Developing Securities Markets in Sub-Saharan Africa: Does it Matter?

In my recently published working paper titled ‘Developing Securities Markets in Sub-Saharan Africa: Does it Matter?’, I revisit the debates on the utility of stock markets in sub-Saharan Africa. I advance two main propositions. First, there is strong historical and empirical evidence supporting the theoretical proposition that liquid securities markets promote economic growth. Second, financing practice shows that cross-listing has not provided a suitable alternative source of finance to sub-Saharan African firms in countries with underdeveloped markets, making the development of domestic markets crucially important.

That Africa has a severe financing deficit can hardly be overstated. A 2018 report of the African Development Bank (here) estimates that Africa needs about $130–$170 billion annually to finance infrastructure, with a financing deficit of between $68–108 billion. This deficit in public finance is mirrored by an equally severe deficit to the private sector, with sub-Saharan Africa recording poor results in World Bank estimates of Domestic Credit to the Private Sector as a function of GDP. In this context, many sub-Saharan African states have turned to securities markets as an engine for financing growth. This led to the establishment of 12 of the region’s 24 securities markets in the 1990s, with Angola and Lesotho recently establishing their markets in 2014 and 2016 respectively, and Ethiopia set to open its stock exchange before the end of 2020. However, this proliferation of securities markets in the region has not muted the debates on whether Africa should promote stock market capitalism.

The first part of the paper reviews the debates on the relevance of stock markets to economic growth in sub-Saharan Africa. The competing viewpoints can be divided into two broad hypotheses: the relevance and the irrelevance hypotheses. The relevance hypothesis argues that liquid securities markets matter to economic growth as they promote the financing of firms with projects which on the margin may have gone unfunded by banks or other external funders; such markets also promote risk diversification, incentivise the acquisition of information and the pricing of securities, and encourage efficiency in the use of corporate assets and good corporate governance (see for instance here and here). On the other hand, the irrelevance hypothesis argues that securities markets react to, rather than promote economic growth as financing through retained profits may be more feasible than financing through securities markets and stock prices in developing countries may not reflect fundamental valuation because of the prevalence of noise traders. Ajit Singh therefore makes a very strong case that African states should prioritise banking development at the current stage of their financial development (see here).

The second part of the paper then examines the empirical evidence on the relationship between securities markets and economic growth. Various scholars using different estimation techniques and methodologies (cross-country, time series and panel data) have sought to empirically assess the relationship between securities markets and economic growth in developed and developing countries, as well as in Africa. Although the empirical literature contains some mixed results, it largely supports the relevance hypothesis and finds a correlation between securities markets and economic development (see part 2 of the paper for a detailed review of the literature, the estimation techniques adopted, the limitations of the methodology and the difficulty in establishing causation).

The third part of the paper then examines securities cross-listing. If securities markets promote growth by providing capital to firms to finance projects that may have gone unfunded in the economy, the same result may be achieved if these firms are able to raise capital by cross-listing their securities into markets outside their domestic jurisdictions. The paper therefore examines cross-listing into developed markets intercontinentally (the US and the UK) and regionally (within sub-Saharan Africa). The paper finds only 7 African firms (all incorporated in South Africa) with securities cross-listed on NASDAQ, NYSE and AMEX. On the other hand, the paper found a total of 29 firms from 8 countries cross-listed into the London Stock Exchange (22 of these were into the LSE’s Main Market).

The paper then examines regional cross-listing within sub-Saharan Africa. I examine all 1,105 firms listed on the 24 securities markets operating in sub-Saharan Africa. This examination reveals 48 regionally cross-listed firms with a total of 64 regional cross-listings. A number of interesting points arise from this regional cross-listing data.

1. There is a significant amount of cross-listing activity involving firms cross-listing regionally as opposed to intercontinentally (into the US or UK).
2. Firms tend to pursue multiple regional cross-listings (8 firms have triple regional listings and 4 firms have quadruple regional listings).
3. There is a strong trend towards sub-regionalism. 45 of the 48 firms are cross-listed within their sub-regions (East, West and Southern Africa). Of these, there are 34 sub-regional cross-listings in Southern Africa, 9 in East Africa and only 2 in West Africa. The level of regional cross-listing among the different sub-regions correlates with the level of intra-regional trade (i.e. sub-regions with more trade have more sub-regional cross-listings).
4. 34 of the 48 firms are regionally cross-listed into countries in which they have ongoing operations. Many of these firms are engaged in industries in which they sell their products to retail consumers in the countries in which they are cross-listed thus potentially fostering a synergy between the firm’s products and capital markets.
5. There is more cross-listing from firms in countries with more developed markets into countries with less developed markets (primarily South African firms cross-listing into Namibia and Kenyan firms cross-listing into Uganda).
6. No firm incorporated in a sub-Saharan African country without a domestic securities market is pursuing an intercontinental listing into the US or UK. Similarly, only one firm in a country without a domestic securities market is pursuing a cross-listing within sub-Saharan Africa (Trust Bank Limited incorporated in Gambia and cross-listed into Ghana).

On the evidence, cross-listing is therefore not providing a suitable alternative source of finance to firms in sub-Saharan African countries without domestic markets or with underdeveloped markets, making the development of domestic markets crucial.

Onoriode Reginald Aziza is a doctoral candidate at Wadham College, the University of Oxford