After Qaddafi

Libya: turmoil and civil war

The tiny Libyan bourse faces an uphill battle to become a player

Tripoli: Spot the stock market © Bryn Jones

By Mary Fitzgerald

Like so much else in Libya, Tripoli’s fledgling stock exchange came to a standstill after the country plunged into civil war in the summer of 2014. But even before, the idea of investing in Libyan stocks was always a hard sell, given the turmoil that preceded and followed the ousting of Muammar Qaddafi in 2011. Libya had seen years of isolation following UN-imposed sanctions in 1992 for an attack on a Pan Am airliner that killed 259 people in the air and 11 on the ground in Lockerbie, a Scottish village. Sanctions were eased after Qaddafi offered to settle for the attack. By 2007 he was claiming to be liberalising the economy. But the country was—and remains—entirely reliant on oil revenues to power a heavily state-controlled economy burdened with one of the biggest public sector payrolls in the world. The Qaddafi regime, with its idiosyncratic laws and rampant cronyism and corruption, had in any case made foreign investors wary. That caution has only grown since 2011 as the ills of the Qaddafi era remain unfixed and successive transitional governments struggle to impose law and order over a vast desert nation where militias are the real power brokers.

Not surprisingly, these tumultuous events have rocked Libya’s stock exchange. It was closed in August 2011 when Qaddafi loyalists took over the building as the capital tipped into armed revolt against the 42-year-old regime. Staff and traders fled with whatever data they could. The bourse reopened in March 2012, but the country’s growing social chaos hit it again. By 2013 the market had lost 25% of its value; by last year, it had lost some 40%, compared to the level on its 2007 debut. Even its physical location can tell us much about its status in the post-revolutionary chaos. The exchange is housed in a building hidden away in a shopping strip in an affluent Tripoli suburb. Many local residents and taxi drivers are unaware of its existence. Inside, the tiny size of the trading floor reflects the bourse’s modest levels of trading. Libya has only 10 listings, mostly banks and insurance firms, according to the Libyan Stock Exchange website. Prior to the current conflict, its bourse had a market value of a mere $3 billion, compared to its Cairo counterpart’s $70 billion. In the Arabic-speaking world, only the bourses in Khartoum and Damascus are smaller.

And while Tripoli treats foreigners as equal to Libyan investors, they have accounted for little more than 1.5% of trades. The Tripoli bourse was modelled on the exchange in Abu Dhabi, capital of the United Arab Emirates. It had planned to attract oil, telecommunications and construction firms. It had also planned to open a branch in Benghazi, Libya’s second largest city. But then renewed fighting erupted last year. If Libya’s stock exchange is to grow, deep structural flaws in the country’s economy will have to be addressed. Public sector salaries and massive fuel and food subsidies take a huge toll on the national budget, while Qaddafi-era laws related to land and property ownership have hobbled investment. But if and when some stability returns to Libya, home of Africa’s largest proven oil reserves, the country is ripe for development. Housing, hospitals, public transport and other infrastructure are needed, while 6m Libyans crave consumer goods they were denied under Qaddafi’s regime. The most significant challenge will be to keep state finances afloat. Conditions for stable investment and economic growth are currently almost entirely absent.

The political power struggle fuelling the civil war has split the country’s institutions. The country’s oil production levels have plummeted while global energy prices have declined sharply. This means that Libya has had to eat into its foreign reserves. Some commentators estimate that Libya’s funds will last only another year. There is a real prospect that Libya will go broke before it is achieves peace. Before the outbreak of violence in July 2014, the bourse had been preparing for the launch of Islamic investment funds, which would have been a first for Libya. The post-Qaddafi parliament, elected in June 2012, had ruled that financial institutions would have to comply with sharia law, with interest payments banned by 2015. Two sharia-compliant real estate funds were in the pipeline last year, the first worth 165m Libyan dinars (about $119m), with a projected annual return of 20%, and the second worth 300m dinars (about $217m). But the continuing conflict means that the fates of both funds, and indeed the bourse itself, hang in the balance. “Everything depends on whether we see political stability return to the country,” says Ahmed Karoud, general manager of the Tripoli stock exchange. “Nevertheless we are using this time to develop strategy so we are ready.”

Making Libya attractive to risk-willing foreign investors will require drawing up a regulatory framework for an effective capital market, particularly after the tyrannical randomness and opacity of Qaddafi-era policies. But the process of drafting the country’s first post-revolutionary constitution is already well past deadline. The chances of seeing an overhaul of market regulations and commercial law any time soon are remote. Moreover, familiarising judges and lawyers with free market rules after decades of iron-fisted government will likely take years. Throughout its existence, the Qaddafi regime consistently demonised capitalism as a tool of Western imperialism; the country’s population, at best, is sceptical of the stock market, which has affected its liquidity or the willingness of investors to invest. These negative perceptions of the stock market will also take time to fix. Until Libya has a stable, representative government underpinned by a new constitutional framework that ends the insecurity that has plagued it since Qaddafi’s fall, the country’s bourse is destined to remain an insignificant bit-player in the region.

Mary Fitzgerald is a journalist based in Libya where she contributes to publications including The Economist, The New Yorker, Foreign Policy, the Financial Times, the Irish Times and the Guardian.

A low blow, or high-minded?

Kenya: rich tax

Kenya’s market quarrels with government over the reintroduction of a levy on capital gains

Investment highs and lows © Wikimedia

By Mark Kapchanga

Since Kenya reintroduced a 5% capital gains tax (CGT) in January, its stock market has plummeted. The Nairobi Securities Exchange lost a massive 6.75% of its value in May when foreign investors withdrew 1.5 billion Kenyan shillings ($15m) from the market, according to Standard Investment Bank, a financial services firm based in Nairobi, the capital. The slump followed the reintroduction of the CGT that had been scrapped 30 years before. It could be argued that such losses hurt individual shareholders and also hinder companies’ chances of raising needed funds on the stock market, which ultimately depresses a country’s economic growth. Investors certainly appear to think so. In the week ending July 17th, the Nairobi Securities Exchange recorded its highest weekly foreign investor outflow this year at $17m. The NSE 20-Share Index, which tracks the performance of the NSE’s 20 best performing companies, dropped 5.5% since the start of the year. Market capitalisation also dipped by 2.1% to $23 billion at the beginning of the year, a $487m loss, and even more during the months that followed, given confusion about responsibility for collecting the CGT.

The government had scrapped a flat 7.5% CGT in 1985, but this January reintroduced a fixed 5% tax that applies to any gains made from the sale of property and shares and does not vary with the length of ownership. Aly-Khan Satchu, an independent financial analyst in Nairobi, blames the new levy for the drop in market activities. He claims the tax discourages investors, who expect it to result in diminished returns. Some stock analysts have identified CGT as one of the most significant factors blocking the growth of Africa’s equities, debt and real estate sectors. This may explain why the Kenyan parliament suspended CGT in 1985 “to spur growth in the real estate market and deepen local participation in the capital markets”, says Eric Munywoki, a research analyst at Old Mutual Securities. The 7.5% CGT was first introduced in 1975, and hurt activities at the Nairobi exchange as share prices dropped and listed Ugandan companies left the stock market, says Luke Mulunda, the managing editor of Business Today, a business and economics website. “After the CGT suspension in June 1985, more companies, both local and international, sought to be listed at the NSE,” Mr Mulunda adds.

“More people also got interested in buying shares at the stock market, a clear indication that CGT suspension had catalysed their appetite for stocks.” Warning signs lit up when the reintroduction of the CGT was proposed in the June 2013 budget. Stock prices at the NSE went south and investors’ wealth slumped because of fears that the new tax would erode their profits. The Kenyan shilling, according to Mr Satchu, also plunged over concerns that the effects on the NSE would trickle down to the entire economy. So why has the Kenyan government reintroduced CGT? The primary reason seems to be the claim that it will earn the Kenya Revenue Authority (KRA) about 7.5 billion shillings ($75m) a year—a figure based on previous Kenya NSE transactions, according to the KRA commissioner, John Njiraini. Many analysts argue that the 5% duty will undermine Kenya’s bid to become a regional business hub because it will deter foreign investors. People interested in such markets will either refrain from buying Kenyan shares or look around for places where they can get higher returns on their investments, says Nikhil Hira, a tax partner at Deloitte Kenya.

Others say they understand the government’s need to boost its revenue, but argue the tax rate should reflect the time investors keep their shares. “Given the need to grow our economy in the long term, the long-term capital gains need to be taxed at a lower rate than short-term gains in order to provide more incentive to invest in firms that build the economy, rather than trying to make quick profits by speculating on stocks,” according to an October 2014 paper by Old Mutual Securities, a trading firm. Mr Njiraini, the KRA commissioner, disagrees. He argues that the new CGT was lowered from the previous rate of 7.5% to allay this concern. “This is among the lowest rates in Africa,” he says. (According to professional services firm KPMG, CGT rates vary from a high of 41% collected in South Africa to 10% charged in Nigeria.) “Therefore the worry that CGT might discourage investment in the stock market is unsubstantiated.” Any levy on profits will discourage investment, claims the Kenya Association of Stockbrokers and Investment Banks (KASIB). Instead of a CGT on the stock market, Kenya should have imposed a transaction levy on turnover, says Willie Njoroge, the association’s CEO.

The government has recently indicated it might impose a 0.3% levy on the sale of shares if CGT fails to work. Unlike a flat CGT rate of 5% on shares sold, the 0.3% transaction levy would be a withholding tax determined by the value of share transactions. The percentage would be deducted upon the sale of shares and remitted to the Kenya Revenue Authority by stockbrokers. In April the revenue service asked stockbrokers and investment banks to submit records on monies collected from trades since January. But KASIB members have not paid any CGT so far, mostly because they have challenged the levy in the high court, a case which is still pending, Mr Njoroge says. And unlike the pre-1985 period, when the revenue service collected directly from shareholders, brokers now must collect and remit CGT directly to the KRA. The dealers object to this burdensome task. “This is not the stockbrokers’ mandate but that of the KRA,” says Morris Aron, an economics consultant in Nairobi. “This is what is impeding the smooth rollout of CGT in Kenya.” On the positive side, the reintroduction of CGT will promote equity and fairness in Kenya’s tax system because it will target the wealthy, according to finance and justice groups.

“For a long time, Kenya’s tax system has put a burden on the poor and the rich, without considering their abilities to pay,” says Alvin Mosioma of Tax Justice Network-Africa, a lobby group. “So CGT will to some degree, bring the fairness our tax system has been lacking.” The levy broadens the country’s revenue base to finance Kenya’s rising budget, and it “is an important way of closing the gap between the poor and the rich without imposing a greater burden on the less fortunate in society”, says Henry Rotich, Kenya’s treasury secretary. Its long-term impact will be the thriving of Kenya’s economy, he argues. “There is no doubt that teething problems will arise with the introduction of the CGT,” Mr Rotich said last year, before the tax was reactivated. “It is normal and it was expected. Ultimately, we will not be hearing of income inequalities or depression in the stock market as the government invests heavily in infrastructure, and new and affordable energy sources to attract foreign investments.”

Mark Kapchanga is an economics consultant in Nairobi and previously worked as a senior writer at Standard Media Group. He is a graduate of the University of Kent and of the Jomo Kenyatta University of Agriculture and Technology.

Delusions of grandeur

Rwanda’s fledgling capital market

Rwanda aspires to a Singapore-like role in Africa, but is all the excitement about its new stock exchange justified?

Rwandan economy: informal high-flyer? © Travel Channel

By David Himbara

Rwanda has acquired a reputation of a rags-to-riches nation. Internationally, President Paul Kagame’s claim to have turned Rwanda into an economic lion “firmly on the path to economic maturity” has been reflected in glowing plaudits. Rwanda “has become a development success story and unity and reconciliation have been consolidated, strengthening good governance”, according to the African Development Bank (ADB). The World Economic Forum (WEF) ranks Rwanda as Africa’s third most competitive economy after Mauritius and South Africa, and 62nd behind Mexico. Investors have also enthused about the Rwanda Stock Exchange (RSE), incorporated in October 2005. It “might not have the volume, but it is looking increasingly attractive”, according to the Financial Times. An investor site focusing on “frontier markets” rated Rwanda as “one of the hottest markets in Africa since its debut” in 2013. Shalifay, the company that runs the Investment Frontier site, says it “endeavours to find investment opportunities in markets that are not fully developed and economies that have leaps and bounds to grow”.

It maintains an index, SIF30, which tracks 30 countries that it believes are growing fast and likely to provide good opportunities for investors. But the hype about Rwanda’s new bourse needs to be put in perspective. First, the RSE’s short history has been subject to some mystification. In fact, its de facto incorporation was delayed until 2008, under the Rwandan Companies Act. According to an interview with an official, the company only started operations in November 2010 with the launch of the first Rwandan initial public offering (IPO). Since its establishment the RSE has launched only three shares that trade on its primary market. In the first IPO, the Rwanda government sold its 30% stake in the brewing company Bralirwa, and the equivalent of $29.5m was raised, according to a company press release at the time. In the second IPO in 2011, the Rwandan government sold its 45% stake in Bank of Kigali (BK) for $62.5m. Rwanda’s third locally-based listing transpired three years later, May 21st 2015, with the sale of the 20% stake held by Crystal Ventures Ltd (CVL) in MTN Rwandacell, a joint venture with South Africa’s MTN Group.

On the first day of trading, a share traded for 144 Rwandan francs ($0.20) and three deals were made involving a total of 886,000 francs ($1,194). But earnings from the entire IPO phase were not made public. The lack of openness may indicate that the IPO flopped, and few investors rushed to buy the stock. Even so, Crystal Telecom, a wholly-owned subsidiary of CVL, began trading its 20% share in MTN Rwanda on the RSE’s secondary market on July 16th this year. CVL, which plays a central role in the Rwandan stock exchange, is no ordinary company. It is a conglomerate owned by the ruling party, the Rwandan Patriotic Front (RPF), and includes construction, road-building, real estate and furniture companies, granite and tile factories, upmarket coffee shops (in Rwanda and overseas) and an agro-processing venture. With purported assets of $500m, CVL is “perhaps the largest quasi-private business venture in the country, and with 7,000 staff, the second-largest employer after the state”, according to a Financial Times special report.

Meanwhile RSE’s secondary capital market has seven listed companies. Of these, three are the above-mentioned Bralirwa, Bank of Kigali and MTN Rwandacell. Four are Kenyan companies primarily listed on the Nairobi Stock Exchange (NSE) and cross-listed on the RSE: Nation Media Group, the Kenya Commercial Bank Group, Uchumi Supermarkets and Equity Group Holdings. With a market capitalisation of 3.5 billion francs (or $4.8m), and having raised capital through two IPOs totalling $92m from 2010 to May 21st 2015, the RSE primary market is hardly a robust mobiliser of money. The RSE’s secondary market is best understood as a junior partner to the NSE, with a market capitalisation of 2.3 billion francs ($23m). Second, to evaluate the Rwanda stock exchange requires examining its economic environment. The country’s economy remains essentially informal and heavily dependent on foreign aid, with inadequate physical infrastructure. Rwanda is one of the world’s poorest countries.

The World Bank ranks it 198th out of 212 economies. Of the East African Community’s five countries, only Burundi with a GDP per capita of $295 is poorer. Kenya, the regional powerhouse, has a GDP of $60.9 billion and per capita of $1,337—more than twice that of Rwanda’s $652, according to the World Bank. All this has implications for the country’s tax base. In 2013 Rwanda had 113,198 taxpayers, but only 354 were considered “large” with an annual turnover of over 200m francs ($277,990). By comparison, the “large taxpayer” in Kenya has an annual turnover of over 750m Kenyan shillings ($7.5m), according to the Kenya Revenue Authority. This reflects Rwanda’s “miniscule” private sector, according to Rene C. Mugenzi, writing for the Pambazuka News website. The limited contribution of the country’s private sector to the economy is also mirrored in the country’s low level of formal employment. Of the country’s 5.5m economically active people, only 309,648 held jobs in private and public sectors in 2013. Put another way, 94.4% of people between 15 and 65 were employed in Rwanda’s informal economy, according to official Rwandan figures.

Additionally, only 267,400 workers contributed to Rwanda’s Social Security Board—a requirement that is strenuously enforced. With such a small tax base, Rwanda is highly dependent on foreign help. In 2013, for example, Rwanda received $1.1 billion in aid, a figure that reveals the absurdity of Rwanda as a success story. Foreign aid comprises 14.6% of Rwanda’s gross national income, 54.2% of its capital formation, 41.3% of imports of goods, services and primary income and 110% of central government expenditure, according to the World Bank. The third main point is that the government says it is open for business because Rwanda desperately needs investment. But companies face constraints, especially official heavy handedness towards investors. The US State Department’s 2014 Rwanda Human Rights Report cites the case of Tribert Rujugiro Ayabatwa, a Rwandan businessman. (This writer worked as a consultant for Mr Ayabatwa.) Claiming that his businesses were “abandoned” because Mr Ayabatwa did not live in Rwanda, government seized his shares in a tea factory, as well as his private residence in Kigali.

“In 2013, the government expropriated Mr Ayabatwa’s $20m shopping mall, the Union Trade Centre, which he built in that city in 2006,” according to the report. Several companies have suffered the same fate, including the American oil company Chevron, which was unceremoniously forced out of Rwanda in 2008, according to an American embassy cable revealed by Wikileaks. Part of the problem is that the state and ruling party are not neutral keepers of regulatory institutions. Rather, they double up as business operators and use state power to frustrate competition. The country’s undeveloped economic infrastructure is another serious hurdle. In Rwanda, most households still rely on wood or charcoal for heating and cooking. Petroleum accounts for only 11% of primary energy consumption, while electricity usage is a mere 4%. Mr Kagame criticises those who see socioeconomic development as a long-term challenge. “Development is a marathon that must be run at a sprint,” he says. “In our pursuit of progress, we have of course looked to East Asia’s so called ‘tiger’ economies for inspiration.”

He says he is building a Singapore in the heart of Africa, but it is difficult to fathom why reputable institutions are taken in by his claims that development can be accomplished at speed. As we have seen, the RSE presently offers only seven shares, three of them cross-listings, while Rwanda’s economy remains extremely undiversified. It may be true that Rwanda is one of 30 developing countries included in a special “frontier markets” investor’s tracking index, economies seen as likely to yield good results over the next 40 years. Given its tiny size, an investor who is interested in returns is likely to consider many other options before the RSE.

David Himbara is an educator, political economist and author. He has taught at the University of Witwatersrand, Johannesburg, and consulted for the Central University of Technology in Bloemfontein, South Africa and the African Development Bank in Tunisia.

Slow times in Casablanca

Morocco’s old-school stock exchange

Hopes rose this year that a large initial public offering would rejuvenate one of Africa’s oldest bourses, but a lack of reform is constraining trading

By Celeste Hicks

Hopes rose earlier this year of a spurt of investor and business confidence in the Casablanca Stock Exchange (CSE) when the local subsidiary of the French petroleum giant Total launched an initial public offering (IPO) on the Morocco-based bourse. Expectations were high that the size of the Total offering, and the financial muscle of the company involved, would rejuvenate one of Africa’s oldest exchanges. By choosing to offer its shares on the CSE, the Total subsidiary was indicating that it could do its best business there. The offering went well. Demand was 6.7 times the number of shares on offer and the share price rose 4%. But the expected wider effect on the CSE was not to be. The Total IPO has been the only share offering on the bourse so far this year. Analysts say this is in line with the CSE’s disappointing performance over the long term. “The last 20 years have been catastrophic,” says Najib Akedbi, a professor of economics at the Institute of Agronomics in Rabat. “It has been a descent into hell where a lot of people have lost money.”

This gloomy assessment is shared by private equity investor Brahim El Jaî, managing director of MarocInvest, a subsidiary of AfricInvest, a private equity firm. “We would really like to encourage some of the companies we invest in to float on the bourse to make it easier to sell their shares,” he says. “But they don’t want to. The bourse is not dynamic enough; there’s a liquidity problem and low valuations of stocks.” Indices of CSE stock prices have fallen consistently over the last ten years. They took a downward turn from 2008 with the influence of the euro zone crisis, which followed the global financial crash of that year. Knock-on effects of the Arab spring in 2010 exacerbated this effect. Taken together, these external factors acted as a double whammy on the Moroccan economy. Europe and north Africa are the country’s biggest trading partners. For the CSE, the bad run continued and indeed, got worse. The stock exchange’s value plummeted more than 15% in 2012 and hit a five-year low in August 2013. Then, just as share prices were recovering, Morocco was hit by Standard and Poor’s decision in late 2014 to downgrade the country from “emerging” to “frontier” status.

The ratings agency blamed a lack of liquidity on global markets. The definition of “market liquidity” is hotly debated, but in rough terms it means that investors can sell their shares easily, and for little or no loss. Historically, highly liquid markets have seen considerable trading activity. One underlying problem is that the CSE has a serious lack of liquidity of its own. Its market capitalisation, or the total value of its traded shares, achieved a peak of $76 billion in 2007, but it now stands at $57 billion. Another anomaly is that the Casablanca bourse is the third largest in Africa after Nigeria and South Africa in terms of capitalisation, yet it currently lists only 77 businesses. A rival exchange, Egypt, has around 200. Aside from the Total offering, the CSE has failed to gain any significant new listings since the early 1990s. Prices fell sharply again early in 2015 but they are currently stabilising. “This poor performance affects the image of our economy as a whole,” concedes Badr Benyoussef, head of business development at the CSE. “We can’t emerge into the world market without a stock market, but we don’t have enough new money and visibility to attract new investors.”

What is the source of the CSE’s damaging lack of liquidity? Analysts blame it mostly on “structural factors”. For one thing, the CSE’s ownership configuration is in question. It is a société anonyme or mutualised public company owned equally by a group of 17 large businesses, including pension funds, Banque Marocaine du Commerce Extérieure and Attijari Intermediation, a brokerage firm. This model was chosen in the 1990s, when most stock exchanges were mutually owned. In recent years, however, exchanges around the world have opened up to private investors, hoping to increase brokering competition and drive down transaction costs. Meanwhile, the Moroccan government has struggled to introduce reforms. Earlier in 2015 the minister of economy and finance, Mohamed Boussaid, warned the members of the société that their licence to run the CSE might be revoked if serious progress were not made on demutualisation, or shedding mutuality for shareholder ownership. Essentially this meant breaking up the bourse’s current ownership structure and allowing private investors to buy shares.

But many of the current members have close links to the government and the royal business empire, so the market’s appetite for genuine reform has come into question. The CSE members are like “a cabal”, Mr Akedbi says. “The bourse has been taken over by a handful of players who do what they want at the expense of small investors. Investors need to be convinced that there will be no manipulation, no conflicts of interest.” But it is not all bad news at the CSE. In 2010 the organisation was admitted to the World Federation of Exchanges, an international trade association. In 2014 it signed a partnership deal with the London Stock Exchange Group that included an agreement to transfer knowledge of new technologies. In the longer term the two organisations plan to launch joint ventures in the underdeveloped sub-Saharan African market. More sophisticated financial instruments are evolving as part of the current CSE reform process, but new products have not been introduced since the early 1990s. For example, the bourse does not have a market in futures or derivatives, though parliament is currently debating a new law to create such instruments. “

“Foreign investors are used to seeing these types of products in other markets around the world; there’s no longer much interest in simply buying and selling shares,” says one employee of an international bank which is giving technical advice on the new derivatives law. Ultimately, however, the CSE’s main investment growth could come from small investors and home businesses. Only about 20% of the CSE’s listed firms are small or medium enterprises. Many Moroccan firms are family-run, and they do not often see the point in using capital markets to raise money when they can get it from family members. “Launching on the CSE means legal requirements to open books and being transparent about the way the firm earns money, and many Moroccan companies don’t like that,” Mr Akedbi says. The upshot is that the Moroccan stock exchange has failed to persuade enough people outside big business to see the institution as a viable way of growing their savings or raising capital for their companies. “We need to instil investor confidence and act as a counter-weight to traditional forms of raising capital for businesses,” Mr Benyoussef says.

“We want to play [a] decisive role in financing Morocco’s overall growth and emergence as a regional player. Everyone understands the need for reform.” But Mr El Jaî says it is difficult to imagine his clients taking an interest in the CSE without an increased pace of reform. “We have the money that business needs to grow, we’re ready to go, but we’ve got a confidence problem,” he says. “No one wants to be the first to take the plunge. We need to see more companies launching on the market.”

Celeste Hicks is a freelance journalist based in Casablanca, Morocco. She is the author of “Africa’s New Oil: Power, Pipelines and Future Fortunes”. She spent four years reporting from Mali, Chad and Somalia for the BBC.

Stock in the past

Nigeria: short cuts

Nigeria’s hope of reforming its capital market using a new corporate governance system is haunted by endemic corruption

New rules for the NSE © eNCA

By Ini Ekott

The Nigerian Stock Exchange won plaudits last November for launching a new set of rules designed to curb corporate misdeeds and reform a market weakened by years of corruption and poor oversight. Nigeria’s former finance minister, Ngozi Okonjo-Iweala, Africa’s richest man, Aliko Dangote, and other industry players endorsed the move. Dealing with poor corporate practices, especially in the public sector and listed companies, would boost foreign direct investment and enhance local participation in the capital market, said Mr Dangote, a former president of the exchange. The Nigerian Stock Exchange’s current head, Oscar Onyema, said he “anticipated that there would be an improvement in the overall perception of capital markets and business practices” with the introduction of the new Corporate Governance Rating System (CGRS). The new rulebook will have its work cut out to reverse Nigeria’s underperforming stock market. In January, the ratio of market capitalisation of listed stocks to GDP was only at 16% compared to 112% in Brazil, 247% in Malaysia and 207% in South Africa, according to Arunma Oteh, the former head of Nigeria’s Securities and Exchange Commission (SEC), the market regulator.

This ratio has become popular since investor Warren Buffet declared it the “best single measure” of a market’s worth. It shows that the Nigerian bourse is significantly undervalued. Meanwhile, analysts have reacted with mixed feelings to the new corporate governance rules. On the one hand, they welcome the move to clean up Nigeria’s murky financial world. On the other, the country has a history of failed corporate governance codes. They worry that the latest code will not be any different. “This is not really new, there has always been corporate governance [legislation] in Nigeria,” said Tope Fasua, a financial markets expert at Global Analytics Consulting, a financial advisory firm based in Abuja. He welcomed the new rules, but said they looked like a “drop in the ocean” considering the scale of the rot. Emmanuel Adegbite, an associate professor at Durham University Business School in the UK, also commended the policy. But he recalled that past attempts to reform company behaviour have yielded little.

For instance, in 2003, the SEC and the Bankers’ Committee (which includes the Central Bank of Nigeria and licensed banks) issued separate voluntary codes for banks and other financial institutions. The two codes were meant to strengthen the corporate governance practices stipulated by Nigeria’s 1999 Companies and Allied Matters Act. The central bank also issued mandatory corporate governance rules for Nigerian banks in 2006, followed by the insurance and pension regulators. The main problem is corruption. Transparency International’s 2014 Corruption Perceptions Index ranked the country 136 out of 176. The Nigerian private sector is one of the largest recipients of the country’s stolen public funds, Mr Adegbite said. Board directorships are often based on political calculations, he said. “Corporate Nigeria is a reflection of the broader political climate of the country,” he added. “There is government corruption, there is societal corruption, so we find corporations operating within the cultural context that permits irresponsibility and irresponsible behaviour.”

In 2014, Nigeria slid seven points on the World Economic Forum’s Global Competitiveness Ranking to 127 out of 144 countries. On ethics and corruption, the country ranked 140. Insider abuse became dramatically apparent between 2008 and 2009, when the country’s capital market experienced its worst crash since the country’s independence in 1960. Between February 2008 and December 2009, the Nigerian stock market’s capitalisation nose-dived from an all-time high of $52.2 billion to about $22.6 billion, according to central bank figures. While the crash was partly a result of the 2008 global economic crisis, the commercial banks manipulated the market and heightened the financial downturn, according to the central bank. At the time, the commercial banks controlled 60% of the Nigerian bourse’s stocks, according to the central bank and Nigeria’s SEC. After the 2008-09 crash, the central bank rescued eight banks by providing them with 620 billion nairas ($3.1 billion). The CBN sacked several bank chiefs for accumulating non-performing loans and other shoddy practices and laid criminal charges against them.

Most of the cases are still in court and only one bank executive has been jailed. In 2012, a parliamentary investigation into the market crash ended without a significant result. Ms Oteh, then head of the SEC, accused the lawmakers who were carrying out the probe of soliciting and taking bribes. Herein lies the problem, according to Mr Adegbite: Nigeria has the requisite laws, but has failed to enforce them. “The regulatory authority is very weak in the sense of economic power, which is in the hands of these corporations,” he said. “To put it straight, corporations can easily pay bribes at no cost to themselves. So this also reduces the ability to enforce regulation.” Legal enforcement is also weak because regulators fail to engage and inform smaller shareholders who could help to hold defaulting firms to account, said Sunny Nwosu, who heads the Independent Shareholders Association of Nigeria. “They only carry big shareholders and the companies along. It is something we always complain about,” he told Africa in Fact. Not much has changed since then, he said.

The latest corporate rules will evaluate listed companies on the quality of their corporate compliance and integrity, as well as directors’ understanding of their fiduciary responsibilities. Well-governed companies will be included in a trade-able Corporate Governance Index and/or listed on a Premium Board. This will provide enhanced visibility to companies with good corporate governance. The new corporate rating system includes a score for corporate compliance self-assessments (50%), a fiduciary awareness test for directors (10%), corporate integrity assessments based on feedback from randomly sampled staff, suppliers, investors and analysts, among others (20%), and representatives from management, the media, NGOs and government (20%). To be listed on the Nigerian bourse’s Premium Board, companies must have a market capitalisation of $1 billion or more and meet liquidity criteria, said Soji Apampa, executive director of the Convention on Business Integrity, a Lagos-based NGO, which sponsors the new code with the NSE.

More broadly, the Nigerian government’s financial reporting council is also developing a national corporate governance code that will merge all existing ones. The national code will have three sections for the public, private and non-profit sectors. The stock exchange’s new ratings system will be subordinate to this new national code. But Mr Adegbite says implementation and enforcement are critical and welcomes the pledge by Nigeria’s new president, Muhammadu Buhari, to confront corruption headlong. “With the new government, I’m a bit optimistic that we could see some heavier implementation of existing codes and punishment for companies that don’t abide by these rules,” he said. “We will continue to have corruption if people are not made to face the consequences.”

Ini Ekott is the Assistant Managing Editor (News) at Premium Times, an online newspaper based in Abuja, Nigeria. Prior to this, he reported for Next, an investigative newspaper in Lagos. He has written for IPS Africa and other publications and is a former Wole Soyinka investigative journalist of the year.

A long and potholed road

Sustainable stock exchanges

Markets around the world are adopting the environmental, social and good governance agenda, but “integrated reporting” faces problems in Africa

By Richard Jurgens

In August 2012, police fired on a crowd of striking miners in Marikana, in South Africa’s platinum mining belt, killing 34. The miners were demanding higher wages from their employer, Lonmin, a London-listed firm. Poverty, unemployment and a lack of basic amenities added to their militancy and sense of grievance. Shockingly reminiscent of apartheid-era crowd shootings, the incident made headline news around the world. The South African government came under scrutiny, while Lonmin was accused of bad corporate citizenship. A later commission of inquiry concluded that the company had failed to provide adequate protection for its workers during the strike and that it had not delivered housing for its workers despite previous commitments. The “Marikana massacre”, as it has become known, brought the question of companies’ responsibility for the broader context of their operations sharply into focus. A February 2015 study by Credit Suisse, a huge Swiss bank, lists it as a glaring example of “owner responsibility” for company caused disasters, along with the BP Deepwater Horizon oil rig explosion and the Fukushima nuclear plant meltdown, both in 2010, among others.

At the time of the incident, the idea and practice of corporate social responsibility (CSR) were well established in South Africa. During the 1980s influential business figures in the country had introduced programmes to tackle urban development and education projects. They also lobbied against the “harshest elements of the apartheid state’s policies”, according to a study by Ralph Hamann of the University of Cape Town. In 1994 with the advent of democracy, the Johannesburg Stock Exchange (JSE) adopted a code of corporate governance developed by Mervyn E. King, a retired Supreme Court judge. The code established guidelines for responsible investment and sustainable business practices for directors and company boards. A 2002 version of the King code included a section on sustainability. A further revision in 2009 integrated sustainability into business reporting. The latest version, due in early 2016, seeks to incorporate smaller businesses and not-for-profits, according to the Institute of Directors in Southern Africa, a Johannesburg- based NGO that promotes professional directorship.

The King code reflected ideas about CSR that had first gained currency in the 1950s with the emergence of studies in America on the social responsibilities of businesses. Some prominent figures, including the influential economist Milton Friedman, opposed it, claiming that businesses’ only role was to make money for their shareholders. But the Exxon Valdez disaster in 1989, in which millions of gallons of oil were spilt into an Alaskan bay after a tanker grounded, gave CSR new prominence. Responding to the Exxon slick, a group of American shareholders formed the Coalition for Environmentally Responsible Economies (Ceres). A few years later, Ceres and the Tellus Institute, based in Boston, Massachusetts, established the Global Reporting Initiative to promote business environmental reporting. Its scope was then broadened to include social, economic and governance issues. “Businesses are expected to report not just on profit but on their impact on the wider economy, society and the environment,” according to the Chartered Institute of Management Accountants, based in London.

The result, in a term coined by CSR authority John Pilkington, has been a growing convergence on so-called “triple bottom-line reporting”, which integrates a company’s performance related figures under three headings: social, environmental and financial (sometimes referred to as “people, planet and profit”). In recent years, business acceptance of integrated reporting has grown rapidly. According to a 2013 study by consulting firm KPMG, 71% of 9,100 companies surveyed in 41 countries were reporting on environmental, social and governance (ESG) factors in their businesses in 2013, up from 64% of companies surveyed two years before. A 2014 report by consultancy Black Sun and the International Integrated Reporting Council, a coalition of regulators, investors, companies and NGOs, found that 92% of companies that had adopted integrated reporting said it had improved their understanding of value creation. In 2010 the JSE became the world’s first stock exchange to make ESG reporting mandatory for its listed companies.

Only the year before, the UN had established a Sustainable Stock Exchanges (SSE) programme to foster greater corporate transparency. It required stock exchanges, investors, regulators and companies to adopt best practices on ESG issues. In 2012, the UN initiated an exchange programme to get bourses around the world to learn from each other’s sustainability experience. The JSE was among the first five members, with one other African bourse, the Egyptian Stock Exchange, as well as BM&FBovespa in Brazil, Borsa Istanbul in Turkey and Nasdaq in the US. The JSE continued to play a leadership role in advancing the sustainability agenda when it co-chaired the World Federation of Stock Exchanges’ sustainability working group, which was started in 2014. The Nigerian and Kenyan bourses have also joined the SSE. Four African countries were among the first SSE members to distribute a communiqué informing domestic and international investors of the sustainability measures in place at these exchanges.

Yet while the JSE has been at the forefront of CSR initiatives on the continent, much work remains to be done. “CSR in sub-Saharan Africa is still in its infancy,” according to a 2009 study by the German Ministry for Economic Cooperation and Development with funding by the British High Commission in South Africa. In 2014 the London-based Association of Chartered Certified Accountants found that the JSE was “the only exchange [in sub-Saharan Africa] with any form of ESG reporting requirement”. Several barriers are still preventing the adoption of CSR practices throughout the continent, according to the International Finance Corporation, the World Bank’s private-sector arm. These include “knowledge gaps, dominant investment practices that are hard to change…poorly applied regulations at both company and/ or investor levels and the incorrect perception of [sustainable investment] as only ‘ethical’ investment”. A critical obstacle to ESG reporting worldwide, and especially in Africa, is whether it offers business benefits to the companies that adopt it.

The SSE encourages stock exchanges to adopt voluntary initiatives and education programmes to help companies incorporate sustainability without imposing burdens of time and cost that would prevent them from doing so. “Some critics believe that sustainability reporting is a costly process that is impractical for companies in developing countries,” says Anthony Miller, a SSE coordinator. “But real-life experience from Brazil to Egypt to India to Vietnam, is proving that this is not the case. Where exchanges are introducing innovative voluntary initiatives, companies are responding with practical low-cost approaches that result in more and better ESG information for the market.” The main task for African bourses is to change the mindset of businesses, said Martyn Davies in 2010, then of the Gordon Institute of Business Science in Johannesburg. “CSR should not be about charity,” he says. “CSR should create competitive communities who benefit from their natural resources.” So what went wrong in Marikana?

Lonmin was not the only actor implicated: the commission of inquiry questioned the actions of politicians and senior police officers. Other factors were to blame, too. While critical of Lonmin, Marikana residents were also scathing about the local council, according to the same report. They saw it as corrupt and unable to deliver essential services. Union officials were also implicated. “There seems to be no doubt that a turf war between two miners’ unions played a key role in setting up the context for the massacre,” said the Ethics Institute of South Africa in an undated comment on its website. Union leaders had “taken a very narrow view of [their] responsibilities”, the independent organisation said. The King code ought to be applied to other institutional role-players, including the unions, the comment noted. Meanwhile, Lonmin was facing financial constraints. “[Its] first-half profits had decreased nearly 90% compared to the same period the year before. Production and platinum prices were down, while the company’s net debt had increased by 20% since the year before [the massacre],” according to a November 2013 report by Global Research, a Canadian independent research and media association.

In addition, the company risked violating its bank loan covenants that depended on delivering good results. A November 2013 study by Ross Harvey for the South African Institute of International Affairs has also highlighted the role of the migrant labour system in the Marikana platinum belt. Mining houses, including Lonmin, attempted to ameliorate the situation by paying workers “living out” allowances rather than accommodating them in the hostels that were an apartheid legacy. But the Marikana mineworkers then found themselves maintaining a second household—a factor that contributed to their wage demands. Corporate social investment, he concludes, was not adequate to dealing with “the legacy effects of migrant labour”. If Marikana serves as an example, the effective implementation of CSR depends significantly on the context in which it is applied. Businesses may be held accountable to strict measures of their wider impact while other interested parties, including government, labour and the police are not. This raises the question of the effectiveness of CSR reporting requirements in Africa, even where they are in place.


Richard Jurgens is editor of Africa in Fact. He spent ten years in exile with the ANC, in Africa and Europe. Since 1994 he has worked as a journalist, editor, translator and writer, with experience in South Africa and Europe in mainstream media, corporate communications and alternative media. An author with several books to his name, he has a BA (Hons) in philosophy and is currently pursuing a Master’s in public policy studies at the Wits School of Governance.
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