Let’s cure what ails Africa financial markets

The DSE. Trusted information on African markets is critical for FDI. PHOTO | FILE

What will move the needle in terms of faster development of financial markets in Africa? That is the question that was top of my mind as I sat among guests at a Nairobi Hotel last week, listening to speeches during the launch of a new financial markets index by Barclays Bank Africa Group.

The new index, which evaluated financial market development in 17 countries in Africa, ranks financial markets on several parameters including strong contract enforcement policies, market depth and capacity of local investors.

Kenya scored 59 per cent ahead of Uganda, Tanzania, Rwanda and Ethiopia but came behind South Africa, the highest performer with 92 per cent, Mauritius (66 per cent), Botswana (65 per cent) and Namibia (62 per cent).

Yet we all know that impressive scores on the Barclays Africa Group Index will not cure the main problem bedevilling financial markets in Africa-namely, small and shallow markets.

The big imponderable remains the question I posed at the beginning: following: what will move the needle?

It seems to me that countries seeking to increase the depths of their financial markets will have to urgently come up with a Marshal Plan to boost national savings.

The needle will only start moving after countries introduce radical policies. I think that top on the agenda will be aggressive effort by governments to reform and improve management of pension funds. We must start discussing how to increase contributions in existing schemes.

We must come up with ways of getting pension schemes in Africa to increase allocations to alternative assets and to tweak strategic asset allocations criteria to include investment in infrastructure.

Currently, our pension funds concentrate on shoving money into treasury bills. As a pension fund manager, you just buy treasury bills and bonds and then go to sleep. This does not increase depth of capital markets. Which is why it does not surprise that the number one ranked financial market in the Barclays Africa Index is South Africa.

Mark you, one of the largest investors in the Johannesburg Stock Exchange is the pension fund for public sector employees. I also believe that depth of financial markets in Africa could also benefit if countries established sovereign wealth funds.

Already, we are seeing a trend where resource-rich African economies, including Angola, Senegal, Nigeria and Ghana, have moved to establish sovereign wealth funds to add on to similar and well established ones such as Poola Fund of Botswana and Laico of Libya.

Tanzania and Kenya have also been talking about creating sovereign wealth funds. The main advantage of sovereign wealth funds is that they make it possible for resource revenues to be managed transparently. And, in most markets, sovereign wealth funds are the largest investors.

African countries also need to take advantage of improvements in telecommunication technologies to mobilise more savings. In the past, mobilising savings was difficult because many Africans were effectively excluded from the financial system.

A far greater majority of the population did not have bank accounts. With the advent of mobile telephony and the phenomenal development of mobile banking policy makers no longer have an excuse to drive higher growths in the rates of national savings.

The new Barclays Africa Index should help because it is introducing comparative market information from a trusted source.

Indeed, trusted information on African markets is what will eventually boost and stimulate higher FDI and portfolio flows.