The results from the previous sections show that African stock markets are small, illiquid, with infrastructural bottlenecks and weak regulatory institutions. Despite these problems, stock markets in Africa have helped in the financing of the growth of large corporations but there is little evidence of broader economic benefits. How do you make the stock market more beneficial to African countries? A number of propositions have been suggested to help develop stock markets in Africa. These range from the need to increase automation, demutualization of exchanges, regional integration of exchanges, promotion of institutional investors, regulatory and supervisory improvements, involvement of foreigner investors, and educational programs. Most of these propositions involve substantial benefits as well as cost outlays. This section looks at the future of African stock markets by examining policy options for promoting stock market development in Africa.
A. Automation Automation is also expected to help reduce the costs and inefficiencies in African stock markets and increase trading activity and liquidity.9 Automation helps to speed up operations and activities of exchanges and reduces cost associated with manual systems. In addition, automation makes it easier to extend trading days and hours due to less cumbersome procedures. Automated trading also eliminates the need for trade intermediation since investors can log onto systems to monitor markets and also trade on markets, thus bypassing the use of brokers.
Automation of the trading system usually either precedes or is preceded by the adoption of a central depository system (CDS). Under the CDS system, there is total elimination of risks such as the loss, mutilation and theft of certificates associated with holding and trading of paper-based securities of investors. CDS systems also reduce errors and delays associated with paper-base Automation is an expensive venture and has huge budgetary implications for African governments. This might explain why most African stock markets have found it difficult to fully automate their systems.10 However, with the proliferation of electronic communication networks (ECNs) and alternative trading systems (ATS), the cost of automation is gradually reducing.
Other African stock exchanges can adopt the Namibian model whereby the NSX of Namibia uses the trading system of the JSE of South Africa. The markets could also adopt the CDS systems in similar manners. Admittedly the operational procedures of such an approach are likely to be difficult in the absence of currency convertibility issues and harmonized financial systems.
Automation is particularly important if African stock exchanges aim at integration. Without automation the much touted benefits of regional stock market integration is likely to be lost.
IMF Working Paper African Department Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges Prepared by Charles Amo Yartey and Charles Komla Adjasi August 2007
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International Monetary Fund
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The IMF is an international organization
of 185 member countries. It was
established to promote international
monetary cooperation, exchange stability,
and orderly exchange arrangements; to
foster economic growth and high levels of
employment; and to provide temporary
financial assistance to countries to help
ease balance of payments adjustment.
Since the IMF was established its purposes
have remained unchanged but its
operations—which involve surveillance,
financial assistance, and technical
assistance—have developed to meet the
changing needs of its member countries in
an evolving world economy.
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