Demutualizing African
Stock Exchanges:
Challenges and
Opportunities
Sam Mensah, Ph.D
Principal, SEM International Associates Limited
Ghana
Presented at the 9th Annual Conference
of the African Stock Exchanges
Association, Cairo, Egypt, 10-12
September 2005
Demutualizing African
Stock Exchanges:
Challenges and
Opportunities
INTRODUCTION
This paper discusses the demutualization of stock exchanges.
In particular, we wish to evaluate the factors driving
demutualization and evaluate their relevance in the African
context. We will then offer some views on the challenges and
opportunities presented by the demutualization movement for
African stock exchanges.
Traditionally, the ownership structure of a stock exchange was
a mutually held organization. Members enjoy rights of
ownership, decision-making (one-member, one vote) and
trading. Demutualization is the term that denotes the change in
the legal status of a stock exchange from a mutual association
with one-vote per member (and usually consensus based
decision-making) to a company limited by shares with one vote
per share with majority decision making. It involves the
separation of trading rights and ownership. Demutualization
signifies that an exchange has become a for-profit firm in a
competitive financial markets environment.
It has more
potential for profit, and also for failure, than before and like any
business, it must stand alone for its financing.
In 1993, the Stockholm Stock Exchange became the first
exchange to demutualize. Since then 21 exchanges in
developed markets have demutualized – representing almost
40% of the membership of the World Federation of
Exchanges.1 In some cases such as the Australian Stock
Exchange and the London Stock Exchange, the demutualized
stock exchanges have become publicly traded companies. By
contrast, the pace of demutualization in emerging markets has
been much slower. As at April 2005, exchange
demutualizations had been completed in only 5 jurisdictions
out of a total of 76 emerging market jurisdictions.2 In Africa,
there are a few stock exchanges such as Mauritius and the
Bourse Régionale des Valeurs Mobilières (BRVM) are limited
1
2
Source: World Federation of Exchanges Annual Report and Statistics
Source: IOSCO EMC WG2 surveys.
1
by shares and in theory demutualized.3 However, there is a
significant overlap between licensed stockbrokerage
companies and shareholders. The demutualization fever has
not caught on in Africa as compared to other emerging
markets.
FACTORS DRIVING DEMUTUALIZATION
The demutualization trend has been that attributed to a
number of reasons that include:

Improved governance

Investor participation

Competition

Globalization and consolidation

Unlocking stock exchange value
Improved Governance
While demutualized stock exchanges will continue to provide
most of the same services, they will have different governance
structures in which outside shareholders are represented by
boards of directors. The mutual association model functions
well if an exchange is a provider of trading services with limited
competition and the interests of members are homogeneous. If
greater competition exists and the interests of members
diverge from one another and from the exchange, the mutual
governance model consensus decision-making becomes slow
and cumbersome. The exchange is unable to respond quickly
and decisively to changes in the market. The profit-oriented
corporate model will enable management to take actions that
are in the best interests of customers and the exchange itself.
With the separation of ownership and trading privileges, an
exchange will achieve greater independence from its members
with respect to its regulatory functions. Owners’ interests will
be aligned with those of the exchange - both will seek to
maximize the profits of the exchange. Strategic decisions will
also be made by management in a much more efficient
manner. Demutualized exchanges will be forced to account to
their shareholders not only regarding the bottom line, but
regarding issues arising in corporate governance.
Investor Participation
A stock exchange must be responsive to the needs of its many
stakeholders, including participating organizations, listed
companies, and institutional and retail investors. Exchanges
may perceive a need to shift power within the exchange from
one group of members to another and to afford institutional
customers direct access to exchange facilities. Separating
3
See Appendix for a table on the ownership structures of African stock exchanges
2
trading rights from ownership may be a politically and
economically feasible way to effect such a shift. Unlike a
mutual structure where often only broker-dealers may be
members, a demutualized exchange affords both institutional
investors and retail investors the opportunity to become
shareholders. The assets managed by institutional investors
and the trading needs of institutional investors differ
dramatically from those of retail investors. A demutualized
exchange will have greater flexibility to accommodate the
needs of institutional investors as customers, and potentially,
as owners.
Competition
Exchanges have lost their monopoly as the sole providers of
trade execution and related services. The widespread
proliferation of Alternative Trading Systems (ATS) and
Electronic Communication Networks (ECN), driven by
technological innovation have allowed efficient and effective
matching of buy and sell orders of customers at lower
transaction costs, while offering transparency, trader
anonymity and extended trading hours. Large global traders
are able to cross orders and only report the net position to the
exchange (thus avoiding transaction costs). In the United
States, the competitive edge of the ECNs is reflected in the
fact that in 2002, ECNs accounted for 45% of NASDAQ shares
traded (compared to 25.5% in 1999). The improvements in
technology that have facilitated the ATS and ECN platforms
have eroded the significance of the physical national exchange
with a trading floor.
Globalization and Consolidation
Competitive pressures have triggered a wave of restructuring
and mergers and alliances among securities markets to
maximize economies of scale and scope, accessibility and
market reach while providing global trading facilities. Examples
of such mergers include Euronext, established by a merger of
national exchanges in France, the Netherlands, Belgium and
Portugal and integrated equity markets in Sweden, Finland,
Denmark and Norway. NASDAQ has also developed global
alliances to attract more liquidity for the United States. In Asia,
several exchanges have trading links and dual listing
agreements with NASDAQ.
Exchanges have been pushed to demutualize as a result of
global competition for order flow and the search for greater
revenues. Globalization has threatened or even decimated the
exclusive franchise that exchanges once enjoyed. Whereas a
domestic exchange was once the only alternative for listing a
particular financial product, now issuers have a variety of
options. They may list on the domestic exchange, choose
another exchange such as for a single listing, or have a dual
listing to the advantage of both exchanges.
3
An IOSCO survey4 has found that demutualization in emerging
markets has also been driven by the increasing competition for
global order flow and fears about lack of liquidity and
marginalization of domestic markets. With domestic issuers
being provided access to multiple markets, order flow and
liquidity could easily migrate to major markets. Demutualization
is seen as a catalyst to transform the stock exchange business
model to facilitate a more effective response to competition.
Resources for Capital Investment
A competitive stock exchange must be able to respond quickly
to global competitive forces and technological advances. With
the capital raised from an Initial Public Offer (IPO) or a private
placement a stock exchange should have both the incentive
and the resources to invest in the competitiveness of its
information systems. To be competitive, products and services
must not only be timely and cost-effective, but also reliable.
The move from floors to screens has required considerable
capital investment. Demutualization offers an opportunity to
buy out trader interests since they are no longer necessary
and shift power to other firms, while raising capital for
continued modernization of trading information systems.
Continued investment in technology may serve as an effective
way to meet competition from ATSs and upstairs trading as
well as justifying the scale of the traditional integrated
exchange model.
Unlocking Stock Exchange Value
Demutualization provides an opportunity to unlock the value of
a stock exchange though the realization of the value will
ultimately depend on the listing of the exchange. In the
majority of exchanges, the value of the exchange is usually
distributed to member brokers. Demutualization and listing
provides an exit mechanism for former brokers to sell down
equity thereby broadening the shareholder vase and
decoupling of broker interests from that of the exchange.
Emerging Market Considerations
There are some additional drivers of demutualization that
seem to be peculiar to emerging markets. Some emerging
market regulators view demutualization as a means of
collaborating with strategic shareholders with specialized
know-how with the object of importing international skills,
knowledge and technical efficiencies into the domestic market.
Demutualization is also seen as a means of accelerating the
development of technology-related infrastructure and
capabilities.
There are some significant differences in the weight of the
factors that drive demutualization when we compare
4
Emerging Markets Committee of the International Organization of Securities
Commissions (2005), “Exchange Demutualization in Emerging Markets”
4
developed and emerging markets. For example, the threat of
competition from ATS and ECN trading and the ability to raise
capital have not been predominant drivers for demutualization.
We should further note that the demutualization in emerging
markets has been largely policy led. Typically, the process is
led by either the government or the regulator. By contrast,
demutualization in developed markets is generally led by the
exchange or industry based on market considerations.
IMPLICATIONS OF DEMUTUALIZATION
It is helpful to review the issues that arise during and after
demutualization in order to establish a goodness of fit between
particular stock exchanges and the demutualized model. We
will consider the implications of demutualization under the
following headings:

Regulation

Financial viability

Process
Regulation
Demutualization raises many questions about the regulation of
stock exchanges:

What role should government play in regulating
private stock exchanges?

What role should private stock exchanges play
in regulating exchange activities and members?
Stock exchanges usually operate as self-regulatory
organizations. The self-regulatory functions usually consist of:

Trading: Setting rules for trading, conducting surveillance
and enforcing the rules

Market manipulation: Overseeing the trading system to
avoid abuses

Membership: Establishing rules to govern the conduct of
members and monitoring compliance with and enforcement
of rules.
An issue that is raised by demutualization is whether attempts
to maximize profits will undermine self regulation. New
regulatory models are emerging in the wake of the
demutualization movement:

A demutualized exchange continues to perform
all of its regulatory functions even after
demutualization. Concerns have been raised as
to whether a demutualized exchange will take
5
enforcement actions and impose penalties on
those who are major providers of revenue

For-profit exchanges can establish a separate
entity to conduct regulatory functions, thereby
avoiding conflict-of-interest issues. Nasdaq has
taken this route by creating two subsidiaries:
NASD Regulation Inc, which is the regulatory
arm and the Nasdaq Stock Market, the
commercial trading arm,

An exchange can outsource its regulation to a
completely independent third party. Thus
approach may help avoid the perception of
conflict of interest. Inc., the US, the National
Futures Association performs this function for
several exchanges. However, there must be
some way of ensuring that the thirds party
regulator is accountable and will perform its
functions effectively.
To be fair, some of the conflict issues that exist under
demutualization already exist with the current mutual
exchanges. For example, the temptation to hurry through a lot
of listings is high even for mutual exchanges because of the
revenue potential. However, this might be exacerbated under
demutualization because of the stronger profit motive, unless
the listing approval is taken away from the exchange as
obtains in the United Kingdom.5
In markets where regulatory systems are fragile, the challenge
is to forge an effective relationship between the for-profit stock
exchange and the regulator and to maintain investor
confidence in the market. To achieve this, regulators in
emerging markets have found it necessary to be a significant
player in the demutualization process.
Financial Viability
The principal sources of revenues for exchanges are
membership subscription fees, listing fees, trading charges,
services fees including clearing and settlement, depository
fees, etc. and charges for other activities such as company
news, quote and trade data. In developed countries and larger
emerging markets, stock exchanges have developed profitable
operation driven by well-developed economies, market size
and business strategies. However, stock exchanges in many
developing countries operate at a deficit and have enjoyed
financial support from government and donors or been even
owned by government because they are viewed as institutions
serving a national interest. The financial viability question is
simply this: what happens in a country with only one major
stock exchange that suddenly goes bankrupt?
5
The Financial Services Authority of the U.K. has set up the U.K. Listing Authority
to independently approve listings.
6
A for-profit demutualized structure does not guarantee a
profitable existence. The possibility the for-profit exchanges
may fail can create serious problems if listed companies
suddenly find it difficult to raise capital and investors face
reduced liquidity for their holdings. Thus regulators may need
to closely monitor the financial condition of demutualized stock
exchanges. For example, in Australia, a reserve fund was
created to provide a capital cushion. The Toronto stock
Exchange provides an early warning system whereby the
exchange is required to maintain certain financial rations and
to notify regulators when not in compliance.
Process
An IOSCO survey has established that the process of
demutualization has been uneven between developed and
emerging markets. In emerging markets, the decision-making
process is largely policy-led whole in developed markets it is
market-led. Because the impact of market forces may not be at
the same level as a developed market, exchange restructuring
issues are considered from the perspective of national policy.
Strong backing by the government is needed to resolve thorny
issues such as how to allocate ownership of an exchange that
was limited by guarantee prior to demutualization, and the
relationship between the regulator and a demutualized
exchange.
In many cases recommendations on the demutualization
design and the model of the new exchange are evaluated and
approved by the government. For example, in Malaysia, there
was a working group chaired the regulator, comprising
members of the exchange, the association of stock brokers
and the Capital Markets Advisor Council to facilitate the
demutualization process.
CONDITIONS IN AFRICA
In this section, we seek to address the question as to whether
demutualization is the answer for stock exchanges in Africa. In
particular, we want to look at the market setting and the
characteristics of African stock exchanges and assess the
goodness-of-fit with the demutualized stock exchange model.
Experience in the markets indicates that certain preconditions
are important for successful demutualization and for
demutualized stock exchanges to operate successfully:

A sufficiently liberalized financial market in
which a for-profit stock exchange can survive
with new business strategies. For example, an
insufficiently liberalized capital account may not
be conducive for the creation of a for-profit
exchange as these controls could inhibit the
ability of a commercialized exchange to
7
implement business strategies including he
implementation f cross-border strategies.

A market justification reflected in a critical mass
of trading activity that supports the financial
viability of the exchange

Support of the government in managing the
conflicting demands of various stakeholders in
the demutualization process and in expediting
the process of regulatory changes and
approval.
Table 1 provides a listing of African stock markets covered by
Standard & Poor’s Global Markets. In addition there is a
market in Mozambique and Cameroon has just established a
stock exchange in Douala, bringing the total number of African
stock exchanges to 20. African stock exchanges have been
described as small, illiquid and poorly regulated.
Internationally, most African markets are classified as “frontier
markets” in contradistinction to “emerging markets”. The
classification is somewhat arbitrary but South Africa and Egypt
as usually classified as “emerging”.6
TABLE 1: AFRICAN STOCK MARKET
Market
Capitalization
(US$ millions)
Botswana
2,131
BRVM
1,650
Egypt
27,073
Ghana
1,426
Kenya
4,178
Malawi
Mauritius
1,955
Morocco
13,152
Mozambique
Namibia
308
Nigeria
9,494
South Africa
267,745
Swaziland
172
Tanzania
Tunisia
2,464
Uganda
Zambia
768
Zimbabwe
4,975
STATISTICS (2003)
MKT
Market
CAP/GDP*
Listed
Turnover
(%)
Companies
(%)
14.2
19
4.4
6.6
38
1.6
10.1
967
13.7
3.1
25
4.1
12.6
51
7.4
0.0
8
14.2
40
6.2
10.9
53
6.5
0.0
2.5
13
0.7
6.6
200
11.0
56.5
426
44.8
3.3
5
0.0
4
3.5
46
7.2
0.0
8.4
11
1.46
16.4
81
26.1
Others
United States
14266266
130.6
5,295
United Kingdom
4212434
261.5
2,311
Singapore
145117
139.5
475
Malaysia
168376
71.4
897
India 6 The Economist magazine publishes
279033
9.1
5,644
weekly economic data for emerging markets.
The only African countries covered in this list are South Africa and Egypt.
Source: Standard & Poor's: Global Stock Markets Factbook, 2004
8
* GDP is is Purchasing Power Parity GDP, World Development Indicators
Database, World Bank, April 2005
122.8
100.6
71.1
34.3
138.5
From Table 1, we can make the following observations:
1.
African stock markets are small by international
and developing country standards. Market
capitalization to GDP is as low as 3% in
Swaziland Excluding outliers such as South
Africa, market capitalization to GDP levels off at
about 14%. This is in contrast to market
capitalization to GDP ratios in advanced
countries which range from such as the 262%
and 131% in the U.K. and USA respectively and
in other emerging markets such as Malaysia
with a market capitalization to GDP ratio of
71%. The low ratio of market capitalization to
GDP suggests that stock markets in Africa play
relatively limited roles in their domestic
economies.
2.
Liquidity as measured by turnover is low.
Markets such as Ghana have turnover ratios as
low as 4.1%. Even South Africa, the largest and
most liquid market in Africa has a turnover ratio
of 44.8%. This contrasts with turnover ratios of
over 100% in developed markets and in other
emerging markets such as India with a turnover
of 138.5%.
3.
The number of listed companies is very low for
most countries. Egypt and South Africa are
obvious outliers with listings of 967 and 426
respectively. Some countries such as Tanzania
have as few as 4 listed companies although
there are countries such as Nigeria, Zimbabwe
and Kenya and Morocco with over 50 listings.
The limited number of listings creates supply
constraints and contributes to the observed
illiquidity of African markets.
The statistics do not tell the full story of the peculiar
characteristics of African stock markets that are relevant for
evaluating the demutualization option. One significant
characteristic of African stock exchanges is the significant
preponderance of listings by local subsidiaries of
multinationals. Examples include multinational banks such as
Standard Chartered Bank and Barclays Bank and global
manufacturers such as Unilever. While the parent multinational
may be cross-listed in a number of developed markets, the
subsidiary listing is “domesticated”. This implies that there is
no incentive for the listed local subsidiaries to migrate. Added
to the fact that the listed domestic companies are usually too
small to migrate or cross list on advanced markets, African
markets are not subject to the international competition for
order flow.
9
The performance of African stock exchanges has been mixed.
The factors that have been identified as impeding the
performance of African stock markets are also relevant for
evaluating the readiness of a stock exchange in Africa to
demutualize. The literature7 cites the following performance
limitations:

The Macroeconomic Setting: Many African
economies are still characterized by high fiscal
deficits, high and volatile inflation, volatile and
fast depreciating exchange rates and high
interest rates. Policy inconsistency and
macroeconomic instability undermine investor
and issuer confidence, thus dampening
business flow to stock exchanges.

.Regulatory Framework:. Most African capital
markets lack a robust regulatory framework.
This is not because of a lack of laws, rules or a
regulatory agency. A survey of African capital
markets indicates that out of 19 markets, 15 of
them have a formal supervisory authority. There
are laws in place to regulate the securities
markets while every stock exchange has a
comprehensive set of rules for members and for
listings. “The real challenge is the shortage of
experienced supervisors and the absence of a
strong tradition favoring compliance with the
rules and discouraging regulatory
forbearance”[Vittas (1998)].8 Poor regulatory
enforcement will create challenges in an
environment with a demutualized stock
exchange given the inherent conflict-of-interest
in demutualized structures.

Market Infrastructure: The smallness of
African capital markets means that usually
resources are unavailable for the acquisition of
key infrastructure needed for market operations.
In most African markets, the state of the art in
market infrastructure still lags established
technology and norms. For example, as many
as 8 African securities markets do not have a
central securities depository. In theory this
should be a positive driver for demutualization
because of better ability of a demutualized stock
exchange to raise capital. However, in practice
this advantage of demutualization is constrained
by the limited profitability prospects of African
stock exchanges.
7
See for example, Sam Mensah and Todd Moss (eds.) African Emerging Markets:
Contemporary Issues, Vol 2, Accra, Ghana: African Capital Markets Forum, 2004
8 Dimitri Vittas, “Institutional Investors and Securities Markets: Which Comes
First?, World Bank Working paper 2032, December 1998
10

The Human Resource Base: In more
developed countries, a large part of the training
in capital markets is commonly on the job.
Working in a market economy and liberalized
financial markets requires fundamentally
different skills than working in a command-type
economy. Given that many African countries
had administered financial systems in the part,
training. With regard to demutualization,
exchange management, having previously
operated mostly in a regulatory mode might find
it difficult to assimilate commercial mindset or
develop the necessary capacity to execute
sound business strategies.

The Investor Base: African markets are
characterized by a small investor base. This is
because the majority of people in these
countries are unable to save or invest.
According to a report from the United Nations
Conference on Trade and Development
(UNCTAD), almost nine out of 10 people in
Africa’s poorest countries live on less than two
dollars a day, and two-thirds survive on less
than one dollar a day. There is a similarly low
base of institutional investors. The limited
investor base has implications for the financial
viability of a demutualized exchange.
In order to appreciate how the demutualization movement is
likely to play out in Africa, it is important to understand the
reasons that led to the establishment of stock exchanges in
Africa. With the exception of older stock exchanges such as
South Africa, Kenya, Egypt, Zimbabwe and Nigeria, African
stock exchanges have been set up as government initiatives.
Many African stock exchanges benefit from direct and indirect
government subsidies in order to cover their operating
expenses. According to Moss (2003)9, the reasons for the high
propensity of African governments to promote stock
exchanges are both “technocratic” and “political”. The
technocratic reasons are the standard economic reasons
normally advanced by technocrats to justify formal capital
markets such as a source of long-term finance, improved
capital allocation, savings mobilization: and improved
corporate governance. However there is also a complex mix of
noneconomic factors which underpin government objectives
for promoting stock exchanges. These noneconomic factors
are generally inconsistent with the market reasons for
demutualizing. Moss has identified the following:

Emerging Market Fever: According to Moss:
“Africa has historically been prone to following,
9
Todd Moss Adventure Capitalism: Globalization and the Political Economy of
Stock Markets in Africa, (Ashgate Publishers, Hampshire, UK, 2003
11
sometimes with quite forcible external
encouragement, development trends as they
swing from one idea to the next” (Moss, p41).
Changes in global investment trends during the
1990s saw significant flows of global capital to
emerging markets of Asia and Latin America.
While Africa’s share was relatively small,
African governments justifiably felt the need to
adopt institutional structures that would help
them compete for their share of global portfolio
flows. The stock exchange was a ready made
institutional import in support of this cause.

A Badge of Inclusion: The liberalization of
African economies which started through the
structural adjustment programs of the 1980s
shifted attention to the private sector in Africa,
which was touted as “the engine of growth”. As
a symbol of international legitimacy, the stock
exchange was ideal. It was a highly visible
symbol of the free enterprise credentials of a
country. Presidents and prime ministers found it
appealing to stress the modernity of their
economies by showcasing their stock
exchanges in investment promotion speeches
around the world.

Geography: In some cases stock exchanges
have emerged as a result of geography. The
BRVM was established as a regional stock
exchange for the eight West African countries
belonging to UEMOEA. Prior to its
establishment, the only stock exchange in the
zone was in Code d’Ivoire. It was natural for the
regional exchange to be established in Abidjan
to build on the existing exchange. Whether
current efforts at regional integration of capital
markets in Africa will succeed will be very much
a function of the geographical appeal of the
location of the regional market.

Populist Symbolism: Governments have been
searching for ways of “democratizing” the
ownership of wealth in the economy. Popular
ownership of shares is appealing, particularly as
a means of deflecting criticisms of privatization
drives. Privatization through stock exchanges is
seen as transparent and fair as well as
supporting a narrowing of the income gap.
Stock exchanges can also be used as tools for
indigenization especially in cases where there is
widespread discontent about foreign ownership
in the economy.
12

Politics of Economic Reform: Financial sector
reform features prominently in the programs of
donors. Countries seen to be making progress
in reforming their financial sectors, including the
capital market are likely to receive high
allocations of aid from donors. Major donors
such as USAID and SIDA have financial
intermediation projects. The IFC provided seed
money for the Ghana Stock Exchange and the
BRVM while SIDA has supported Tanzania,
Uganda and Zambia.
The existence of these non economic factors mean that in
most cases, demutualization is unlikely to be driven by the
economics of an exchange. Government policy will be critical
in African demutualization and in many cases as long as the
stock exchange fulfils its national policy role, demutualization is
unlikely to be a priority.
There are good reasons for African Stock exchanges to
demutualize. From our discussion of the factors that drive
demutualization, the factors that drive demutualization that
may be equally relevant in Africa are:

Improved governance

Investor participation
However, most African stock exchanges are not subject to the
competition that is faced by stock exchanges in advanced
markets. The reason is that the advanced markets are much
more integrated with the global financial markets and operate
within very high technological environments that expose them
to competition from alternative trading systems. By contrast,
African stock exchanges have domestic monopolies in their
countries and serve primarily domestic issuers who are not
able to access global financial markets.
The justification of demutualization in terms of the mobilization
of resources for investment and the unlocking of stock
exchange value rests on the assumption that stock exchange
will be profitable, at least in the medium term. While in principle
demutualization should allow a stock exchange better access
to finance, the size of African stock markets make this unlikely.
With the possible exception of Egypt, Nigeria, Kenya, and
Mauritius, African stock markets operate below breakeven
because of their small sizes. Thus, demutualization is unlikely
to result in more resources. Given the strong correlation
between stock market growth and growth in the larger
economy, the journey towards financial self-sufficiency is likely
to be long.
Having reviewed the relevance of the drivers of
demutualization in the African context, we make the following
13
observations with regard to the earlier mentioned preconditions
for demutualization:

Financial markets in Africa are still not
sufficiently liberalized to enable a for-profit stock
exchange top explore an expanded opportunity
set. For example, markets such as Ghana still
have capital account restrictions that limit the
ability of a stock exchange to implement cross
border strategies such as cross listing.

Of the 20 stock exchanges in Africa, only about
7 are likely to be financially viable. In my
unscientific view, these are the stock exchanges
with a combined market capitalization of at least
$2 billion and at least 40 listings. I see Egypt,
Kenya, Mauritius, Morocco, Nigeria, South
Africa and Zimbabwe as possibly having such
critical mass.

While government support for demutualization
is likely to be forthcoming in cases where a
market case can be made, African governments
may not be in a hurry to demutualize stock
exchanges, especially in cases where they still
provide financial support to the exchange.
Furthermore, as long as exchanges as in their
current mutual form meet national policy
objectives, African governments will continue to
provide financial support although the usual
underfunding and erratic disbursement will
continue.
Summary and Conclusion
In summary, African stock exchanges should move cautiously
on demutualization. The factors that have fueled
demutualization in developed and the larger emerging markets
are largely absent from Africa. In addition, the key
preconditions such as a sufficiently liberalized market and
critical mass of stock exchange trading and related services do
not exist in most markets. Having sounded this note of caution,
I hasten to add that there are a minority of African stock
exchanges that are likely to meet the various tests of readiness
for demutualization. In my view, these are the larger stock
exchanges with market capitalization and listings that are
adequate to sustain profitable operations upon demutualization
and whose markets are currently sufficiently liberalized.
Demutualization does not have to be an “all-or-nothing” model.
Stock exchanges that do not have the necessary preconditions
for demutualization at this time should consider
demutualization as a long-run objective. In the transition
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period, which may be long for many exchanges in Africa, some
of the touted benefits of demutualization can be partially
captured as follows:

Mutual stock exchanges can improve their
corporate governance by reducing the
representation of members and government in
favor of external experts and other stakeholders
such as institutional and retail investors.

To the extent that resources are available, stock
exchanges should continue to improve their
trading and post-trade technology so that they
can remain competitive and avoid possible
migration of liquidity as companies mature on
their exchanges.

Ongoing market liberalization such as a
managed current account liberalization will
enhance the prospects of the demutualized
stock exchange.
Finally, African stock exchanges should avoid pressure from
donors to demutualize. As we know, donors tend to move from
one fad to another. Already, some donors have proposed
demutualization as a condition for funding. African stock
exchanges should seize control of the demutualization agenda
and only move when the objective conditions are right.
15
Appendix: Ownership Characteristics of African Stock
Exchanges
Country
Botswana
Ownership Characteristics




BRVM



Egypt

Ghana



Kenya
Mauritius


Namibia




Nigeria
South
Africa
Tanzania
Zimbabwe





Established by statute (Botswana Stock
Exchange Act, 1994) as body corporate
Statutory body Committee of Botswana Stock
Exchange manages exchange
3 members appointed by Minister of Finance
2-6 elected from membership of stock
exchange
Private corporation
13.5% owned by the West African Economic
and Monetary Union (WAEMU)
Remainder distributed among brokerage
firms, chambers of commerce and industry,
subregional institutions and other private
institutions or WAEMU companies
Mutual; Member-based
Company limited by guarantee
Member owned
Registered under the Companies Act in 1991
as a company limited by guarantee
Shareholder owned
Trading membership separate from
ownership
not for profit
comprises 43 associate members (banks,
listed companies, investment institutions,
etc.)
Executive Committee of nine members of the
business community, representing different
business sectors, and the tenth member
represents(Namibia Financial Institutions
Supervisory Authority,
Regulated by the Stock Exchanges Control
Act (1985, amended 1992)
Limited by guarantee
Mutual, member based
Mutual, member based
Incorporated in September 1996 as a private
company limited by guarantee and not having
a share capital under the Companies
Ordinance (Cap. 212).
The ZSE is regulated by the Zimbabwe Stock
Exchange Act Chapter 24:18 of 1996. It
operates under the supervision of a nine
member Committee comprising of 2 members
appointed by the Minister of Finance and not
less than 4 and not more than 7 members
elected from within the stock broking
fraternity.
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