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REGIONAL INTEGRATION OF STOCK EXCHANGES

IN AFRICA
Article January 2006
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S.O. Onyuma (2006) Regional Integration of Stock Exchanges in Africa. African Review of Money,
Banking & Finance (Supplement Issue) December, pp. 99-124.
REGIONAL INTEGRATION OF STOCK EXCHANGES IN AFRICA
Samuel O. Onyuma
Egerton University, Kenya
sonyuma@yahoo.com
Abstract
Although stock markets contribute to economic development, the advances in
technology, globalisation, stiff competition, institutionalisation of capital markets, and
their traditional nature as self-regulatory, controlled and governed by members or
governments threaten their well-being. Elsewhere, exchanges are demutualizing and
integrating with others domestically or across borders. African stock exchanges cannot
ignore these developments. This article discusses the implications of globalisation to
stock markets, benefits and impediments to stock market integration, and suggests how to
promote integration of stock markets. It argues that becoming cost-efficient, transparent,
widely accountable, and contributively to regional integration, Africa exchanges must
first adapt to global standards, improve their governance practices before thinking of
regional integration. Harmonizing listing, trading and settlement systems and rules, and
adopting a single currency are crucial as developing mutual commitment and other ties
bonding cooperating exchanges. Successful integration requires meticulous planning and
execution, political determination and economic rationale. Further progress in developing
domestic exchanges must precede any move to integrate. Creating a single African stock
market is a complex undertaking thus domestic exchanges should consider forming closer
cooperation through cross-border listing and information and technology sharing. From
these regional alliances, continental integration could then be considered.
1. INTRODUCTION
Stock markets worldwide are undergoing tremendous reforms brought about by many forces.
For instance, advances in technology and globalisation imply that stock exchanges have to
reconsider how to adapt to serving markets beyond their traditional borders. In markets where
there exist several stock exchanges, competition is driving stock exchanges to rethink their
management and marketing strategies for expanding and maintaining their markets, even if it
means going cross-borders. Elsewhere stock exchanges are trying to adapt to these changes by
signing cooperation agreements with each another nationally and across their borders, creating
regional stock markets. Using a multi-country survey approach internationally accepted, this
article begins by considering the implications of globalisation to stock exchanges, and discusses
the forms of stock market integration. It then documents the integration progress made so far in
conjunction with the economic, trade and monetary organizations in Africa. Possible benefits
likely to accrue to African exchanges forming regional markets, and the impediments standing on
their way are explored. Finally, it suggests how to promote the integration of African stock
markets.
1.1 Globalisation of Stock Exchanges

The global capital markets have been experiencing three divergent trends. First, is the
creation of new stock exchanges as firms need for growth capital, sores. Africa currently has 18
stock exchanges (Hillcapita, 2004). Second, is the trend toward cooperation among exchanges in
developed capital markets brought about by the economies of scale and scope required by the
exchanges, need for huge expenditure on new technology necessary for global exchange
competition, and need for increased market liquidity through adding other members to an
exchange who will be available to buy and sell securities and attract customers to an exchange
(Domowitz and Steil, 2000; Shah and Thomas, 1996). These cooperation efforts may in future
lead to regional stock markets to meet the need for expensive technology and enhanced market
liquidity. Finally, many exchanges are becoming public forprofit corporations owned by
shareholders, thus moving away from the usual mutual member-owned structures (Ramos and
von Thadden, 2002; IOSCO, 2001).
Africa has not been spared the effects of globalisation as it moves deeper into economic
liberalisation, universal standardisation and rapid technological integration. Key tenets of
globalisation include international diffusion of technology and increasing cross-border
transactions of which international capital is the driving force. Globalisation is driving world
economies towards a single market, due to the liberalization of trade, which allow better and
more efficient allocation of resources. Globalisation can be achieved by deepening trade relations
among regions and nations (Ramanlal et al., 1997). The increasing availability of global capital,
coupled with advances in ICT, is serving to accelerate the processes of globalisation. Barriers to
free trade and flow of capital are coming down in UK and US, as well as, Africa, Latin America
and Asian-Pacific (Arnold et al, 1999), indicating that nations are becoming more integrated into
a single, interdependent, global capital market.
The creation of world trading blocs and other economic and monetary unions is further
encouraging global trade and providing favourable conditions for firms to establish in domestic
and foreign markets. The growth and integration of the world capital markets is one of the
engines of globalisation. As the word stock exchanges become more integrated, the law of one
price begins to apply and capital becomes more mobile throughout the world. The widespread
mobilization of capital movements brought about by cross-border capital flows foster fierce
competition among stock exchanges, enhanced by technological innovation that allowed huge
capital to move quickly and safely across borders, and diffusion of real-time information.
Stock exchanges have traditionally been natural monopolies, non-profit and mutual or
cooperative organizations (Stail, 2002), self-regulated and owned, controlled and governed by
their members, and enjoyed monopoly in the trading of domestic securities thus protected from
meaningful cross-border competition. The traditional ownership and governance structure, and
trading systems are being affected by advance in information technology that allows the provision
of the immediacy, price discovery, liquidity and transparency; globalisation; institutionalisation
of capital markets, and growing competition in the rise of alternative trading systems like
Electronic Communication Networks (ECNs). These pressures mean that stock exchanges must
become more cost efficient, transparent and widely accountable. Securities market firms no
longer confined to domestic markets as they can access markets across the borders and route their
orders by seeking the best price for securities across a number of different exchanges.
The long-term effect of these developments poses major challenges to the continuation of
the traditional exchanges. To enhance efficiency and liquidity, competition among exchanges
produced new automated trading systems, technological agreements among exchanges, price
wars, integration of stock exchanges through mergers, takeovers and alliances, and creation of
new exchanges within a country. Emergence of quasi-exchanges like ECNs have developed and
reforms of stock exchange regulations have led exchanges to demutualize and sometimes self-list
their shares with the objective of expanding their markets, providing cheaper and better quality of
services, and adopting good market regulations (Di Noia, 1999).
Stock exchanges are therefore turning from non-profit, mutually owned by members into
profitable client-driven companies with shareholders, resulting in the separation of ownership and
membership with members enjoying trading rights but not membership rights. Many exchanges
have also integrated other services such as clearing and settlement and trading in derivative
products, as witnessed in the merger of Deutsche Bourse with Clearstream (Wellons, 1998), as
away of offering a one-stop shop to clients. Other exchanges specialized in providing transaction
technology by offering integrated and cost-efficient IT solutions to markets like the OM Group
that offers its technology to over 25 exchanges and clearing houses worldwide. Globalisation is
also changing how stock markets are regulated, with competition acting as a spur for exchanges
to continually improve the quality of their trading platforms and rules. Good regulation implies
that regulators, exchanges and investors all share responsibility of maintaining the quality of the
market. Regulators are best able to establish the general principles for safeguarding the integrity
of stock markets, cracking on insider-trading and promoting fair competition (Murray, 2002).
These developments have to be monitored more closely and adapted to by African stock
exchanges.
2. INTEGRATION OF STOCK EXCHANGES

2.1 Integrated Stock Market
An integrated stock market is where, without restrictions, investors in one country can
buy and sell equities that are issued in another. Stocks are issued and traded at the same price
across markets after adjustment for foreign exchange rates (Domowitz et al., 1998; Pieper and
Vogel, 1997). Integration may lead to regional stock market, a consortium of stock exchanges
within geographic proximate nations, and one with no specific location. A firm located within a
region is free to issue and redeem stocks through any exchange that is a member of a regional
stock market (Hooper, 2001), and the investors within a region are free to trade stocks on a
regional market. Regional integration is a step toward global capital market since it enables the
integration of trading and regulation infrastructures within a region that make exchanges to
benefit from the depth and liquidity, optimum turnover and competitive price advantages that
larger markets provide. The regional exchanges can later form continental and global stock
markets.
The objective of integration is to link stock markets electronically so that their members
can execute orders on exchanges that offer the best deals for their clients. However, countries and
exchanges should evaluate regionalization on a strict cost-benefit analysis and not become
overindulged in the political payoffs associated with it. The crucial issue is how integration will
affect exchange competition. In cooperating, exchanges must specialize in different securities that
differentiate them from others. Given African exchanges monopoly power in listing equities, the
manner in which integration will affect exchange competitive power, the possibility of driving out
the smaller inefficient exchanges through cooperative behaviour, and the implications for regional
integration, need to be addressed and resolved prior to integration of stock markets.
2.2 Forms of Integration of Stock Exchanges

There are many ways in which stock exchanges can cooperate with each other (Onyuma,
2006; Cybo-Ottone et al., 2000; Lee, 2000) including effecting a linkage, forming a joint venture,
an alliance or merging with others. The various functions undertaken by two exchanges like
marketing, listing, order-routing, marching and execution, information dissemination, clearing,

settlement, and administration services can be shared. There are also different contractual
procedures by which shared delivery of these services can be implemented like one exchange can
purchase the services form another exchange, both exchanges may agree to sub-contract delivery
to a third party, or one exchange can buy the other exchange.
The first form of integration is a cross-border merger or joint venture (any type of mixed
integration using some common vehicle), where the parties (exchanges, clearing houses, or
technology providers) to the deal are located in different countries, and leads to same trading
system. Secondly, a domestic merger or restructuring is where exchanges in a country, vertically
or horizontally, merge their internal activities like trading, and clearance and settlement (C&S)
facilities to enjoy economies of scale and scope. This form has been conducted by Deutsche
Bourse, Amsterdam, Brussels, Singapore, and Helsinki exchanges (Alvarez and Kalatay, 2004).
In addition, a cross-remote membership occurs where an exchange gives access to its
trading engine to brokers of another exchange even if they are not located physically in the same
country (El Sarafie and Shahid, 2002). It is a much easier and feasible form as it provides wider
access to other markets. Moreover, cross-boarder listing is where firms cross-list their stocks to
allow domestic investors to trade in a foreign firms stocks. Firms are able to raise more capital,
diversify their shareholder base, allow more broadened investor exposure, and enhance the image
of the firm in other markets outside its home country (Irving, 2005; Ramanlal, et al., 1997). But,
the bulk of trading usually occurs at the home market, although the reverse could occur and
liquidity is driven out of local smaller, to the larger and more liquid, exchange as witnessed in the
case of New York Stock Exchange (NYSE) and Buenos Aries Stock Exchange (NYSE, 2000).
Lastly, an implicit merger, a hybrid of cross-membership and cross-listing, is an
agreement between two exchanges, where stocks originally listed on an exchange are listed by the
other, and remote access is reciprocally offered to brokers of both exchanges. It can lead to higher
profits for both exchanges due to cross advantages of marginal costs, as one exchange may have a
lower marginal cost in trading and the other lower listing cost.
3. BENEFITS OF INTEGRATING AFRICAN STOCK EXCHANGES

Several studies (World Bank, 2002; Bissember, 2000; Rothchild, 2003; Bolkenstein,
2001) have reported on various advantages of integration in the financial industry. An integrated
stock market can be an integral part of the deepening and widening the economic integration
process in Africa. It will promote the movement of capital across the continent, increase
investment opportunities, encourage optimum financing for firms irrespective of where they
resides, and increase the attractiveness of Africa as an investment area both by local and foreign
investors. African stock markets would also overcome poor liquidity, promote parastatals
privatisation programs being implemented in African countries without the need to reserve part of
the shares on sale for strategic investors, as their participation is definite.
Integrating stock markets would encourage more savings and investment by Africans and
offer investors the opportunity to share in, and benefit from, the growth of the best firms across
the continent regardless of where investors live. Integration may help individuals to invest in
many regions or countries thereby reducing sovereign risks. The improved marketability of a
firm's securities achieved through widespread public exposure may lead to increased investors'
confidence and an expanded investors base, reducing price volatility and narrowing spreads
through wider market participation.
Moreover, regional exchanges can also complement domestic exchanges as they are
made up of all stocks listed on domestic exchanges, thus offering investors a wider market and
greater choices in the selection of investment options. Securities market firms would attract more
order-flow to reduce transaction and operational costs due to improved standards for market
making and broking, efficient technology utilization and sharing such costs among several
exchanges/markets. Firms, stockbrokers and exchanges will also inject good corporate
governance practices in their management, raise the level of information disclosure to match
global standards, and share in the benefits of automation and efficiencies brought about by
economies of scale and scope.
Furthermore, it will be easier for issuers, through integrated markets, to raise capital in a
region on a scale not possible in their domestic markets, thereby strengthening issuers name
recognition and enhancing the image of its products/services in the region/continent. More
primary listing and secondary cross-border listing would also improve the depth of stock markets.
This would enlarge the market for the local firms shares through a broadened and more
diversified investor exposure thus increasing or stabilizing share prices. It would also be easier
for foreign institutional investors in Europe, America and Asia to invest in integrated rather than
fragmented African markets.
4. PROGRESS TOWARD INTEGRATION OF STOCK EXCHANGES IN AFRICA

4.1 African Stock Exchanges Association
Most African stock exchanges are constrained by outdated trading systems and rules,
product marketing strategy that inhibits delivery, and are yet to become dynamic means of
financial intermediation (Irving, 2005; Mwenda, 2001). Following the encouraging experience
from equity markets in Europe and America, African exchanges have been pondering about their
future as independent capital markets. Although many benefits accrue from exchange
competition, advantages may also accrue through exchange cooperation to exchanges, brokers,
investors and states. Consequently, stock exchanges from African, in 1993, formed the African
Stock Exchanges Association (ASEA) with the primary objective of encouraging the
development of stock exchanges in all African countries, and ultimately integrating them through
technology. The aim of ASEA is to assist in systematic mutual cooperation; exchange of
information and materials; and undertaking joint projects between the members, harmonization of
trading and C&S rules, thereby providing a formal framework for integration of stock exchanges
in the Africa.
4.2 Regional Cooperation Through MoUs and Cross-border Listings

With the encouragement from ASEA, African stock exchanges have started forming
numerous memorandum of understanding (MoU) to promote exchange cooperation through
cross-border listing and act as future integration platforms. The MoUs cover listing and disclosure
requirements, regulation and C&S standards that are globally acceptable. Following the 1990s
liberalization of exchange controls in many African countries, several firms have sought dual
listings. More than 70 percent of the equities listed on the Namibia Stock Exchange (NSX) are
dual listed on the Johannesburg Stock Exchange (JSE). The various efforts within various regions
to harmonize rules, technology, and systems are expected to pave the way for more cross-border
listings thereby boosting the supply of listed stocks, market capitalization and liquidity.
African exchanges are already developing linkages with one another through MoU to
facilitate cross-border listing of their securities. The Nigerian Stock Exchange (NiSE) signed
cooperation agreements with the Ghana Stock Exchange (GSE) and JSE in 1999. In 2000, NiSE
signed an MoU with Nairobi Stock Exchange (NSE), while NSE also signed a similar MoU with
GSE. The JSE has various MoUs with Cairo & Alexandria (CASE), NSE, GSE, Swaziland Stock
Exchange (SSE), Tunisia Stock Exchange (TSE), Dar-es-Salaam Stock Exchange (DSE),
Mozambique Stock Exchange (MSE), Uganda Securities Exchange (USE), and Zimbabwe Stock
Exchange (ZSE). In addition, JSE and LSE (Strate) share various agreements with NSX. Other
MoUs have also been signed between GSE and NSE, whereas, the NiSE and GSE also have MoU
with LSE.
These MoUs have led to a number of cross-border listing in Africa stating with the 1994
privatisation of Ghanas Ashanti Goldfields Co., that listed its shares simultaneously on the GSE
and LSE, and later on NYSE, and ZSE. Shares of M-Net, primarily listed on the JSE were cross-
listed on the NiSE in November 1999. The Anglo American PLC, primarily listed at LSE, also
obtained listing in 2001 on NSX and BSE, and secondary listings on the JSE. Moreover,
Alexander Forbes Ltd and Ellerine have dual-listing on the JSE and BSE. Other firms with dual-
listed on the ZSE and JSE include Bicc Cafca Ltd., Falcon Investment Holdings, Old Mutual,
Pretoria Portland, and Wankie Colliery. In addition, Old Mutual, primarily listing on LSE, had
secondary listings by end of 2004 on four SADC exchanges in Malawi, NaSE, JSE, and ZSE. In
2001, African Lakes PLC, primarily listed on LSE, obtained secondary listing at NSE. East
African Breweries and Kenya Airways, with primary listings on the NSE have cross-listed on the
USE (2001 and 2002), and on DSE (2005 and 2004), respectively. These cross-listing have
boosted exchanges market capitalization (Irving, 2005). The cross-border listing and MoUs are
the building blocks in integrating exchange into regional, and later Pan-African Stock markets.
4.3 Emerging Regional Stock Markets In Africa

The integration process is slowly picking up on sub-regional level, notably, the southern
region, western region, and eastern region as discussed below.
4.3.1 Southern Africa Regional Market

The South African Development Community (SADC) Committee on Stock Exchanges
(COSSE) has been established. SADC established exchanges include those in Botswana, Malawi,
Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe.
The aim of COSSE is to facilitate the raising of capital in compliance with acceptable listing
requirements, and build an integrated real-time network of national SADC exchanges by 2006. It
is harmonizing listing and C&S rules based on the 13 principles of JSE, and recommended a
central depository system (CDS) for the region (Rothschild, 2003). Each exchange will offer
automated trading for a wide range of financial instruments (with all trading systems accessible
from a single desktop workstation) and C&S facilities of international standards (Mbendi, 1998).
Although harmonization of regulation and surveillance, listing and other functions remain the
responsibility of a designated regional body, national listing rules are not identical across the
board, but maintains some slight differences to take care of varying national laws and levels of
technical development (Benimadhu, 2002).
To this end, COSSE is promoting a transparent regulatory environment that protects
market participants and attracts investors; improving the exchanges operational and technical
capacities; promoting cooperation among the exchanges; encouraging harmonization of trading,
C&S rules; and providing a forum for information sharing on development of the subregions
stock markets. The installation of the JSEs electronic trading system- the Johannesburg Equities
Trading (JET) system, at the NSX in 1998 via a telecommunications link to the JSE, marked a
major step toward harmonized trading in the subregion. In 2002, NSX and JSE adopted the LSEs
Stock Exchange Electronic Trading System- SETS, under a 5-year agreement, in which LSE will
provide its trading system technology and upgrades, technical support to the JSE, and brokers in
SA and the UK will access one anothers markets. To increase its access by foreigners, JSE has
extended its operating hours so that early-day trading is more aligned with trading hours in
Europe and jointly launched with LSE, the JSE/FTSE Africa indexes to facilitate foreign investor
comparison of shares. The NSXs indexes are also distributed as part of the JSE/FTSE Africa
index series. This link has attracted more foreign investors to the JSE and NSX.
The COSSE members have singed in a Multilateral MoU November 2002 and April 2003
addressing commitments to further growth and development of ASEA and COSSE initiatives;
communication and exchange of information; training, and development of stock broking
profession; and experience sharing in terms of surveillance and self-regulation. Others include
exploring opportunities for the development of joint products and the dual listing of firms;
initiatives to encourage and attract new investments; and how developed exchanges like JSE
could advise others on how to expand and modernize (Rothchild, 2003). Mauritius and JSE
already have a CDS running thus achieving paperless securities trading. The Botswana, Lesotho,
Malawi, ZSE and ZaSE exchanges hope to use the Mauritius CDS. However, joining such
linkages is costly undertakings. For instance, the ZaSE for a long time has been looking for US$2
million required to join the JSE system but drop the plan in 2005 (Sandu, 2004).
Since August 2003, JSE has been in discussions with NaSE, ZaSE, and ZiSE, and GSE
(non SADC exchange), on a proposal to set up a Pan-African Board whereby large firms could be
traded on a Virtual African Exchange. The qualifying firms will list simultaneously on all
participating exchanges, which would maintain their autonomy and responsible for regulation of
their members and issuers. SADC exchanges are already establishing a linked network of
individual CDS tailored to the specific needs of member exchanges and drawing up common
standards for SADC stockbrokers to enable them to establish a presence in all SADC exchanges.
The COSSE is coordinating the regional integration process, regulation, and surveillance of
national exchanges in the region. It is promoting development of SADCs bond markets by
encouraging national governments to issuing their bonds on SADC exchanges and build
infrastructures that promote active bond markets.
4.3.2 Western Africa Regional Market

4.3.2.1 West African Economic and Monetary Union
The Bourse Regional De Valeurs Mobiliere (BRVM) is the first African regional
exchange established in Abidjan, Cote dIvoire in 1998, and an outcome of a cross-boarder
merger among 8 stock exchanges in Benin, Burkina Faso, Guinea-Bisseau, Cote DIvoire, Mali,
Niger, Senegal and Togo. Through a satellite link, it connects these exchanges from West African
Economic and Monetary Union (WAEMU). It is a private firm with shareholders from WAEMU
Central Banks and other member governments (allAfrica, 2000). Despite, satellite links between
BRVM and its WAEMU exchanges, the market is considered illiquid since trading takes place
only three days a week with an average daily volume of $ 200,000.
The BRVM has developed a bond market for raising industrial project funds, in which
West African Development Bank has four bond issues. It is urging state and local governments to
issue bonds through it. The exchanges are collaborating in joint investment public awareness
campaigns. Prior to that link, brokers outside Abidjan had to fax orders over unreliable land lines
while the data was fed manually with BRVM electronic pricing system. This weak performance
BRVM is partly explained by the weak Euro-linked French franc currency and the current
prevailing rules that limit share price ceilings to 7.5% per trading day (Okeahalam, 2001).
4.3.2.2 Economic Community of West African States

The stock market integration process in West Africa being complemented by the MoU
signed by GSE and NiSE providing for cross-border listing of securities on both exchanges. This
is part of a wider push within the region toward lowering barriers to the free movement of capital.
This has long been a goal of the 16-member Economic Community of West African States
(ECOWAS). ECOWAS members, led by Ghana and Nigeria, are fast-tracking plans to set up a
second monetary union and common currency in the subregion by 2003, alongside WAEMUs
CFA franc pegged to the French franc. This is because lack of a common currency, along with the
need for further harmonization of regulatory, tax and policy frameworks, is hampering rapid
regionalization. The first ECOWAS cross-border listing occurred in November 2002 when Trust
Bank of Gambia, trading over-the-counter in Gambia, crosslisted on the GSE (ACMF, 2003).
4.4 Eastern Africa Regional Market

4.4.1 East African Community
The capital market regulatory authorities of Kenya, Tanzania, and Uganda entered into MoU in
1997, and set up the East African Member States Securities Regulatory Authorities (EASRA) as
the coordinating regulatory body for integrating the stock markets. Article 80 of the 1999 Treaty
of East African Cooperation recognizes EASRA and provides for harmonization of exchange
policies and regulatory frameworks; promotion of cooperation through cross-border listing and
trading among the three exchanges; and developing a regional rating system for listed firms.
A Joint Stock Exchanges Task Force on cross-border listing was formed in 2000 to
consider critical legal, regulatory, procedural and disclosure issues needed to create a conducive
environment for cross-border listing of securities within East Africa Community (EAC). The
Chief Executives of USE, DSE and NSE signed the Joint Task Force Report that recommended
that the 3 exchanges should obtain approval from their respective regulators for its
implementation; Tanzania to the liberalization its capital market; and the cross listing of already
listed firms will not attract additional listing fees.
As part of measures to develop a common capital market strategy for the subregion, EAC
finance ministers agreed to (EAC, 2001) strengthen the EAC stock exchanges, encourage cross-
border listings, and develop a regional exchange with trading floors in each member state. To this
end, the ministers are implementing legislation that enable investors from EAC countries to be
treated as residents in all the 3 markets, and encouraging respective governments to issue long-
term bonds on their capital markets to support development of a bond market in the subregion.
Consequently, there has been the issue of: 5, 7, and 10 year state bonds on the DSE since 2002; 2,
3, and 5-year state bonds on the USE since 2004; and 4, 5, 6, 7, 8, and 10 year state bonds on the
NSE since 2002 (Njau, 2004; Loubser, 2002), and NSE has also had 5 corporate bond issues. The
CMD Committee of EAC promotes the use of capital markets for conducting privatizations and
development of financial instruments like collective investment vehicles. EASRA is compiling
debt ratio criteria for EAC banks and insurance firms wishing to issue debt securities.
The NSE is promoting regional integration of EAC capital markets by coordinating the
drafting of harmonized foreign investor rules for EAC members; offering for adoption the CMA
trading rules and its CDS regulations to all EAC members as minimum eligibility criteria for
cross-border brokers. It has proposed that regional public awareness campaign be done jointly by
all EAC exchanges and compilation be done of potential regional issuers of equity and debt.
In November 2004, the 3 exchanges formed the East African Stock Exchanges
Association (EASEA) to promoting growth and development and integration of EAC stock
markets. It has proposed an infrastructure development fund (IDF) to finance, through stock
exchanges, infrastructure projects in the region. The three exchanges have signed an agreement
for the integration of their markets with EF Software Services that installed the CDS and is to
install the Automated Trading System at the NSE. A unified stock market for the East African
region is therefore planed by 2008 with trading floors in all three capitals. They have already
agreed on the principles of cross-border listing and USE has harmonized its listing rules with
those of the NSE. They are moving toward common trading and C&S rules with the East African
CDS and an electronic trading platform plans being underway following implementation of the
CDS at the NSE. This synchronization of rules, technology, and systems would encourage more
cross-border listings, and the automated regional infrastructure could, in future, form the basis for
additional linkages with other African exchanges.
4.4.2 Common Market for Eastern and Southern Africa

The Common Market for Eastern and Southern Africa (COMESA) members with established
national exchanges are Egypt, Kenya, Malawi, Mauritius, Swaziland, Uganda, Zambia, and
Zimbabwe. Given the overlapping memberships in Southern and Eastern Africas regional
organizations, COMESA sees its role in promoting regional integration of stock markets as one of
building on the work already done by SADC and the EAC. To this end, COMESA encourages
cooperation among its member states through harmonization of listing requirements and full
integration stock markets.
In 2000, COMESA commissioned a study on International Portfolio Investment Funds in
Nascent Markets: The Case for Closed-end Country Funds in Africa, undertaken by the Lusaka
Stock Exchange (LuSE), to promote regional integration of capital markets and integration of
Africa in global investment markets. The study explored the possibility of setting up a closed-end
fund that would be crosslisted on COMESA exchanges. The fund would buy shares on COMESA
national exchanges, package them into regional share units, and sell these regional stocks to
regional and overseas investors. Investors would therefore acquire cross-shareholdings on the
individual exchanges. The fund would generate regulatory and economic reforms in COMESA,
broaden and deepen capital markets in the region. A reputable investment bank would be
appointment to coordinate and manage the fund. COMESA is preparing terms of reference for a
follow-up study to build on the LuSE study, among others, to identify constraints to portfolio
investment, assessing the reaction of the members and financial community to the proposed fund,
and review tax and securities markets policies in the region.
4.5 Other Regional Markets

Apart from the above serious integration processes, there are also plans to create the
Central African Region Market. During 1998, authorities in the Central African part of the franc
zone consulted the Mauritius Exchange on the potential of a regional stock market. Similarly,
plans for a bourse in Gabon were reported to be proceeding under the aegis of the Finance
Ministry. The Central African Exchange would serve Cameroon, Central African Republic, Chad,
Congo Republic, Equatorial Guinea and Gabon, which share a common currency, the CFA franc,
and a common Central bank. Since 2001, the CASE for some strange reasons have been fronting
for alliance with Arab stock exchanges (Michael, 1998) as a way of creating Middle East North
Africa (MENA) regional market made up or their fellow Arab countries. All these cooperation of
exchanges is expected to increase economic integration not only in different subregions, but also
within the African Union.
5. IMPEDIMENTS TO INTEGRATION OF AFRICAN STOCK EXCHANGES

5.1 Political Impediments
Regional integration plans may encounter some resistance at the national government
levels. Governments in different countries are sovereign and autonomous in relation to their
economic planning and budget financing. They may oppose the idea of relinquishing the symbol
of national sovereignty that a national exchange represents. They will be more willing to maintain
their influence in local stock markets and may become reluctant to shed off such regulatory
influence due to regional integration. Moreover, some exchanges are state-owned and the
government may drag its foot in pursuing integration. The resistance is likely to vary according to
the degree to which sovereignty is relinquished. A government may also be unable to
simultaneously issue its bonds on more than one stock exchange in a region. The reasons for
achieving minimal African integration are mainly due to putting a great emphasis upon the notion
of integration by the political leaders without considering the economic rationale. Political
instability is one of the reasons that diminish integration efforts, in particular the unresolved crisis
in Somalia, Sudan, Uganda, Cote dIvoire, Liberia and Burundi.
5.2 Poor Integration of Economies

The small size of African trade compared to world trade is thin since the African markets
are small markets and similarity of products in the African region resulted in having limited
mutual trade benefits among African countries. In addition, there is the poor infrastructure links
and inadequate executive institutions that help in enforcing the integration agreements, as well as,
under capacity of production facilities. Furthermore, African countries have not agreed upon a
rule of origin or assigned an effective institution for capital markets dispute resolution.
Integration often leads to some transitional costs such as reduction in the tariff rates, widening
external imbalances, downsizing of import substitution industries and rising unemployment,
which would result in social pressures that are too costly and thus constitute disincentives to
integrate.
5.3 Social Factors

Certain factors like differences in history, language and culture may impede integration
of stock markets. There is the problem of existence of micro-markets in Africa. Historically,
Kenyan stock market is more developed than its neighbouring USE and DSE and any that may
come up in Ethiopia, Eritrea or Rwanda. It may drag its feet in facilitating faster regional
integration. Language barriers may affect execution of trade transactions between investors and
brokers from another country. For example, Tanzania transacts most of its business in Kiswahili
and this might affect investments in markets where transaction language is French or Arabic. The
investment risk outlook is affected by the cultural orientation of investors. For example, investors
from Zambia may be comfortable investing in securities issued by Zambian firms as opposed to
those issued and traded at the Tunisia stock market, as they better understand the behaviour and
corporate culture of Zambian firms and that fits well with their own culture.
5.4 Overlapping Membership

Instead of having one strong regional integration body in southern, eastern, western,
central and northern Africa, there are overlapping memberships by exchanges in different
regional economic blocs, such as ECOWAS, COMESA, SACU, SADC, WAEMU and EAC.
This has resulted in duplication of effort and inconsistent aims in regional integration initiatives,
particularly by SADC and COMESA (Okeahalam, 2001), delaying faster integration process.
5.5 Economic Factors

The economic impediments to stock market integration are many (Hooper, 2001; El Serafiie and
Shahid, 2002). First, capital market segmentation makes identical assets to be priced differently in
different markets, prevents the laws of supply and demand from interacting fully across national
frontiers, and cause large mispricing anomalies on exchanges. Mispricing may discourage
international investors, affect operational efficiency of stock exchanges, and stifle the integration
efforts. Also, dealing on different currencies creates foreign exchange risk and affect market
integration. In fact, the single currency in Europe (Euro) was one of the necessary prerequisites
prior to any discussion of European Union.
5.6 Differences Among Exchanges

The existence of capital controls hinders the arbitrage opportunities that can be
capitalized by local investors, just like different time zones, which leads to different trading hours
by various exchanges in a region (FEAS, 2001). Likewise, different trading systems employed by
various exchanges in a region affects regionalization process. Most African stock markets
envisage different governance structures, regulatory systems; information disclosure systems and
tax regimes; different C&S systems. There exist different levels of capital markets development,
turnover, liquidity and market capitalization, and different accounting systems. According to
IOSCO (2001) cooperation among exchanges is difficult if a stock exchange has a mutual
structure while the other is demutualised. In fact, the technology (Strate, Jets) that would be
required to link the JSE with the other SADC exchanges may be beyond the financial means of
other smaller exchanges (Irving, 2005). Also the difference in ceiling on foreign ownership of
domestic shares in different stock markets may affect integration of participating exchanges.
5.7 Difference Among African Countries

Despite the large number of African countries, the divergence in their levels of
development works against further deepening of their economic relations. Insufficient interest and
motivation from within a region itself impedes further stock market development and
regionalization. There are relatively large (over twenty-five fold) differences in per-capita
incomes of African countries, whereas this gap reaches only ten-fold and five-fold in the NAFTA
and EU regions (World Bank, 2002; Shafik, 1994). This wide income gap implies that the
distribution of the gains and losses from integration would be uneven across countries, thus
increasing opposition to integration. The prevailing shortcomings in the regulatory and
operational institutions governing economic integration in the African regions leads to lack of
transparency in the regulations, higher transaction costs and reduced competitiveness. The
differences among states in their commitments to further capital market development and regional
cooperation and integration, due to a combination of sovereignty concerns and limited resources
further delay the integration progress.
Integration efforts elsewhere also failed due to a combination of the above factors and
lack of clear objectives and sound economic justification (Johnson and Mims, 2003; Okeahalam,
2001) and transacting on multiple currencies (World Bank, 2002). Others include different
transparency standards, conflicting disclosure and reporting rules and lack of inside-trading rules
(Zenina, 2001; Mwenda, 2000). Some planned mergers faced resistance from shareholders at both
markets, who feared that their respective market shares would be lost if the deal materializes
(Kapumpa, 2000).
6. PROMOTING INTEGRATION OF AFRICAN SOCK EXCHANGES

There are certain conditions that must exist before integrating stock markets. These issues
have been reported by studies elsewhere (Hooper, 2001; Cybo-Ottone et al, 2000; Wellons, 1998;
Bolkestein, 2001; Arnold, et al., 1999), and can form the prerequisites for integrating stock
markets in Africa.
6.2 Enhancing Economic Integration

6.2.1 Economic Complementarities
An active role by the private sector is essential prior to economic integration. A review of
successful regional blocs such as EU and NAFTA illustrates the important role played by the
private sector in the integration process. In Africa, the role of the private sector still remains
limited and governments continue to dominate economic activity, with their large size and share
of expenditures to GDP thus crowding out the private sector. The strong degree of economic
complementarity enhances economic integration and regional capital markets integration. In
comparison with other regional blocs, there is a very low degree of complementarity between the
trade structures of most African countries, which limits regional integration and creates a
disincentive to integrate.
Geographical proximity and openness of economies is another important factor for
economic integration. Although, African countries are geographically close, most of them having
common borders and majority have started their liberalization efforts through unilateral,
multilateral and regional trade agreements, the high tariff barriers and lack of adequate
infrastructures have increased the cost of trade among these countries and thus eroding the
comparative advantage of proximity. Proximity played an important role in activating intra-
regional trade and economic integration of EU and NAFTA because of the zero-level tariff and
availability of a well-linked infrastructure network. The non-tariff barriers are extensive in most
African countries and the high level of protection make integration very costly because it results
in large revenue losses from tariffs in African countries.
6.2.2 Economic Liberalisation

Prior to regional integration, governments should first liberalize their economies and
adopt international rules. They should jumpstart regional integration by facilitating the way for
private sector service providers to have in place, the necessary linking institutions, establishing
regular channels to exchange information among markets that ensures that a regional electronic
trading and settlement system is in place. The public agencies should harmonize the regional
capital account convertibility and the taxes within the region. The degree of openness of the
economy and the provision of adequate financial resources are important determinants for the
integration process, since a major problem that has slowed down the implementation of
integration of stock exchanges in Africa is reduced openness of economies.
6.3 Political and Legal Reforms

6.3.1 Political Will
Political leaders must be willing and determined to integrate based primarily on economic
viability of integration and agree on an effective regional institutional set up. This is essential in
order to facilitate the operational and technical steps of setting regional rules, regulations and
policies that are needed to overcome any problems that may be associated with integration.
Leaders must accept voluntarily that one member of the group must act as regional leader because
regional integration usually goes beyond the removal of borders barriers and include the adoption
of common regulations and policies, which need a common leadership for the agreement to hold.
African countries should pursue integration both domestic and regional. Domestically,
efforts should be devoted to liberalization, removal of high tariff and non-tariff barriers,
increasing the importance of the private sector, deregulation, speeding up structural reform, and
establishing regional capital markets rules. There is also need to strengthen the regional
institutional framework and moving toward more profound African Free Trade Area agreement.
African must focus more on having a common currency and harmonizing financial regime.
6.3.2 Legal Reforms

There are legal conditions that will create the necessary environment to foster the
integration of African stock markets. First, reforming the laws governing company establishment
and encouraging private firms to seek exchange listing. Second, encouraging firms to issue bonds
as an alternative means of finance to bank loans, as this will activate the bond markets. Third,
creating legal regulations and rules governing African exchanges according to global standards.
Moreover, reforming investment and taxation laws is crucial, as well as, providing incentives to
foreign investors to increase foreign portfolio investment. New legislations on pension funds
should be set to ensure that the fund managers have sufficient freedom to decide on how their
assets should be managed and that future pensioners receive a higher level of protection.
Strengthening the court system and legislating bankruptcy and receivership laws that protects
lenders and borrowers alike (Onyuma, 2004). The African Union (AU) should issue new laws
relating to IPO, listing prospectuses, market abuse, e-commerce and cyber-crime to properly
protected investors. It should draft laws needed to integrate AU national financial regulatory
systems, paving the way for the introduction of regional, and ultimately, a single Pan-African
stock market. Harmonizing the AU financial regimes must aim at increasing the size of the AU
capital markets and emphasize on corporate transparency. An Investment Service Protocol should
also be formulated and implemented to further integrate financial markets and allow exchanges to
offer remote access to financial intermediaries in EU, US and other African countries.
6.3.3 Sound Regulation and Surveillance Policies

For African stock exchanges to survive in the globalisation era, governments must set out
sound fiscal and monetary policies that increase investor confidence, build a strong supervisory
and regulatory framework, ensure the existence of modern risk management techniques, place
more emphasis on privatisation, and open up their economies to competition through trade.
Financial sector liberalization and complete privatisation of parastatals should be conducted
through the exchanges to help increase the depth of capital markets. Regulatory reforms should
aid strategic dialogue between individual African small exchanges and developed ones to keep
abreast with new technology and financial innovations and generate ongoing interest of foreign
portfolio investors in the continent. This calls for the implementation of sound capital market
regulation, supervision and surveillance policies that enhance information disclosure and
transparency, and encourage free movement of capital across countries through cross-border
listing, alliances and mergers of stock markets. Establishment of investor compensation funds,
introduction of new indexes series, and creation of credit rate services are important in protecting
investors (Solaiman, 2005) and improving market confidence.
6.4 Inside-Out Integration

6.4.1 Demutualization of Stock Exchanges
Successful integration calls for reforms in legal and ownership structures through
demutualization (IOSCO, 2001). Before thinking of any integration, African exchanges must first
demutualize to become more competitive and focused about their purpose as commercial entities.
Through demutualization, they will restructure from a nonprofit mutually member-owned
organization (with members as decision makers, and direct users of trading system.) into forprofit
shareholders-owned organizations (with shareholders owning and controlling, and members trade
in the exchange). Exchanges should then self-list shares and distribute them among members,
listed firms, stock brokerage firms and investing public. The new structure has more explicit
checks and balances in the decision-making process. Most successful exchange integration cases
from EU, US and Asian-Pacific had demutualised. Demutualization, if appropriately conducted,
could provide the needed capital to enter into alliances and mergers, build the marketplace, lower
costs to members, and better serve investors, as the management are compelled to take decisions
that are geared towards the well-being and profitability of their exchanges. From Africa, CASE
has demutualised and remained private, while others JSE, NSE, GSE, and NiSE are studying
demutualization in order to go public and self-list own shares.
6.4.2. Automating Trading Systems

Advances in ICT and computer technologies should make all the markets in Africa
accessible at a reasonable cost. There is need for continuous investment in technology and
infrastructure as excellent computers and technology solutions are vital for having successful
integration of stock exchanges. Advances in ICT enhance implementation of automated trading,
C&S systems through which markets can use to inter-link. The success of cross-border listing and
integration therefore call for improving trading infrastructure. First, exchanges that still use
manual trading systems (like the floor, call-over or central order matching) have to computerise
to build markets accessible through computer screens.
6.4.3 Commonality Among Exchanges

Stock markets wishing to integrate should ensure that they have similar listing, membership,
trading, disclosure and reporting requirements, C&S and accounting systems before attempting
integration. They must develop competent integrated trading and C&S systems that allow quick
execution and transparent transactions, and common information systems. A common currency
does enhance price transparency of markets. For instance, there is a greater sense of consolidation
in the Euro countries than the non-Euro countries (Licht, 1998). The denomination of shares in
any countys currency, rather than a single African currency, as well as, the stamp duty on
shares trading in most African countries constitute the main obstacles for regional integration of
stock markets. The AU should issue a proposal for a single set of accounting standards based on
IFRS, to improve market transparency, price discovery and reduce hidden market distortions, and
aid fair and easy comparison. There should be some commonality not only in trading and legal
systems, but also in transactional language.
6.4.4 Domestic Integration

During and after integration, all the national exchanges should remain in place and be
crosslinked to form a network offering automated trading in a range of financial instruments via a
regionalized trading system that is accessible from a single desktop workstation. This will make
sovereignty concerns minimized and national leaders would likely give their support more readily
than they would in the case of a regionalization strategy that close down and replace national
exchanges with a single regional or continental exchange. Therefore, exchanges should be
developed domestically before entering into international alliances. Domestic exchanges must
have in place globally acceptable regulations regarding capital adequacy, listing standards, insider
trading, and exchange infrastructure before entering into regional cooperation. A country with
several stock exchanges might need to integrate its stock exchanges on a national basis, prior to
regional integration. Thus, integration on a single country basis must occur first before countries
attempt multicountry integration.
6.4.5 Cooperation Though Cross-listing

The end results of having a regional exchange or those specializing in trading different
securities might not be a win-win situation for participating exchanges. Exchanges should not
become too ambitious from the outset, but rather adopt an evolutionary approach to integration
based around cooperation. This may start with the introduction of dual-listing or cross-
membership as a mechanism for enhancing liquidity and getting to know each other. They should
think of developing joint projects with other exchanges to avoid the regulatory and political
problems that could rise in case of mergers or take-overs. This will make it much simpler for
firms listed on one exchange to crosslist on others.
6.4.6 Forming Regional Alliances

In integrating African exchanges, individual African countries have to first develop the
culture of having a stock market with appropriate structures and governance since one cannot
merge what does not exist. As regionalization advances, the establishment of stock market
segments across the region specializing in different industry sectors or types of share issue, could
foster further capital market development by improving efficiency. Segments might be set up to
specialize in trading issues of high-growth stocks or to listings of SME in the region. Of recent,
some national exchanges have begun setting up their own specialized tiers for well-managed,
high-growth potential SMEs, and these specialized tiers could perhaps, in future, be linked at the
subregional level to improve liquidity and efficiency and costs savings.
The long-term goal for African stock exchanges should be to develop local exchanges
and later encourage creation of regional stock markets. For instance, Nigeria could lead the
merger of West African stock markets; Johannesburg, the merger of Southern African stock
markets; Nairobi, the merger of Eastern African stock markets, and Tunisia, the merger of
Northern African stock markets since CASE in Egypt is, for some strange reasons, fronting for
the integration of Arab stock markets. This will lead to the formation of four strong regional stock
exchanges in Africa. Then later, efforts could be made towards eventually merging all of them
into one large Pan-African stock market.
6.4.7 Developing Prowess in Investment Finance

Educating investors and the public about the importance and benefits of stock investment
is important if people are to become knowledgeable about investments. Exchanges and
stockbrokers must increase investment in human resource training, particularly in the area of
investment finance to enhance the skills of the staff working in African capital markets. The
stockbrokers and their staffs, for uniformity in experience, should also undertake the same entry-
level examinations administered by Securities Institute (UK) or a similar one to be administered
from Africa.
7. Conclusion and Policy Considerations

Due to advances in technology, globalisation, competition and institutionalisation of
capital markets, African stock exchanges cannot continue as self-regulatory, controlled and
governed by members or governments. Competition from other exchanges, securities firms and
ECNs (free of the regulatory burdens imposed on traditional exchanges, and offer cheap trading
alternatives) implies that stock exchanges cannot view themselves simply as share trading
platforms and overseer of the proper functioning of stock markets. Stock exchanges must
therefore review their ownership and governance structures through demutualization and
cooperate with others domestically or across their borders through domestic restructuring, cross-
border listing, mergers and joint ventures, cross-remote membership, or implicit mergers to
become cost-efficient, transparent and widely accountable to owners, investors and traders. If
African exchanges are to survive, they must prepare for integration and brutal pruning of cost
since securities markets are becoming increasingly homogenous and competitive.
The ASEA and other regional stock exchange associations are collaboratively working
together with stock exchanges and various regional economic and monetary organizations
towards the integration of African stock markets. The SADC, WAEMU, ECOWAS, and the EAC
aim at putting in place an integrated, real-time network of national securities markets in their
regions. Considering the overlapping memberships of countries to regional organizations in
Africa, a lot of duplication of plans and efforts are stifling the integration process. While listing
rules are being harmonized in line with global standards in some regions, some slight differences
between exchanges listing rules should remain to take care of national variances in economic,
law and technical development levels.
Any form of cooperation and integration of the national stock exchanges in Africa could
offer a way of overcoming some of the impediments to development that most of them now face
as relatively fledgling and illiquid markets. Regional integration, if carried out at the right pace
and through the right approach, could improve the liquidity, efficiency, and competitiveness of
the exchanges, thereby enhancing their ability to mobilize local and global capital for private
sector and infrastructure development. Exchanges stand to gain from integration since the
synergies that are expected to rise from integration efforts could allowing the new merged
exchanges to earn higher revenues than each separate entity could achieve alone, resulting in
higher operating margins and significant cost savings. However, too rapid a move to a fully
integrated regional stock exchange could merely create a large illiquid market. It may also present
a threat of increased risks in the trading, C&S and regulation particularly if the improvements in
market infrastructure and supervision are not introduced in all exchanges participating in regional
efforts. This calls for policy makers to consider rigid membership criteria, based on a
commitment to reform, and changes to the legal and regulatory infrastructure and standardization
of operations.
In EU and US, alliances and mergers have been employed by exchanges to cope with
competition and globalisation, but some of these attempts failed, due to various complications
like the difficulty in merging electronic platforms, deciding on the balance of power, different
C&S systems, foreign currency risk, different regulatory regimes, and nationalistic issues. The
adoption of the common listing requirements is expected to make the integration work faster.
However, the measures adopted and the required effectiveness calls for the complementary
actions of African governments who must demonstrate their political commitment to economic
and exchange integration efforts by fully implementing all proposed integration protocols.
Therefore, exchange integration in Africa should be carefully studied and analysed by the
management of exchanges before embarking on it. Further progress in developing national
exchanges must precede any actual move to integrate. Domestic exchanges could take advantage
of closer cooperation through encouraging cross-border listing and information and technology
sharing and adapt to global standards and improve governance practices before thinking of
regional mergers or alliances. They must reform and harmonise their listing, trading, clearance
and settlement systems and rules, and develop mutual commitment and other ties bonding
cooperating exchange partners. The thought of creating a single Pan-African stock exchange is a
complex effort and must therefore start through cross-boarder cooperation. It is unclear as to how
regional integration would affect both exchange liquidity and the perceived value of any such
regional alliance. By forming strategic alliances with exchanges outside the subregion, including
exchanges in developed countries, African exchanges could gain better access to new
technologies and innovative financial instruments needed to attract more local and foreign
investors and deepen and integrate themselves. Although integration could improve liquidity,
efficiency, and competitiveness of exchanges, it requires meticulous planning and execution,
political determination and economic justification.
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REGIONAL INTEGRATION OF STOCK EXCHANGES

Article January 2006

Cross border listing View project

Media representation, perception and the flow of capital View project

REGIONAL INTEGRATION OF STOCK EXCHANGES IN AFRICA

1.1 Globalisation of Stock Exchanges

2. INTEGRATION OF STOCK EXCHANGES

2.2 Forms of Integration of Stock Exchanges

marketing, listing, order-routing, marching and execution, information dissemination, clearing,

3. BENEFITS OF INTEGRATING AFRICAN STOCK EXCHANGES

4. PROGRESS TOWARD INTEGRATION OF STOCK EXCHANGES IN AFRICA

4.2 Regional Cooperation Through MoUs and Cross-border Listings

4.3 Emerging Regional Stock Markets In Africa

4.3.1 Southern Africa Regional Market

4.3.2 Western Africa Regional Market

4.3.2.2 Economic Community of West African States

4.4 Eastern Africa Regional Market

4.4.2 Common Market for Eastern and Southern Africa

4.5 Other Regional Markets

5. IMPEDIMENTS TO INTEGRATION OF AFRICAN STOCK EXCHANGES

5.2 Poor Integration of Economies

5.3 Social Factors

5.4 Overlapping Membership

5.5 Economic Factors

5.6 Differences Among Exchanges

5.7 Difference Among African Countries

6. PROMOTING INTEGRATION OF AFRICAN SOCK EXCHANGES

6.2 Enhancing Economic Integration

6.2.2 Economic Liberalisation

6.3 Political and Legal Reforms

6.3.2 Legal Reforms

6.3.3 Sound Regulation and Surveillance Policies

6.4 Inside-Out Integration

6.4.2. Automating Trading Systems

6.4.3 Commonality Among Exchanges

6.4.4 Domestic Integration

6.4.5 Cooperation Though Cross-listing

6.4.6 Forming Regional Alliances

6.4.7 Developing Prowess in Investment Finance

7. Conclusion and Policy Considerations

Ramanlal, P., Hargis, K. and McDonald, C. G. 1997. When Do Markets Consolidate? An

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