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
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