5.3.2 Comparison of Sample Percentage with Expected .......................................... 78 5.3.3 Does the ZSE promote investment for small investors? .................................. 78 5.3.4 Does the ZSE promote growth for small to medium enterprises? ................... 78 5.3.5 Is the Zimbabwean Capital Markets properly regulated? ................................ 79 5.3.6 How significant is the capital raising ability of the ZSE? ................................ 79 5.3.8 Can companies rely on the ZSE for capital raising for project development? . 80 5.3.9 Has there been any change for the better in terms of the effectiveness of the ZSE since the introduction of the multicurrency regime? ........................................ 81 5.4 Recommendations ............................................................................................... 81 5.4.1 Corporate Governance ..................................................................................... 81 5.4.2 Stock Market Development and Economic Growth ........................................ 82 5.4.2.1 ZSE must play a leading role in Zimbabwe Economic recovery .................. 83 5.4.3 Regulation ........................................................................................................ 84 5.4.4 Can companies rely on the ZSE ....................................................................... 84 5.4.5 Capital Market Stability ................................................................................... 84 5.4.6 Demutualization ............................................................................................... 84 5.5 Suggestions for Further Research ....................................................................... 85 5.6 Summary of Conclusions and Recommendations............................................... 85 APPENDICES .................................................................................................................. 88
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List of Tables Table 1: Time Budget .23 Table 2: Monetary Budget...23 Table 3: Questionnaire response rate...62 Table 4: Respondent Field...64 Table 5: Respondent By position of Employment65 Table 6: Summary of findings..78 List of Figures Figure 1: Industrial Index and Daily volume ..40 Figure 2: Industrial Index and Value Traded...42 Figure 3: ZSE Index Movements.....43 Figure 4: Effective Response...63 Figure 5: Respondent field...64 Figure 6: Comparison of sample percentage with expected....66 Figure 7: Respondent Classification.67 Figure 8: Classification of Respondent by Position Held.67 Figure 9: Working Experience of Respondents....68 Figure 10: Does the ZSE promote Good Corporate Governance Practice....69 Figure 11: Does the ZSE promote Growth...70 Figure 12: Is the ZSE properly Regulated.....71 Figure 13: Significance of ZSE in raising Capital.71
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List of Abbreviations and Acronyms ZSE RBZ JSE LSE Corporate Governance Zimbabwe Stock Exchange Reserve Bank of Zimbabwe Johannesburg Stock Exchange London Stock Exchange The ways suppliers of finance to corporations assure themselves of getting a return on their investment and how they make sure that managers do not steal the capital or invest in bad projects. King Report South African code of best practice on Corporate Governance GDP CEO SEC IPO IPO Gross Domestic Product Chief Executive Officer Securities Exchange Commission of Zimbabwe Initial public Offering Where a company issues shares to the public for the very first time. SMEs Small to Medium Business Enterprises
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CHAPTER I 1.0 INTRODUCTION
1.1 Introduction This chapter seeks to provide the background to the study focusing on the roles and effectiveness of the Zimbabwe capital market, which basically revolves around the Zimbabwe Stock Exchange, from 2008 to date. The chapter also highlights objectives, the research questions limitations and delimitations of the study and the hypothesis to be tested and the assumptions adopted in carrying out the study, the limitations and delimitations of the study. 1.2 Background of the study Under normal operating conditions the Zimbabwe Stock Exchange (ZSE) should perform the following roles1: Facilitates the raising of capital for businesses expansion through selling shares to the investing public. Mobilizing savings for investment- When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed or kept in idle deposits with banks, are mobilized and redirected to promote business activity. . Creating investment opportunities for small investors- As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Facilitates Government in raising capital for development projects-The government may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works by selling bonds.
1
Sam Mensah, Ph.D
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These bonds can be raised through the ZSE whereby members of the public buy them, thus loaning money to the government. Barometer of the economy - At the ZSE, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy. The ZSE failed to attract investors during the financial year 20102 and the chairman of the management committee of the ZSE, Ndodana Mguquka has said: Currently our capitalization is just above US$3 billion and is falling, but if we attract big companies to list, especially in the mining and banking sectors, we can grow the size of the market up to levels of US$10 billion.3 Ndodana added the following: As the new executive committee, we are looking forward to reviving the ZSE. At the moment there are a lot of issues that need to be sorted out, particularly the quality of our listings. We need to improve the quality of our listings to attract foreign and local investment.4 It has been suggested that some of the key reasons why investors avoid investing in emerging markets are poor corporate governance and transparency5.Failure to
2
Tom Minney, 26 July 2010,
3 4
5
http://www.zse.co.zw/
Zimbabwe Independent newspaper, (http://www.theindependent.co.zw/) McKinsey and Company, 2001; Gibson, 200)
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attract foreign investors by the ZSE is therefore mainly attributable to poor corporate governance practices. Following the corporate scandals of early 2000s in America like the fall of Enron and World com, investors became conscious of the need to consider good corporate governance practices in their investment decisions6. Generally foreign investors have got an appetite for emerging market growth prospects7. However on 14 July 2010 the Finance Minister, Tendai Biti had given a summary of the ZSEs woes in his 2010 Mid-Term Fiscal Policy Review
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to Parliament.
He said that trading on the Zimbabwe Stock Exchange has largely been low, mainly due to market illiquidity in the first half of the year and that foreign participation has remained subdued with investments mainly confined to portfolio restructurings. Corporate results have also failed to uplift the equity market as most corporates were still undercapitalized and also suffering from subdued demand. He said that on average take up of recapitalization rights issues had only been 50%, and underwriters had taken the balance. According to the same MidTerm Fiscal policy review, the industrial index which started the year at 156.52 had dropped to 127.46 by June 2010, whilst the mining index fell from an opening of 209.8 to 143.08. Similarly, market capitalization fell from US$3.97 billion in January 2010 to US$3.19 billion by end of June 2010. The poor performance was as a result of investors pulling out their investments reflecting depressed investors sentiment over perceived financial risks, especially following the gazette of the Indigenization Regulations on March 1.In particular, foreign investors contribution to market turnover fell from between 40-50% to an average 20% per month. The performance of the ZSE remained subdued despite the fact that transaction costs on the Zimbabwe Stock Exchange (ZSE) have been slashed by more than
6
Musa Mangena, University of Bradford Gilbert Muponda, 2009
www.zimtreasury.org
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half, to 3.21% (buying 1.73%, selling 1.48%) from 7.5% in December 20099. The stockbroker had commented that generally this should encourage trading resulting in better price discovery. On 1 June 2008, Gilbert Muponda suggested that the ZSE be reformed and restructured to be more effective in assisting both investors and entrepreneurs reach their respective goals. He added that among the requirements of conducting an Initial Public Offering (IPO) in Zimbabwe is the need for the company to be of a particular size and to have a trading record of a specified period (minimum 3 years), and be showing certain level of profitability. These requirements exist mainly to protect investors and also to make the ZSEs life easy and simple yet IPOs are often issued by smaller, younger companies seeking capital to expand. In fact the ZSE needs to actively encourage small to medium scale businesses to pursue the possibility of IPOs as a way to raise capital for their operations as an alternative to borrowing to keep pace with higher requirements of working capital. Zimbabwe is lagging behind on the disclosure of executive remuneration, which is shrouded in secrecy10. This is a clear indication of the deficiencies in corporate governance among Zimbabwean companies. The ZSE should incorporate guidelines on corporate governance in their Listing Rules like the Johannesburg Stock Exchange (JSE) that incorporated the King II guidelines11.
1.3 Statement of the Problem Small business enterprises are having difficulties raising enough capital to finance their operations. The most effective way to do so is by Initial Public Offerings yet the ZSE requires specific levels of profitability and about three years of trading
9
Imara Edwards Securities (http://www.imaracapital.com/ Chris Muronzi, Zimbabwe Independent Business Editor, 13 August 2010
10
11
Willia Bonyongwe, Chairperson of the Securities Commission of Zimbabwe (SEC)
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history for a company to do so12. As much as this is meant to protect investors it is compromising economic growth. Zimbabwe is lagging behind on the disclosure of executive remuneration which is a deficiency in corporate governance as witnessed by the United States of America (USA) corporate scandals of 2000s and the Zimbabwean scandals of 2004 in the banking sector that saw not less than ten Banks placed under curatorship and two under liquidation13. Board compositions of some listed companies are not up to standards that good corporate governance practices would want them to be. It is up to the ZSE to incorporate the practices in their Listing Rules14 Indigenization laws of the ZSE is discouraging foreign investors. The Chief Executive Officer (CEO) of the ZSE, Emmanuel Munyukwi believes that the 2010 financial year would have been a better year had it not been for the indigenization regulations gazetted in March 2010. Munyukwi said: In April we raked in about US$5 million while months before that we were raking in more than US$20 million a month. Since the regulations were gazette, we have seen a negative impact on trade..Last year our market was driven by foreigners, making up to about 45 -50% of the total turnover of about US$200 million on the ZSE,15 The indigenization laws as observed by Munyukwi clearly negatively impacts the growth of the economy by dispiriting profitable trading at the ZSE.
12 13
Gilbert Muponda, 1 June 2008 Dr. Gono, Troubled Banking Institutions Handout, p 2 Willia Bonyongwe, August 2010 Zimbabwe Daily News, 29 December 2010
14
15
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Foreign investors improve the inflow of foreign exchange, which is often greatly needed in developing countries to finance imports and other foreign payments16. However, whilst foreign investors are important for emerging markets, the currency crises of East Asia (1990s) brought doubt that such investment flows generate benefits for developing countries17. 1.4 Research objectives The primary objective of the study was to assess the effectiveness of the Zimbabwe Capital market (ZSE) in accomplishing its roles. In line with the major objective, the project also attempted to pursue the following subtopics: Assessment of the ZSEs performance in ensuring good corporate governance among Zimbabwean companies; Analyzing the extent to which the ZSE assist small enterprises grow; Assessing the effectiveness of the ZSE in promoting economic growth and development; Establishing whether companies can rely on the ZSE as a source of financing operations; 1.5 Research Questions The major question the researcher attempted to answer was whether the capital market is effective in accomplishing the roles that it is supposed to? The following questions were also asked: What is the best strategy in addressing the shortcomings that the Zimbabwean capital market (ZSE) has as a way of raising capital among other roles?
16
Jefferis, 1995; Doidge et al., 2004 Bhagwati, 2001; Gabriele et al., 2001
17
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Has there been any change or improvement on the performance of the Zimbabwean capital market in accomplishing its roles ever since the introduction of the multi-currency regime in February 2009? Is the capital market heavily regulated? Does the capital market help firms to raise funds for new projects? Does the capital market adequately support start-up firms? 1.6 Statement of Hypotheses With respect to the research objective of determining whether the ZSE is effective in accomplishing is roles, the hypotheses to be tested is as follows: Ho: The Zimbabwe capital market (ZSE) is effective in accomplishing its roles. H1: The Zimbabwe capital market is not efficient in performing its roles. 1.7 Importance of the study The major significance of the research was to spell out the weaknesses and or strengths of the Zimbabwe capital market and provide solutions thereto. The research project shall enable companies to make an assessment of the method of raising capital that they can use having evaluated the past, current and the expected performance of the Zimbabwe Capital market, the Zimbabwe Stock Exchange to be more precise. Small and medium enterprises will be able to resort to some methods of raising finance for their demanding working capital needs and also the ZSE if the recommendations of the study are adopted. The project will enable the researcher to have a better understanding of the Zimbabwe Capital market, ZSE. He will gain a thorough knowledge of how the ZSE operates, its institutional weakness, current developments that are happening to the capital market, the instruments traded through the capital market and be able to identify gaps that need particular attention. Besides gaining knowledge about the ZSE, the researcher also gain the necessary experience for research projects in further studies.
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The country shall also benefit from the research project. This is because the research is aimed at ensuring that the ZSE is functionally effective. If the capital markets becomes effective it leads to improved economic growth and development and ultimately improved standards of living which is perceived to lead to political stability. The research results are also expected to improve the spirit of enterprise and better corporate governance that will improve the status of the ZSE in the world of investment. This will see an improvement in capital inflows which had dropped drastically over the last decades because of political insecurity and indigenization laws. Good governance is also expected to reduce regulatory expense on the part of the government. As noted by Magayisa, the corporate scandals of 2004 cost the Reserve Bank of Zimbabwe a lot in trying to rescue the Troubled Banking Institutions. The results of the research, if implemented are expected to result in self regulatory markets that are both efficient and effective and possibly dilute the monopoly status of the ZSE. 1.8 Assumptions of the study All the Zimbabwe capital market trading is done through the Zimbabwe Stock exchange (ZSE) and therefore the phrase capital market and ZSE shall be used interchangeably; The sample used is a true representative of the population; All questionnaires will be responded to; All interviews will be successful; All the seventy seven listed companies on the ZSE use the capital market as the sole method of raising capital; Any company can be listed easily on the ZSE; Companies across all industries can switch from one method of raising capital to another.
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1.9 Scope of the Study In line with the research objectives, the scope of this study is restricted to the following areas: Assessment of the ZSEs performance in ensuring good corporate governance among Zimbabwean companies; Assessment of the extent to which the ZSE assist small enterprises grow; Assessment of the effectiveness of the ZSE in promoting economic growth and development; Assessment of whether companies can rely on the ZSE as a source of financing operations; Assessment of the extent to which the ZSE facilitate raising of capital for both the government and nongovernment corporate; The research project will be confined to the roles and effectiveness of the Zimbabwe capital market (ZSE) considering the currently listed companies. The main focus of the research is on the effectiveness of the ZSE in accomplishing its roles. 1.10 Time budget Table 1: Time Budget Chapter Project proposal Chapter 1(Introduction) Chapter2(Literature review) Chapter 3(Methodology) Chapter4(Research Findings) Chapter 5(Conclusion ) 1.11 Monetary Budget The research will be carried out within the budget below: Allocated Time One week One month Three weeks One month Two weeks One month Due Date 13/12/2010 21/01/2011 15/02/2010 14/03/2011 28/03/2011 30/04/2011
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Table 2: Monetary Budget Item of Expenditure Tuition fees Internet Printing Transport Accommodation for field research Total cost Cost (USD) $315.00 $20.00 $30.00 $40.00 $50.00 $455.00
1.12 Limitations The major limitations that the researcher encountered in the course of the research are as follows: Financial constraints for field research Limited time within which the research was carried out During field research some people were not willing to dedicate their selves to supporting the project However, to overcome such limitations and problems the researcher made the best use of the available financial resources and time. The researcher prepared a financial and time budget to ensure that the quality of the research outcomes was not affected by such constraints. Challenges in field research were overcome by making prior arrangements and appointments with the people with whom interviews were going to be held. The researcher also took his time explaining the benefits and importance of the
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research project to them. The researcher made it clear that the research is not to his benefit only.
1.13 Summary The chapter provided the background information on the role and effectiveness of the ZSE. The roles that the ZSE should perform are also clearly spelt out in the background section of the chapter. The problem statement is shown as resulting from the fact that local companies are failing to utilize the capital market to raise enough finance to cater for their operations. The problem also emanates from the fact that foreign companies are not willing to invest at the ZSE due to indigenization laws and poor corporate governance practices by local companies. The background clearly showed that the poor performance of the ZSE is not directly linked to transaction costs as witnessed by the subdued performance even after transaction costs have been slashed in 2009. The primary objective of the study as explained in the chapter is to determine whether the ZSE is effectively accomplishing its roles. The primary objective is broken down into sub objectives with the aim of thoroughly accomplishing the major objective. The chapter provided the purpose of the study, emphasizing on the fact that the time and resources was worth it. The research questions included in the chapter helps
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coming up with the hypothesis tests and leading to pursuance of the objectives. The hypothesis tested is, Zimbabwe Stock Exchange is effective in accomplishing its roles. The major assumptions of the study are that all capital markets trading is through the ZSE and therefore that the ZSE is the capital market of Zimbabwe. The major limitations of the study are that of time and monetary resources involved during the course of the research. Having looked at the background, purpose, limitations and delimitations in chapter I, chapter II focuses on the literature review of the study which aims at identifying gaps in knowledge as well as weaknesses in previous studies and providing possible solutions thereto. Chapter III looks at the research methodology and why a particular approach was chosen over the others. Chapter IV focuses on presentation techniques, discussion and interpretation of research findings and chapter V looks at recommendations and conclusion. CHAPTER II 2.0 LITERATURE REVIEW
2.1 Introduction As the activities on the stock exchanges tend to be specialized and not understood by common people, this chapter gives some basic definitions and review stock exchange history, participants, operations and importance, so as to serve as the basis for understanding how the stock market can help promote investment and trade. Besides, review of other studies is done in this chapter to give various dimensions of stock exchanges in the economy. A brief background of the Zimbabwe Stock Exchange and how it performed and the current performance is also be explored in this chapter. The ZSE is the only stock exchange currently operating in Zimbabwe. Historically, there was no statutory provision for the operation of more than one stock exchange but only the ZSE which is in operation. However with the formation SEC provision was given for the operation
of more than one stock exchange in Zimbabwe. Since its formation, the ZSE went through vast changes, including numerous changes in premises utilization, trading systems, management and modification of rules, among other things. Attention is given to changes that are believed to have impacted on the efficiency and effectiveness of the ZSE, reduced costs of both trading and the running of the exchange, and increased the exchanges efficiency in information dissemination. The main focus is not on the chronology of changes but on the purpose of these changes, or rather, their purported effect on market efficiency and effectiveness. This study attempts to fill the gap in the literature by tracing the history and operations of the Zimbabwe Stock Exchange (ZSE). It examines why and how the ZSE was formed and documents its early history, as well as investigating the role and impact of the local bourse in the economy. The study is divided into different sections. The first section examines the origins of the ZSE and analyses the internal organization of the Exchange, while the second gives an analysis of the ZSE's operations and its influence on economic development between 2008 and 2011. Finally the conclusion assesses the ZSE's role and performance and highlights some theoretical issues emerging from the study's findings. 2.2 Definition of Stock Exchanges A Stock Exchange is a market where stocks and shares are purchased and sold and capital is raised for the purposes of industry and both local and central government.18 Markets for the trading of stocks and shares or securities have existed for centuries all over the world. One of the earliest known markets was established in Paris, France around 1138.19 However, the modern form of the Stock Exchange can be traced to about 200 years ago. 20 By the twentieth century, the Stock Exchange had become a common feature in many capitalist economies and was widely considered an institution characteristic of a 'modern economy'.
18 19
F. E. Armstrong 1957 The Book of The Stock Excliange, London: Pitman: p 17.
E. H. H. Edwards 1963 "The Role of the Stock Exchange", in RSE, Financial and Economic Symposium, Record of Proceedings, Salisbury: p 3
20
W. T. C. King 1954 The Stock Exchange, London: Allen & Unwin: p 15
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The Stock Exchange is now recognized as an important component in the financial structure of the capitalist system. While the Stock Exchange serves an important function in the economy, it can also wreak havoc. Nowhere is this clearer than in the case of the Wall Street Crash of 1929, which triggered a global economic depression.21 2.3 History of Stock Exchanges22 In the 12th century France, the courratier de change was concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because they also traded with debts, they could be regarded the first brokers. In early 13th century, Bruges commodity traders gathered inside the house of a man called Van der Beurse and in 1309 they institutionalized this. But until then informal meeting and become the Brugse Beurse. The idea quickly spread around Flanders and neighboring countries and Beurzen and soon opened in Ghent Amsterdam. In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351, the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states which were not ruled by a duke but a council of influential citizens. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam stock exchange. It was the first company to issue stocks and bonds. The first stock exchange to trade continuously was the Amsterdam Beurs, in the early 17th century. The Dutch pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them. Now there are stock markets in virtually every developed country and most developing countries, with the
21
J. Atack and P. Passell 1994 A New Economic Vieir of American History fiom Colonial Times to 1940, New York: VV. W. Norton: p 583
22
Wikipedia, the free encyclopedia
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worlds biggest markets in the United States of America, United Kingdom, Germany and Japan. 2.3.1 History of the Zimbabwe Stock Exchange Trading of stocks and shares in Zimbabwe goes back to 1891, when the first stock-broking firm was opened.23The first Stock Exchanges were set up a few years later in 1894 in Salisbury and Bulawayo. Later, two other exchanges emerged in Gwelo (now Gweru) and Umtali (now Mutare) around 1898. These exchanges were intended to meet the capital needs of the gold mining industry, whose rapid expansion was fuelled by rumors of a 'Second Rand' in Southern Rhodesia. During this period, the London and Johannesburg exchanges also saw the listing of Rhodesian enterprises seeking to raise capital.24 On the whole, these exchanges generated wild speculation in the country, which ended in financial chaos as the hope of the Second Rand faded. The result was that, as mining companies withdrew, the local stock markets collapsed. By 1902, all the local Exchanges had ceased to operate. Between 1902 and 1945, public authorities and companies in Southern Rhodesia relied on the London Stock Exchange (LSE) and the Johannesburg Stock Exchange (JSE) for their capital needs. Due to a number of reasons, the main one being the boom in manufacturing during World War II, the Rhodesian Stock Exchange (RSE) was set up in Bulawayo in 1946.25 By 1963, there were 98 listed companies, from only seven in 1946. Because of economic sanctions during the Unilateral Declaration of Independence (UDI) period, the ZSE was largely quiet. This was because the period was characterized by the utilization of existing excess capacity as opposed to investment in capital development. During the late 1970s, the hope of independence and the end of sanctions led to a brief rise in share prices. By 1980, the ZSE was a highly specialised market, which was likely to prove useful in the economy if a capitalist
23 24 25
The Rhodesinn HeniUi, 29 October 1892 The Rhodesinn Herald, 1 June 1894 George Karekwaivenani, A History of the Rhodesian Stock Exchange, p 2
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oriented development strategy was adopted. After independence, however, the independence government declared Socialism as its official ideology. This, combined with a global recession, resulted in the dramatic fall of the industrial and mining indices on the Exchange. By 1981, the market's total capitalisation had fallen from Z$911 million to Z$52.5 million.1984 marked the Exchange's lowest point since its birth. However, between 1984 and 1990, the ZSE's performance improved considerably. The industrial index shot up from 150 in 1984 to 2 732 in 1991, while the mining index jumped from 28 to 500 between 1984 and 1990. This was due to the restored confidence among the investors that colonial property rights would be upheld. To date, the history of the Stock Exchange in Zimbabwe has received little scholarly attention although some economic analyses exist, van Onselen, Phimister and Bond have each made passing references to the history of the local Exchanges during the 1890s26.However, their focus has been, invariably, on illustrating the highly speculative character of the gold mining industry in the country and not on the Exchanges themselves. Newlyn and Rowan have briefly discussed the emergence of the ZSE. While their arguments on the anomaly of the emergence of a Stock Exchange in a dependent economy are useful, their analysis focuses on the broad monetary and financial systems in eight British African colonies between 1946 and 1951. As such, their treatment of the ZSE is necessarily limited. Sowelem's work similarly concentrates on the monetary experience of the Federation of Rhodesia and Nyasaland between 1952 and 1963 and only Sowelem touches on the internal organisation of the ZSE and its performance. These analyses do not trace the origins and development of the Stock Exchange in the country. Clarke also briefly examines the ZSE's performance in the 1970s, but his study is not on the Exchange itself. Rather, it only uses quoted companies as its sample for investigating the degree of foreign control in the Rhodesian economy. 27 Finally, Bonds' work comes closest to a critical study of the Stock Exchange but is limited
26 27
ibid
D. G. Clarke 198(1 Foreign Companies and Intel national Investment in Zimbabwe. Gweliv Mambo: p 116.
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to the period between 1980 and 1995 and concentrates on illustrating the role of financial capital in the uneven development of Zimbabwe. There is, thus, need for a scholarly study of the history of the Zimbabwe Stock Exchange, which has played a very important part in the recent history of Zimbabwe. 2.4 Stock Market participants and trading28 Many years ago, worldwide, buyers and sellers were individual investors such as wealthy businessmen, with long family histories to particular corporations. Over time, markets have become more institutionalized with buyers and sellers largely institutions e.g. pension funds, insurance companies, mutual funds, hedge funds, investor groups and banks. The rise of institutional investor has brought with it some improvements in stock market operations but not necessarily in the interest of small investors or even youthful institutions, of which there are many. Now participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end with a professional at a stock exchange, who executes the order. Most stocks are traded on exchanges e.g. ZSE, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. The other type of exchange is a virtual kind e.g. NASDAQ, composed of a network of computers where trades are made electronically via traders at computer terminals. Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for a stock. When the bid and ask price match, a sale takes place on a first come first serve basis if there are multiple bidders and askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). Really, a stock exchange is nothing more than a super-sophisticated farmers market providing a meeting place for buyers and sellers.
28
Wikipedia, the free encyclopedia
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2.5 ZSE functions29 The ZSE serves three critical functions: mobilize and efficiently allocate resources for the country's economic development
provide a fair, efficient, transparent and secure price discovery mechanism in a well regulated environment
build liquidity through innovation
The ZSE also provides a properly constituted and regulated environment that ensures market integrity and fairness among stock market participants. Any off market deals and any unethical criminal activities are dealt with within the framework of the rules and regulations governing stock market transactions in Zimbabwe. Only stockbrokers and authorized dealers are allowed to transact in shares on behalf of the public. Over The Counter Trading (OTC) is not allowed in the market.OTC is a telephone and computer linked network of dealers who do not physically meet. 30 2.5.1 Remark 1 Although there is much high credit risk in the OTC market the ZSE limits the possibility of better trade and high volumes of trade in the economy. Trades in the OTC markets are typically much larger than trades in the exchange traded market. A key advantage of the OTC is that the terms of the contract do not have to be those specified by the exchange, participants are free to negotiate any attractive deal.31
29
http://www.zse.co.zw/ Options, Futures, and other Derivatives, John C Hull, fourth Edition, P 17 ibid
30
31
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2.6 Importance of Stock Exchanges Just as it is important that networks of transportation, electricity and telecommunications function properly so it is essential that payments can be transacted, capital can be saved and channeled to the most profitable projects and that both households and firms get help in handling financial uncertainty and risk as well as possibilities of spreading consumption over time. Financial markets constitute an important part of the total infrastructure for every society that has passed the stage of largely domestic economies. Stock market which is part of financial markets, perform the following functions in an economy: 32 2.6.1Raising capital for businesses: The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. Shares can be sold in either of the two markets, primary or secondary. The Primary Market deals with the trading of new securities. When a company issues securities for the first time (i.e. IPO) , they are traded in the Primary Market through the help of issuing houses , Dealing /Brokerage Firms, Investment Bankers and or Underwriters. The acronym IPO stands for Initial Public Offering, which means the first time a company is offering securities to the general public for subscription. The amount of money raised in the Primary market goes directly to the Issuing Company/Firm to finance its operations. Once the securities (shares) of a company are in the hands of the general public, they can be traded in the Secondary Market to enhance liquidity amongst holders of such financial securities. Thus, the Secondary Market facilitates the buying and selling of securities that are already in the hands of the general public (investors). The Stock Exchange therefore is an organized financial platform that deals in transactions involving the buying and selling of financial securities in the Secondary Market. In short, the Stock
32
Sam Mensah, Ph.D
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Exchange does the work of a Secondary Market by facilitating a formal trading arrangement for financial securities.33 On 1 June 2008, Gilbert Muponda suggested that the ZSE be reformed and restructured to be more effective in assisting both investors and entrepreneurs reach their respective goals. He added that among the requirements of conducting an Initial Public Offering (IPO) in Zimbabwe is the need for the company to be of a particular size and to have a trading record of a specified period (minimum 3 years), and be showing certain level of profitability. These requirements exist mainly to protect investors and also to make the ZSEs life easy and simple yet IPOs are often issued by smaller, younger companies seeking capital to expand. In fact the ZSE needs to actively encourage small to medium scale businesses to pursue the possibility of IPOs as a way to raise capital for their operations as an alternative to borrowing to keep pace with higher requirements of working capital. 2.6.2 Mobilizing saving for investment:34 When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed,
or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in a stronger economic growth and higher productivity levels and firms. 35
2.6.3 Facilitating company growth:
33
Dr. Mohamed Jalloh, Director general Sierra Leone Stock Exchange, The role of financial markets in economic growth, p 7
34 35
R. R. West and S. M. Tinic 1971 The Economics of the Stock Market, New York: Praeger: D Dr G Gono, Press statement on the rampant fraudulent activities on the stock exchange, the
insurance and pension fund industries and the banking sector, p 6
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Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. Companies can merger and or takeover another company in the same line of business ether vertically or horizontally for different motives. Both takeovers and mergers are done by way of selling and or buying shares through the stock exchange. 2.6.4 Redistribution of wealth:
By giving a wide spectrum of people a chance to buy shares and therefore become part owners of profitable enterprises, the stock market helps to reduce large income inequalities. Although Stock exchanges do not exist to redistribute wealth, both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses. 2.6.5 Corporate governance: 36
By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is assumed that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is
36
Hans Christiansen and Alissa Koldertsova, 2009
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alleged that there has been considerable slippage in corporate governance on the part of some public companies (e.g. famous Enron Corporation, MCI Worldcom, Pets.com, Sunbeam, Webvan, and Adelphia) Zimbabwe is lagging behind on the disclosure of executive remuneration, which is shrouded in secrecy37. This is a clear indication of the deficiencies in corporate governance among Zimbabwean companies. According to the chairperson of the Securities Commission of Zimbabwe (SEC) (Willia Bonyongwe) the ZSE should incorporate guidelines on corporate governance in their Listing Rules like the Johannesburg Stock Exchange (JSE) that incorporated the King II guidelines. 2.6.6 Creating investment opportunity for small investors: As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. 2.6.7Government capital- raising for development projects:38 Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of
37
Chris Muronzi, Zimbabwe Independent Business Editor 13 August 2010 George Karekwaivenani,Department of Economic History, University of Zimbabwe, P 8
38
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with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. 2.6.8 Barometer of the economy: At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy. 2.6.8.1 Remark 2 The ZSE falls short of some of the functions that other stock exchanges around the world do perform. Among the listing requirements of the ZSE should be the need by companies to comply with international codes on corporate governance like the King Report on corporate governance. The JSE adopted the King II guidelines on corporate governance among its Listing requirements.
Contrary to the noble purpose for which the ZSE was created; which is that of acting as a progressive vehicle for the mobilization of productive capital, the ZSE has literally galloped astray, in the process creating obscene paper wealth that is causing havoc in the economy.39 By 2008 the Zimbabwe Stock Exchange had become the most devastating vehicle of economic destruction, there was rogue trading at the ZSE: The ZSE allowed some stock brokers to falsely bid up share prices, when in fact the same stock brokers had absolutely no money to pay for the
39
Press statement on the rampant fraudlent activities on the ZSE, Dr. G. Gono governor reserve bank of zimbabwe 20 november, 2008, pp 6-9
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shares. The end result has been that some counters grew by as high as 2 million percent in a single day; Where share prices were rising at the ridiculously bloated rates, what that effectively meant was that someone could work up with no penny at the bank, but end the day a multitrillionnaire. The next morning, the false wealth so created would show up as high demand for cash. The Stock Exchange was deliberately indexing the entire stock market to the spurious Old Mutual share prices. The whole economy was then being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itself. The Zimbabwe Stock Exchange had been operating with no strict rules and regulations that prohibit rogue behavior. On numerous occasions, company share prices rose astronomically with absolutely no actual volumes trading; Some stock brokers were buying shares cheap in the morning call overs then drive up prices before off-loading the same shares on the same day at inflated prices; The Stock Exchange did not rule a few aggressive Stock Brokers out of order, when they stampeded specific counters up with the sole intention of amassing false wealth.40 2.7 Listing requirements of the ZSE41 It is an integral function of the ZSE to provide facilities for the listing of securities (including securities issued by companies, domestic or foreign), to provide the ZSEs users with an orderly market place for trading in such securities and to regulate the market accordingly. The Listings Requirements apply to companies seeking a listing for the first time, presently listed companies, all other securities
40 41
(ibid) (http://www.zse.co.zw/)
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that applicants may wish to list and those presently listed and, where applicable, to directors (as defined in each relevant section) of applicant issuers. The Listings Requirements contain the rules and procedures governing new applications, all corporate actions and continuing obligations applicable to issuers and issuers of specialist securities. They are furthermore aimed at ensuring that the business of the ZSE is carried on with due regard to the public interest. Among the listing Requirements should be provision of the need for companies to comply with International codes on Corporate Governance like the Cadbury Report, King Report and the combined code. 2.8 Trading and Settlement 42 The ZSE uses a call over system on the floor of the exchange. The ZSE currently conducts one call over session daily between 10.00 am and noon. Trading reports are published and circulated to broking houses, the investing public and the press. Trading on the Zimbabwe Stock Exchange is presently by open cry floor system on a matched bargain basis. Shares are traded in minimum lots of 100. 2.9 Performance and Size of the Market The month of March 2010 saw the release of financial results of a number of listed companies. While there was growth in revenues across many companies, most battled with costs which on the level of profits and many reported operating losses. This, in addition to battered investor sentiment, pulled the stock market down. The industrial index was down in April, bringing the year loss to -8.5% at the end of April. Manufacturing and Financial companies posted the worst results and have seen the worst declines as investors shun them. The last time the ZSE hovered around these levels albeit for a short time was in May 2009 during an exciting bull run on the way to the peak levels of November 2009. From one year ago the market has experienced a lot of hype but has basically remained in one
42
(http://www.zse.co.zw/)
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spot for investors. Volatility has increased on the market, with share prices swinging as depicted in the chart below. 43
Figure 1: Industrial Index and Daily volume
Source: DATVEST April 2010 Newsletter
Market activity in February 2010 was dominated by the Statutory Instrument 21 of 2010 which compels businesses with assets worth at least $500,000 to cede 51% of their total shareholding to indigenous Zimbabweans within five years. The
43
DATVEST April 2010 Newsletter, p 3
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industrial index dropped 10.32% to close the month at 140.37 points while the mining index weakened 16.6% to close at 175.08 points. Value traded was 32% lower than January at $23.3m. The gazette of regulations with the requirement of compliance plans to be submitted to the responsible ministry within 45 days from the 1st March resulted in subdued investor appetite for the stock market. Volumes were generally weak throughout the month. Given that foreign investors were contributing significant levels in liquidity, the regulations have left many on the line trying to assess the impact on businesses going forward. For foreign investors the critical considerations was to make sure that the aggregate equity stakes are below the limit in all businesses that they invest in. 44
2.9.1 Remark 3 Empowerment is a noble cause in its simplest form. Its primary motive is to transform the lives of the previously disadvantaged by giving them the opportunity to benefit from mainstream economic activity. Countries like South Africa have similar schemes that have managed to keep international capital flows at significant levels though questions have been asked if it has really benefited South Africans! However each nations scheme differs in threshold levels, time frame and social investment credits among other factors. The ideal situation is to ensure that its implementation results in a positive impact to the economy and to the intended beneficiaries. The Act and Regulations have been widely criticized since promulgation in 2007/08 and since the regulations have been gazetted. Suffice to say the Act & Regulations are not investor friendly for either external or internal investment. The legislation comes at a time when most companies are restructuring working capital funding from the expensive short-term debt by requesting existing shareholders to inject fresh capital in the form of rights issues. Tight liquidity conditions, total bank deposits at $1.3 billion also limit the scope for any
44
DATVEST March 2010 Newsletter, P 2
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financing structures that other markets have managed to create for their cases. Multinational Corporations have the financial wherewithal to invest in Zimbabwe to stimulate growth; we are unable to do it ourselves. The question must be asked as to how the Zimbabwe Stock Exchange could operate efficiently with these regulations.
The figure below highlights market activity since the beginning of the year 2010
Figure 2: Industrial Index and Value Traded
Source: DATVEST March 2010 Newsletter
By the end of the year 2010, the ZSE market capitalization was at US$ 3,884,485,459 up from US$ 3,829,925,096 by year end 2009. In September 2009
the industrial index declined 7.7% to close the month at 137.06 points while the mining index softened 13.37% to close the month at 192.8 points. Total value traded for the month amounted to $39.8m down 20% from the previous months $49.5m. The graph below shows the ZSE Index Movements for August 2009:
Figure 3: ZSE Index Movements
Source: DATVEST March 2010 Newsletter
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2.9.2 Regulation of the Stock Exchange For each of the markets there are rules relating to listing, trading, settlement, and the general running and management of the exchange activities. It is generally agreed that self-regulation is the best way to maintain standards that safeguard the interests of investors; this explains why all the markets are self-regulated as is the JSE. The existence of comprehensive rules, per se, does not guarantee compliance, thus supervision and monitoring of the stock markets cannot be overemphasised. The NSE has a compliance department that monitors the disclosure of company information and ensures that market participants are aware of the rules as they are embodied in the rulebook. The Capital Market Authority of Egypt supervises the MCSD and inspects its activities to ensure the trading; clearing and settlement are done in accordance with the rules and regulations of the stock exchange. In addition to strict supervision each of the stock exchanges has a guarantee fund. These funds were set up to reduce the risk of default by members of the relevant stock exchange. If a member fails to settle upon delivery of purchased securities, the exchange will make good the amount owing on the account of the guarantee fund. All members of the stock exchange are covered by the guarantee fund and they contribute to it. It is apparent that the ZSE is more advanced than the other stock markets in respect of most of the issues considered above, except in terms of regulation where all stock exchanges have similarly strict regulation. For a stock exchange to operate successfully, investors must have the confidence that they can deal at genuine and fair prices, and that the market is not manipulated to their disadvantage. A proper regulatory framework that is adhered to by all market participants, and is enforced by the appropriate regulatory authorities, brings about this confidence and integrity. Since its inception, the ZSEs regulatory framework has been based on self-regulation. Legislation relating to the ZSE, as embodied in the Zimbabwe Stock Exchanges Act (Chapter 24:18), seeks to protect the interests of the general public in buying and selling shares without unduly infringing upon self-regulation. In the interest of selfregulation the SEC proposed a Financial Services Institute which shall train ZSE
participants.45 The ZSE executive has the authority and discretion to alter the trading period, close, suspend or halt trading, or take any such steps necessary to maintain an orderly market, notwithstanding any other provisions of the rules. The rules also detail the security procedures, reporting procedures and resources required by members to ensure the efficiency and integrity of the equities market as well as the proper functioning of the ZSE trading system. 2.9.3 Regulation of the ZSE46 The Zimbabwe Stock Exchange (ZSE) is supervised by the Securities Exchange Commission (SEC). SEC is a statutory body established in terms of the Securities Act. Members of the ZSE are licensed by SEC, which also determines the level of capitalization required for practicing members of the ZSE. SEC has the power to intervene in the event that irregularities arise in the areas of conduct of licensed members, financial difficulties, and rejection of applications and/or termination of membership. The Exchange supervises and monitors the trading process to ensure transparency in the market and to prevent manipulation of the market. All trades for listed securities by Members of the ZSE are declared to the ZSE. Any unethical or criminal activities are dealt with within the framework of the rules and regulations governing stock market transactions in Zimbabwe. 2.9.4 Regulation affecting foreign investors 47 Foreign investors can participate on the bourse provided they bring in their capital through normal banking channels. No prior exchange control approval is
45
Securities Commission of Zimbabwe Proposed Institute : Discussion Draft, 4/1/2010, P 5 (http://www.zse.co.zw/)
46
47
(http://www.zse.co.zw/)
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necessary for a foreign investor to participate on the Zimbabwe Stock Exchange. Authorized dealers, acting on behalf of non-resident investors and FCDA holders, receive funds for onward transmission to stock brokers for purchase of shares. Shares purchased on behalf of the foreign investor are registered into either their own names or the names of nominee companies. The share certificates, once registered, are endorsed 'non-resident'. For dual quoted shares, a further endorsement 'For Sale Within Zimbabwe Only' is required. The maximum foreign investment is limited to 10% per single investor and 40% collectively. Should a foreign investor exceed the 10% limit, the transfer secretary may not effect registration and is obliged to report to the Zimbabwe Stock Exchange. The latter may issue a directive to the investor to sell the excess shares within sixty days; any losses incurred will be for the investor's account. The Zimbabwe Stock Exchange is required to report the matter to the Reserve Bank. Withholding taxes on dividends are deducted at source at the rate of 10%. Repatriation of income and capital is free. This is subject to proof that payment for any purchases was made with funds received through formal banking channels.
2.10 Summary The chapter discussed theoretical and empirical literature concerning the roles of stock exchange in relation to the Zimbabwe Stock Exchange. In line with the research questions the chapter looked at the history of stock exchanges and the roles that such exchanges are expected to perform. The ZSEs roles were compared with roles performed by other stock exchanges around the world like the JSE. The chapter also documented theoretical disagreement which exists about the importance of stock exchanges for economic growth. Mayer (1988) argues that even large stock markets are unimportant sources of corporate finance. Stiglitz (1985, 1994) says stock market liquidity will not enhance incentives for acquiring information about firms or exerting corporate governance. Moreover, Devereux and Smith (1994) emphasize that greater risk sharing through internationally integrated stock markets can actually reduce saving rates and slow
economic growth. The analysis of Shleifer and Summers (1988) and Mork, Shleifer and Vishny (1990) suggest that stock market development can hurt economic growth by easing counterproductive corporate takeovers.
CHAPTER III 3.0 RESEARCH METHODOLOGY
3.1 Introduction Research methodology refers to the systematic, focused and orderly collection of data for the purposes of obtaining information in order to solve research questions. Data collection and analysis procedures are central to the validity of the research findings in so much that it determines the success (or failure) of the study. This chapter outlines the research design adopted, the research population and sample, data collection method and instruments and the data presentation and analysis plan. The chapter also explains the rationale for and shows why a particular research methodology was deemed appropriate for this study. Selections of research methodologies are also investigated. The topic of roles and functions of capital markets can be approached from different angles, depending on the nature of the problem under consideration. In this case, a case study
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approach was chosen because of its ability to use multiple sources of evidence48 including documents, interviews, observations and its flexibility. Case study research seeks to obtain a holistic view of a specific phenomenon or a series of events able to assist in the implementation of findings49. The ZSE could not have found a better approach because of the need for informed decisions that would assist with the implementation of proposed programmes and policies. The researchers aim in this study was to establish the effectiveness of the ZSE in accomplishing its roles and functions. In order to achieve this goal, thorough investigation was required on the roles and functions of the ZSE, hence both primary and secondary sources of data were used.
3.2 Definition of Case Study A case study is a detailed and thorough investigation of a few cases50. It is an intensive description and analysis of a phenomenon or social limit such as an individual, a group, an institution or community51. Case study method enables the researcher to closely examine the data within a specific context. In most cases, a case study method selects a very limited number of individuals as the subjects of study. Case studies, in their true essence, explore and investigate contemporary real-life phenomenon through detailed contextual analysis of a limited number of events or conditions, and their relationships. Yin defines the case study research method as an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used. In some case studies, an in-depth examination of a single case or event is used. The examination provides a systematic way of observing the events,
48 49 50 51
Yin, 1993 Gummersson, 1991 p 76 Bliss and Smith, (1999) p43 Merrian and Simpson, (1984) p 95
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collecting data, analyzing information, and reporting the results over a long period of time. There are mainly three categories of case studies, namely exploratory, descriptive and explanatory case studies. Unlike quantitative analysis which observes patterns in data at the macro level on the basis of the frequency of occurrence of the phenomena being observed, case studies observe the data at the micro level. 3.2.1 Design of Case Study Research design is the plan and structure of investigation so conceived as to obtain answers to the research questions52. The researcher adopted a multiple-case design because of the need to provide evidence in addressing the issue in question. The research used a case study approach, which is exploratory, carried out about the ZSEs effectiveness in accomplishing its roles and functions. Results obtained from a case study cannot be generalized over a wider area. Empirical data was obtained from different sources through sampling, questionnaires, structured and unstructured interviews, and secondary data from reports and recommendations derived from the various stock brokers, asset management companies and the Zimbabwe Stock Exchange. A research design is a plan, structure and strategy of investigating conceived information so as to obtain answers to the research questions53. Therefore the validity, reliability and usability of the methods and research instruments used in this design are explained in this section. The respondents were restricted to dealers, other stock broker personnel, credit analysts and former credit analysts only since the study was limited to the roles and functions of the ZSE. Due to shortage of time and financial resources the researcher was not able to encompass larger samples of the total population so as to derive results from more subjects.
52 53
Kerlinger, (1996) p 279 Nadler ,(1994)
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3.2.2 Rationale for Case Study Approach A case study method can contain several case studies and could use multiple sources of evidence54 including documents, interviews and observations. It also allows for the utilization of both qualitative and quantitative approaches and is thereby seen as being more advantageous. Because this study intents to deal with a management and administration phenomenon, it became logical to adopt a case study approach. The other advantage of the method is that a case study approach is rich in details and well defined. It therefore becomes immediately useful in gathering detail. It also provided a chronological chain of events and lessons that are learnt from these case studies. Case study is also an effective way of explaining a situation. The key difference between quantitative and qualitative methods is their flexibility55. Qualitative research methodology was suitable for this research topic because, with the non-quantitative nature of the study, it seemed the most appropriate methodology to prove the wide-ranging and intuitive answers and personal opinions aimed for. Moreover, generally, quantitative methods are fairly inflexible because they allow greater spontaneity and adaptation of the interaction between the researcher and the study participant. For example, qualitative methods ask mostly open-ended questions that are not necessarily designed in exactly the same way with each participant. With open-ended questions,
participants are free to respond in their own words, and these responses tend to be more complex than simply yes or no. This suited very well the requirements of the problem at hand, which requires rich and detailed answers as opposed to yes or no. In addition, with qualitative methods, the relationship between the researcher and the participant is often less formal than in quantitative research. Participants have the opportunity to respond more elaborately and in greater detail than is typically the case with quantitative methods. In turn, researchers have the
54 55
Yin, 1993, p3 Yin (2003)
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opportunity to respond immediately to what participants say by tailoring subsequent questions to information the participant has provided. It is important to note, however, that there is a range of flexibility among methods used in both quantitative and qualitative research and that flexibility is not an indication of how scientifically rigorous a method is. Rather, the degree of flexibility reflects the kind of understanding of the problem that is being pursued using the method.
With quantitative methods such as surveys and questionnaires, for example, researchers ask all participants identical questions in the same order. The response categories from which participants may choose are closed-ended or fixed. The advantage of this inflexibility is that it allows for meaningful
comparison of responses across participants and study sites. However, it requires a thorough understanding of the important questions to ask, the best way to ask them, and the range of possible responses.
However, despite these advantages, case studies have received criticisms. There are three types of arguments against case study research56. First, case studies are often accused of lack of rigour. Too many times, the case study investigator has been sloppy, and has allowed equivocal evidence or biased views to influence the direction of the findings and conclusions. Second, case studies provide very little basis for scientific generalization since they use a small number of subjects, some conducted with only one subject. The question commonly raised is How can you generalize from a single case? Third, case studies are often labeled as being too long, difficult to conduct and producing a massive amount of documentation. A common criticism of case study method is its dependency on a single case exploration making it difficult to reach a generalizing conclusion.
56
Yin (1984)
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3.3 Data Collection Data collection is a term used to describe a process of preparing and collecting data, for example as part of a process improvement or similar project. The purpose of data collection is to obtain information to keep on record, to make decisions about important issues, to pass information on to others. Primarily, data is collected to provide information regarding a specific topic. The main types of collection include census, sample survey, and administrative by-product and each with their respective advantages and disadvantages. A census refers to data collection about everyone or everything in a group or population and has advantages, such as accuracy and detail and disadvantages, such as cost and time. A sample survey is a data collection method that includes only part of the total population and has advantages, such as cost and time and disadvantages, such as accuracy and detail. Administrative by-product data is collected as a byproduct of an organizations day-to-day operations and has advantages, such as accuracy, time simplicity and disadvantages, such as no flexibility and lack of control. In this research the researcher collected data from both primary and secondary sources. Primary data can be defined as data which can be collected directly from target respondents whereas secondary data can be collected from publications of various institutions such as textbooks and newspapers. 3.3.1 Primary Data Primary data is observed or collected directly from first-hand experience. It can be defined as data which is collected directly from target respondents. In this research primary data was gathered through questionnaires, face-to-face interviews and telephone interviews and these instruments are explored below: 3.3.1.1 Questionnaires: This is the structured technique of collecting primary data. A good questionnaire construction highlights the need for ensuring that the items have clear
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instructions, have no negative wording that may confuse the respondents57. Though the method was time consuming it is less costly when compared with other methods of data collection. A questionnaire is used o collect data because of its applicability to the survey research design58. The major advantage of using the questionnaire was its ability to be administered to a large number of people at the same time59. Closed end and open ended questions were asked as to obtain precise answers and also to allow respondents to express their own views without restricting them to suggested responses. The use of questionnaires enabled respondents to answer questions at their own pace without any pressure of there and then responses associated with face-to-face interviews where respondents are rushed leading, in most cases, to some of the important information being lost. Questionnaires were used because they allow respondents to complete them at a time convenient to them which improves the quality of responses. They are also important for record keeping and for future reference. Selected respondents from different stock broking firms were asked to complete a series of structured and unstructured questions pertaining to the effectiveness of the ZSE in accomplishing its roles and functions. Unstructured questions enabled the researcher to obtain full details to questions asked especially in those areas the researcher had little knowledge. The use of questionnaires was relevant in this study because they allow for free style of investigation and pursuing issues in greater detail. The researcher constructed the questionnaires using the research objectives and research questions as a guideline. The researcher used the research objectives and research questions to use the information gathered to achieve the research objectives.
57 58 59
Walsh and comer, (1998)
Labovitz and Hagemon, (1996) Holsten and Gubrium, (1995)
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Questionnaires were found to be the best instrument for the study because of their versatility, simplicity and the fact that they provide a list of possible answers from which the respondents could choose. It was relatively quick to collect information using questionnaires and it was possible to collect information from a large portion of the sample population. The questionnaires proved useful in that it became easier to compare responses from questionnaires as the questions were standardised. The nature of this research requires comparative analysis of responses from several respondents. In this regard, the use of questionnaires which enabled respondents to give responses in a standardised manner was found appropriate. Also, questionnaires were very effective in soliciting descriptive responses. Respondents were required to give detailed descriptions and explanations on the effectiveness of the ZSE in accomplishing its roles using questionnaires. Questionnaires are faster and cheaper than the observation method. Also the use of questionnaire provides the researcher with more control over the data collection activity compared to the observation method. However questionnaires are not without their own disadvantages. Firstly, there is always unwillingness by some respondents to provide information. In some cases potential respondents refuse to answer specific questions. The use of the cover letter on the questionnaire is to assure respondents that the information provided is held with confidentiality. Despite a natural tendency of unwillingness to cooperate, many persons are unable to give accurate information on questions asked, especially on open ended questions. Targeting professionals in the capital market, the stock and financial markets helped reduce this problem. 3.3.1.2 Telephone interviews: Telephone interviews were used to obtain information from those respondents who neither had time to complete questionnaires nor time for personal interviews. Telephone interviews allowed the researcher to cover a wide geographical area within a short period of time. Instant responds to the questions were given. The
use of telephone interviews enabled the researcher to conduct unstructured interviews which is critical as it gives the respondent chance to express their opinion without the bias that is always associated with personal and face to face interviews. Telephone interviews had advantages as follows: The researcher could cover a wide geographical area within a short space of time The costs were less than those of conducting personal interviews Gives instant responses as opposed to questionnaires However, telephone interviews had the following drawbacks: Time for detailed discussion was limited More costly than questionnaires
3.3.1.3 Personal Interviews: An interview is a data-collection technique that involves oral questioning of respondents, either individually or as a group. Answers to the questions posed during an interview can be recorded by writing them down (either during the interview itself or immediately after the interview) or by tape-recording the responses, or by a combination of both. Interviews can be conducted with varying degrees of flexibility. A personal interview is the face to face interview between the respondent and the interviewer60. Personal interviews were also used to support questionnaires. They were appropriate for respondents who did not have time nor failed to complete questionnaires somehow. Interviews were conducted in a structured form to ensure consistency. During the interview process each question was read out and the response recorded on a standardised answer sheet with both closed and openended responses. Like questionnaires, interview questions were formulated in line with the research objectives. The researcher used interviews because structured
60
Kumar et al, (1999)
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interviews were flexible and enabled the researcher to have a degree of control over the targeted population. Personal interviews allowed the researcher to explain and elaborate on instructions. This enabled the researcher to get more accurate information since there was an opportunity to give and receive immediate feedback and evaluation. The researcher also managed to rely on verbal and non verbal responses. However, it was difficult to find an appropriate time for the interview as some of the respondents were committed to other business. Personal interviews had the following advantages: Questions would be explained and elaborated on so as to get accurate information It proved more flexible as compared to a questionnaire There was an opportunity to give and receive immediate feedback and evaluation The researcher relied on verbal and non verbal responses, facial expressions However personal interviews had their own limitations as below: The method was more costly and time consuming People are less likely to provide personal or sensitive information in person More often than not, information is constrained due to time given for a personal interview It promotes interviewer-interviewee bias
3.3.2 Secondary Data Secondary data is that which is already available prior to a study because it was collected for some other purposes some other time, not for solving the current problem. Secondary data is the data that have been already collected by and readily available from other sources. Such data are cheaper and more quickly
obtainable than the primary data and also may be available when primary data cannot be obtained at all. To gather the data, the researcher went through already existing records, statistics and other publications. Other sources of secondary data included the press, newsletters by investment companies and stock broking firms and the Internet. 3.3.3 Justification for the use of Secondary Data Although secondary data in some cases did not give enough detail and failed to meet the exact requirements of the research, it was less expensive to use than collecting the data personally. Due to the inadequate time and financial budget, the researcher required secondary data. Secondary data was very useful in the literature review section and the introduction chapter. Document review can save administrative time and costs61. However the weaknesses of secondary research could not be underestimated. In most case the information was not designed as to meet the researchers needs and the demands of the research topic. Also, some of the information was obsolete and not so useful. 3.4 Sampling Sampling is the way sample elements are to be selected from the entire population to come up with representative samples62. Samples almost indispensable in research work. The need to sample arises when the entire population cannot be surveyed because either of budget constraints, practically impossible, or time constraints63. Some of the reasons for sampling are lowering costs, greater accuracy of results, and greater speed of data collection and availability of population elements64. Sampling also enables the researcher to collect data from a
61 62 63 64
Taylor ,(199) p 12 Hill, et al., 2003
Saunders et al. 2003 Cooper and Schindler ,2003
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subgroup rather than all possible cases thereby overcoming time, money and access constraints. The main challenges of sample design are representativeness and non-response65. Careful sample selection and design of questions helps minimize these problems. There are two basic methods of sampling, namely66: Probability or representative sampling Non probability or judgmental sampling Probability samples are so called because it is possible to express the mathematical probability of sample characteristics being produced in all population. Each element in the population of interest has an equal chance of being part of the sample. A sampling frame is the complete list of the population from which sample is selected. It is advisable to use as large a sample as possible to reduce error in generalizing to the population67. However size is not always the most important consideration. A large, poor quality sample that does not reflect the population characteristics will be less accurate than a smaller one that does68. In non-probability sampling, the statistical accuracy of probability is less important than the criterion of fit for purpose69. The researcher uses his subjective judgment to come up with sampling method that he feels will deliver results and enable him answer the research question. This is particularly so where the data to be collected is qualitative70. The resulting sample was not dependent on rigorous application of probability theory and individual units in the population did not have an equal chance of appearing in the sample71.Because of
65 66 67 68 69 70 71
Lehmann, 1979 White ,2000 and Hill et al. 2003 Saunders et al 1997 May ,2001 May, 2001 Patton ,1990 Chisnall, 1986
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the qualitative nature of this research, non-probability sampling techniques were used to select the sample. Because of its practicality, sampling theory forms the basis of most research by survey. The sample must be designed properly for it to be representative of the whole group. One has to consider reliability and validity of the design. It is in view of this that selection of the researchers target population was on the basis of knowledge, flexibility, availability and convenience. The targeted population included credit analysts, dealers, and other ZSE personnel. 3.4.1 Population Identification A population is the total collection of elements about which we wish to make some inferences72.Selection of respondents was on the basis of their acquaintance, expertise and convenience of the sample. The targeted population included mainly included the research in stock broking firms and investment banks. 3.4.2 Purposive Sampling Purposive samples or judgment samples are selected on the basis of what some expert thinks those particular units or elements will contribute to answering the particular research question at hand73. Judgmental sampling enables the researcher to select cases that will best help him answer the research question(s) 74. This is ideal when workings with small samples such as in case study research and when there is need to select cases that are particularly informative.
72 73
Cooper and Schindler, 2003 Kinner and Taylor, 1983 Saunders et al ,1977
74
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3.4.3 Sample Size Deciding on a sample size for a qualitative enquiry can be more difficult than for a quantitative one because there are no rules to be followed 75. It all depends on what will be useful, what will have credibility and what can be done within available time and resources. There is always a difficulty in striking a compromise between the accuracy of the findings and the amount of time and money available for collecting, checking and analyzing the data76. The final sample size is matter of judgment rather than calculation77. Selection of sample size depends on the breadth and depth of information being sought by the researcher. To validate meaningfulness of insights generated from qualitative enquiry, have more to do with the information richness of the case selected and the analytical capabilities of the researcher than with sample size. This research study had two populations or sampling frames. One population was ZSE personnel. The other population was that of dealers and other employees of stock broking firms and investment banks. 3.5 Data Analysis Plan Due to the inherent noisy nature of raw data, questionnaire entries have to be processed before being applied into any analytical models. Data processing involves coding responses using numeric symbols, classifying respondents into individual groups as well as adjusting for non responses. To make a reasonable conclusion about the topic, there is need to find systematic and justifiable ways to analyze data and draw sound conclusions and recommendations. The data will be analyzed by sorting it out into categories. Answers will be grouped by question in order to draw numbers and percentages of the number of respondents whose responses fall in a certain category.
75
According to Mugo, 2005 Saunders et al ,1997 Hoinvalle, Jowel and associates, 1978
76
77
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3.6 Summary In this chapter, the researcher identified the research methodology and outlined the approaches used in carrying out the research, the sampling technique and the data gathering instruments employed in making this research study a success. This research is a descriptive research involving the use of primary and secondary data. Primary data is collected from respondents using the questionnaire method whilst secondary data is gathered from various databases and websites. Questionnaire is structured in such a way that respondents express their opinion. The validity, reliability and justification for the use of different instruments were also given in this chapter, being guided in the process by the objectives initially established for the research study. Data analysis tactics and presentation procedures were outlined and conclusions later drawn from the said data. This chapter showed data sources which the writer used in collecting information for the success of this undertaking. It was in light of the advantages of interviews that they were chosen for the purposes of this undertaking. The chapter also outlined how the whole research was carried out. It also addressed all the issues that form the backbone of the research. The next chapter shall look at the data presentation and
discussion or analysis.
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CHAPTER IV 4.0 DATA PRESENTATION AND ANALYSIS OF RESULTS
4.1 Introduction The chapter focuses on presentation techniques, discussion and interpretation of research findings. It presents the data obtained through primary and secondary means, the analysis and discussion of such data is in line with the research objectives outlined in Chapter I. Specifically it presents results and analysis of questionnaires, sampled data and results from the print media. The researcher present and analyze the data collected from field research carried out in an attempt to determine whether Zimbabwean Stock Exchange is effective in accomplishing the roles that capital markets are expected to perform. The results of the analysis are presented diagrammatically and expressed in percentages for ease of assessment. The hypothesis, Zimbabwean Capital Markets is effective in accomplishing its roles is tested. The research conclusions shall be based on such analysis. 4.2 Response Rate The table below shows the questionnaire response rate:
Table 3: Questionnaire response rate Number of Questionnaires Distributed Received back Spoiled Effective Response Source: Raw Data 3 16 35 19 54.30% 8.60% 45.70% Percentage
From the thirty five questionnaires distributed, nineteen were received back to give a response rate of 54.30 % but three of the questionnaires received were incompletely filled to such an extent that they were deemed spoiled thus reducing the effective response rate to 45.70%. The response rate would have been higher had respondents been given additional time to submit their responses but however due to time constraints the 45.70 % response rate is accepted as being adequate for this study. The response rate was also low due to the time and monetary budget of the researcher. The graph below shows the response and non response rate: Figure 4: Effective Response Questionnaire Response Rate
Number of Questionnaires Percentage
100% 54.30% 8.60% Distributed Received back Spoiled Effective Response 45.70%
Source: Raw Data

As shown by the bar graph above, of the questionnaires distributed 54% were responded to and 46% were not responded to.
4.3 Typography of Respondents 4.3.1 Respondent Field The table below shows the respondents by field, that is whether the respondent is employed by Stock Broking firms, Asset management, Banking, Pension Funds or Mutual Funds. The table below shows response by respondent field:
Table 4: Respondent Field Stock Broking Asset Management Banking Pension Funds Mutual Funds Other Total
4 Contribution 25%
2 12.50%
3 18.75%
3 18.75%
2 12.5%
2 12.5%
16 100%
Source: Raw Data
The bulk of the respondents (25%) were drawn from stock broking and pension funds and banks (18.75%) due to their better understating of the Zimbabwe Capital Markets (ZSE). Respondents from other institutions were unwilling to disclose certain information pertaining to their asset allocation decisions. As shown by the graph below, the largest number of respondents came from stock broking firms which contributed 25% of the total respondents. The graph below shows the respondents by field Figure 5: Respondent field
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Respondent Field
0% 20% 40% 60% 80% 100% Total 16 100% 12.50% 12.50% Contribution 18.75% 18.75% 12.50% 25% Other 2 Mutual Funds 2 Pension Funds 3 Banking 3 Asset Management 2 Stock Broking 4
Source : Raw Data 4.3.2 Position of Employment The table below shows respondents by position of employment
Table 5: Respondent By position of Employment Financial Analyst Dealer Fund Manager Stock Broker Credit Analyst Total
5 Contribution 31.25%
4 25%
2 12.5%
3 18.75%
2 12.5%
16 100%
Source: Raw Data
From the above table it can be seen that the bulk of respondents were Financial Analysts who contributed 31.25% of the total respondents followed by Dealers. 4.4 Comparison of Sample Percentage with Expected Seventy five percent of the respondents surveyed indicated that the ZSE is not effective in accomplishing the roles of capital markets.
Figure 6: Comparison of sample percentage with expected ZSE is effective in accomplishing its roles
Yes (4) 25%
No (12) 75%
Source: Raw Data 4.5 Data Presentation The following analysis is based on questionnaires collected at the end of the project. The questions asked are basically the same for all respondents.
4.5.1.0 Questionnaire Response Review 4.5.1.1 What class of companies does your company fall? About 81% of the respondents who successfully completed the questionnaires were from asset management firms and stock broking firms, the rest (19%) being from audit firms and banks. Of the 81% respondents from asset management and stock broking firms 40% were financial analysts, 30% were dealers and 11% were stock brokers. Of the 19% from Audit firms and Banks 13% were from Audit firms and 6% from banks. The figure below shows respondent classification: Figure 7: Respondent Classification Respondent Classification
90%
Contribution (Percentage)
80% 70% 60% 50% 40% 30% 20% 10% 0% Asset Management and Stock Broking Audit Firms Banks
Source: Raw Data
The chart below shows the classification of respondents by position held: Figure 8: Classification of Respondent by Position Held
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Classification of Respondents by Position Held

6% 13% 40% 11% Financial Analysts Dealers Stock Brokers Audit firms Credit Analyst 30%
Source: Raw Data
4.5.1.2 How long have you been in your profession? About 65% of the respondents had above 5 years of working experience and the rest of 35% were below 5 years of working experience.
Figure 9: Working Experience of Respondents Working Experience of Respondents Contribution(Percentage)

70% 60% 50% 40% 30% 20% 10% 0% Above 5 Years Below 5 Years
Years of Experience Source: Raw Data

4.5.3 Corporate governance is now one of the key considerations by investors. Do you agree? An analysis of whether the ZSE should place greater emphasis on corporate governance showed that markets that practice good corporate governance tend to have a firm background and hence grow in future. All respondents believed in the importance on corporate governance on the Zimbabwean Capital Markets. Good corporate governance ensures that assets are not diverted for personal use and gain. About 69% of the respondents believed that the ZSE is not adequately promoting good corporate governance. The remaining 31% believed it does adequately promote corporate governance. They argue so because companies are required to publish their accounts to avoid insider trading hence good corporate governance. They also believe that by selling shares through special bargain on the ZSE companies practice good corporate governance. Figure 10: Does the ZSE promote Good Corporate Governance Practice Does the ZSE promote Good corporate governance
ZSE Promotes Good Corporate Governance, 31%
ZSE does not promote Good corporate governance, 69%
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Source: Raw Data 4.5.4 Does the ZSE promote investment for small investors? About 100% of the respondents believed that the ZSE adequately promote investment and growth of small investors arguing that shares can be transacted in lots of 100 for all listed counters. 4.5.5 Does the ZSE promote growth for small to medium enterprises? 40% responded to this question agreed that the ZSE promote growth for small to medium enterprises. However 60% of the respondents belied that the ZSE does not adequately support small entrepreneurs to grow. The majority argued that the requirements for small entrepreneurs to be able to list and issue shares through initial public offerings (IPOs) were too much. For a company to be able to do that it is required to have a trading history of about three years and showing some levels of profitability. Some small entrepreneurs with brilliant ideas therefore fail before they even launch their ideas because of lack of funding. Figure 11: Does the ZSE promote Growth Does the ZSE promote small entrepreneurs' growth?
ZSE Promotes Growth, 30% ZSE does not Promote growth, 70%
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Source: Raw Data 4.5.6 Is the Zimbabwean Capital Markets properly regulated? 50% of the respondents believed that the ZSE is heavily regulated especially concerning foreign investors and selected sectors like the mining counters. They believe that the introduction of SEC would, in the long term, enhence the ZSEs performance in relation to regulation. 45% of the respondents believed that the ZSE is properly regulated. 5% were indifferent as to whether the regulation currently prevailing affect the ZSEs effectiveness. Figure 12: Is the ZSE properly Regulated Is the ZSE properly regulated
5%
45% 50%
Properly Regulated Heavily Regulated Somewhat properly
Source: Raw Data 4.5.7 How significant is the capital raising ability of the ZSE? The majority of the respondents believed that the capital raising ability would be very significant had it not been of the illiquid market. Capital flows from international markets however seem to be affected more by regulation than market liquidity. Currently the capital raising ability is not significant. Figure 13: Significance of ZSE in raising Capital
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Very Significant(28%)
Insignificant(72%)
Source: Raw Data 4.5.8 What do you think should be done for the ZSE to be more effective in accomplishing its roles? Respondents believed that regulators should enforce stringent insider trading and market manipulation regulations to improve on corporate governance. They also believe that the demutualisation process should be hastened. Demutualisation is the process of converting a non-profit, mutually owned organization to a forprofit, investor-owned corporation. Although, demutualized exchanges will continue to provide many if not most of the services, they will have different governance structures in which outside shareholders are represented by boards of directors. There are two main forces driving stock exchanges to demutualize: 1) increased global competition and 2) advances in technology. Some respondents also believed that the ZSE should incorporate codes on good corporate governance practices like the King Report so as to improve corporate governance.
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4.5.9 What recommendations do you expect this study to provide for the benefit of stock market development in Zimbabwe? Respondents believed that the stock market should be computerised through a Central Depository and do away with physical trading. Investors should be able to trade on the local bourse without the need to be physically present at the ZSE. Some respondents also believe that overregulation of the stock market should be avoided. They belived that the should be a clear relationship between capital markets and the Securities Commission of Zimbabwe. 4.5.10 How effective is the ZSE in promoting economic growth and development? Respondents believe that the ZSE can play a leading and prominent role in marketing Zimbabwe as a suitable and promising investment destination by attracting foreign and local investors who have an appetite for emerging market growth prospects. There are several areas that the ZSE can deliberately promote and encourage which will position Zimbabwe ahead of other countries on the continent. The Financial sector is one such area due to the well developed infrastructure and highly experienced and educated professionals. The second area is the information, communication and technology (ICT) sector which Africa is still lagging behind. This presents an opportunity for Zimbabwe. Zimbabwe has excellent infrastructure to build on a decent hub which can attract capital into the country. This can be channeled through the ZSE. 4.5.11 Can companies rely on the ZSE for capital raising for project development? The majority of respondents believe that companies cannot rely on the ZSE for their capital needs due the liquidity constraints that the market is currently facing. The current trading and settlement system is also too slow and poor. Therefore companies should supplement their capital through retained earnings than relying on the ZSE for their capital needs.
4.5.12 Has there been any change for the better in terms of the effectiveness of the ZSE since the introduction of the multicurrency regime? Respondents noted that there was some remarkable improvement especially just after the introduction of the multicurrency regime in February 2009. However with the introduction of indigenization laws performance on the ZSE dampened as it discouraged international investments because of the increased risk. 4.6 Interviews Apart from questionnaires primary data was also collected through interviews. Of the scheduled five interviews, three were successful making a response rate of sixty percent. The interview carried out at the ZSE proved that the major problem that the ZSE is facing is liquidity challenges. The market condition is such that the ZSE cannot effectively perform its roles. Regulatory constraints also affect the ZSE negatively. The ZSE would do better if it is demutualised. However the process of demutualization is being delayed by the fact that there are some members resisting. 4.7 Discussion and Interpretation of Findings There was a general consensus by respondents that the ZSE plays a critical role in the economy with many respondents arguing that, the level of economic growth and development would improve should the ZSE be reformed and take a lead in marketing the economy as a better investment environment. Further analysis depicts that, the ZSE is not doing enough to make sure that there is adequate support to potential SMEs and to ensure that there is quality corporate governance in the market. The Zimbabwe stock exchange needs to be reformed and restructured to be more effective in assisting both investors and entrepreneurs reach their respective goals. Initial Public Offering (IPO), also referred to simply as a "public offering," is
when a company issues common stock to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. The Zimbabwe Stock Exchange (ZSE) is the primary institution involved in this and sets the various rules, requirements, terms and conditions of conduct of IPOs. The ZSE needs to be reformed to be able to make it more effective and responsive to the needs of entrepreneurs especially small and medium scale businesses who struggle to raise capital even though they may have all the other ingredients for success. The ZSE needs to the reformed from an exclusive club into a more inclusive institution that transforms upcoming, promising ideas, ventures and projects from dreams into reality. If it cant be reformed and restructured to meet those goals then there is an urgent need to set up a rival exchange to do that. The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of dissolution. Among the requirements of conducting an I.P.O in Zimbabwe is the need for the company to be of a particular size and to have a trading record of a specified period (minimum 3 years), and be showing certain level of profitability. These requirements exist mainly to protect investors and also to make the ZSEs life easy and simple. The ZSE needs to actively encourage small to medium scale businesses to pursue the possibility of IPOs as a way to raise capital for their operations since the high level of inflation makes it almost impossible to keep borrowing to keep pace with higher requirements of working capital.
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4.8 Data Presentation and Analysis Summary The response rate for the questionnaires distributed was 45.7%. The bulk of the respondents were drawn from stock broking and asset management related institutions due to their greater understating of the investment market in Zimbabwe. From all the responses obtained from the field research, most were in favor of implementation of proper regulatory framework that will ensure transparency and reduce market manipulation. The study used both qualitative and quantitative approaches to analyze the research findings. The primary data, which was gathered through questionnaires and interviews was presented and analyzed first, then secondary data, which was collected from related literature. Tables, bar graphs and pie charts were used to present the findings. Logical judgments were also used to come up with results as well as an analysis of responses given by interviewees.
CHAPTER V 5.0 CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction The chapter focuses on the summary, conclusions and recommendations of the case study. Conclusions were be made from the data obtained as compared to what is expected as highlighted in the literature review. The chapter begins with a recap of the research progress with the conclusion to the previous chapter. The purpose of the study was to analyze the roles and effectiveness on the Zimbabwean Capital Markets (ZSE). In trying to gather empirical data a sample of 35 respondents were used being selected from financial institutions. The study was necessitated by the fact that small business enterprises are having difficulties raising enough capital to finance their operations; Zimbabwe is
lagging behind on the disclosure of executive remuneration which is a deficiency in corporate governance and the indigenization laws which dispirits foreign investors to participate at ZSE. This section presents the conclusions of the findings and offers recommendations to investors, the regulators and players in the Zimbabwean Capital Market. 5.2 Summary of Findings The major research problems that motivated the researcher included the fact that small business enterprises are having difficulties raising enough capital to finance their operations, Zimbabwe is lagging behind on corporate governance practices as witnessed by the poor board compositions of some listed companies and poor disclosure of executive remuneration, indigenization laws discouraging foreign investor participation on the ZSE and the participation of the Zimbabwean Capital Markets to contributing economic Growth and Development.
In trying to gather data that would assist in determining the effectiveness of the ZSE and assess the importance of the ZSE in contributing to economic growth and development the researcher used both primary data and secondary data. Primary data was collected mainly through interviews and questionnaires done with various financial institutions in Zimbabwe. Secondary data was collected from text books, previous research carried out on stock market development and efficiency and also from various websites.
The findings of the research as outlined in the previous chapter proved that indeed experts on capital markets are in agreement that the ZSE is not effective when it comes to roles and functions of stock exchanges that if performed well would eliminate the current problems outlined above. Furthermore, this dissertation examined the ZSEs effectiveness in accomplishing the various functions of stock markets in a quest to address the problem of slow economic growth and development and the deficiencies in accomplishing roles
that stock exchanges around the globe perform. The research examined the roles and functions of other stock exchanges and used such roles and functions as benchmark to appraise our own bourse (ZSE). Both primary data and secondary data was used to address this problem with the questionnaire being used as the primary data collection instrument from a sample of thirty five respondents drawn from various financial institutions. The findings show that the Zimbabwean Capital Market is not up to global standards, with various functions of Stock Exchanges not addressed by the stock market of our own. Emerging markets present a great opportunity for entrepreneurs to build the future. However, in Zimbabwe the small business entrepreneurs, despite the fact that they are the world's frontline risk takers, job creators and problem solvers, are not getting the necessary support that would make them kick-start the economy. In poor countries and emerging markets like Zimbabwe, small business entrepreneurs are the best chance to fight extreme poverty and create broad-based wealth. The research has also shown that corporate governance in our own market is still lagging behind with poor board structures for some of the listed companies. Some of the directors remuneration is not disclosed as good corporate governance practice would want them to be. The table below is a summary of the roles that the ZSE perform as obtained from field research through the questionnaire. Table 6: Summary of the ZSEs roles The following are the functions that stock exchanges perform. Using your own experience, please tell, for each role, whether the ZSE is performing such role. Show by ticking in the relevant box? Role/ Function Capital business raising Yes for Yes No Somewhat
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Mobilizing savings for investment Company growth Profit sharing Corporate governance Investment opportunity for small investors Capital raising for the government Barometer economy for the Yes Yes No No
Somewhat
Somewhat
No
5.3.0 Conclusions The conclusions made emanated from the research findings as presented in chapter IV, hence they are research based conclusions. They are summed up answers to research questions and sub problems and are drawn directly from data reported in the previous chapter. The conclusions section shall demonstrate whether or not conclusions agree with the theory of previous researches. The conclusions on the analysis are as follows: 5.3.1 Does the ZSE promote Corporate Governance for listed companies? An analysis of whether the ZSE should place greater emphasis on corporate governance showed that markets that practice good corporate governance tend to have a firm background and hence grow in future. All respondents believed in the importance on corporate governance on the Zimbabwean Capital Markets. Good corporate governance ensures that assets are not diverted for personal use and gain. Some respondents argued that ZSE promotes good corporate governance
practice by way of avoiding insider trading because companies are required to publish their accounts.
The conclusion from the above observation is that although the ZSE does promote good corporate governance practice it is not adequately doing so. This is because of the mixed responses with some analysts believing that there is still need to move an extra mile enhancing corporate governance of the listed companies in Zimbabwe. 5.3.2 Comparison of Sample Percentage with Expected Seventy five percent of the respondents surveyed indicated that the ZSE is not effective in accomplishing roles of Capital Markets in Zimbabwe. The conclusion from the hypothesis testing is that The Zimbabwe capital market is not efficient in performing its roles. (H1) 5.3.3 Does the ZSE promote investment for small investors? About 100% of the respondents believed that the ZSE adequately promote investment for small investors arguing that shares can be transacted in lots of 100 for all listed counters. The fact that shares are transacted in minimum lots of 100 shares means that even small investors that may want to participate on the market can easily do so thereby contributing to economic growth and development somehow. The conclusion that can be drawn from the above observation is that the ZSE adequately and effectively promotes investment to small investors. 5.3.4 Does the ZSE promote growth for small to medium enterprises? The majority of the respondents argued that the requirements for small entrepreneurs to be able to list and issue shares through initial public offerings (IPOs) were too much. For a company to be able to do that it is required to have a trading history of about three years and showing some levels of profitability. Some small entrepreneurs with brilliant ideas therefore fail before they even
launch their ideas because of lack of funding. However, about 40% of the respondents believed that the ZSE does promote growth for small to medium enterprises by the same reasoning that shares are traded in small lots. The conclusion from the response frequency clearly demonstrate that the ZSE does not adequately promote small to medium business enterprises because of the heavy requirements for qualification for raise money through the ZSE. 5.3.5 Is the Zimbabwean Capital Markets properly regulated? 50% of the respondents believed that the ZSE is heavily regulated especially concerning foreign investors and selected sectors like the mining counters. They believe that the introduction of SEC would, in the long term, enhence the ZSEs performance in relation to regulation. 45% of the respondents believed that the ZSE is properly regulated. 5% were indifferent as to whether the regulation currently prevailing affect the ZSEs effectiveness. The distribution of the response shows that the ZSE is heavily regulated. 50% respondents believed that the ZSE is heavily regulated, 45% believed it was properly regulated and 5% were indifferent. In conclusion therefore the implication is that the ZSE is heavily regulated. 5.3.6 How significant is the capital raising ability of the ZSE? The research has found out the strength of capital raising by listed companies depends on the performance of the company. If the company is doing well it would attract more investors and thus more capital is raised and the reverse is true. This means to say that the significance of the capital raising ability of stock exchange is a function of the individual stocks on the stock exchange. The result from respondents shows that the ZSE is effective with respect to local investors because the ability of a share to pool demand is a function of the performance of the individual company. However, concerning foreign investors, the significance is more dependent on regulation than the performance of the company. Hence, it can be safely concluded that the ZSEs capital raising ability
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is significant on the local arena but in terms of pooling from international stock markets it is not that significant. 5.3.7 How effective is the ZSE in promoting economic growth and development? Respondents believed that the ZSE can play a leading and prominent role in marketing Zimbabwe as a suitable and promising investment destination by attracting foreign and local investors who have an appetite for emerging market growth prospects. There are several areas that the ZSE can deliberately promote and encourage which will position Zimbabwe ahead of other countries on the continent. The Financial sector is one such area due to the well developed infrastructure and highly experienced and educated professionals. The second area is the information, communication and technology (ICT) sector which Africa is still lagging behind. This presents an opportunity for Zimbabwe. Zimbabwe has excellent infrastructure to build on a decent hub which can attract capital into the country. This can be channeled through the ZSE. From the obove, it can be observed that the ZSE can promote economic growth and development if it utilizes the opportunity it has to market the country economy. Therefore, the conclusion is that the ZSE is not effective in promoting economic growth and development 5.3.8 Can companies rely on the ZSE for capital raising for project development? The majority of respondents believe that companies cannot rely on the ZSE for their capital needs due the liquidity constraints that the market is currently facing. The current trading and settlement system is also too slow and poor. Therefore companies should supplement their capital through retained earnings than relying on the ZSE for their capital needs. Companies cannot rely on the ZSE for their various capital needs.
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5.3.9 Has there been any change for the better in terms of the effectiveness of the ZSE since the introduction of the multicurrency regime? Respondents noted that there was some remarkable improvement especially just after the introduction of the multicurrency regime in February 2009. However with the introduction of indigenization laws performance on the ZSE dampened as it discouraged international investments because of the increased risk. From the responses of provided by respondents, there was no remarkable improvement in the effectiveness of the ZSE. The gazette of indigenization laws further worsened the situation by dispiriting foreign investors. 5.4 Recommendations In the light of the conclusions drawn by the study, the researcher clearly stated recommendations on actions that should be taken to solve problems identified. In addition, suggestions for future research on the study were made in the latter section of the chapter. 5.4.1 Corporate Governance In light of poor corporate governance structures of some listed companies, the ZSE should redefine their listing requirements and make it compulsory that listed companies should follow guidelines on good corporate governance. For example it can adopt codes of best practice on corporate governance like the King Report or the Cadbury Report like the JSE that adopted the King 11. This will go a long way in addressing the problem of corporate scandals and ensuring better economic growth and development in the long run. By the same token, the ZSE should enforce stringent insider trading and market manipulation regulations. This ensures that resources are not diverted for personal gain and use than benefit the economy at large. Although the ZSE requires every listed company to publish their financial statements as a way to ensure that there is no insider trading and market manipulation, there is still need
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for making follow ups and ensuring those that does not comply face strict punishment and legal quencequences. Furthermore, the process of demutualization should be hastened so that the effectiveness of the ZSE in enhanced. Demutualization is likely to bring with it competency and drive of the local bourse. Ever since demutualizing the ZSE was proposed it seems that there are still arguments and disagreements between the responsible as to whether demutualising the ZSE are the best way to ensure efficiency and effectiveness. Indeed demutualization and remarkably improve the efficiency and effectiveness of the ZSE since it brings about better organization and state of affairs concerning how the stock exchange run. 5.4.2 Stock Market Development and Economic Growth The stock market should be computerized through the central depository and do away with physical trading. This is most likely to promote foreign participation on the ZSE. Investors around the globe will be able to trade from their respective locations. The central depository system also enhances better settlement system and obviously converts the market into a continuous market. The ZSE could be improving its effectiveness by employing electronic share registering system as compared to the current manual system. The manual system has a lot of loopholes, among them, loosing shares certificates and delays in getting share certificates for investors. The Zimbabwe stock exchange needs to be reformed and restructured to be more effective in assisting both investors and entrepreneurs reach their respective goals. Initial Public Offering (IPO), is when a company issues common stock to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. The Zimbabwe Stock Exchange (ZSE) is the primary institution involved in this and sets the various rules, requirements, terms and conditions of conduct of IPOs.
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The ZSE needs to be reformed to be able to make it more effective and responsive to the needs of entrepreneurs especially small and medium scale businesses who struggle to raise capital even though they may have all the other ingredients for success. The ZSE needs to the reformed from an elitist club into a more inclusive institution that transforms upcoming, promising ideas, ventures and projects from dreams into reality. If it cant be reformed and restructured to meet those goals then there is an urgent need to set up a rival exchange to do that. There global trends that ZSE can tap into and enhance both the quality and quantity of investment option available for investors. Specifically the ZSE needs to actively encourage small to medium scale businesses to pursue the possibility of IPOs as a way to raise capital for their operations since the high level of inflation makes it almost impossible to keep borrowing to keep pace with higher requirements of working capital. 5.4.2.1 ZSE must play a leading role in Zimbabwe Economic recovery Efforts to resuscitate Zimbabwes economy needs to involve more participants which have expertise in mobilizing financial and other economic resources. The ZSE can play a leading role in mobilizing recovery resources and investor interest. The ZSE can play a leading and prominent role in marketing Zimbabwe as a suitable and promising investment destination by attracting foreign and local investors who have an appetite for emerging market growth prospects.
There are several areas that the ZSE can deliberately promote and encourage which will position Zimbabwe ahead of other countries on the continent. The Financial sector is one such area due to the well developed infrastructure and highly experienced and educated professionals. The second area is the information, communication and technology (ICT) sector which Africa is still lagging behind. This presents a clear opportunity for Zimbabwe to brand itself. Zimbabwe has excellent infrastructure to build on a decent nucleus which can attract capital into the country. This can be channeled through the ZSE. For this to
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take place the ZSE must actively and aggressively encourage Information, Communications and Technology companies to list. 5.4.3 Regulation Overregulation of the ZSE should be avoided. There should be a clear relationship between capital markets and the Securities Commission. Indigenization laws clearly negatively impacts the growth of the economy by dispiriting profitable trading at the ZSE. The ZSE should be moderately regulated in a way that does not compromise the need for such regulation and at the same time in a way that promotes trading and economic growth that will benefit the economy at large. 5.4.4 Can companies rely on the ZSE Because of the conclusions drawn about the ineffectiveness of the ZSE companies need to find alternative sources of capital. This will make sure that the impact of the ineffectiveness of the ZSE on economic growth and development is reduced. Companies need to try and finance their operations using internally generated funds and retained earnings. 5.4.5 Capital Market Stability It is up to the ZSE to make sure that the capital market is more stable by ensuring that the professional caliber of personnel who participate in financial markets is up to standards. Some brokers and dealers, custodians and back office personnel have not been formally trained. The ZSE should set up minimum acceptable standard by which such people are allowed to participate in financial markets. There is need for a creditable qualification that would ensure that individuals can run complex operations in competitive securities markets. 5.4.6 Demutualization The process of demutualization should be hastened so as to improve on efficiency and effectiveness of the Zimbabwe Stock Exchange. Demutualization enables the
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ZSE to be run properly and converted from a club to a profit seeking organization that should be listed also.
5.4.7 Over The Counter Markets (OTC) The current regulation of the ZSE that does not allow OTC markets should be relaxed. OTC markets are a computer linked network of dealers that do not physically meet. Although there is much high credit risk in OTC markets the ZSE limits the possibility of better trade and high volumes of trade in the economy. Trades in the OTC markets are typically larger than trades in exchange traded markets (ZSE). One of the key advantages of the OTC market is that the terms of the contract do not have to be those specified by the exchange, participants are free to negotiate any attractive deal. 5.5 Suggestions for Further Research Most of the research in market efficiency, including this one, has concentrated on using qualitative information to investigate effectiveness of stock markets. It would be necessary for further research to employ more statistical tests and models in appraising capital markets.
Further research should be on evaluating the feasibility of establishing a rival stock exchange in Zimbabwe. If efforts to reform the ZSE and possibly demutualization fails, there is need to establish a rival stock exchange that will dilute the monopoly status of the ZSE and improve the overall effectiveness of the Zimbabwean Capital markets. Therefore further research on the topic of effectiveness of Zimbabwean Capital markets should look into the feasibility of the possibility of establishing a rival stock exchange. 5.6 Summary of Conclusions and Recommendations The chapter looked at conclusions drawn from each research question and made recommendations thereto. The major recommendations included the
establishment of the central depository system that enables electronic trading,

reducing the level of regulation of the ZSE. Hastening the demutualization process was also among the recommendations. The chapter drew conclusions to problems of the ZSE making particular reference to the objectives of the study as spelt out in every chapter of the research. The last part of the chapter provided suggestions for further research. It is the researchers belief that the current research and available literature is inadequate to address the identified pitfalls of the local market. This is especially because of the dynamic nature of capital markets around the globe. New recommendations should be drawn more often so as to incorporate any of the vast changing features of stock markets hence further research on the topic is indispensable.
REFERENCES Bhalla V.K (2004) Investment Management, 10th Edition, Dehli, India, PP 10-22 Bliss and Smith, (1999) p 43 Chris Muronzi, Zimbabwe Independent Business Editor 13 August 2010 DATVEST April 2010 Newsletter, pp 2- 3 D. G. Clarke 198(1 Foreign Companies and Intel national Investment in Zimbabwe. G Mambo: p 116. Dr. Gono, Troubled Banking Institutions Handout, p 2 Dr. G. Gono governor reserve bank of Zimbabwe, Press statement on the rampant fraudlent activities on the ZSE, 20 November, 2008, pp 6-9 Dr. Mohamed Jalloh, Director general Sierra Leone Stock Exchange, The role of financial markets in economic growth, p 7 Dr. John Mangudya, Zimbabwe Financial and Capital Markets, 2009, pp 11-15 E. H. H. Edwards 1963 "The Role of the Stock Exchange", in RSE, Financial and Economic Symposium, Record of Proceedings, Salisbury: p 3
Fraser G (1995) The Role and Development of Local Capital Markets http://www.typepad.com/ services/trackback/6a00e00987fe5188330115720b2d46970b F. E. Armstrong 1957 The Book of The Stock Excliange, London: Pitman: p 17. George Karekwaivenani, A History of the Rhodesian Stock Exchange, pp 2-8 Gummersson, 1991 p 76 Hans Christiansen and Alissa Koldertsova, The Role of Stock Exchange in Corporate Governance 2009, pp 13-22 Idanan J (1994) An evaluation of the roles of capital market in the industrial development of Nigeria pp 25-26 J. Atack and P. Passell 1994 A New Economic View of American History from Colonial Times to 1940, p22 John C Hull, Options, Futures, and other Derivatives, fourth Edition , P 17 Kerlinger, (1996) p 279 Merrian and Simpson, (1984) p 95 Mayer T et al (1996) Money, Banking and The Economy, 6th Edition, USA New York: VV. W. Norton: p 583 Pinches G.E (1994) Financial Management, New York, USA Plummer T (1998) Forecasting Financial Markets: The psychology dynamics of successful investing, Third Edition Rose P.S (2004) Money and Capital Markets: Financial Institutions and Instruments in a Global Market place, Eighth Edition, McGraw Hill pp 613-620 Robert (2004) Business dictionary http://business.gov.in/starting_business/source_finance.php. Access date 28/07/09 1207hrs Ronald J. Gilson, Transparency, Corporate Governance and Capital Markets William (2008) Capital Market http://www.answers.com/topic/capitalmarket Access date 31/07/09 0945hrs Sibanda T (2009) IMARA Edwards Securities- Members of the Zimbabwe Stock Exchange report Sam Mensah, Ph.D, Demutualizing African Stock Exchanges: Challenges and Opportunities, pp 55-63 Securities Commission of Zimbabwe Proposed Institute : Discussion Draft, 4/1/2010, P 5
Securities Commission of Zimbabwe Proposed Institute : Discussion Draft, 4/1/2010 William (2008) Preference Stock www.answers.com/topic/preference-stock Access date 31/07/09 1045hrs W. T. C. King 1954 The Stock Exchange, London: Allen & Unwin: p 15 Yin, 1993, p3 Zimbabwe Stock Exchange Handbook 2010 Zimbabwe Daily News, 29 December 2010 Websites http://www.zse.co.zw/ http://www.theindependent.co.zw/ http://www.zimtreasury.org/ http://www.imaracapital.com/ http://www.investorhome.com/emh.htm http://www.africanir.com/2010/11/05/new-ipo-on-the-zimbabwe-stock-exchangepadenga-holdings/ http://www.africanfinancials.com/Report.aspx?afr_year=2010&CountryDOMAI N=zw&CshortName=PADENGA
APPENDICES 1 Questionnaire
Department of Finance P Box AC 939 Ascot, Bulawayo
Date:../..../20...
TO WHOM IT MAY CONCERN
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REF: REQUEST FOR RESEARCH ASSISTANCE My name is Chimuriwo Tafadzwa P; I am a fourth year student for Bachelor of Commerce Honors Degree in Finance at the National University of Science and Technology (NUST), registration number N007 1352T. In partial fulfillment of my studies I am supposed to carry out a research and my research topic is, Evaluation of the roles and effectiveness of the Zimbabwean Stock Exchange (ZSE) It is against this background that I am approaching you with a sincere hope that you will assist me by completing the questionnaire attached to this letter. Please be guaranteed that the information you will provide shall be used purely for academic purposes and that any such information will be kept with the uppermost degree of confidentiality.
Yours faithfully
Chimuriwo Tafadzwa P.
The Questionnaire Section A :( 1) (i) Company name: (ii) What class (for example Asset Management, Stock broking, Corporate Finance, property, beverages etc) of companies does your company fall? Please specify on the space below. (iii) Position Held (tick appropriate) Stock broker. Fund Manager. Dealer.
Financial Analyst. Other (specify)..

(iv) How long have you been in your profession? 0-5 Years. Years. Section B: 2. Nowadays there is increased emphasis on corporate governance before the decision to invest in a particular market is made. Do you agree? Tick the corresponding box for you answer. Strongly agree strongly disagree 3. Markets which practice good corporate governance tend to have a firm background and hence grow in future. Tick the corresponding box for your answer. True 4. Justify your answer to question 3 5. Does the Zimbabwe Stock Exchange promote investment for small investors? Tick in the relevant box Yes. extent. 6. Briefly explain your response to question Ag No. To some False Disagree Above 5
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7. The following are the functions that stock exchanges perform. Using your own experience, please tell, for each role, whether the ZSE is performing such role. Show by ticking in the relevant box. Role/ Function Capital business Mobilizing savings for investment Company growth Profit sharing Corporate governance Investment opportunity for small investors Capital raising for the government Barometer economy for the raising for Yes No Somewhat
8. Is the Zimbabwean Capital Markets properly regulated? Tick the appropriate box. Yes.
No.
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9. I your answer to question 8 is no, explain. 10. If answer to question 8 is no, how is the need for proper regulation affecting the effectiveness of the Zimbabwe Stock Exchange? 11. Generally, is the ZSE effective in accomplishing the functions it is currently performing? Yes. 12. Explain your answer to question 11 No.
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13. How significant is the capital raising ability of the Zimbabwe Stock Exchange? ... 14. What do you think should be done for the Zimbabwe Stock Exchange to be more effective in accomplishing its roles and functions? 15. What recommendations do you expect this study to provide for the benefit of the stock market development in Zimbabwe?
Thank You.
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UNIVERSITY OF ZIMBABWE FACULTY OF COMMERCE DEPARTMENT OF BUSINESS STUDIES

COMPILED BY: JAMES VASHIRI R101557A

SUPERVISOR: MR. JD NHAVIRA

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CHAPTER I 1.0 INTRODUCTION

Sam Mensah, Ph.D

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Tom Minney, 26 July 2010,

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Musa Mangena, University of Bradford Gilbert Muponda, 2009

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Willia Bonyongwe, Chairperson of the Securities Commission of Zimbabwe (SEC)

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W. T. C. King 1954 The Stock Exchange, London: Allen & Unwin: p 15

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Wikipedia, the free encyclopedia

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Wikipedia, the free encyclopedia

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build liquidity through innovation

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Sam Mensah, Ph.D

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2.6.3 Facilitating company growth:

insurance and pension fund industries and the banking sector, p 6

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Hans Christiansen and Alissa Koldertsova, 2009

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Figure 1: Industrial Index and Daily volume

Source: DATVEST April 2010 Newsletter

DATVEST April 2010 Newsletter, p 3

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DATVEST March 2010 Newsletter, P 2

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Figure 2: Industrial Index and Value Traded

Source: DATVEST March 2010 Newsletter

Figure 3: ZSE Index Movements

Source: DATVEST March 2010 Newsletter

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Securities Commission of Zimbabwe Proposed Institute : Discussion Draft, 4/1/2010, P 5 (http://www.zse.co.zw/)

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CHAPTER III 3.0 RESEARCH METHODOLOGY

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