Amb. Claver GATETE Governor, National Bank of Rwanda February 28 th, 2012 Promoting EAC Regional Financial integration

Outline  Background  Progress in EAC Capital Markets Integration  Challenges  Way forward  Conclusion 2

I. Background  EAC financial markets integration is identified as one of the key pillars of establishing the future Monetary Union. Its objectives are to contribute to : Mobilisation of domestic savings and investments; Efficient allocation of resources, which contribute to accelerate economic growth; Increase competition and innovation in the region; Harmonize regional laws and institutions, etc… 3

II. Progress in EAC Capital Markets Integration  The integration of EAC capital markets began in 1997 with the establishment of the East African Securities Regulators Association (EASRA);  Its objective included technical cooperation, mutual assistance and information sharing;  An MOU between the Capital markets regulators in Kenya, Uganda and Tanzania was signed on 5 th March Rwanda and Burundi joined on 20 th Aug 2008 and 11 th Aug 2011 respectively. 4

Progress in EAC Capital Markets Integration (Ctd)  Implementation of common market protocol is at advanced stage: Free movement of capital (capital liberalisation) in Uganda, Kenya and Rwanda. Plans for gradual removal of capital controls underway in Tanzania; In Kenya, Rwanda and Uganda, non residents have full access on capital markets, treated equally with residents for all transactions; All stock exchanges in EAC are members of East African Stock Exchanges Association (EASEA); NSE, USE and DSE signed an MOU in Rwanda Capital Advisory Council joined in

Progress in EAC Capital Markets Integration (Ctd)  EASEA established a Securities Industry Training Institute for building capacity of industry players;  Cross-border listing and trading have been identified as part of integration process;  To facilitate this process, integration of clearing and settlement infrastructure is ongoing within EAC: EAPS + Currency convertibility;  Most of EAC countries have adopted regionally recommended fiscal incentives; 6

Progress in EAC Capital Markets Integration (Ctd)  Kenya, Rwanda and Uganda have adopted the EAC policy of recognizing EAC citizens as domestic investors with respect to taxation;  Furthermore, Rwanda and Kenya implement the policy of reserving a minimum of 40% of privatisation IPOs to EAC citizens;  The process of integration of CSD is advanced in EAC towards one regional network of depositories. 7

Progress in EAC Capital Markets Integration (End)  All EAC countries operate debt markets but at different stages of development: Burundi and Rwanda: 2-5 years; Tanzania and Uganda: 2-10 years; Kenya: 1-30 years  Stock exchanges exist in all EAC except Burundi, but with large disparity in number of companies listed: 55 in Kenya, 15 in Tanzania, 13 in Uganda and 4 in Rwanda. 8

III. Challenges For Financial Markets to operate with more efficiency, the EAC still needs to sustain the following prerequisites:  Stable macroeconomic environment :  Fundamental in promoting cross-border investments because of fluctuating interest rates and exchange rates  Sustained economic growth increases people’s wealth, mobilize regional savings and attract private investment from inside and outside the region.  Appropriate financial market infrastructure ;  Effective Regulatory framework. 9

Challenges (ctd)  Institutional investors (insurance companies, pension funds, mutual funds, unit trusts) to provide more benefits to the market.  Financial Disclosure: Reliable and timely information to play an important role in the evaluation and monitoring of the financial sector soundness. 10

Challenges(ctd)  Human Resource Base : Needs for more well trained professionals (dealers, brokers, investment managers, security analysts).  Banking Sector : Sound financial intermediaries and liquid Interbank Market for sustained development of Financial Market.  Effective Tax Policies : To treat all incomes of all types of investments and savings fairly. 11

Challenges (Ctd)  Market infrastructure and regulatory frameworks; Domestic Debt Markets in EAC region still face challenges in meeting international standards;  They are characterized by short term maturities, low savings rates, underdeveloped bond markets, illiquid secondary markets, limited investor base, etc. 12

Challenges (Ctd) Shallow financial depth: 13 Ratios in % Middle Income Countries M3/GDP Private Credit/GDP Deposits/GDP Financial Assets/GDP

Challenges (Ctd) Narrow investor base - Securities Markets dominated by commercial banks: Burundi: 65% Kenya : 53% Rwanda: 83% Tanzania: 30% Uganda: 77% 14

Challenges (Ctd) Stock Exchanges underdeveloped Stock Exchanges underdeveloped:  Stock market is viewed as a medium to encourage savings, improve the efficiency and productivity of investments;  Secondary markets are very illiquid and do not exist in some countries;  Bond Market is dominated by government bonds and very few corporate issuance. 15

Challenges (Ctd) Poor infrastructure base Poor infrastructure base:  Most EAC countries use auction method to issue Government Bonds.  Usually primary dealership is almost limited to commercial banks.  Invitation to tender for bids is by open box system as opposed to wire service facilities like Reuters, Bloomberg, etc.  This system exposes the auctions to operational risks. 16

Challenges (End) Low level of skills base Low level of skills base :  Skills base in EAC countries to be employed by the Financial Markets is limited.  Fund management services which create competition and develop the market are almost non-existent.  Understanding of the brokerage services, asset pricing techniques, derivative market trading skills are lacking.  It becomes difficult to develop the market without grounded skills in these areas. 17

IV. Way Forward  Each country in EAC has its particular concerns and goals, but generally there are some basic issues that, as a region, we need to consider:  Ability to raise capital by the entrepreneurs;  Establishment of an environment that will create confidence in both domestic and foreign investors in order to encourage the inflow of investment capital.  Facilitating capital formation opportunities for domestic businesses. 18

Way Forward (Ctd)  Increase the number of listed corporations through cross - country listings.  Remove the impediments that restrain the growth of SMEs. In most of our countries, entrepreneurial class owning small businesses are often neglected.  Further measures should be taken to improve proficiency in capital market matters, including international accounting standards for especially the legal and accountant communities. 19

IV. Way Forward (end)  Enforcement of laws is essential in order to maintain public confidence in the capital market.  Enforcement requires adequately trained and financed investigators and prosecutors, as well as knowledgeable judges. 20

V. Conclusion  The EAC countries have made great strides to develop the domestic Financial Markets and integration.  Infrastructure development is on good course but more needs to be done.  Capacity has been developed but more skills are still needed in terms of debt management, legal, accounting and other capital market professionals.  Despite the mentioned constraints, the general outlook for Financial Markets development and integration is positive. 21

THANK YOU 22