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VII C Regional Integration :PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA

Written by: International Monetary Fund

Article Overview: Another proposed solution to problems faced by African stock markets is to integrate stock exchanges.

VII C Regional Integration :PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA

Another proposed solution to problems faced by African stock markets is to integrate stock
exchanges. Merging stock exchanges (the extreme form of integration) results in volumes
multiplying with potentially the same overhead costs (Claessens, Klingebiel and Schmukler,
2002). Merging African stock markets into a single regional exchange immediately is no
doubt an ambitious and daunting task, given the associated institutional and financial cost
complexities. Proponents of this proposition argue that a well integrated regional stock
exchange in Africa will be a powerful source and driver of capital flows to Africa. Such an
exchange will also, if well structured, solve the current problems of illiquidity, small size,
and fragmentation.

Integration is expected to solve the fragmentation problems of African stock exchanges since
the number of national exchanges in an integrated market reduces. This promotes cost
efficiency, and improves liquidity and price discovery. Investors can execute orders without
routing through brokers and there is only one payment of listing fees in an integrated
exchange. Integrated markets harness a pool of economic and human capital, the economic
and human capital skills of various markets are brought to play in one single market. The
market thus benefits from a rich and diverse pool of skills. Integration fosters synergies in
risk management. Risk management is spread thin across market segments, which prior to
integration, were national exchanges. Integration reduces complexities, since all trading,
operations clearing and settlement systems are harmonized. It also improves surveillance and
risk management, by enabling access to information in all market segments.
One problem that has hindered successful stock market integration is nationalistic politics.
African governments tend to view stock exchanges as national assets with pride just like
national airlines (Moss, 2003). As a result, they are uncomfortable with transformations
which lead to a reduction in the national touch. In addition, smaller economies tend to
perceive the bigger economies as being domineering and fear that their exchanges will be
overshadowed by the bigger exchanges with integration. These economies also fear that
capital may be diverted away from them to the bigger economies with integration. For
instance, Okeahalam (2001) reports that Botswana officials were uncomfortable with South
Africa’s virtual African exchange proposal due to the fear of capital flight towards JSE.

There are important preconditions for successful regional approaches such as the legal
harmonization (trading laws and accounting standards) and a liberalized trade regime.
Integration requires that there are harmonized legislation, rules, listings, trading days,
settlement, and reporting standards. This implies that for African stock markets to become
integrated, the various national exchanges must adopt and/or harmonize their existing rules
and systems. This can be potentially a long and arduous task for these exchanges. Even if
trading rules and listing requirements are harmonized there is the issue of accounting and
reporting standards. These standards tend to be based on national systems which in turn also
depend on the colonial history of the countries. For instance, the BRVM comprises of
countries which adopted common standards following their common colonial past.

Integration cannot also be successful in the absence of automated systems. Integration
requires investors and traders to be able to log on into trade from other stations and this
requires that systems be automated.
Currency convertibility is very important in an integrated exchange. An integrated exchange
with a multiplicity of inconvertible currencies only compounds the administrative costs
which integration itself seeks to remove. Here the advantages of having existing monetary
unions, like the WAEMU in the case of the BRVM preclude such problems. This is also a
reason why the SADC region is progressing quickly towards a regional stock exchange due
to the convertibility of most of the regions currencies. Africa has many currencies, few of
which are convertible within the continent. Indeed currency convertibility depends more on
trade density between two countries and cannot be forced. This thus places hurdles on the
way of regional exchange integration efforts.
The experience of BRVM (Box 1) can teach us a number of lessons on stock market
integration in Africa (Asea, 2004). First, it can take a very long time to build a regionally
integrated exchange. Second, the fact that a regionally integrated exchange is established
does not mean that it will be used effectively or that it will integrate the markets. The
sustainability and success of any regional project must be very carefully assessed before the
project is undertaken. Private sector participation, as opposed to just regulators, central banks
and other public institutions normally has the best incentive to determine whether the
expenditure on a particular integration scheme for market infrastructure is worthwhile.


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

Related Articles
  VII. A. Automation: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA
  VI. B. Banking Sector Development: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?
  References: Enhancing Africa’s Trade: From Marginalization to an Export-Led Approach to Development
  Regionalism, Trade and Development in Africa
  New Partnership for Africa’s Development

Article Tags: african governments, african stock exchanges, capital flows, cost efficiency, illiquidity, management risk, market integration, market segments, national airlines, national assets, overhead costs, price discovery, proposed solution, regional exchange, regional stock exchange, risk management, settlement systems, single market, stock markets, trading operations



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