Promoting EAC Regional Financial integration Amb. Claver GATETE Governor, National Bank of Rwanda February 28th , 2012 Stock exchange in LST, SWZL, MOZK, RWA?

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

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…

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 5th March 1997. Rwanda and Burundi joined on 20th Aug 2008 and 11th Aug 2011 respectively.

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 2004. Rwanda Capital Advisory Council joined in 2009. Stock exchange in LST, SWZL, MOZK, RWA?

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;

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.

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.

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.

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.

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.

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.

Middle Income Countries Challenges (Ctd) Shallow financial depth: Ratios in % 2005 2006 2007 2008 2009 2010 Middle Income Countries M3/GDP 26.53 28.49 30.42 28.76 31.40 33.26 60 Private Credit/GDP 14.94 16.08 20.25 17.63 18.45 19.54 40-60 Deposits/GDP 21.17 23.11 24.75 23.81 28.87 28.22 40 Financial Assets/GDP 38.16 41.82 38.08 34.98 45.90 45.92

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

Challenges (Ctd) 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. Stock exchange in LST, SWZL, MOZK, RWA?

Challenges (Ctd) 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.

Challenges (End) 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.

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.

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.

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.

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.

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