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Harmonised regulation, infrastructure key to African capital market integration

Capital markets play an important role in supporting economic activities and their resilience vital to financial stability. However, the absence of regulation can lead to distrust and low confidence among investors which then affects economic activity.

One of the key features of global financial market integration is that, wherever they happen to be established, entities are able to offer financial services in other jurisdictions on terms similar to those enjoyed by domestic market participants.

The degree of integration could be measured in terms of the intensity of cross-border financial flows or the market quota of foreign entities in domestic markets. It is safe to say that market integration provides a number of social benefits, including broadening the range of financial services and investment opportunities available to consumers and increasing competition in the provision of those services. In addition, integrated financial markets act as private risk-sharing mechanisms that facilitate the smoothening of both economic and financial cycles in domestic economies. Moreover, market integration enables greater risk diversification, thereby contributing to more effective risk management and to financial stability.

Regulation certainly plays a highly relevant role in facilitating market integration. In particular, the homogeneity of financial regulation across jurisdictions and the consistency of the requirements imposed on internationally active entities may provide powerful incentives for cross-border financial activities and operations. By the same token, heterogeneous rules or any type of regulatory discrimination against foreign players in domestic markets tend to inhibit the internationalisation of financial activity.

Yet market integration is by no means the only, let alone the most relevant, policy objective and fostering international market integration is not also the primary goal of financial regulation. It is rather the availability of infrastructures. It is known that infrastructure deficit is prevalent in most African countries and when this prevalent, how can one then integrate markets?

As it is, standard regulatory mandates, such as pursuing financial stability or ensuring consumer protection in a specific jurisdiction, may occasionally conflict with achieving international regulatory consistency. As far as domestic economic or market conditions relevant to the achievement of specific policy goals differ across jurisdictions, regulation may need to be adapted to those conditions, even at the cost of generating regulatory discrepancies across jurisdictions or additional costs for internationally active entities.

This, in no doubt, would have been at the back of minds when the West African Monetary Institute recently hosted a 2-day Capacity Building/Sensitization Program on West African Capital Markets Integration (WACMI) Phase II Project.

WACMI Phase II project

The project is funded by the African Development Bank (AfDB) and implemented by the West African Monetary Institute (WAMI) while lead anchors are the West African Capital Markets Integration Council (WACMIC), a platform for Chief Executive Officers of the Securities Exchanges and Central Securities Depositories in West Africa, and the West African Securities Regulators Association (WASRA), comprised of Directors General of the Securities & Exchange Commissions in the region. Speaking during the event, the Director General, WAMI, Dr. Olorunsola Olowofeso stated that one of the aims of the WACMI Phase II Project is to deepen West African markets as well as achieve robust and integrated capital markets.

According to him, aside the harmonization of market rules and the capacity building and sensitization programme across the stock exchanges in ECOWAS, other activities under component I include development and hosting of a centralized database/ website for the West

He assured that WAMI as implementing agency of the project will continue to collaborate with all the stakeholders, particularly WASRA and WACMIC to ensure that the project is completed within the stipulated time (June 2024).

Also speaking, the Chief Executive Officer, NGX Limited, Temi Popoola, who was represented by Divisional Head, Capital Markets, Jude Chiemeka, said to address the infrastructure deficit currently affecting capital markets in the West African region, a harmonised regulatory environment as well as smart infrastructure will help to drive Africa’s competitiveness in the global market.

In his keynote address, Director General, Securities and Exchange Commission, (SEC), Lamido Yuguda, stated that one of the ways to expand the markets in the sub-region, is to encourage cross-border capital market activity as this increases the opportunity set for people in our sub-region, helps diversification of investments, and encourages transfer of skills and best practices.

Participants who were at the event, kept asking one question, now that this project is being discussed, what factors would drive the integration of capital markets and what strategies would be put in place to ensure this happens?

Stakeholders’ views

Speaking during a panel session tagged; Capital Market Integration in West Africa, the Managing Director of  FBN Capital Asset Management, Michael Oyebola, said having right harmonised regulations and information will drive integration of capital markets.

Citing an example, Oyebola explained “A couple of years ago, the first US dollar mutual fund was created in this country, at the last count, I think we have close to 29 of them. If for example, there is a fund manager and any Nigerian wants exposure to Ghana, they can either be a single currency product, or they can create a product of multi currencies of which each of them has shares. It engenders that there has to be rules and regulations for that to happen. Currently, we don’t and it is possible it is because it has not been brought to the fore of the regulators.

Another strategy is the harmonisation of tax and reporting. All these need to be in place because there is no point of a fund manager sitting down in Nigeria and wants to invest in stock in Ghana without being able to get their annual report or anything about the company other than outdated information from a Google search”.

Whilst explaining that the capital market is both the provider and user of capital, the Chief Executive Officer, NGX Regulation, Tinu Awe, said that with so much amount of capitalization in Africa’s capital markets, investors would look to invest but there is a need to have regulation, protection laws in place as this would help in integrating capital markets successfully.

For his part, Divisional Head, Business Technology and Digital Innovations at Central Securities Clearing System (CSCS) Plc, Tobe Nnadozie, lamented that African countries have a platform that can handle trades in multi currencies in different countries and have not been able to use it.

Nnadozie stressed on the need for creation of more products as well as application of new technologies.

“I think the first opportunity would be that we would have many more products which would create much more onboarding of people into the market. If you take a look at the investor base across the region of people involved in the capital market, less than two per cent of the value space is active.”

As of the last time I checked the data, we are not even doing up to 10 per cent of what they do in the insurance space. So, if they come in and we are able to apply new technologies and expand the market by onboarding more people, then we would have more things happening in the market”, he said.

Source: The Sun