capital market legislation in the east african community: challenges, opportunities and lessons from...
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CAPITAL MARKET LEGISLATION IN THE EAST AFRICAN COMMUNITY:
CHALLENGES, OPPORTUNITIES AND LESSONS FROM THE EUROPEAN UNION
By TUMUSIFU KEZA Jean de Dieu
A Thesis Submitted in Partial Fulfillment of Academic
Requirements for The Master’s Degree in International Economic
and Business Law
Kigali Independent University
ULK
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September, 2015
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DECLARATION
I, TUMUSIFU KEZA Jean de Dieu, declare that this thesis is my
original work and it has not been previously printed or submitted
elsewhere or for any other purpose. Works of others cited or
referred to are accordingly acknowledged.
Signature……………………………………….
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DEDICATION
I dedicate this Thesis to my beloved mother M.Rose MUKAMUDERI for
her inestimable love and support, may Almighty God abundantly
bless her!
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ACKNOWLEDGEMENTS
I would like to express my gratitude to the following people for
all their support and assistance:
To my Mother and to my brothers and sister for their support and
continued encouragement throughout my education, without which I
could not have made it through with my studies. Thank you for
constantly urging me to dig deep within myself to reach for
excellence.
To my supervisor, Dr.Eliamani LALTAIKA, who despite his busy
schedule, kindly accepted to supervise me and whose guidance and
advice were of paramount importance and without his assistance, I
would not have completed this work.
To my class mates thank you so much each of you brought something
unique and new to my life. It has been a challenging journey but
without your presence and support we would not have made this
far. May almighty God richly bless each and every one of you.
I would not have asked for better class mates!!!
Lastly to those who contributed in one or other way to the
completion of this research, I extend my gratitude.
TUMUSIFU KEZA Jean de Dieu
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LIST OF ABBREVIATIONS AND ACRONYMS
Art. : Article
CEPGL : Communauté Economique des Pays des
Grands Lacs(Economic
Community of the Great Lakes Region).
CET : Common external tariff
COMESA : Common Market for Eastern and Southern Africa
EAC : East Africa Community
EACJ : East African Court of Justice
EACSO : East African Common Services Organization
EACSOF : East African community Civil Society
Organization forum
EALA : East African Legislative Assembly
ECOWAS : Economic Community of the West African States
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EPA : Economic Partnership Agreement
EU : European Union
FTA : Free Trade Agreement
GATT : General Agreement on Tariffs and
Trade
GDP : Gross Domestic Product
http : Hypertext Transfer Protocol
Ibid. : Ibidem (Same book, same author same page)
Id. :Idem(Same book and same author)
NGOs : Non-Governmental Organizations
No : Number
Op.ci.t : Opere citato(already cited)
P. : Page
REC : Regional Economic Community
REC Courts : Regional Economic Community Courts
RTA : Regional Trade Agreement
SADC : Southern African Development Community
TBT : Technical Barriers to Trade
UK : United Kingdom
ULK : Université Libre de Kigali (Kigali Independent
University)
USA : United Sates of America
vol : Volume
www :world wide web
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TABLE OF CONTENTS
vii
DECLARATION....................................................i
DEDICATION....................................................ii
ACKNOWLEDGEMENTS.............................................iii
LIST OF ABBREVIATIONS AND ACRONYMS............................iv
TABLE OF CONTENTS.............................................vi
ABSTRACT
GENERAL INTRODUCTION...........................................1
I.1. Background to the study...................................1
I.2. Scope of the study........................................5
I.3. Problem statement.........................................5
I.4. Hypotheses................................................7
I.5. Objectives of the study...................................7
I.6. Research methodology......................................7
I.7. Literature review.........................................8
I.8. Outline of the research..................................10
CHAPTER I
CONCEPTUAL AND THEORETICAL FRAMEWORK ON EAC AND CAPITAL MARKET 11
I.1. Conceptual framework on capital market...................11
I.1.1.Definition of cross-listings............................11
I.1.2.Proponents of cross-listings............................12
I.1.3.Reasons for domestic markets and firms to participate in
cross-listing.......................................14
I.1.3.1 Expand Investor Base..................................15
I.1.3.2. Liquidity............................................16
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I.1.3. 3 Increase Visibility..................................17
I.1.3.5. Marketing Motivations................................19
I.1.3.6. Bonding..............................................20
I.1.3.7. Increased Analyst Coverage...........................22
I.2. Theoretical framework on EAC.............................24
I.2.1.Legal capacity of the Community.........................24
I.2.2.The objectives of the Community.........................25
I.2.3.The fundamental principles of the Community.............25
I.2.4. EAC as a regional integration entity...................26
I.2.5. The process of regional integration....................27
I.2.5.1. The Preferential Trade Area (PTA)....................28
I.2.5.2.The Free Trade Area ( FTA.............................28
I.2.5.3.The Customs Union and Common market...................29
I.2.5.4.The Monetary Union....................................30
I.2.5.5.The Political Federation..............................30
CHAPTER II......................................................
CAPITAL MARKET LEGISLATION IN THE EAST AFRICAN COMMUNITY......31
III.1. Legal framework........................................32
III.1.1. EAC Treaty and Capital Markets.......................32
II.1.2.Current Market Structure of EAC Capital Markets........37
II.1.2.1.Debt Markets.........................................37
II.1.2.2.Stock Markets........................................38
II.1.3.Regional initiatives to integrate the EAC Capital Markets
....................................................38
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II.1.3.1.Capital Account Liberalization.......................39
II.1.3.2.Harmonization of Market Infrastructure...............40
II.2. Challenges for the EAC Capital Markets..................41
II.2.1.Lack of commitment.....................................42
II.2.2.Overlapping Memberships................................43
II.2.3.High Transaction Costs.................................44
II.2.4.Lack of information....................................44
II.2.5.Lack of Public Confidence and Human Resources..........45
II.2.6.Disruption Spill Over from One Market to Another.......47
MECHANISMS FOR ENHANCEMENT OF THE EAC CAPITAL MARKET..........49
III.1.Legal mechanisms........................................49
III.1.1.The Requirements for a Proper Legal and Regulatory
Framework for the Regional Integration of Capital
Markets.............................................49
III.1.2. Investment Code......................................50
III.1.3. Harmonization of legal and regulatory framework......51
III.1.4. Harmonization of Market Infrastructure and Facilitating
Cross-Border Transactions...........................53
III.1.5. Strengthen Regional Surveillance Mechanisms..........54
III.1.6. Encourage Local Currency Bond Issuance by Multilateral
Financial Institutions..............................55
III.2.Lessons from other regions..............................56
III.2.1 .West Africa..........................................56
III.2.2.The Euronext as a working example of a regional stock
exchange............................................62
III.2.2.1. Background of Euronext.............................63
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III.2.2.2. Harmonisation of listing requirements..............64
GENERAL CONCLUSION............................................67
BIBLIOGRAPHY..................................................72
ABSTRACT
This work investigates the extent of Capital Market integration
in East Africa over time by examining the degree of convergence
in the stock markets. The work further assesses long-run
equilibrium of returns among the East African stock markets. The
study was motivated by the current move by the East African
member states to establish a monetary union in the region. The
position on the stage of financial integration could offer a way
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of overcoming impediments to the development of the envisaged
monetary union.
This thesis examines the economic importance of stock markets in
East Africa. It discusses policy options for promoting the
development of the stock market in East Africa. The results of
the work show that the stock markets have contributed to the
financing of the growth of large corporations in certain African
countries.
Key words
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GENERAL INTRODUCTION
I.1. Background to the study
Well-functioning capital markets1 can accelerate economic growth
and therefore alleviate poverty. A large body of research has
found evidence that capital market development contributes to
economic growth, including in sub-Saharan Africa2
In general, the EAC region has shallow and underdeveloped
financial markets.3 Their development has been hampered by a
number of factors which include; political and economic
uncertainty, fiscal dominance, weak judicial institutions,
limited investment opportunities in the private sector,
technological constraints, and the shortage of skilled personnel
with expertise in banking and finance.4
It is contended that all these problems could be eased through
regional financial integration. The integration of East African1 Capital markets generally consist of equity markets and bond markets, whereissuers can raise long-term funds. In addition to these markets, this paperalso covers treasury bill markets where governments raise short-term funds,considering the critical role of the markets in establishing a monetary union.2 Levine, R., and S. Zervos, 1998, “Stock Markets, Banks, and EconomicGrowth,” American Economic Review, Vol. 88, pp. 537–58.3 Ibid.4 Linn J & Wagh S ‘Regional Financial Integration: Its Potential Contributionto Financial Sector Growth and Development in Sub-Saharan Africa’ ,InternationalMonetary Fund Institute, (2008) IV.
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stock markets and the introduction of regional stock exchanges
will promote cross-border listings and thus stimulate increased
liquidity across markets.5Thus, it is suggested that the
integration of EAC’s stock markets and the creation of a regional
stock exchange is one of the panaceas to overcome Africa’s stock
market problems.6 A regional stock exchange has the potential for
tremendous benefits for both local and foreign investors, as well
as for business enterprises in the region.7
The term “regional stock exchange” refers to a stock exchange
which would stimulate not only cross-border trading in securities
of companies within the region, but would also attract securities
investment from abroad.8 Also, a regional stock exchange would
belong to a region and such an exchange would be located in one
of the countries in the region.9
Developed capital markets promote growth by mobilizing domestic
savings and investments and by efficiently allocating mobilized
resources to local companies. In addition, deep and liquid local
capital markets can lessen vulnerability of an economy to
5 Mlamblo C & Biekpe N ‘Investment Basics XVLIV. Review of African stockmarkets’ ,Investment Analysts Journal, ,2001, p.62. 6 Bradley E ‘A regional stock exchange: Hope for Sub-Saharan Africa stockmarkets’ ,Michigan State University-DCL Journal of International Law Summer , 1999,p. 30.7 Ibid.8 Mwenda KK, Legal Aspects of Corporate Finance: The Case for an emerging stock market
(published PH.D thesis, Warwick University, 2000,p.31. 9 Ibid.
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external shocks, by reducing currency and duration mismatches in
raising funds.
EAC has realized that the progress toward integration of capital
markets on a regional basis may actually help spur accelerated
economic growth. Articles 85 and 86 of the Treaty for the
Establishment of the East African Community (EAC) provide the
main framework for integration of the regional capital markets.
The provisions of the Articles call for capital market
development programs and a conducive environment for the movement
of capital within the EAC; harmonized capital markets policies on
cross-border listing, foreign portfolio investors, taxation of
capital market transactions, accounting, auditing and financial
reporting standards, commissions and other charges; the
establishment of a regional stock exchange within the EAC with
trading floors in each of the Partner States; adherence by the
appropriate national authorities to harmonized stock trading
systems and permitting residents of the partner states to freely
acquire and negotiate monetary instruments within the EAC; and
the unimpeded flow of capital within the EAC.
Further, the East African Community is pursuing strategies of
financial integration through programmes for the harmonization of
regulatory and legislative frameworks and policies, and the
promotion of cross-border investments and listing of securities.
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This regional financial integration is expected to establish
stronger links with financial systems and capital markets in more
developed countries.
Cross-country evidence shows that financial development can
reduce income inequality by increasing the income of the poor10.
In spite of these merits, capital markets remain underdeveloped
in most low-income countries owing to structural constraints.
Limited income and the small size of the private sector make
investors and issuers scarce.
Running capital markets entails huge start-up and operating costs
for both the regulators and market participants. This can be
prohibitive for countries with limited capacity and small
markets: authorities are required to establish and manage
regulatory frameworks and trading platforms, and issuers need to
go through painstaking due diligence processes for initial
offerings and maintain detailed financial reporting afterwards.
An empirical study suggests that there exists a certain minimum-
efficient size of bond markets, because large issuance and
trading volumes are more economical11 .
10 Making Finance Work for Africa (MFW4A), 2007, “Financial Sector Integrationin Two Regions of Sub-Saharan Africa,” Available athttp://www.mfw4a.org/resources/documents/documents-details/financial-sectorintegration- in-two-regions-of-sub-saharan-africa-how-creating-scale-in-financialmarkets- can-support-growth-and-development.html. (last visited on4April 2015….) 11 Eichengreen, B., and P. Luengnaruemitchai, 2004, “Why Doesn’t Asia HaveBigger Bond Markets?” NBER Working Paper 1,Cambridge, MA: National Bureau ofEconomic Research).
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Regional integration has the potential to help countries overcome
these constraints. East African Community attaches great
importance to financial sector development in pursuit of their
regional integration goal. This is exemplified by their
commitment to the creation of an enabling environment within
which the private sector can flourish and generate faster growth
in individual countries.
One of the pillars of this effort as enumerated in Chapter 14 of
EAC treaty is the pursuit of financial integration with a view to
maximizing the ability of financial sectors to mobilize resources
and efficiently allocate them to the most productive sectors of
the respective economies.
Integrated capital markets, if managed properly, will allow
savings to be pooled across the region; cost and information
sharing among members; diversification of risks; enhanced
competition and innovation across financial institutions; wider
choices of financial products provided to regional and foreign
investors; and more integration into the global economy
facilitated by increased attractiveness of markets12.
12 Irving, J., “Regional Integration of Stock Exchanges in Eastern andSouthern Africa: Progress and Prospects,” IMF Working Paper 05/122(Washington: International Monetary Fund, 2005.
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Countries of the East African Community (EAC)13 have been
pursuing development of capital markets through regional
integration. Having well-functioning local capital markets is
important for these countries because they need large amounts of
financing to build infrastructure for sustained growth. Capital
markets are needed as an alternative source of financing,
supplementing commercial banks, which dominate the EAC financial
sector with low competitiveness14.
Recognizing the benefits of capital markets and the limitations
of individual country approaches, the EAC member states are
committed to establishing a common market, which would include
free movement of capital under the treaty establishing the
community.
The importance of this study is that it comes at a time when many
East African countries are reviewing policy options including the
benefits of wider market participation through increased regional
financial integration.
13 The EAC was established in 2000 by Kenya, Tanzania, and Uganda; Burundi andRwanda joined in 2007. Its objectives are to deepen cooperation among memberstates in political, economic, and social fields to establish a monetary unionand ultimately a political federation of East African states. A customs unionwas established in 2005, followed by the starting up of a common market in2010. The member states are currently negotiating a monetary union protocol toestablish a monetary union by 2012.14 Gaertner, M., S. Sanya, and M. Yabara, “Assessing Banking Competitionwithin the Eastern African Community,” unpublished manuscript (Washington:International Monetary Fund), 2011.
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Furthermore, the research will provide information to Capital
Market Authorities by giving enhanced insight and knowledge that
will help to shed light on the role of cross-listings in
establishing an EAC regional stock exchange.
The study will be of value to the EAC which is also planning to
set up a regional stock exchange.
Moreover, this study will be useful to companies seeking to
exploit profit and growth opportunities on the abovementioned
regional stock exchanges by means of cross-listings investment
ventures.
Therefore, the study makes a significant contribution to the
existing literature by filling the gap on how Capital Market
assist in setting up a EAC regional stock exchange.
I.2. Scope of the study
In this work, the researcher mainly focuses on East African
community capital market within the framework of the area of East
African community partner states (Burundi, Kenya, Rwanda,
Tanzania and Uganda, the domain treated is Business Law) and in
terms of duration, we start from 1999, the year of the East
African community treaty has been signed up to now.
I.3. Problem statement
Capital markets in the East African Community (EAC) face common
challenges of low capitalization and liquidity, but to different
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degrees. EAC member countries have made noticeable progress in
developing domestic capital markets through a regional approach,
removing constraints on capital transactions and harmonizing
market infrastructure.
Nevertheless, empirical analysis suggests capital market
integration has not deepened during the past few years in the
EAC, although convergence of investment returns is taking place
to some extent. Learning from the experience of the West African
Economic and Monetary Union and the Association of Southeast
Asian Nations, EAC countries would benefit from four actions to
accelerate financial market integration: (i) further harmonize
market infrastructure; (ii) strengthen regional surveillance
mechanisms; (iii) encourage local currency bond issuance by
multilateral financial institutions; and (iv) build the capacity
of the existing regional institutions.
Cross-border listing, where a firm lists its equity shares for
trading in a stock exchange located in a different country has
gained significance in East Africa over the past years since the
signing of the Treaty for the Establishment of the East African
Community (the Treaty).
Article 85 (Banking and Capital Market Development) of the Treaty
states that the Partner States must undertake to implement within
the East African Community (EAC), a capital market development
program to be determined by the Council for the purpose of
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creating a conducive environment for the movement of capital
within the EAC.
A major gap in the provision of financial services to the EAC
private sector is the lack of long-term finance. Financial
systems in the EAC are dominated by commercial banks, which
typically have not been reliable sources of long-term capital.
Non-bank sources of medium to long-term financing for example,
leasing, mortgage and contractual savings are also
underdeveloped.15
Hence, a principal component of financial sector development
efforts in the EAC is the expansion of capital markets in the
Community, with the objective of developing long-term debt and
equity capital for the private sector.
Capital markets in the region have not been able to provide
effective support for the private sector because they are small,
underdeveloped and have limited activity. Although there are
ongoing efforts in individual countries to alter this situation
and expand capital markets, all the EAC countries have recognized
that a regional financial integration could potentially address
several limitations associated with the country-focused approach,
and they have placed substantial emphasis on the pursuit of a
regional approach16.
15 World Bank,Building institutions for markets, Washington, DC, The World Bank, 2002.16 Ibid.
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It is expected that a regional market will ensure that capital
markets fulfill their potential in providing long-term finance to
support private sector activities in the small, fragmented
financial markets in EAC region.
Furthermore the Partner States (which as of March 2015 consisted
of Tanzania, Kenya, Uganda and Rwanda) were specifically tasked
with promoting co-operation among the stock-exchanges and the
capital markets and securities regulators in the EAC. This
included establishing within the EAC a mechanism for cross-
listing stocks, a rating system of listed companies and an index
of trading performance to facilitate the negotiation and sale of
shares within and external to the EAC. The following legal
questions are asked:
1. What are challenges faced by the EAC partner states in respect
to the regulation of capital market?
2. What are mechanisms to overcome challenges of capital market
in EAC?
I.4. Hypotheses
1. There are legal and economic challenges faced by the EAC
partner States on the process of capital market.
2. Legal and other mechanisms are necessary to overcome
challenges faced by the EAC partner states on the process of
capital market.
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I.5. Objectives of the study
This study aims to evaluate the importance of cross-listings in
establishing a EAC regional Capital Market and in solving the
problems of EAC’s stock markets. Furthermore, the study seeks to
identify important lessons from the SADC, Francophone West Africa
and the European Union that are crucial for pursuance of regional
Capital Market integration within EAC.
The main objective of this study is to analyze the capital market
in East African community, its development and current status, to
compare it with other regional mechanisms.
The Specific Objectives of this study are the following:
1. To identify the problems with the current East African capital
market;
2. To identify the role of the East African Community in
promoting capital market;
3. To identify positive attributes that the EAC can borrow from
the European union on capital market ;
I.6. Research methodology
This study shall basically be literature based with emphasis on
the analysis of the relevant available literature on the subject
matter. The study shall rely on both primary and secondary
Sources of literature. On primary sources regard will be given to
EAC treaty, EAC Agreements on financial transactions.
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On secondary sources reference will be taken from various
background papers, books, and academic or scholarly articles.
Various internet sites will be consulted for relevant up-to-date
data and information. Documentary technique has enabled the
researcher to check legislations, international conventions,
internet website, and some other written materials that were
found interesting for the research.
I.7. Literature review
Although there is no universal definition of financial
integration, in general, financial markets are said to be
integrated when the law of one price holds needed more
explanation this sounds too technical. In perfectly integrated
financial markets with no barriers to cross-border transactions,
returns of comparable assets should be equalized across
economies, so long as there is no difference in country risks and
exchange risks.
The literature relies on two broad categories of measures to
assess financial integration: price-based and quantity-based
measures. The former directly estimate whether and at what speed
rates of return of comparable assets converge across borders.
The latter investigate correlation between domestic savings and
investment, building on the idea of Feldstein and Horioka that in
a world of high capital mobility, there should be no relation
13
between domestic savings and investments, because domestic
investments are financed by a pool of global savings under a
unified interest rate17.
This work empirically investigates whether actions taken under
the EAC framework have succeeded in advancing integration of
financial markets. Few preceding studies exist on this subject.
IMF assesses movements of government bond yields among Kenya,
Uganda, and Tanzania18. Wang measures deviations from covered
interest rate parity in money markets for the same countries19.
Overall, there is a large body of literature that documents
whether cross-listings enhance African securities exchanges in a
way that overcomes the impediments to their development. Drawing
heavily on the case of the Lusaka Stock Exchange, Mwenda argues
that, although emerging stock markets are relatively illiquid,
there is a need for capital markets in Africa to integrate by
moving towards the establishment of a regional stock exchange.20
He advocates the establishment of a regional stock exchange under
the Common Market for Eastern and Southern Africa (COMESA), and17 Feldstein, M., and C. Horioka, “Domestic Saving and International Capital Flows,”Economic Journal, Vol. 90, No. 358, 1980, pp.31‒32.18 International Monetary Fund (IMF), Regional Economic Outlook: Sub-Saharan Africa, AprilWashington: International Monetary Fund), 2008.19 Wang, Z., J. Yang, and D. A. Bessler, “Financial Crisis and African StockMarket Integration,” Applied Economics Letters, 527‒533, 2003.20 Mwenda KK, ‘Securities Regulation and Emerging Markets: Legal andInstitutional Issues for Southern and Eastern Africa’ ,Murdoch University ElectronicJournal of Law , 2000,p. 7
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SADC, as an incentive to improve the efficiency and
competitiveness of the sub-region’s national securities
markets.21
Moreover, Mwenda argues, in favour of establishing a regional
stock exchange that would coexist with the sub-region’s national
stock exchanges, while simultaneously promoting multiple cross-
border listings and cross-border investments, to ease liquidity
problems on the national exchanges.22
Both of these studies conclude that financial integration is
limited in the EAC. This work contributes to the literature by
comprehensively assessing integration of the EAC capital markets,
both debt and stock markets, and examining whether integration
has progressed over time.
The work also reviews other regional initiatives to integrate and
develop local currency debt markets to draw practical
recommendations for the EAC, given the urgent need to accelerate
debt market integration.
I.8. Outline of the research
This Thesis composed by 3 chapters, Chapter one deals with
Conceptual and Theoretical Framework on EAC and Capital Market
and chapter two deals with Capital Market Legislation in the East
21 Ibid.22 Ibid.
15
African Community chapter three deals with the Mechanisms on the
Enhancement of the Capital Market in EAC. This research ends with
General Conclusion and personal suggestions.
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CHAPTER I
CONCEPTUAL AND THEORETICAL FRAMEWORK ON EAC AND CAPITAL MARKET
As previously noted, the core aim of this research is to
establish how cross-listings will assist in establishing an EAC
regional Capital Market. Following the same route, this chapter
attempts to provide an insight into understanding the concept of
Capital Market
I.1. Conceptual framework on capital market
It is essential to note that the notion of cross-listings long-drawn-out significantly in the nineties and it started in the United States of America here below is the explanation of closs-listing and its evolution
I.1.1.Definition of cross-listings
The concept of “cross-listings” is a new and efficient instrument
which enhances the integration of emerging stock markets with
global stock markets.23 Cross-listings refer either to the
listing of ordinary shares of a firm on a different exchange
other than its home stock exchange, or entail a single stock
being listed on more than one exchange.24
23 World Bank, , Developing Government Bond Markets (Washington: World Bank, 2001.24 African Development Bank,Eastern Africa Regional Integration Strategy Paper(2011 – 2015), Newyork: Author,2012.
17
In addition, cross-listing is a strategic policy of firms to
secondarily list their shares abroad.25 Cross-listings can be
achieved via direct listing, the Depository Receipts Programme,
and Global Registered Firms.26 Direct listing is where an
increasing number of firms perceive the benefits of listing their
securities abroad.27
Generally such a firm’s primary listing is on a stock exchange in
its country of incorporation, and its secondary listing is on an
exchange in another country. Cross-listing is especially common
for companies that started out in a small market but grew into a
large market. Furthermore, cross-listings is a mechanism through
which domestic markets and firms can improve their access to the
lower cost of external financing and consequently use the funds
to invest in viable projects, and affirm a strong commitment to
stringent rules backed by stringent enforcement.28
25 Bhumisirikul T & Supattaraku S., Cross Listing, Firms Origins And Destinations, And Cost ofEquity Capital ,The Barcelona European Academic Conference, 2011.26 Karolyi A., ‘Why do companies list shares abroad? A survey of the evidenceand its managerial implications’ ,Financial Markets Institutions and Instruments , 1998,P.727 Mmieh F & Frimpong N., ‘The Making of a Sub-Saharan Africa Success Story:The Case of Cross-Border Listing of Trust Bank Limited of the Gambia on theGhana Stock Exchange’ Thunderbird International Business Review , 2009,p. 51.
28 Miller D .,‘The market reaction to international cross-listings: Evidencefrom depository receipts’ ,Journal of Financial Economics , 1999,p. 51.
18
It is important to note that the concept of cross-listings
expanded significantly in the nineties and it started in the
United States of America (USA).29 Burns and Bill regard cross-
listings as a vehicle through which a firm’s management can bond
themselves to a legal system with more protections against
management self dealing or excessive consumption of private
benefits of control.30
Therefore, cross-listings can be characterized as a limited type
of jurisdictional choice that involves opting into an
alternative, perhaps stricter, regime from that in which the
market is based, but not opting out of the default
jurisdiction.31
I.1.2.Proponents of cross-listings
Proponents of cross-listings assert that regional integration can
bring greater efficiency, synergies and economies of scale;
attract foreign flow of funds; foster risk sharing and portfolio
diversification; act as an drive to financial sector reforms,
thereby broadening the competitiveness of regional financial
systems and minimising the risks of financial instability;
29 Inder & Khurana et al ‘Does cross-listing lead to a higher firmgrowth?’(2004) University of Missouri,Colombia available at http://www.zwu-wien.ac.af (accessed on 11 January 2015). 30 Burns & Bill ‘Cross-listing and Legal Bonding: Evidence from mergers andacquisitions’ (2006) University of Georgia New York available athttp://www.ceistorvergay.it/conferenzconvergin/banking&finance (accessed 11 January 2015). 31 Coffee J .,‘Racing Towards the Top? The impact of Cross-Listings and StockMarket Competition on International Corporate Governance’ ,Columbia Law Review ,2002,p.12.
19
facilitate capital market development; and lead to economic
growth.32 Economic growth increases in integrated markets because
of the better allocation of capital among investment
opportunities.33
However, cross-listings have implications not only for cross-
listing markets, but also for countries in which these markets
are based, as cross-listing markets might demand changes in home
country law in order to better coordinate with the law of the
cross-listed jurisdiction.34 Thus, if cross-listing countries
attempt to impose laws on cross-listing markets which conflict
with the law of their home countries; this could reduce cross-
listing and, therefore, the benefits which that foreign market
brings to cross-listing jurisdictions.35
It is contended that, even though cross-listings give wider
opportunities to potential investors or companies to invest in
multiple markets in order to exploit profit opportunities, they
are susceptible to market conditions, and there is a potential
32 Faruqee H ‘ Equity Market Integration in Integrated Europe’s Financial
Market in Market’ in Decressin J and Fonteyne W ., Integrated Europe’s Financial
market ,2007,p. 14.
33 Ibid.34 Ribstein L., ‘Cross-Listing and Regulatory Competition’ Review of Law &Economics , 2005,p. 1.35 Ibid.
20
loss of management control, associated costs, loss of privacy and
an increase in reporting and disclosures.36
Regional cross-listings in Africa have either been policy driven
or market driven. Some of the government policy-induced regional
cross-listings are the cross-listings between the Johannesburg
Stock Exchange (JSE) and the Namibian Stock Exchange (NSX) in
October 1992. In the SADC region there has been regional cross-
listing between stock markets in Botswana and South Africa since
1997, Malawi and South Africa in 1999, and Zambia and South
Africa in 2003. 37
For instance, Investec Limited of South Africa has primary
listings on the JSE, and is also dually listed in Botswana since
1995. Ashanti Goldfields is listed on the Zimbabwe Stock Exchange
and is also cross-listed on the Ghana Stock Exchange (GSE), the
London Stock Exchange (LSE), and the New York Stock Exchange
(NYSE).38
AngloGold Ashanti has its primary listing on the JSE and a
secondary listing on the GSE. Moreover, a number of companies are
cross-listed on the Zimbabwe Stock Exchange and the JSE: Bicc
Cafca Ltd, Falcon Investment Holdings, Old Mutual, Pretoria
Portland, and Wankie Colliery. Oando PLC, registered in Nigeria,
cross listed on the JSE on 25 November 2006. 36 Ibid.37 Adelegan O .,Impact of the Regional Cross-Listings of Stocks on Firm Value in Sub-Saharan AfricaInternational Monetary Fund Policy Discussion Paper No. WP/09/99, 2009.38 Ibid.
21
The market driven cross-listings, on the other hand, include the
West African triple cross-listing of Ecobank on the Bourse
Régionale de Valeurs Mobilières (BRVM), the Nigerian Stock
Exchage (NiSE), and GSE; and the cross-listing of Shoprite on the
JSE and Lusaka Stock Exchange (LuSE) in Zambia. Irrespective of
the reason for the regional cross-listing, it is beneficial to
both the host and home countries.
Decisions on regional cross-listings are taken by firms, while
market regulators, policy makers and stock exchanges facilitate
the regional approach to cross-listings by signing Memoranda of
Understandings (MoUs) and putting in place the necessary
conditions to harness the benefits of regional cross-listings and
develop their capital markets.39
I.1.3.Reasons for domestic markets and firms to participate in cross-listing
Academic literature has identified a number of different reasons
which motivate local markets and firms to cross-list.40 For
example, firms and domestic markets cross-list in order to expand
their investor base, increase stock liquidity, improve the terms
on which they can raise capital, increase visibility of stock
exchanges, and achieve non-financial benefits such as increasing
their customer base through the broadening of product recognition
39 Ibid.40 Hargis K., ‘International Cross-Listing and Stock Market Development inEmerging Economics’ International Review of Economics and Finance , 2000,p. 9.
22
among investors of the host country. In addition, cross-listings
enrich and strengthen each individual exchange by the addition of
quality-level listed securities.41
I.1.3.1 Expand Investor Base
Cross-listings in a foreign market make the domestic market
available to more investors and, consequently increase the
shareholder base and risk sharing, which results in higher
valuations. Foerster and Karolyi provide empirical support to
this perception, namely that cross-listing increases market value
by expanding the shareholder base and improving liquidity.42 In
support of this notion, Canadian managers whose firms are cross
listed in the U.S. place greater emphasis on the role of cross-
listings in widening their shareholder base.
As cross listings increase the shareholder base, the market’s
risk is shared among more shareholders and this increased
diversification reduces the market’s cost of capital. Baker
reports that the major benefit of foreign listing is to broaden
the shareholder base.43 It is depicted that cross-listings
increase the investor base of the stock market with beneficial
effects on its cost of capital.41 Ibid.42 Foerster S & Karolyi A., ‘The effects of market segmentation andilliquidity on asset prices: evidence from foreign stock listing in theU.S’ ,Journal of Finance , 1998,p. 54.43 Baker H., ‘Why Us Companies List on the London, Frankfurt and TokyoExchanges’ .,The Journal of International Securities Markets ,1992.
23
Cross-listings help to draw the interest of new investors and not
only from the larger scope of corporate information available
after listing overseas, but also from a signal of commitment to
higher governance standards which a local market sends when
deciding to enter foreign markets.44
Furthermore, by cross-listing a domestic market could expand its
potential investor base more easily than if it is traded on a
single market, as cross-listings bring foreign securities closer
to potential investors, and they increase investor awareness of
the securities.45 Therefore, firms and domestic markets
participate in cross-listings because this provides an avenue for
portfolio diversification for a wider investor base
I.1.3.2. Liquidity
Significantly, cross-listing on deeper and more liquid equity
markets leads to an increase in the liquidity of the stock and a
decrease in the cost of capital. Liquidity is a crucial feature
of stock market development since greater liquidity can translate
into a lower cost of capital for the stock market concerned,
insofar as it is valued by investors and factored into market
prices. 44 Armstrong, H. ,Convergence and Divergence. London:Vickerman editors, 1995.45 Ibid.
24
According to a World Bank study, liquidity in stock markets
increases long-term economic growth by easing firms’ access to
funds for investment.46 In addition, liquidity plays an important
role in the ability of markets to attract trading volume Liquid
markets also experience faster rates of capital accumulation and
subsequently greater productivity. Hence, it can be noted that
stock market liquidity can positively influence economic growth,
capital stock growth and productivity growth47.
It is thus contended that cross-listings generate improved
liquidity which lowers the cost of capital and increases share
value. Cross-listings lead to an increase in liquidity due to a
pick-up in trading volumes in both the home and foreign stock
market.48 As a result of cross-listing, the home market and the
host market will compete for order flows for the cross-listed
stocks and order flows will shift to the market with lower
trading costs.49
It is established that when local markets enter foreign markets,
liquidity of the domestic markets improves significantly.
Therefore, secondary market liquidity increases following cross-
listing in both the home and foreign market, accompanied by a46 Levine R & Zervos S Stock Markets, Banks and Economic Growth (1996) 44 World BankWorking Paper No.44. 47 World Bank,Building institutions for markets, Washington, DC, The World Bank, (2002).48 Ibid.49 Zingoni, T. ,Regional integration in East Africa- towards a united state of Africa (unpublishedPhD Thesis,University of Stellenbosch, Stellenbosch, USA, 2010.
25
reduction in trading costs and a narrowing of bid-ask spreads in
the home market.50
The cross-listings of emerging stock markets to developed stock
markets increases domestic prices by enhancing the ability of the
domestic stocks to provide diversification and liquidity, and
transfers a segmented local equity market to an integrated market
with high liquidity and market capitalisation.51 For example,
Domowitz et al., based on a study of Mexican firms, submits that
cross-listings increase liquidity as long as the advantage of
being traded in a more liquid market outweighs the disadvantages
of order flow migration.52
Greater liquidity is associated with increased visibility,
greater analyst coverage, improved earnings forecasts, and
overall better investor recognition. Cross-listings result in
reduction of transaction costs for investors through gains in
market liquidity.
In contrast, cross-listings may not always enhance liquidity, due
to the potentially offsetting impact of market fragmentation. It
is argued that liquidity may suffer in both the domestic and the
foreign market if inter-market information linkages are poor.
Order flow migration from the domestic to the foreign market50 Ibid.51 Ibid.52 Domowitz I, Glen J & Madhavan A., ‘International Cross- Listing and orderFlow Migration Evidence from Emerging Market’ ,Journal Of Finance , 1998,p. 53.
26
after cross-listing, can, however, reduce the liquidity of the
listed shares in the domestic market.53
Cross-listing is a dynamic and destabilizing force that can moved
liquidity from local exchanges to international markets, thereby
impelling a consolidation among market centres. Nevertheless,
cross-listings result in improved liquidity which is the major
reason why domestic markets participate in cross-listings.54
I.1.3. 3 Increase Visibility
The quest for increasing visibility of stock exchanges is the
principal reason that drives domestic markets to participate in
cross-listings. The putative benefits of increased visibility in
the host country go well beyond the expected increase in
shareholder base. Local capital markets are attracted to cross
lists to larger markets, insofar as they provide access to a
larger pool of potential investors.55
Notably, being cross-listed on a larger stock market confers a
reputation upon a domestic stock market. In addition, to greater
demand for its stock, cross-listings provide a stock market with
greater access to foreign money markets and makes it easier to
sell debt there.
53 Ibid.54 Shaw, E.S. ,Financial Deepening in Economic Development. New York: Oxford UniversityPress, 1973.55 Ibid.
27
Increased visibility can also boost local stock market marketing
efforts, by broadening product identification among investors and
consumers in the host country. Evidence shows that cross-listings
enhance the visibility of a market and signal to customers and
non-investor stakeholders that the market has become a global
player.56
For example, Daimler-Benz, a German firm cross-listed on the NYSE
in 1993 and this cross-listing gave it direct access to the
largest and most dynamic stock market in the world; as a result
it became the first firm in the world to have a truly global
share. It is established that visibility of stock exchanges, as
measured by analysts and media coverage, increases around the
time of cross-listings.57
Smith and Sofianos analyzed the effect of the New York Stock
Exchange (NYSE) listings on the liquidity of one hundred and
twenty eight non-US stocks and found that, after the cross-
listing, the average annual turnover ratio in the domestic market
increases from 65% to 89%.58
Bancel and Mittoo, in a survey of 305 European companies cross
listed on foreign exchanges, report that the most perceived
benefit of cross-listing is the increased visibility and56 Ndebbio, J. ,Financial deepening, economic growth and development: Evidencefrom selected sub-Saharan African countries. African Economic Research CconsortiumResearch papers no 142, Nairobi, Kenya: Regal Press, 2004.57 Ibid.58 Smith K & Sofianos G., The Distribution of Global Trading In NYSE-listed Non-U.S. Stocks(1996) NYSE Working Paper 96-06.
28
prestige. A cross-listed market becomes more credible by
providing information to the local capital market and, in turn,
this continuous flow of information allows the capital market to
make faster and more accurate decisions.59 Therefore, firms and
domestic markets participate in cross-listings in the quest for
increasing visibility of stock exchanges and firms.
I.1.3.4. Financial Gains
Firms and domestic markets participate in cross-listings for
financial gain motives. Thus, cross-listing is regarded as a
means for lowering a market’s cost of capital, that is, for
enabling markets to get more money from investors when they offer
their stock to the public.60 It is noted that this effect stems
from segmentation gains and diversification gains.
Segmentation is whereby foreign listing allows the local stock
markets to become part of the global portfolio. Moreover, cross-
listings bring foreign stocks closer to investors and offer
several other straightforward advantages that stem from lower
transaction costs.61
59 Bancel F & Mittoo U., ‘European Managerial Perceptions of the Net Benefitsof Foreign Stock Listings’ European Financial Management , 2001,p. 760 Ibid.61 Ibid.
29
Stulz submits that cross-listings provide financial gains by
enabling markets to get more money from investors when they offer
their stocks to the public. It is evident that cross-listed
domestic markets benefit from a lower cost capital and raise more
external funds after they enter the foreign markets.62
However, criticism leveled against market segmentation is that,
it cannot explain the time-series pattern of listings. For
instance, with greater market integration over time, net benefits
of a listing should diminish since the cost of capital for
companies is increasingly determined globally. Hence, it is
argued that there should have been a reduction in cross-listings
instead of an increase.63
I.1.3.5. Marketing Motivations
Another reason that pushes domestic markets and firms to
participate in cross-listings is marketing motivations. It is
claimed that cross-listings creates greater market demand for the
market’s products as well as its securities. Domestic markets do
cross-list their capital markets as a tool to signal their
transparency and private information; hence, they also try to
deliver a positive signal of capital markets’ value to outside
62 Stulz R ‘Globalisation, corporate finance, and the cost ofcapital’ ,Journal of Applied Corporate Finance , 1999,p.1263 Ibid.
30
investors that they are high-value or high-growth capital
markets.64
Cross-listings attract positive publicity in the foreign market.
However, a good marketing campaign may bring about the same
outcome. Therefore, it is evident that the drive for marketing
motivations is one of the reasons domestic markets and firms
participate in cross-listings.65
I.1.3.6. Bonding
Cross-listing in a foreign market acts as a bonding mechanism
used by firms that are incorporated in a jurisdiction with poor
investor protection and enforcement systems to commit themselves
voluntarily to higher standards of corporate governance.66 In
this way, firms attract investors who would otherwise be
reluctant to invest.
Bonding refers to the costs of liabilities that an agent or
entrepreneur will incur to assure investors that it will perform
as promised, thereby enabling it to market its securities at a
higher price. The bonding hypothesis suggests that cross-listings
help capital markets to improve their corporate governance and
64 McKinnon, R., Money and Capital in Economic Development, Washington, DC: BrookingsInstitution, 1973.65 Ibid.66 Kose, M. ,Effects of financial liberalization on developing countries: some empiricalevidence,Washington DC, International Monetary Fund, 2003.
31
protect minority shareholder interests by reducing the agency
costs of controlling shareholders.67
In addition, bonding mechanisms also include submitting to
reputational intermediaries in the target jurisdiction, such as
securities analysts, investment bankers, auditors and exchanges.
Cross-listings involve bonding, which causes markets to adhere to
superior regulatory and governance standards.68
Firms often cite the desire for improved corporate governance as
one of the motivations for cross-listings on foreign exchanges.
Fernandes and Ferreira suggest that, an improvement in governance
stimulates investors’ incentives to collect private information
and thereby work to make stock prices more informative.
Conversely, an improvement in price information may be one
channel through which a cross-listing attenuates agency problems
between managers and shareholders.69
In doing so, markets provide a clear signal to shareholders that
they intend to abide by higher standards than they would
otherwise do in their home market. Thus, it is evident that the
increased disclosure and monitoring associated with the cross-
67 Ibid.68 Ibid.69 Fernandes N & Ferreira M ‘Does International Cross-Listing Improve theInformation Environment?’ Journal of Financial Economics , 2008,p.88.
32
listing acts as a bonding mechanism for controlling shareholders
for less expropriation of market resources.70
Doidge, show that cross-listed markets are valued more than non
cross-listed markets because-the higher disclosure requirements,
which usually occur in cross-listings programmes, reduce the
opportunity to extract private benefits for controlling
shareholders. At the same time the bonding hypothesis will
constrain insiders of the cross-listed markets from trading on
private information, particularly if foreign legislation is
tighter than the domestic insider trading rules.71
Cross-listings can be a tool for markets to signal to their
investors that they are more willing to protect minority rights
as corporate governance rules are stronger abroad. Thus, it is
argued that markets in weaker protection for minority shareholder
countries are more likely to bond themselves by cross-listing in
markets with stronger protection for minority shareholders, such
as the NYSE.72
Cross-listing in a country with better accounting standards
allows the market to pre-commit to greater transparency and
thereby reduce the monitoring costs of its shareholders and their
required rate of return. Litch contends that the bonding70 Ibid.71 Doidge C, Karoyli G & Stulz R., ‘Why are foreign firms that are listed inthe U.S worth more’ ,Journal of Financial Economics , 2004,p. 71.72 Ibid.
33
hypothesis is completely unfounded, and asserts that instead of
bonding most issuers of foreign securities may actually be
avoiding better governance. Therefore, firms participate in
cross-listings because of enhanced corporate governance and
bonding associated with cross-listings.73
I.1.3.7. Increased Analyst Coverage
It is important to note that an improved information environment
associated with cross-listings is one of the reasons why domestic
markets and firms are participating in cross-listings. Ammer et
al. submits that information disclosure provides the primary
influence on foreign cross-listing shareholding.74
Thus, the better information environment is associated with the
increased returns and the higher valuation of the cross-listed
market. One strand of literature suggests that more analyst
coverage and more accurate earnings forecasts indicate an
improved information environment.75
Hence, it is observed that the analyst coverage hypothesis, which
predicts that an increase in trading activity resulting from
cross-listings induces entry of analysts. Furthermore, cross-
73 Ibid.74 Ammer J, Holland S & Smith D et al., Look at Me Now: The Role of Cross-Listing inAttracting U.S. Investors International Finance Discussion Paper No. 815, 2005. 75 Kasekende, L., and Ng‘eno, N. ,Regional integration and economic integration in Easternand Southern Africa. Macmillan Press Ltd, London, 2000.
34
listings bring the cross-listed markets to the attention of more
investors and lead to more analyst and media coverage.76
Also, Ahearne et al. contend that cross-border listings mitigate
the information barriers by stimulating local market media and
analyst exposure in the foreign market.77 Baker et al. points out
that, cross-listings on the NYSE are associated with greater
analyst coverage and heightened media attention.78
Analysts can reasonably be viewed as financial watchdogs that
should be at least as skilful as public regulators in uncovering
financial chicanery, and hence a market that subjects itself to
their scrutiny is arguably bonding its promise to make full and
fair disclosure. Similarly, a recent study finds that as foreign
stocks cross-list in the United States, they obtain significantly
increased coverage by securities analysts and, as an apparent
result, forecasts of their future earnings become more accurate
relative to forecasts of markets that do not cross-list.79
Furthermore, market value increases in direct response to
increased analyst coverage. The improvements in a market’s
information environment provides investors with more public
76 Ibid.77 Ahearne A, Griever W & Warnock F ‘Information Costs and Home Bias: Ananalysis of U.S Holdings of Foreign Equities’ ,Journal of International Economics ,2004,p. 62. 78 Baker K, Nofsinger J & Weaver D ‘International Cross-Listing andVisibility’ ,Journal of Financial and Quantitative Analysis , 2002,p. 37.79 Ibid.
35
information, allowing them to better evaluate the impact of
firms’ investment decisions on future cash-flows.80
Lang et al. show that the earnings forecasts of cross-listed
capital markets are superior to those that do not cross-list.
This increase in information associated with cross-listings is
helpful in making the capital market attractive to more potential
buyers.81 It is submitted that cross-listings is a vehicle to
reduce information asymmetries between market insiders and
outsiders through more disclosure.
Hence, it is clearly evident that countries participate in cross-
listings because of the improved information environment
associated with increased analyst and media coverage markets on
capital market reactions to the cross-listing decisions.82 This,
in turn, may lead to lower cost of capital.
Even though, the evidence so far suggests a positive link between
the information environment and cross-listing, the association is
not clear-cut for various reasons. Sarkissian and Schill argue
that overseas cross-listings reflect rather than reduce the
80 Ibid.81 Lang M, Lins K & Miller D ‘ADRs, Analysts and Accuracy: Does Cross Listingin the U.S Improve a Firm’s Information Environment and Increase MarketValue?’ ,Journal of Accounting Research , 2003,p. 41 82 Ibid.
36
information barriers that lead to investor home bias in
international investment.83
Rather, they observe that countries tend to cross-list in those
foreign markets where the information barriers are already low;
for instance countries that share large trade, cultural ties, and
a similar industrial structure as their home market and are close
geographically.
Again, it is contended that analyst activity is not a good proxy
for private information trading because analysts are showcasing
devices and do not possess significant private information.84
Nevertheless, increased analyst coverage fosters the production
of industry and market wide information and dampens market-
specific return variation.85
I.2. Theoretical framework on EAC
The free circulation applies on goods as the main subject of the
policy of the Regional integration and a motor to commerce which
is considerable in the East African Community development, such
that it the present section86.It’s our duty to precise certain
notions about history, legal capacity and objectives of EAC,
83 Sarkissian S & Schill M., ‘The Overseas Listing Decision: New Evidence ofProximity Preference’ , Review of Financial Studies , 2004,p.17. 84 Ibid.85 Ibid.86 Ibid.
37
fundamental principles, Organs and institutions of the Community
which operate on the principle of free circulation of goods.
I.2.1.Legal capacity of the Community
The most significant attribute of the Treaty is the establishment
of the East African Community. The Community is established in a
manner reflective of intended systematic development of a Customs
Union and a Common Market as transitional stages to an integral
parts thereof, subsequently a Monetary Union and ultimately a
political federation87.
The Treaty provides that the Community shall be a body corporate
with perpetual succession. The Community as a body corporate
shall have power to perform any of the functions conferred upon
it by the Treaty. It can also do all things including acquiring
and managing property and borrowing which are necessary or
desirable for the performance of those functions88.
I.2.2.The objectives of the Community
The Community aims at widening and deepening co-operation among
its Member States through the development of political and
program in various fields for their mutual benefits with a view
to achieving economic, social and political integration.
87 Ibid.88 S ,WANGWE, “Proposals to Address Economic and Social Disparities in the East African Community”Dialogue on the Regional Integration in East Africa, East African Dialogue Number4, EAC, Arusha, 2001.
38
The main aspiration is the creation of a bigger market in the
region whose purpose will include attraction of investments,
expansion of business, encouragement of competition and
innovation
In the fulfillment of this objective, the Community shall ensure
the fulfillment of article 5 of the EAC objectives among which
are:
The promotion of sustainable growth and development of the
Partner States by the promotion of a more balanced and
harmonious development of the Partner States;
The strengthening and consolidation of co-operation in agreed
fields that would lead to equitable economic development
within Partner States and which would in turn raise the
standard of living and improve the quality life of their
population.
This requires giving up part of their sovereign rights in several
aspects of developments including the political, economic, legal
and social economic ones.
Besides to what has been said, the East African Community
operates on the basis of a five year development strategy.
I.2.3.The fundamental principles of the Community
39
The fundamental principles of the Community pursuant to art 6 of
the EAC Treaty; the principles that shall govern the achievement
of the objectives of the Community among them are:
Mutual trust, political will and sovereign equality;
Peaceful co-existence and good neighborliness;
Peaceful settlement of disputes;
Equitable distribution of benefits;
The principle of complementarily and
The principle of asymmetry89.
I.2.4. EAC as a regional integration entity
Regional integration can be defined by cooperation between
countries in one or two or many areas of political, economic,
social, cultural, technological development, defense, security
and legal aspects. The cooperation is for mutual benefit of all
parties and it is guided by a legal framework in form of an
agreement or pact or treaty.
In other words, regional integration is the process of
overcoming, by common accord, political, physical, economic and
social barriers that divide countries from their neighbors, and
of collaborating in the management of shared resources and common
89 Art 11 of the E.A.C Treaty.
40
regional goods.90 Regional integration is therefore the joining
of individual states within a region into a larger whole.
The overall objective of regional integration is to attain
economic development. It creates environment where bigger markets
permit exploitation of economies of scale while factor The
assessment of mobility across borders and the coordination and
harmonization of monetary and fiscal policies would facilitate
faster economic growth and greater welfare for the participating
countries.91
As far as the EAC is concerned, the creation of this regional
entity stems from the desire by the Governments of the EAC
countries to improve the standard of living of the population
through increased competitiveness, value-added production, trade
and investment. This is aimed at promoting the sustainable
development of the region with a view of creating a prosperous,
internationally competitive, secure, and stable and politically
united region. The five EAC Partner States are keenly aware that
by pooling their resources and potential, they are in a better
position to realize and sustain common development goals more
easily than by national efforts alone.92
90 EUROPEAN UNION, Regional integration for development in African, Caribbean and PacificCountries(ACP): Summaries of EU legislation, quoted by J.KAZAIRE, The Legalimplications of implementing the East African Community Customs by Rwanda, LLM Thesis, NUR,Faculty of Law, 2008/2009, p.791 Economic commission for africa, op.cit. p.192 AFRICAN UNION, Status of integration in Africa (SIA), second edition, April 2009 :http://www.africa union.org/root/ua/conferences/2009/mai/ea/07-08mai/status
41
In fact, this overall aim of the creation of the EAC is clearly
indicated in the Treaty for the establishment of the EAC, when
defining its objectives summarized as follows:
a) The attainment of sustainable growth and development of the
Partner States by the promotion of a more balanced and harmonious
development of partner states;
b) The strengthening and consolidation of co- operation in agreed
fields;
c) The promotion of sustainable utilization of natural resources
and the taking of measures that would effectively protect the
natural environment of the Partner States;
d) The strengthening and consolidation of long standing
political, economic, social, cultural and traditional ties and
associations between the people of the Partner States;
e) The mainstreaming of gender in all its endeavors and the
enhancement of the role of women in cultural, social, political,
economic and technological development,
f) The promotion of peace, security and stability within, and
good neighbourliness among, the Partner States
g) The enhancement and strengthening of partnership with the
private sector and civil society.
%20of%20integration%20in%20africa%2027-04-09.pdf
42
As we can see, regional integration implies mainly an open,
liberal trade regime, minimizing barriers to trade as well as
implementing policies to encourage foreign direct investment,
adopting policies to promote competitive enterprises, exports and
entrepreneurship.93
I.2.5. The process of regional integration
Generally, regional integration follows successive stages,
namely: the Preferential Trade Area (PTA), the Free Trade Area
(FTA), the Customs Union (CU), the Common Market (CM), and the
Political integration. But this is not absolute for all
integration systems. This is the case for the EAC whose phases of
its integration started with the CU, as it appears in the Treaty
establishing the East African Community which stipulates that’’
Partner States undertake to establish among themselves and in
accordance with the provisions of the Treaty, a Common Union, a
common Market, subsequently a Monetary Union and ultimately a
Political Federation’’94
Before entering into details of the implementation of the
different stages of the EAC integration process, it is important
to present briefly the two first stages of regional integration
in the systems where integration agreements establish them. This
is the case for the SADC grouping where some Southern Africa’s
93 National EAC Policy, Strategy and implementation plan( draft), 23 September2011.p.694 EAC Treaty , art 5(2).
43
countries launched a FTA on 1/8/2008, and the COMESA which is a
successor of the PTA for the Eastern and Southern Africa, which
launched the FTA in 200095 .
I.2.5.1. The Preferential Trade Area (PTA)
A preferential Trade Area is the first stage of economic
integration. It is a trading bloc which gives preferential access
to certain products from the participating countries. This is
done by reducing tariffs, but not abolishing them completely96.A
preferential trade area (or PTA) can be established through a
trade pact or agreement.
I.2.5.2.The Free Trade Area ( FTA)
During this stage, Member States undertake removal of tariff on
goods, quotas and preferences on most or all goods and services
between them. With Free trade Area, benefits become reciprocal in
nature. However, Members States maintain their own foreign
cooperation policies. Therefore duties and other restrictions on
trade are eliminated between its members but each member
maintains its own level of tariffs on imports from outside the
FTA.
95 J.KAZAIRE, op.cit.pp.24-26.96 X., “Preferential Trade Area’’, available athttp://www.answers.com/topic/preferential-trading-area, accessed on 3th
/04/2015.
44
I.2.5.3.The Customs Union and Common market
In the integration process, Customs Union and Common market are
the pillars of the economic integration. A Customs Union builds
on a free trade area characterized by a removal of tariff and non
tariff barriers in order to create the most favorable environment
for the development of regional trade. This implies establishing
a common external tariff (CET) and import quotas on products
entering the region from third-parties countries, as well as
possibly establishing common trade remedy policies such as
antidumping and countervail measures.97
Customs Union is a partial form of economic integration,
intermediate between free trade zone, which allows mutual free
trade but without common tariff system, and common market, which
both utilize common tariffs and allow free movement of resources
including capital and labor between members. As a free trade area
with common external tariff, the participants countries set up
common external trade policy, and a common competition policy to
avoid competition deficiency.
Regarding the Common market, it is a deeper form and economic
integration where the partner states attain free movement of
goods, free movement of capital, free movement of labor, free
movement of services, fiscal policy harmonization and
97 M.HOLDEN, Stages of Economic Integration: from Autarcy to Economic Union, available athttp://dsp psd.pwgsc.gc.ca/Collection-R/LoPBdP/inbrief/prb0249-e.htm ,accessed on 3th /04/2015.
45
administrative and legal structures. Common market creates a
single market where goods and services have no restrictions to
move between the partner states. During this phase of economic
integration, the Community establishes laws aiming at
facilitating movement of labor and regulates unfair trade
practices as well as industrial harmonization.98
The principal advantage of establishing a common market is the
expected gains in economic efficiency. As M. HOLDEN put it, with
unfettered mobility, labor and capital can more easily respond to
economic signals within the common market, resulting in a more
efficient allocation of resources.99
I.2.5.4.The Monetary Union
A monetary union builds on a common market, monetary
harmonization, common currency, a single Central Bank, and the
establishment of related financial institutions.
The main advantages of a monetary union are the following100:
4. Reduction even elimination in transaction costs associated
with currency exchange counts;
5. Consolidation of the single market;
98 J.KAZAIRE,op.cit.p.1699 M. HOLDEN, op.cit. p.20.100 M. GRABNER, the Costs and Benefits of Monetary Union, June 2003, available onhttp://www.econ.ucdavis.edu/graduate/mgrabner/research/monetary_union.pdf,accessed on 3th /04/2015.p.10
46
6. Price convergence and price stability.
I.2.5.5.The Political Federation
The political federation is the ultimate stage of regional
integration;101 it is characterized by a supranational authority
that governs the Community, with one President, one constitution,
and one foreign policy.102
Since the EAC Monetary Union and the political integration are
not yet implemented, the researcher don’t intend to develop them
further; we wish instead to go into details of the current stages
of the EAC integration being implemented , namely the Customs
Union and the Common Market.
CHAPTER II.
CHALLENGES AND LESSONS
101 E.MUGISA, C. ONYANGO , P. MUGOYA, An Evaluation of the Implementation and Impact of theEast African Community Customs Union, final report, 2009, available onwww.eac.int/customs/index.php?option=com_docman, accessed on 3th /04/2015.p.2102 J.KAZAIRE, op.cit.p.17.
47
EAC is a region of five countries with diverse cultures,
languages and economies. Getting the consensus on key issues that
must be resolved in establishing a regional stock exchange is
likely to be a daunting task.
East African Community attaches great importance to financial
sector development in pursuit of their regional integration goal.
This is exemplified by their commitment to the creation of an
enabling environment within which the private sector can flourish
and generate faster growth in individual countries.
One of the pillars of this effort as enumerated in Chapter 14 of
EAC treaty is the pursuit of financial integration with a view to
maximizing the ability of financial sectors to mobilize resources
and efficiently allocate them to the most productive sectors of
the respective economies.
A major gap in the provision of financial services to the EAC
private sector is the lack of long-term finance. Financial
systems in the EAC are dominated by commercial banks, which
typically have not been reliable sources of long-term capital.
Non-bank sources of medium to long-term financing for example,
leasing, mortgage and contractual savings are also
underdeveloped.
48
Hence, a principal component of financial sector development
efforts in the EAC is the expansion of capital markets in the
Community, with the objective of developing long-term debt and
equity capital for the private sector.
Integration of the capital markets means that investors will buy
and sell securities in any East African stock market without
restriction; participants in capital markets will freely offer
their services throughout East Africa and those identical
securities will trade at essentially the same price across
markets after foreign exchange adjustments.
The EAC treaty signed in November 1999, provided for the
establishment of a Customs Union, a Common Market, a Monetary
Union and ultimately a Political Federation. Only the capital
market has achieved minimal integration to date, with two Kenyan
firms – East Africa Breweries and Kenya Airways having been
listed in the three stock markets.
The prosperity of these two cross border companies shows that
this should be encouraged. However, it will not only lead to
lower prices for all financial services, but also enhance risk-
return frontiers for investors who previously faced restricted
opportunities. They will now diversify their investments to a
greater extent. Capital market integration will also lead to more
efficient, more liquid and broader securities' markets.
49
Generally, such a capital market will allow residents of the
three countries to pool risks, impose discipline upon
governments, and allow countries with very little domestic
savings to borrow abroad so that they can pursue growth policies.
For corporations it will lead to cheaper financing alternatives
given the lower transaction costs.
III.1. Legal framework
The current EAC treaty contains articles which provide for the development of capital markets within East Africa the following chapter analysis the possibility for a capital market legislationin EAC
III.1.1. EAC Treaty and Capital Markets
The current EAC treaty contains articles which provide for the
development of capital markets within East Africa.103 Member
nations are permitted under the treaty to harmonize their
policies on cross-border listing, to tax capital markets
transactions, and to promote cooperation among regulators and
exchanges.
Thus far, the most concrete development has been the
establishment of a customs union in 2005, in an effort to
increase the very modest levels of intra-regional trade; followed
by the starting up of a common market in 2010. Since 2005,
members have implemented a common external tariff, but due to
overlapping membership of other regional organizations such as
103 Article 85 of the East African Community Treaty of 1999.
50
COMESA and SADC, exceptions have been made so that tariffs apply
to countries who are not members of these organizations.
There is a strong commitment among the member nations of East
Africa to develop a regional capital market. Many of the EAC
nations have already harmonized their legal and regulatory
structure in anticipation of integration. The development of an
East African Regional Exchange is heavily anticipated though not
yet a reality. The proposed collaboration would allow companies
and investors from any single East African nation to participate
in the exchange. There are provisions within the EAC Treaty for
the harmonization of laws, should such a merger occur.104
In the EAC, the intent to harmonize market infrastructure was
evident, even before the establishment of the community. The
capital market authorities of Kenya, Tanzania, and Uganda
established the East African member states Securities Regulatory
Authority (EASRA) in 1997 to serve as a coordinating body for
capital market cooperation and integration.
Partial capital account liberalization has been implemented and
cross-listing has been encouraged. The EASRA agreed on an
approval procedure for cross-border listings in the EAC in 2000
and compiled common debt ratio criteria for those wishing to
issue debt securities. November 2006 saw the signing of a
104 Art 85 of EAC Treaty of 1999.
51
memorandum of understanding (MoU) between the NSE and USE on mass
cross-listing.
The MoU will allow listed companies in both exchanges to dual-
list. This will facilitate the growth and development of the
regional securities markets. Some of NSE’s listed companies that
have dual-listed include: Kenya Airways, East Africa Breweries
and Jubilee Holdings.105 Benefits that accrue to cross-listed
companies include: access to a wider capital base across the
region, a regional presence, resulting in a wider acceptance and
recognition of the company brand across the region by company
stakeholder, and the prestige of a regional listing. However,
cost considerations seem to have prevented several companies from
availing themselves of this cross-listing facility.106
With respect to the integration of capital markets, the areas of
harmonization and co-operation as outlined in Article 85 of EAC
Treaty of 1999 can be categorized into three main areas, namely:
policy formulation; regulatory and legal harmonization; and
structural and institutional matters. The Capital Markets
Development Committee (CMDC), which was established in 2001, is
the driving force behind the integration of capital markets
within the EAC.107
105 Mwenda KK ,Legal Aspects of Financial Services Regulation and the Concept of a Unified RegulatorWashington DC: The World Bank, 2006.106 Ibid.107 Ibid.
52
It comprises representatives from member states’ central banks,
securities markets regulators, ministries of finance, stock
exchanges, and insurance and pension sector regulators. Its most
ambitious goal is to establish a regional stock exchange within
the EAC with trading floors in each of the member states through
the harmonization of capital market policies on cross-border
listing, foreign portfolio investors, taxation of capital market
transactions, accounting, auditing and financial reporting
standards, commissions and other charges.108
It has achieved a great deal of progress: harmonized stock
trading systems, which allow residents of member states to
acquire and trade financial instruments freely within the EAC,
now exist. Hence, its interim responsibility is to ensure that
national authorities adhere to the harmonized stock trading
systems. Additionally, three of the five member states, Kenya,
Tanzania and Uganda, have harmonized their trading rules around
the standards set by Kenya’s Capital Market Authority.109
II.1.1.2 Cross-border listing in EAC
Cross-border listing has gained significance over the past few
years since the signing of the East Africa Community treaty in
1999. The development of cross-listing across national stock108 African Development Bank Group, Financial Sector Integration in Three Regions of Africa:How Regional Financial Integration Can Support Growth, Development, and Poverty Reduction,2010,Tunis: Sildar.109 Ibid.
53
markets in Tanzania, Kenya, Uganda and Rwanda is a milestone in
the EAC’s drive for regional integration. The three East African
stock exchanges, namely the NSE, USE, DSE, and the Rwanda Stock
Exchange, have established a working relationship among them in
the spirit of integrating and developing capital markets in the
EAC.110
The exchanges operate under the umbrella of the East African
Stock Exchanges Association (EASRA). EASRA is a member of the
Capital Markets Development Committee of the EAC. Other members
of the CMDC include EASRA and the East African Stock Exchange
Brokers Association (EASBA). The three associations have a common
objective of integrating the three markets in order to achieve
growth of the market with the ultimate aim of economic union in
the EAC.111
The three markets are aiming at achieving this objective in a
systematic, coordinated manner that will facilitate the
availability of listed securities in the three markets
simultaneously. To this end the East Africa Stock Exchanges
Association (EASEA) has determined mass cross-listing as the key
activity that will achieve this objective.
Furthermore, EAC countries have pursued the development of their
capital markets through regional integration. In the Treaty for
110 Mwenda KK ,op.cit,p.12.111 Ibid.
54
the Establishment of the East African Community, the member
states committed to establishing a common market with free
movement of capital. Specifically, the treaty calls for: the
removal of controls on capital transactions among member
countries.112
Kenya, Tanzania, and Uganda share a common legal tradition, based
on British common law, which has enhanced cooperation among the
three countries. Due to Kenya’s advanced status in capital market
development, the legal and regulatory frameworks in Tanzania and
Uganda were largely designed with the objective of minimizing
deviations from the Kenyan securities law so as to facilitate the
regional integration agenda.113
Disclosure rules and financial and accounting standards are also
being reformed, and a framework developed by the Kenyan Capital
Market Authority has been recommended for adoption throughout the
EAC with appropriate modifications in individual jurisdictions114.
The fact that all these three countries are members of the EAC,
and that they share a common colonial past, as well as a similar
legal framework, makes it easier for the stock markets concerned
to pull together. The integration of the three stock exchanges112 Article 86 of the EAC Treaty 1999. 113 Moss T Adventure Capitalism: Globalisation and the Political Economy of Stock Markets inAfrica ,London: Palgrave Macmillan, 2003.114 Ibid.
55
concerned was achieved more easily considering the good work done
upstream in computerizing their transactions systems and
harmonizing their regulatory and legislative frameworks.
Nonetheless challenges for capital markets integration exist
within the EAC, including: formal and informal national
restrictions on cross-border investment; lack of harmonization of
cross-listing rules;115 differences between the treatment of
capital gains within the three main countries, making it more
attractive to invest through one market rather than another;116
and no harmonization of accounting and reporting standards.
All this is further compounded by the absence of a regional
dispute resolution mechanism for cross-border disputes, meaning
that any dispute must be resolved slowly and expensively through
the national courts. As such, capital markets integration would
be achieved within the EAC only to the extent that integration
policies agreed at regional levels by the national supervisory
authorities are implemented at domestic levels.117
Therefore, the EAC has by far the strongest proposed framework
for capital market integration and harmonization among all the
115 Tanzania, which has the most stringent cross-listing rules, requires acompany to obtain special approval from the Bank of Tanzania in order tocross-list. 116 Listed companies receive tax concessions in Kenya, making that market moreattractive. 117 Salami I .,Financial Regulation in Africa: An Assessment of Financial Integration Arrangements inAfrican Emerging and Frontier Markets ,England: Ashgate Publishing Limited, 2012.
56
Regional Economic Communities (RECs) in Africa. It has also been
branded the model for African capital markets integration in
certain quarters. Thus, this process is one of the most promising
models of stock exchange integration in the light of the above-
mentioned favorable conditions.118
II.1.2.Current Market Structure of EAC Capital Markets
This section explain the current structure of EAC Capital market,debt markets, stock markets ,capital account liberalization and the harmonization of Market infrastructure.
II.1.2.1.Debt Markets
All five EAC countries operate government debt markets at
different stages of development. Central banks in all the EAC
countries hold auctions under different frameworks) to sell
treasury bills and bonds on behalf of the governments, as
instruments for monetary and fiscal policy implementation.119
These auctions are open to non residents except in Tanzania,
where non residents are prohibited from holding government
securities. Issued securities are traded over-the-counter and/or
in local stock exchanges, although the secondary markets are
largely inactive.
118 Ibid.119 Gaertner, M., S. Sanya, and M. Yabara, “Assessing Banking Competitionwithin the Eastern African Community,” unpublished manuscript ,Washington:International Monetary Fund, 2011.
57
Size of the market considerably differs among the countries.
Kenya leads the region, with government securities outstanding at
27.3 percent of GDP and with maturities of up to 30 years.
Tanzania and Uganda follow with amounts outstanding of 10.3
percent and 8.1 percent of GDP, respectively. These two countries
succeeded in extending the maturities of treasury bonds to 10
years in the 2000s. Markets in Burundi and Rwanda were recently
instituted120.
The Central Bank of Burundi started auctioning government
securities at end-2006, with maturities now up to 10 years.
Rwanda launched its over-the-counter (OTC) securities market in
2008 and started listing government securities there. A first
five-year treasury bond was marketed in Rwanda in 2010, and the
OTC market was converted to a stock exchange in January 2011.
While the size of the market is relatively large in Burundi, at
8.5 percent of GDP, the market in Rwanda is only 2.2 percent of
GDP.121
Corporate bonds are issued in the EAC countries except for
Burundi and traded at local stock exchanges. The markets,
however, are at nascent stages and are inactive, with local
companies mainly relying on commercial bank financing. The
amounts outstanding are negligible when measured as percent of120 African Development Bank (AfDB), Financial Sector Integration in Three Regions of Africa,Tunis: African Development Bank Group, 2010.121 The relatively large scales of securities outstanding in Tanzania andBurundi partly are due to central bank holdings of government securities.
58
GDP; issuers are limited to financial institutions, especially
foreign affiliated institutions. Transactions in the secondary
markets rarely take place even in the stock exchange of Kenya,
the Nairobi Stock Exchange (NSE).122
II.1.2.2.Stock Markets
Disparities across the region are larger in stock markets than in
debt markets. The NSE, established in 1954, has the longest
history and is by far the largest in the region. It has 55 listed
companies, reaching market capitalization of 46 percent of GDP as
of end-2010. The Dar es Salaam Stock Exchange (DSE) in Tanzania
and the Uganda Securities Exchange (USE), instituted in the late
1990s, have market values of about 15 percent of GDP123.
The Rwanda Stock Exchange (RSE) has only six companies listed as
of April-2015, with transactions seldom taking place. There is no
stock exchange in Burundi, and capital is raised mainly from
commercial banks.
II.1.3.Regional initiatives to integrate the EAC Capital Markets
EAC countries have pursued developing their capital markets
through regional integration. In the Treaty for the Establishment
of the East African Community, the member states committed to
122 Adelegan, O. Janet, “Can Regional Cross-Listings Accelerate Stock MarketDevelopment? Empirical Evidence from Sub-Saharan Africa,” IMF Working Paper08/281 ,Washington: International Monetary Fund, 2008.123 African Development Bank (AfDB), op.cit,p.11.
59
establishing a common market with free movement of capital.
Specifically, the treaty calls for:
(i) removal of controls on capital transactions among the member
countries (Article 86) and
(ii) harmonization of capital market infrastructure including
regulations, taxation, accounting, trading systems, and cross-
listings of securities (Article 85).124
The common market was officially launched in June 2010, awaiting
full implementation by 2015. The Common Market Protocol requires
legislation by each member to fully implement the common market
by 2015. The annexes to the protocol provide timetables of
actions to be undertaken by each state, including capital account
liberalization.
Liberalizing capital transactions and harmonizing market
infrastructure are essential and natural steps toward capital
market integration. Regulations for cross-border capital
transactions prevent domestic investors from freely participating
in foreign markets and foreign investors from investing in
domestic markets, making barriers to cross-border financial
flows.
Non harmonized market infrastructure hampers cross-border
transactions and constitutes another barrier to capital market
124 Ibid.
60
integration. Because financial transactions are affected by many
factors such as regulatory frameworks, trading systems, and
taxation, harmonization of these market settings is essential in
realizing the law of one price. The ultimate form of capital
market integration is the unification of the entire market
infrastructure, in which all participants can engage in financial
activities across borders in exactly the same way as they do in
their home countries.125
II.1.3.1.Capital Account Liberalization
Although liberalizing capital transactions across a region is the
first step for integrated capital markets, countries’ experience
illustrates that capital account liberalization could be a cause
of a crisis by making an economy vulnerable to external capital
flows. To minimize the adverse effects, countries are advised to
sequence the process of liberalization and advance it along with
comprehensive pro-market reforms to maintain the stability of an
economy.126
Uganda, Rwanda, and Kenya have already liberalized capital
transactions within the region. Uganda was the first to fully
open capital accounts in 1997, as part of a broader package of
market-oriented reforms. Rwanda achieved full capital account
liberalization in 2010.
125 Bank of France, “The Rapid Growth of the Government Securities Markets inSub- Saharan Africa: The Case of WAEMU,” Rapport Zone franc 2006 ,Paris: Banque deFrance, 2006.126 Ibid.
61
Even though restrictions on nonresidents’ investments in domestic
markets remain in Kenya, East African investors are treated as
local investors, meeting the commitment under the treaty. Plans
for gradual removal of capital controls are underway in Tanzania,
while Burundi is lagging
behind. Tanzania partially liberalized capital transactions in
the 1990s, but has not made much progress since then .
The Bank of Tanzania, recognizing the risk of opening a capital
account, is in the process of formulating a plan for the gradual
lifting of capital controls, in accordance with the Common Market
Protocol. In Burundi, where capital markets are the least
developed, the authorities still have significant control over
capital transactions; regulatory frameworks are yet to be
established in some areas.
II.1.3.2.Harmonization of Market Infrastructure
In the EAC, the intent to harmonize market infrastructure was
evident, even before the establishment of the community. The
capital market authorities of Kenya, Tanzania, and Uganda
established the East African Member States Securities Regulatory
Authorities (EASRA) in 1997, with the objectives of enhancing
cooperation among members and advancing the integration of the
markets.
62
Rwanda and Burundi later joined the organization in 2008 and
2011, respectively. The Capital Markets Development Committee
(CMDC), consisting of chief executives of the regulatory
authorities and security exchanges, was established in 2001. It
is a standing committee of the EAC, making policy recommendations
on regulation and integration of the capital markets.127
Cooperation for harmonization is fairly advanced in the EAC,
compared to other regional integration arrangements in the
African continent.128 The EASRA agreed on an approval procedure
for cross-border listings in the EAC in 2000 and compiled common
debt ratio criteria for those wishing to issue debt securities.
The organizations are also taking the lead in taxation of capital
transactions, financial reporting standards, trading systems, and
financial education. The USE has harmonized its listing rules
with those of the NSE, although the number of companies cross-
listed at the EAC stock exchanges is only six as of end- 2010.
Kenya, Uganda, and Tanzania are working toward demutualizing
their respective stock exchanges, and merging them into a single
regional stock exchange in the future.129 Regional initiatives are
127 The committee was reorganized into the Capital Markets Insurance andPensions Committee (CMIPC), with anexpanded mandate covering insurance and pension development.128 Grimm, S., “Institutional Change in the West African Economic and MonetaryUnion (WAEMU) since 1994: A fresh Start after the Devaluation Shock?” afrikaspectrum, 1999, pp. 25‒32.129 The Rwanda Stock Exchange has been demutualized since its inception.
63
ongoing to integrate payment and settlement systems across the
region.
II.2. Challenges for the EAC Capital Markets
Despite the diversified degrees of development, the EAC countries
face the same challenges as other low-income countries in
developing domestic capital markets: low capitalization and
liquidity. Owing to the costs of issuing and listing securities,
issuers in the markets are overly confined to government
entities, former state-owned enterprises, and foreign-affiliated
banks130.
Low income and savings prevent individuals from participating in
the markets, leaving the investor bases heavily dominated by
commercial banks and pension funds. Whereas foreign investors’
transactions occupy fair amounts of total turnovers, available
statistics, though the coverage is restricted, indicate that
nonresident holdings of securities stand at substantially low
levels in the EAC compared to the aggregate of sub-Saharan
Africa. 131
130 an Securities Exchanges Association, African Securities Exchanges Association Yearbook2009. Available via Internet: http://www.africansea.org.131 Data are compiled from the Coordinated Portfolio Investment Surveyconducted by the IMF and are available athttp://www.imf.org/external/np/sta/pi/datarsl.htm. About 75 countriesvoluntarily participate in the survey, reportingcross-border holdings of portfolio investment securities, classified byissuers.
64
From a regional perspective, holdings by EAC investors are only
3.2 percent of total shares in the NSE, indicating intra-regional
capital transactions are still limited, notwithstanding the
authorities’ efforts discussed below. As a result, market size
has remained small, and governments are largely dependent on
external sources of financing, including concessional borrowing.
Low liquidity also is due to the shallow investor bases. Local
commercial banks and pension funds, dominant investors in the
region, generally tend to hold securities until maturity. Market
infrastructure is another impediment to enhancing liquidity of
the markets.
While trading infrastructure consisting of real-time-gross-
settlement systems, clearing houses, and central securities
depositories are all operational with the exception of Burundi,
these systems are yet to be connected outside the borders,
rendering investments by foreign investors costly and time-
consuming. These constraints create rather illiquid capital
markets in the EAC.
II.2.1.Lack of commitment
Another reason for the failure of past regional cooperation
efforts were a lack of commitment. Oftentimes, when politicians
did not see immediate gains from the cooperation, they lost
65
interest. The EAC regional stock exchange proposal could
potentially be met with similar constraints.132
Obtaining the cooperation and serious commitment of all the
parties that would be involved in this endeavor would by no means
be a simple task. The aggressive promotion of the benefits of a
EAC regional stock exchange to governments and nationals of the
different countries would be very crucial in this regard.133
The inherent nature of nation states implies that it is not
uncommon for all regional integration plans to encounter some
resistance at the national government level. Governments may
oppose the idea of relinquishing the symbol of national
sovereignty which a national exchange represents.134 However,
resistance is likely to vary according to the degree to which
sovereignty is relinquished.
In sufficient interest and motivation from within the region
itself’ impedes further stock market development and
regionalization. For instance, the African Stock Exchanges
Association (ASEA) which was formed in 1993 to promote the
development of and cooperation among African exchanges actually
had to cancel its 2001 annual conference scheduled in
Johannesburg due to a lack of sufficient confirmation of132 Mensah S.,Harmonisation Initiative for SADC Stock Exchanges ,Gaborone: USAID SouthernAfrica, 2007.133 Ibid.134 Ibid.
66
attendance from delegates from stock exchanges and governments in
Africa.135
Shortly thereafter, ASEA cancelled the conference. Following the
cancellation, some commentators suggested moving future
conference events to venue sites in Europe as a better means of
showcasing Africa’s capital markets to the West. In 2003, ASEA
joined with the UN Development Programme and the NYSE to host an
African Capital Markets Development Forum in New York, the main
aim of which was to inform US-based institutional investors of
the investment opportunities offered by the African Stock
Exchanges.
Forums such as this could help African participants to showcase
some of the high-performing companies listed on their countries’
exchanges, whilst simultaneously drawing attention towards the
need for more public-private partnerships between large
international companies, African SMEs and international donors to
nurture the growth of nascent African private sectors, create
jobs and contribute to economic growth.136
II.2.2.Overlapping Memberships
Instead of having one strong regional integration body in Eastern
Africa, there are overlapping memberships in the different135 Messrs, Flemin & Balio ‘et al’ Financial Sector Assessment: A Handbook ,WashingtonDC: The World Bank, 2005.136 Ibid.
67
regional groupings-; including COMESA, SACU and SADC. This has
resulted in duplication of efforts and, occasionally,
inconsistent aims in regional integration initiatives-by SADC and
COMESA, in particular. Notably, however, in recent years, COMESA
has defined its role in promoting the regional integration of
stock exchanges as one of building on the prior achievements of
SADC and EAC.137
If market participants are subject to multiple regulators when
they operate in different countries in a region, they are
especially likely to face regulatory uncertainties, complexities,
and increased costs, both directly in having to comply with
multiple regulatory regimes, and indirectly in having to pay for
the many regulators.138 These problems may be evident in all areas
subject to regulatory oversight, and by all types of market
participants. Inappropriate arrangements for cooperation and
mutual assistance between national supervisors can also hinder
capital market integration.139
II.2.3.High Transaction Costs
Transaction costs in African markets are the highest in the
world. This would be an obstacle to regional financial
integration, whenever any element of the cross-border trading
137 Schillinger, Ajulu & Kaunda ‘et al’ Revisiting Regionalism in Southern Africa, Midrand:Institute for Global Dialogue, 2008.138 Ibid.139 Ibid.
68
process faces unnecessarily high costs. Amongst the functions
where such high transaction costs may be evident are cross-border
listings, information dissemination, order routing, trading,
clearing via a central counter-party, and settlement.140
II.2.4.Lack of information
A lack of information about all aspects of capital markets across
a region can obstruct regional integration. This includes
information about regulatory requirements, exchange prices and
quotes, company finances and strategies, investor allocation
policies, or intermediary products and historical records.141
II.2.5.Lack of Public Confidence and Human Resources
Lack of public confidence in the integrity of the securities
markets as a result of distrust of governments and centralized
financial institutions in business transactions is another major
challenge that must be addressed if the regional stock exchange
and individual national markets are to develop credibility. This
is fuelled by the adverse history in most EAC economies of
140 World Bank, Financial Sector Integration in Two Regions of Sub-Saharan Africa Washington DC:World Bank, 2007.141 Ibid.
69
corruption, bank failures and collapse of corporations and
mismanagement of pensioned provident funds.142
There is a strong perception that stock exchanges are linked to
their governments and they suffer from the taint of public
distrust and inefficiencies. For many EAC countries, public
distrust resulting from years of corruption would have to be
overcome before local investors can confidently invest in stock
markets. This will require companies and stock markets to be well
run and clearly managed. Transparency and accountability will
have to be emphasized if the investor’s perception of Africa as a
corrupt continent is to be overcome.143
Regional capital market integration requires dynamic and
effective regulation. Most EAC capital markets lack a robust
regulatory framework. There is scarcity of institutional
investors due to the poor legal regime for the protection of
investors within the EAC region. Contract, property, insolvency,
and secured transaction laws are weak and poorly enforced. 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.
142 Adeloba SS & Dahalan J., ‘An Empirical Analysis of Stock MarketsIntegration in Selected African Countries’ ,Euro Economica, 2012, pp.16-17.143 Ibid.
70
The enforcement of rules and regulations is increasingly
challenged by weak judiciary systems making it difficult to
obtain convictions when rules are violated. Thus, securities
regulators can work hard to administer the law and identify
violators but the normal process of enforcement may not be
equipped to apply the new laws. The judiciary in many countries
is plagued with weaknesses which include: politicization and lack
of independence; corruption and low remuneration; too few judges,
staff and lawyers; weak calendar management; sanctions not
specified or limited; ideology; and ignorance of law and
markets.144
Therefore, these legal issues need to be addressed at member
state level if there is to be an increase in the number of
institutional investors participating in the regional stock
exchange. There is a lack of public awareness hence the limited
public participation. The public is reluctant to engage in
securities purchases or trading because they do not understand
stock exchange operations.145
Most schools and universities in EAC’s economies do not have
programmes and courses related to capital markets. Accordingly,
people who invest their funds in the capital markets are either
144 Aduda J, Masila J & Onsongo E ‘The Determinants of Stock MarketDevelopment: The Case for the Nairobi Stock Exchange’ ,International Journal ofHumanities and Social Science, 2012, pp. 21-23.145 Ibid.
71
professionals or self educated, thus the capital market lack a
large number of potential investors.146
Many EAC countries also face a number of challenges with respect
to building the human resource base of capital markets. In more
developed countries, a large part of training in capital markets
is commonly conducted on the job. However, the scope of on the
job training for EAC countries is somewhat limited in many areas
since the practices for which people need to be trained often do
not exist in a country.
It is, therefore, not sufficient to learn existing practices but
learning has to keep up with global practices.147 Working in a
market economy and liberalized financial markets requires
fundamentally different skills than working in a command-type
economy. Given that many SADC countries had administered
financial systems in the past, training is required to bring
about a shift in the mindset of employees from a command-type to
a market-type economy.148
II.2.6.Disruption Spill Over from One Market to Another
146 Agarwal S .,‘Stock Market Development: Prelimary Evidence from AfricanCountries’ ,Journal of Sustainable Development in Africa , 2001,p. 48.147 Ibid.148 Ibid.
72
Stock market integration is likely to increase the likelihood of
disruptions from one stock market spilling over to other markets.
Where financial systems are small and underdeveloped, a few large
financial institutions with complex balance sheet linkages and
exposures across markets, beyond the monitoring ability of the
local monetary authorities, may make it difficult for the
supervisory and regulatory authorities to do their job
effectively, with concomitant risks.149
With the region’s intermittent political confusion, this is
likely to be a major problem. In addition, with the integration
of capital markets, domestic financial institutions are exposed
to the vagaries of the integrated markets. This is the case as
losses on linked stock exchanges can so easily be transferred to
banks and other financial institutions through the operation of
financial conglomerates and domestic banks dealings on the
capital markets.150
Banks within the monetary union can thus be exposed to a
financial crisis. The domestic banking crisis requiring the
institution of crisis management procedures and bailouts could
easily spill over to other jurisdictions within the monetary
union arrangement.
149 Akinrinsola I ‘Legal and Institutional requirements for West Africaneconomic integration’ , Law and Business Review of the Americas, 2004,p.11.150 Ibid.
73
The appropriate response of regulators to such systemic risk
would have to be the focus of much attention.151 Accurate and
timely disclosure of country information would decrease the
likelihood of cross-country contagion of financial shocks.
Investors would then realize that a disruption may be
attributable to a specific country as opposed to the whole
region.
Legislative and regulatory impediments of many types can limit
integration, including differences in bankruptcy regimes,
sanctions regimes, restrictions on ownership by non-nationals,
the imposition of national rules to protect national industries,
requirements to establish local companies, and restrictions of
many types on issuers, intermediaries, and investors in providing
cross-border services. Local or regional laws may also be
detailed, and thus too inflexible in changing circumstances.152
There are many sometimes intangible factors related to a region’s
history and culture which may limit the possibility of capital
market integration. These may include differences in language,
and variations in attitudes towards corporate governance and
investor protection. Deep and pervasive poverty coupled with the
large role of the agricultural and informal sectors in many
southern African economies may make stock exchanges seem a
151 Ibid.152 Bradley E ‘A .,regional stock exchange: Hope for Sub-Saharan Africa stockmarkets’ ,Michigan State University-DCL Journal of International Law Summer , 1999.
74
“costly irrelevance”, the number of local companies which
currently use them tend to be small, and the number of potential
local investors much smaller.153
Start-up costs for most of the African exchanges that have
emerged since the late 1980s have been partly funded by the
International Finance Corporation and other donors. However, the
low trading levels which characterize most national exchanges in
southern Africa mean that they cannot cover their own operating
costs and tend to have to continue to rely on some form of
subsidy and high taxes imposed on members and investors. Even
abstracting from the narrow cost argument, efficiency questions
remain, given that smaller stock exchanges in developed countries
also are struggling.154
Therefore, variance among member states in their commitments to
further capital market development as well as regional
cooperation and integration-due to a combination of sovereignty
concerns and limited available resources for such initiatives-can
derail or delay progress. As one concrete example, the technology
that would be required to link the JSE with the other stock
exchanges in the region may be beyond the current financial means
of many of the smaller stock exchanges, particularly since the
153 Ibid.154 Cohn R .,‘Confidence Building in Sub-Saharan Stock Markets’ ,United NationsInstitute for Technology and Research, 2000,p. 14.
75
JSE has forged technological links with the London Stock
Exchange155
CHAPTER III
MECHANISMS FOR ENHANCEMENT OF THE EAC CAPITAL MARKET
This chapter firstly outlines the requirements for a proper legal
and regulatory framework for the regional integration of capital
markets. Secondly, it elucidates the benefits of regional
financial integration. The final part focuses on the lessons from
other regions such as West Africa and the Europe.
III.1.Legal mechanisms
Serious lessons can also be learnt on how to promote Capital
market integration in the EAC and to lay a solid foundation for
the creation of the EAC regional stock exchange.
III.1.1.The Requirements for a Proper Legal and Regulatory
Framework for the Regional Integration of Capital Markets
A sound legal and robust regulatory framework is critical for the
competent functioning of a regional stock market. It acts as a
bulwark against the backdrop of a financial or economic crisis,
155 Ibid.
76
and provides clarity and confidence for market players and
consumers alike.156
The preconditions for a sound legal and robust regulatory
framework for a regional stock market consists of: the
harmonization of legislation, such as bankruptcy, listing and
accounting laws; the establishment of regional self-regulatory
agencies and regulatory commissions; coordinated monetary
arrangements; and harmonized reporting standards.157
In particular, the tax treatment of investments must be
harmonized, since tax policy is an important incentive or
disincentive both for issuers and investors. Moreover, effective
regulation for cross-listings requires harmonizing corporate
governance standards, common standards for stock brokers, and
national rules for capital gains, withholding taxes and
transaction costs.158 Therefore, the preconditions for the robust
regulation of regional exchanges serve as the foundation for
adequate access to sustained stock market development and
stability.
III.1.2. Investment Code
A sound and robust regulatory framework for regional exchange
requires the creation of a common investment code; such a code is
156 Di Giorgio G & Di Noia C., ‘Financial Market Regulation and Supervision:How Many Peaks for the Euro Area? Brooklyn Journal of International Law , 2003,p. 28157 Ibid.158 Ibid.
77
fundamental to the efficient operation of securities trading and
investment across borders within the EAC region. This investment
code, together with the municipal laws of EAC member states, can
provide legal rules on securities regulation at the regional
level.159
In order to be effective, the common investment code would have
to be adopted in member states’ national legislation, making it
binding on all member states, and provisions of this code must
take precedence over municipal laws of EAC member states.
Furthermore, an efficient legal and regulatory framework for
regional exchanges requires the institution of a regional
supervising authority, which might be either private or public,
charged with responsibility for off-site analysis of adherence to
prudential rules and regulations on a regional basis.160
A regional supervising authority must be an independent, quasi-
judicial regulatory agency with the responsibility for
administering the EAC securities exchange laws. The regional
regulatory agency must be politically independent and not subject
to political interference; such independence is vital for
consumer and industry credibility. Independence acts as an
159 Teunissen JJ., Regional Integration and Multilateral Co-operation in the Global Economy TheHague: Fondad, 1998.160 Ibid.
78
incentive to the regulator to adopt best practices of corporate
governance and accountability.161
III.1.3. Harmonization of legal and regulatory framework
The first precondition of an effective legal and robust
regulatory framework for regional capital markets integration is
the harmonization of legislation. Harmonization is the process,
through which different states adopt identical laws-by bridging
the gap between the rules. It induces the creation of norms and
principles to be used as rules and guidelines as well as the
elimination of differences in the technical contents of norms.162
It is also a process through which two or more institutions
achieve consistency in their rules and regulations. Harmonized
legislative and regulatory initiatives normally seek to enhance
the delivery of the three key objectives of regulation as
identified by the International Organization of Securities
Commissions (IOSCO), namely: the protection of investors;
ensuring that markets are fair, efficient and transparent; and
the reduction of systemic risk.163 161 Kohler-Koch B.,‘Organised interests in European integration: the evolutionof a new type of governance?’ , London: Claredon Press, 1997,p.11.162 Ibid.163 Avgouleas E., ‘A Critical Evaluation of the New EC Financial-MarketRegulation: Peaks, Troughs, and the Road Ahead’ ,Transnational Law , 2005,p. 18
79
It is also likely that harmonization will be easier to achieve
amongst countries with common legal backgrounds, such as within
Anglophone or Francophone groupings, than between countries with
highly divergent legal traditions.
Three of the most significant ways in which the delivery of these
objectives may be improved are: firstly, by lowering the direct
costs of operating multiple regulators that market participants
bear; secondly, by reducing the indirect costs that the existence
of multiple regulators impose on market participants by dint of
the fact that they have to comply with many regulatory regimes;
and, thirdly, by enhancing competition at a regional level
between the various types of participants in the capital markets,
most importantly by reducing barriers to such competition164.
Harmonization of common listing requirements and rules will
facilitate cross-border listing and transparency; also in
addition, accounting could be improved through moving to a common
financial reporting system and accounting framework. Again, a
common accounting framework can lower the costs of maintaining
multiple accounting frameworks for firms listed in, or seeking to
obtain financing from, different countries within the SADC
region.165
164 Ibid.165 Ibid.
80
However, accounting differences can hinder market participants’
abilities to compare financial statements; hence, it is important
to harmonize accounting frameworks. It is important to note that
cross-listings are assisted by the adoption of common listing
standards across stock exchanges. Thus, within SADC all member
stock exchanges have harmonized their listing requirements,
accounting, and auditing standards based on the thirteen
principles of the JSE’s listing requirements.
By adopting common regional standards, SADC regional cross-
listings can spur higher standards on both a regional and a
national basis, and thus contribute to greater economic growth.
Such rules and practices should also, be monitored and enforced
by national exchanges and authorities, thereby ensuring
horizontal integration and producing decentralized and
technically uniform exchanges.166
On the other hand, harmonization also comes with a number of
challenges, such as: achieving consensus is difficult and slow,
harmonization of listing rules still requires compliance with
multiple regulatory regimes, harmonization reduces competition
between rules, and the problem of implementation is not easily
resolved.
166 Baker K, Nofsinger J & Weaver D., ‘International Cross-Listing andVisibility’ ,Journal of Financial and Quantitative Analysis , 2002,p.37
81
The harmonization of laws will result in sharing of information
between the regulators of different jurisdiction in a region.
Harmonization facilitates the sharing of information amongst
different securities regulators at the regional level, both about
surveillance and enforcement actions against market participants,
and in resolving crises in a market or at a particular firm.167
Such information sharing is valuable when examining a firm or a
market that operates in more than one jurisdiction where, by
definition, a local, as opposed to a regional, view of the firm
or market will always be limited. Moreover, it also improves
surveillance and risk management by enabling access to
information in all market segments. It can be observed that, as
regional cross listings deepen, the exchange of information
between stock exchanges is facilitated.
Thus, the ministries of finance across the region must have the
overall responsibility of coordination among the different
agencies involved in financial regulation, so as to ensure co-
operation, information sharing and policy coordination amongst
the various agency regulators. Therefore, the harmonization of
listings rules within a region can make the following
contributions towards capital market integration: reduction of
duplication of regulatory efforts, simplification of compliance
by issuers across markets, and ease of market entry.168
167 Ibid.168 Ibid.
82
III.1.4. Harmonization of Market Infrastructure and Facilitating
Cross-Border Transactions
A unified system for issuing, distributing, and settling debt
securities made a significant contribution to the increased
volume of issuance and cross-border transactions of government
securities in the WAEMU. The unification attracted issuers of
multilateral institutions and provided more financial products to
regional and foreign investors.
A number of studies and surveys conducted by the ABMI identified
the lack of harmonized trading infrastructure—such as regional
clearing and settlement mechanisms, harmonized credit rating
systems, and a regional information disseminating platform as a
main obstacle for developing regional bond markets. These inputs
led to launching a one-stop clearinghouse of information on
regional bond markets, AsianBondsOnline,169 but many other areas
remain to be addressed.
In the EAC, while the harmonization of cross-listing rules has
been relatively advanced among the existing stock exchanges, more
harmonization is needed in a number of areas, including auction
mechanisms of treasury bills and establishment of regional
clearing and settlement systems. Member states are advised to
169 http://asianbondsonline.adb.org/index.php.
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ensure that any newly-introduced regulations and trading
facilities conform to regional standards or best practice170.
III.1.5. Strengthen Regional Surveillance Mechanisms
Macroeconomic stability across the region is fundamental in
promoting cross-border investments because fluctuating interest
rates, inflation, and exchange rates make investment returns
unpredictable, creating barriers to cross-border transactions.171
Sustained growth will increase people’s wealth, mobilize regional
savings, and attract private investment from inside and outside
the region.
The WAEMU countries have implemented macroeconomic convergence
criteria under a regional surveillance mechanism, backed up by
potential sanctions on noncompliant members. The literature
suggests that the expansion of the WAEMU government debt market
is partly attributable to macroeconomic stability realized under
the mechanism172 .
170 Click, R. W., and M. G. Plummer, “Stock Market Integration in ASEAN afterthe Asian Financial Crisis,” Journal of Asian Economics, 2005, pp.25‒28.171 Eichengreen, B., and P. Luengnaruemitchai, “Why Doesn’t Asia Have BiggerBond Markets?” NBER Working Paper ,Cambridge, MA: National Bureau of EconomicResearch, 2004,172 Espinoza, R., A. Prasad, and O. Williams, “Regional Financial Integrationin the GCC,”IMF Working Paper ,Washington: International Monetary Fund, 2010.
84
The ASEAN countries signed the terms of understanding to
establish a surveillance process in 1998 to enhance macroeconomic
stability and facilitate regional policy dialogues through peer
reviews—the first concrete attempt by a group of developing
countries for such purposes. The process is informal and
consensus based with no agreed set of macroeconomic targets.
Nevertheless, the process is relatively well organized, supported
by a high-level Macroeconomic and Finance Surveillance Office set
up in the ASEAN Secretariat and a number of regional technical
assistance projects provided by the Asian Development Bank (ADB)
to strengthen surveillance capacity in the region173.
The EAC member states have agreed on a set of convergence
criteria as a step toward the monetary union. However,
performance has been mixed so far, with the convergence of fiscal
deficits excluding grants and inflation persistently exceeding
the targets.
Mechanisms for monitoring countries’ performance under the
criteria have not been sufficiently articulated and
institutionalized to ensure members’ adherence to the criteria.
The EAC countries could consider assigning the EAC secretariat a
formal function of assessing and reporting developments under the
criteria, at least for the time being. To do so, it is essential
173 Ibid.
85
that the secretariat have more capacity to conduct regional
surveillance and that economic data submitted
by the member states are well defined and more comprehensive.
III.1.6. Encourage Local Currency Bond Issuance by Multilateral Financial Institutions
Countries’ economic size and fiscal positions are the most
stringent structural limitation in increasing amounts of
securities issued in local markets. To address these constraints,
both the WAEMU and the ASEAN have intensified cooperation with
multilateral financial institutions to encourage their bond
issuance in the local markets.
As for the WAEMU, the International Finance Corporation (IFC)
floated its first local currency bond issue in sub-Saharan Africa
equivalent to $44.6 million in the BRVM at end-2006. The West
African Development Bank, a regional development bank serving the
WAEMU countries, is also an important issuer in the markets,
accounting for 6.5 percent of total bonds outstanding in the
market at end-2010. In Asia, the ADB issued local currency bonds,
being the first foreign issuer in a number of countries including
Malaysia, Philippines, and Thailand.174
The IFC also issued a series of bonds denominated by Asian
currencies. The East Asian countries established funds in
174 Feldstein, M., and C. Horioka, “Domestic Saving and International CapitalFlows,” Economic Journal, Vol. 90, 1980,p.11.
86
collaboration, such as investing pooled foreign reserves in
sovereign and quasi-sovereign bonds in the region (Asian Bond
Fund) and providing guarantees for local corporate bonds.
Such instruments facilitate integration and development of
regional debt markets by issuing high-rated bonds denominated in
local currency without influencing countries’ debt positions;
providing know-how and benchmark transactions for long-term
financing; and attracting domestic and international investors175.
While there is a possibility that large bond issues by these
institutions could crowd out government domestic financing,
especially in narrow markets of small economies, that risk can be
minimized by strong interests of regional investors in investment
opportunities and deliberate consultations between governments
and issuers on the amounts and timing of issuance.
While the East African Development Bank—a regional development
bank owned by the EAC countries except for Burundi—issued bonds
denominated in Uganda, Kenya, and Tanzania shillings in the mid-
2000s, no subsequent issuance has followed since then.176
Therefore it is beneficial for the EAC countries to launch a
study to investigate required actions to promote issuance of
175 Kasa, K., “Common Stochastic Trends in International Stock Markets,” Journalof Monetary Economics,1992, pp. 99‒100.176 The amount outstanding stands at $8.6 million as of end-2010.
87
local currency bonds by multilateral financial institutions in
their local markets.177
III.2.Lessons from other regions
The experiences of other regions might be more relevant to SADC
policy-makers-except that the path of regional financial
integration in other parts of African countries has been
similarly problematic.
III.2.1 .West Africa
The Bourse Régionale des Valeurs Mobilières (BRVM) is the world’s
first truly regional stock exchange serving eight French
countries in West Africa. As such it is the only integrated
regional capital market in Africa, covering eight West African
Francophone countries of the West African Economic and Monetary
Union (WAEMU), and with a common regulatory framework for all
market participants.178
The BRVM was opened in 1998 and has branches in each WAEMU
country. Prior to its establishment, the only stock exchange in
the zone was in Côte d’Ivoire. It was therefore natural for the
regional exchange to be established in Abidjan to build on the
177 The IFC was granted approval by the Kenyan authority to issue and list a KSh3 billion (about $37 million) bond on the NSE in August 2010. There are anumber of requirements for multilateral financial institutions to issue localcurrency bonds, typically including tax exemptions; domestic ratingexemptions; broad investor access; risk weighting; and reserve eligibility178 Claessens S, Klingebiel D & Schmukler S ‘The Future of Stock Exchanges inEmerging Economies: Evolution and Prospects’ ,Brookings-Wharton Papers on FinancialServices, 2002, p.16.
88
existing exchange. The BRVM started with listing of 35 companies
from Cote d’Ivoire, but these were supplemented by the listing of
a Senegalese company late in 1998, and a total market
capitalization of 2904 CFA francs.179
The establishment of the stock exchange was led by the Union
Monétaire et Économique de l’Afrique de l’Ouest (UMOEA) central
bank, the Banque Centrale des Etats de l’ Afrique de l’ Ouest
(BCEAO), and member governments. In addition, the establishment
of this regional stock exchange was clearly facilitated by the
fact that the member countries share a common currency (the CFA
franc) and thus have no restrictions on capital movements between
themselves. Although the bourse is majority owned by the private
sector, the member states own 13.4 percent of the capital.180
Trading on the BRVM is computerized with satellite links to the
central trading facility in Abidjan. Brokers and agents can
transmit orders and consult and edit quotation results to the
central site in Abidjan whilst sitting in workstations in their
offices or desks located in national branch offices. The exchange
has 15 brokerage firms. Trading takes place on three days of the
week and all orders are filled at a price set at a fixing once a
day. Trades are cleared and settled at the Depositaire Central.181
179 Ibid.180 Coffee J., ‘Racing Towards the Top? The impact of Cross-Listings and StockMarket Competition on International Corporate Governance’ ,Columbia Law Review ,2002 ,p.31.181 Ibid.
89
The problem with the BRVM however, is that the exchange is
dominated by Ivorian companies. Activity in the stock market
declined substantially after the crisis in Cote d’Ivoire in 1999
because most of the listed firms are Ivorian. Sadly, corporations
in the remaining member countries have not fully embraced the
exchange.182
Although the volume of transactions on the BRVM is still low and
irregular, the partnership between the participating countries
subsists. The existence of a common colonial heritage seen
notably through homogeneous legal systems and the use of a common
currency, contributed to easily overcome some bottlenecks that
were also observed in other attempts to form regional stock
exchanges.
With respect to a regional framework for capital markets
regulation, WAEMU adopts the single formal regional regulator and
stock exchange style of capital markets integration. Thus, within
WAEMU all the existing financial markets are merged into one
single market and under a single regulator.
The single market for both bond and stock trading and fund
management is supervised by a regional securities commission
called Conseil Régional de l’Epargne Publique et de Marchés
182 Cohn R .,‘Confidence Building in Sub-Saharan Stock Markets’ ,United NationsInstitute for Technology and Research, 2000,p.14.
90
Financiers (CREPMF).183 All the member states use one single
rulebook for listing, trading, clearing and settlement. This is
the reason why financial integration in the WAEMU is deemed to be
very advanced.
Fostered by regional institutional arrangements and the abolition
of all capital controls, the integration of financial markets in
WAEMU is further along than in other parts of Africa, especially
when it comes to harmonisation of rules. A single commission was
created in 1990 to reinforce regional banking supervision
Commission Bancaire de I’UMOA.184
However, despite the presence of the commission and the BCEAO,
the regional central bank, some national banking systems are
still fragile and the interbank is underdeveloped. Given the gaps
in risk assessment and the lack of collateral, activity in the
regional interbank market is largely restricted to in-group
subsidiaries. Excess liquidity in some banking systems continues
to coexist with liquidity shortages in others. Differential
reserve requirements by country, ranging from 3 percent in
Guinea-Bissau and Togo to 15 percent in Benin, further distort
cross-border competition.185
183 Hearn B & Piesse J., ‘Barriers to the Development of Small Stock Markets: Acase study of Swaziland and Mozambique’ ,Journal of International Development ,2010,p.37.184 Ibid.185 Herrero G & Wooldrige P., ‘Global and Regional Financial Integration:Progress in Emerging Markets’ ,Bank for International Settlements Quarterly Review,2007,p.13.
91
The growth of the BRVM exchange has been curtailed by political
disruptions in Côte d’Ivoire. Activity at the BRVM is
concentrated in the bond markets.186 After about a decade of
trading, the market is still underdeveloped compared with other
stock exchanges in Sub- Saharan Africa, with the low level of
development due to low trading values and volumes and stringent
listing requirements.187
In 2006, total market capitalization was just under 24 percent of
regional GDP, and a bourse listing of 40 companies, compared to a
market capitalization of 280 percent of GDP and 401 listed
companies at the JSE. Prospects for further growth of the market
are constrained by both supply-side factors, and demand-side
factors. 188
The WAEMU banking regulatory framework is provided for by the
WAEMU treaty of 1994, the BCEAO statute and the Banking
Commission Convention. The West African Monetary Union (WAMU)
treaty provided that WAMU states would have a common banking
code. This banking code or regulation is the WAMU banking law.
The BCEAO and the WAMU Banking Commission jointly share banking
186 Ibid.187 Ibid.188 Jackson H & Roe M .,‘Public and Private Enforcement of Securities Laws:Resource- Based Evidence’ ,Journal of Financial Economics , 2009,p. 93
92
supervisory functions with residual functions in this field being
left to ministers of finance of WAEMU member states.189
In addition, the WAEMU countries have implemented macroeconomic
convergence criteria under a regional surveillance mechanism,
backed up by potential sanctions on noncompliant members.
Progress on other fronts of market integration has been achieved
largely through supranational regulatory laws and bodies190.
Since 1995, the regulatory framework for cooperative financial
institutions has been based on the Projet d’ Appui a la
Reglementation sur le Mutuelles d’Epargne et de Credit law
(PARMEC). In the rapidly proliferating area of microfinance, a
regional institution Banque Regionale de Solidarite (BRS), with
regional institutional shareholders has been created. The BRS
tends to concentrate largely on refinancing microfinance
institutions rather than providing direct loans.191
One encouraging development is the rapid growth of the regional
market in local currency debt, especially public debt. Spurred by
the cessation of central bank financing of fiscal deficits, the
market in treasury bills and government bonds has been expanding
since 2000.192 In the absence of restrictions regional investors
189 Ibid.190 King M & Mittoo U., ‘Why Companies Need to Know About International Cross-Listing’ Journal of Applied Corporate Finance, 2007,p.19.191 Ibid.192 Ibid.
93
within WAEMU, being mostly banks, have in recent years taken up
roughly half the treasury bills issued.193
In fact, the rapid growth of the treasury bill market in WAEMU,
the excess liquidity in most banking systems, and the continuing
lag in private sector investment opportunities has meant that
governments in these countries have been able to raise funds at
low costs largely unrelated to their credit ratings.194
Therefore, in WAEMU, enhanced autonomy and the capacity of the
regional institutions, illustrated by the establishment of the
common stock exchange and the elimination of central bank
advances to governments are attributed to the acceleration of
debt market integration.
Despite these institutional measures, further regional
integration in WAEMU is made difficult by continuing challenges.
Intra-regional trade, at just over 10 percent of total trade, is
a poor motivator for further integration. While substantial
progress has been made on the harmonisation front there are still
differences across borders. For instance, bankruptcy proceedings
and rules on the realisation of collateral vary across countries.
193 Onyuma S., ‘Regional Integration of Stock Exchanges in Africa’ African Reviewof Money, Finance & Banking , 2006,p. 97194 Ibid.
94
Despite the agreement, national authorities exercise their
discretion in the licensing and de-licensing of banks.195
The deeper structural problems which have plagued member
countries also make it harder to build regional financial
markets. The lack of diversification in economic activity across
the region means that investor portfolios are limited to a few
assets and there is very little cross-border competition in
lending. One clear sign of the lack of effective integration of
financial markets in WAEMU member countries is the simultaneous
co-existence of liquidity shortages in some countries with
substantial excess liquidity in other countries and region-
wide.196
Côte d’Ivoire is a Francophone country in the WAEMU whose civil
unrest and crisis affects the functioning of WAEMU. The IMF
records that the 2002-2004 civil war between the former President
Laurent Gbagbo and the rebel forces affected the region.197 For
instance, this instability has resulted in an increase in
transaction costs and in diversion of trade away from Côte
d’Ivoire in favor of other countries equipped with ports and has
led to a reduction of WAEMU’s overall potential trade.198 195 Onyuma, Mugo & Karuiya ‘et al.’ ‘Does Cross-Border Listings (Still) ImproveFirm Financial Performance in Eastern Africa?’, Journal of Business, Economics &Finance , 2012,p.12.196 Ibid.197 McLaughlin J., ‘Taking Responsibility-Securities Regulation Reform and theGlobal Financial Crisis: The United States, United Kingdom, and EastAfrica’ ,Transnational Law & Contemporary Problems , 2011,p.19198 Ibid.
95
Although, intra-regional trade represents a small share of the
total of WAEMU trade, Côte d’Ivoire accounts for around half of
that total, thus highlighting the importance of this country for
the WAEMU region.In 2010 Côte d’Ivoire experienced a second civil
war after President Gbagbo refused to step down when he lost
elections to Mr OuattaraThis recent political crisis affected the
financial aspects of WAEMU operations more than its trade
relations. The BCEAO regional central bank offices and most banks
were closed in mid-February 2011, resulting in a near liquidity
crisis.199
In addition, the operation of the BRVM single stock exchange for
the region was closed on 9 February 2011 and was moved
temporarily to Bamako in Mali after Gbagbo’s troops attacked its
office in Abidjan.383 Due to the political upheaval, Côte
d’Ivoire defaulted on its $ 2,3 billion Eurobond which is not
good for foreign portfolio investment in the region.200
A number of lessons can therefore be drawn from the experiences
of BRVM on stock market integration in Africa. Firstly, it can
take a very long time to build a regionally integrated exchange.
Secondly, the fact that a regionally integrated exchange is
established does not mean that it will be used effectively or
199 Mlamblo C & Biekpe N., ‘Investment Basics XVLIV, Review of African stockmarkets,’ Investment Analysts Journal , 2001,p. 54.200 Ibid.
96
that it will integrate the markets. Further, the eight countries
had several regional institutions already in place at the BRVM’s
launch, including a central bank, common currency, financial
market supervisory body, Supreme Court, as well as a regional
legislative framework.201
The sustainability and success of any regional project must be
carefully assessed before the project is undertaken. Private
sector participation, as opposed to just regulators, central
banks and other public institutions normally have the best
incentive to determine whether the expenditure on a particular
integration scheme for market infrastructure is worthwhile.202
III.2.2.The Euronext as a working example of a regional stock exchange
Euronext is the first pan-European market which was created in
September 2000, following the merger, demutualization and initial
public offering of the Paris, Amsterdam and Brussels Stock
Exchanges. This alliance, called Euronext, was declared to be the
first real merger of stock exchanges in Europe. It boasts of the
world’s most advanced and effective regulatory frameworks.203
201 Ibid.202 Bris A, Cantale S & Nishiotis G., ‘A Breakdown of the Valuation Effects ofInternational Cross- Listing’, European Financial Management , 2007p. 13203 Ibid.
97
III.2.2.1. Background of Euronext
Euronext is the second largest European stock exchange. It is
primarily private-sector driven involving the operational
integration of the exchanges based in the Netherlands, Belgium,
France, Portugal and the United Kingdom under a single holding
company with wholly owned subsidiaries.
It was created as a result of strong demand from the market
against the backdrop of a favorable climate for integration of
the European stock market, in particular, and the financial
market, in general, as well as to satisfy the increasing
liquidity need and cost reduction from the introduction of the
Euro204
This merger gave the European Union its first transnational stock
market, making securities listed on any of the four predecessor
stock exchanges readily available to the clients of members from
all four stock exchanges. Together, the three stock exchanges
established a holding company, Euronext N.V., which owns all the
shares in the participating exchanges.205
204 Clausen N & Sorensen K., ‘Stock Exchanges Mergers-The new Driver in theHarmonisation of Securities Regulation Market Regulation?’ ,European Company &Financial Law Review , 2009,P.11.205 Doukas J & Switzer L ‘Common Stock Return and International ListingAnnouncements: Conditional Tests Of The Mid Segmentation Hypothesis’, Journal ofBanking & Finance, 2000,p.24
98
Therefore, the three stock exchanges have become full-fledged
branches of Euronext NV, a Dutch portfolio company, and its names
have been changed to Euronext Paris, Euronext Brussels and
Euronext Amsterdam. Each represents a portal offering issuers,
intermediaries and investors access to a single market. The
holding company, Euronext NV, is incorporated and supervised in
the Netherlands and was successfully listed in 2001.206
In January 2001, Euronext went public and acquired the London
International Financial Futures and Options Exchange (LIFFE),
out-bidding the London Stock Exchange and the Deutsche Bourse.
Shortly thereafter, Euronext merged with the Portuguese stock
market in February 2002 and created Euronext Lisbon.207
By acquiring LIFFE, Euronext was able to offer a broad selection
of products such as cash, derivatives, equity and bonds, as well
as gain a foothold in the United Kingdom market. Furthermore,
Euronext’s ambition was to consolidate the financial markets
across Europe to provide users with a single market which would
be broad, highly liquid and extremely cost-efficient.208
Euronext was successful in the technological integration of the
exchanges. For instance, in September 2002, all Euronext members
regardless of their location were able to access all securities206 Ibid.207 Ibid.208 Durand R, Gunawan F & Tarca A., ‘Does Cross-Listing SignalQuality?’ ,Journal of Contemporary Accounting & Economics , 2006,p. 2
99
listed on Euronext. As a result, every market participant now has
a single point of access to all elements of trade. This order-
driven trading architecture is based on the French trading
system, the Nouveau System Cotation (NSC).209
Again, all Euronext products listed in Amsterdam, Brussels, Paris
and Lisbon are cleared by Clearnet. Therefore, the centralised,
order-driven trading system, along with the central clearing,
settles transactions on a net basis to guarantee performance.
Significantly, this creates the potential for greater cost-saving
because most of the costs of building trading and clearing
platforms are fixed.210
III.2.2.2. Harmonisation of listing requirements
The Euronext securities markets are regulated markets within the
meaning of the markets in the Financial Instruments Directive of
2007 (MIFID)211. As such they are governed by a common set of
rules applicable to all the Euronext securities markets. Euronext
and regulators in the individual jurisdictions have harmonised
their rules and regulations over the years to produce the so
called Euronext harmonised rules.212
209 Ibid.210 Hirsch S & Marquette V .,‘Euronext leads the way for European exchangemergers’ ,International Financial Law Review, 2000,p.18.211 Ibid.212 Lannoo K., ‘The Emerging Framework for Disclosure in EU’ ,Journal of CorporateLaw Studies , 2003.
100
The Euronext rulebook currently has two books: rulebook I
contains harmonised rules, including rules of conduct that are
designed to protect the markets, as well as rules on trading and
membership. Rulebook II contains the remaining rules of the
individual markets which have not been harmonised.213
Notably, the notices adopted by Euronext for the enforcement of
rulebook I applies to all Euronext markets, whereas those for the
enforcement of book II are specific to local jurisdictions. The
coverage of rulebook I have gradually increased from harmonised
membership, trading, and enforcement rules in the early periods
to a common set of listing qualifications governing listed
companies in later periods. Thus, the regulators in Belgium,
France, Netherlands, Portugal and the United Kingdom have
approved the market rules of books I and II.214
To list on a Euronext exchange an issuer must comply with the
unified listing requirements as specified in rule book I, and
after admission, with the ongoing financial reporting
requirements of its home member state. Euronext provides issuers
with the opportunity to access a larger pool of capital at a
lower cost.215
213 Ibid.214 Ibid.215 Lel U & Miller D ‘International Cross-Listing Firm Performance, and TopManagement Turnover: A Test of the Bonding Hypothesis’ ,Journal of Finance ,2009,p.64
101
To achieve even more consistent regulation of at least some firms
from the markets in each country, Euronext established two
voluntary named segments of the integrated stock market on which
firms could choose to list by pre-committing themselves to
enhanced financial reporting quality and corporate governance.
The two named segments are Next Economy which is for companies
from high-tech industries and Next Prime which is for companies
from the traditional sectors of the economy. Thus, this mechanism
of voluntary pre-commitment to transparency, if credible to
investors, is a solution to the problem of regulating integrated
global capital markets.216
The Euronext model has been facilitated by wider European
integration involving a common currency with no capital account
restrictions, adoption of common trading and post trade
technology platforms, and a harmonization of national regulatory
frameworks. Obviously, the European stock markets presented a
high degree of integration and efficiency before the euro and the
euro has clearly added to the pressures from technological change
and globalization for the creation of new Euronexbvt alliances
among Europe’s exchanges.217
As the most advanced example of regional financial integration,
the European Union (EU) seems like the most obvious place to end216 Ibid.217 Poser N ‘The Stock Exchanges of the United States and Europe: Automation,Globalisation, and Consolidation’ University of Pennsylvania Journal of InternationalEconomic Law , 2001,p.22
102
this exercise. However, given the stark differences between
European and EAC economies, great care must be taken in trying to
apply lessons from the EU to EAC. The European model of financial
market integration has evolved and adapted over decades, and
functions in an institutional and economic environment that is in
many respects quite different from that found in most SADC
countries.
103
GENERAL CONCLUSION
EAC capital markets are underdeveloped, although with significant
divergence of developmental
stages across the region .The discussion above in this research
points out that, preconditions of a sound legal and robust
regulatory framework for a regional exchange consists of;
harmonization of legislations, such as bankruptcy, investments,
listings and accounting laws; establishment of regional self-
regulatory agencies and regulatory commissions; coordinated
monetary arrangements; and harmonized reporting standards.
There are a number of benefits which can be exerted by regional
capital markets integration. These benefits range from lower
prices for all financial services to more efficient, more liquid,
and broader securities markets.
However regional capital markets integration in the world have
been beset with contradictions stemming from the absence of a
clear consensus on the benefits of integration, the lack of
political will necessary to make it work, vested interests, and a
proliferation of a variety of groupings with multiple
memberships. African governments view stock exchanges with pride
as national assets, and are unlikely to embrace any policy which
will limit their national profile.
104
A fear of bigger economies dominating the stock exchange and
diverting capital towards their economies is also a key
constraint against acceptance of regional integration by smaller
economies. These concerns may also partly explain the reluctance
to move EAC and other regional groupings in Africa to higher
levels of integration. These concerns should be addressed before
any benefits can be gained and financial development leads to
economic growth across the wider populations.
Any strategy intending to realise the benefits of regional
financial integration would be well served by incorporating the
lessons from SADC’s own experiences with the regional arrangement
thus far, as well as those from others regions such as West
Africa and EAC.
A major lesson of experience from West Africa suggests that
regional financial integration schemes should constitute an
extension of the domestic reforms of the member countries rather
than act as a force to engineer them. In other words, prior to
the establishment of a regional financial integration
arrangement, each member country should have its domestic house
in order where this means maintaining macroeconomic stability and
a competitive domestic economy.
The experiences of the BRVM, as well as the merging of stock
markets in other parts of Africa, are quite encouraging and thus
105
go a long way to confirm the idea that stock market integration
or regionalization is gradually taking root in Africa and that
only the nature of the process still has to be developed.
In general, therefore, the lessons of experiences with respect to
the design and implementation of regional financial integration
schemes in Africa and elsewhere, as well as the initial
conditions and structural characteristics of East African
economies, suggest that new approaches for establishing more
successful regional financial integration and cooperation
arrangements among groups of African countries should pay
attention to certain key changes.
These should include a change in the primary objective or focus
of such arrangements, a change of their orientation and a re-
definition of the basic strategy for their implementation. Thus,
for EAC countries to achieve successful regional financial
integration, with all the resulting benefits in terms of larger,
more efficient, more dynamic, and more stable financial systems,
national governments must be firmly committed to both financial
and economic integration, even to the extent of allowing short-
term national concerns to be outweighed by the benefits of long-
term regional cooperation. The alternative may well be the
continuation of small, inefficient financial sectors, which are
unable to contribute effectively to economic growth and poverty
reduction.
106
Four lessons to accelerate EAC capital market integration can be
drawn from the experience of
The WAEMU and the ASEAN. First, the member states would benefit
from further harmonizing Market infrastructure, especially
systems for processing security transactions, to facilitate cross
border transactions.
Second, the authorities could strengthen regional surveillance
mechanisms to ensure members’ adherence to the convergence
criteria and promote macroeconomic stability across the region.
Third, encouraging participation of multilateral financial
institutions in the local markets will help the member countries,
especially relatively less advanced countries in the region, to
develop their local markets, overcoming the constraints of their
economy size and fiscal positions. Last, strengthening capacity
of the existing regional organizations would help implement the
above-mentioned recommendations and make up for the capacity gap
among the members.
These recommendations are applicable regardless of whether the
EAC countries will pursue the institution-based approach of
integration or the non-institution-based approach. The member
countries benefit from capital market integration even if the
monetary union is not established in the short term. Thus the
recommended actions could be carried out separately from the
107
ongoing negotiations on the monetary union protocol. ASEAN’s
experience clearly illustrates the critical role of governments
in advancing capital market integration even under the non
institutionalized approach.
RECOMMENDATIONS
108
The results of the thesis underscores the importance of stock
market development for economic growth, therefore policy makers
need to give due consideration to taking the necessary steps to
further integrate EAC stock markets. These steps include the
following:
• Providing incentives to encourage corporate firms to fully
embrace increased regional cross-listings. These incentives
should include reductions in the transaction and approval costs
of regional cross-listings and relaxation of stringent cross-
listing requirements.
• Encouraging national stock markets to embark on increasing
significantly regional cross-listings. To achieve this, there is
a need to sign MOUs among more stock markets in the region. In
the African region, for example ,the JSE South Africa has already
signed an MOU with Botswana, Egypt, Ghana, Kenya, Namibia,
Nigeria, and Uganda.
• Introducing measures that focus on shareholder protection and
information, and the proper code and regulation of corporate
governance. Strong investor protection and transparency are
prerequisites for capital inflows. Therefore, such measures are
important if the stock markets are to make external capital
available to firms with growth prospects and lower the cost of
capital.
109
• Harmonizing legal and regulatory mechanisms, listing and
trading rules, accounting laws, disclosure requirements, and
taxes and fees associated with cross-listings across the region.
It is necessary to harmonize legal mechanisms such as bankruptcy
courts and laws to enforce contracts and ensure minority rights
protection by EAC stock markets.
Harmonizing common listing requirements and rules will facilitate
cross-border listings. Transparency and accountability could be
improved through moving to a common financial reporting system
and accounting framework.
A common accounting framework can lower the cost of maintaining
multiple accounting frameworks for firms listed in, or obtaining
financing from, different countries within the EAC region.
It is necessary to harmonize trading rules, settlement periods,
operating days, taxes, and fees associated with cross-listings
across the region. Such rules and practices should be monitored
and enforced by national exchanges and authorities, thereby
ensuring horizontal integration and producing decentralized and
technically uniform stock exchanges.
Although vertical integration with a common trading platform will
bring about cost efficiency and economies of scale by combining
trading, clearing, and settlement in a single institution, it
110
will not be favored by EAC countries because of the institutional
and financial complexities, culture, and nationalistic politics
discussed earlier.
• Improving the regional flow of information and coordination to
facilitate cross listings. The exchange of information between
stock exchanges should be facilitated as regional cross-listing
deepens.
• Introducing regional integration policies that are aimed at
removing artificial or policy induced barriers, particularly
those that are legal, regulatory, and institutional in nature.
Barriers to entry can compartmentalize markets and hamper market
liquidity and efficiency.
Legal text
111
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1. Treaty for establishment of the East African community signed
on November 1999 in Arusha , Tanzania (as amended on 14th
December , 2006 and 20th august , 2007).
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customs union , signed at Arusha , TANZANIA , on the 2nd march
2004.
3. Protocol on the establishment of the common market signed at
Arusha on the 20th November 2009.
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