Enhancing liquidity for further growth, development

Thursday November 21 2019

Deputy Finance Minister Ashatu Kijaji rings the

Deputy Finance Minister Ashatu Kijaji rings the bell during the listing of a company at the Dar es Salaam Stock Exchange in the city. PHOTO|FILE 

The DSE recently achieved the Frontier Market Status by FTSE Russell, it could meet criteria for an Emerging Market Status, if liquidity constraints are addressed.

According to FTSE the DSE liquidity is not sufficient to support sizeable global investments.

Also, the recent OMFIF-Absa Africa Financial Markets Index 2019 Report paints a similar picture with regard to liquidity in our market.

The report indicates that much as we have made significant progress in many aspects, but the one key impediments towards a better ranking is the limited liquidity. So, what can be done to enhance liquidity? These are some of the proposals:

Promoting a diversified domestic investor base

Currently, over 80 per cent of liquidity on the DSE listed securities in the equity segment emanates from foreign investors, while local investors (both retail and institutions) makes up about 20 per cent.


This tells us that promoting domestic investors base, including both retail investors and a range of institutional investors with different investment horizons and perspectives, is central to the development of our domestic equity markets.

Of course, the right investor mix ultimately depends on the goals being pursued by market participants.

In our case, policymakers, regulators, and exchange operators could focus both on increasing long-term domestic savings and enabling the investment of a portion of those savings into DSE.

This can be approached by focusing on both retail and institutional investors in the context our market-specific considerations.

Learning from others, one could observe that some markets have a large retail investor base from the outset of the stock market inception, while others have grown this investor segment over time.

In such cases as market matures, regulators and market operators continue to promote the development and diversification of the domestic investor base, while also opening the market to (greater) international investment.

Our experience in this has been different, in the sense that we overly rely on international investors somehow too early in our growth trajectory, since we liberalized our market further in 2014 by removing foreign investors’ limits, domestic investors ownership and liquidity participation declined significantly.

The case for increasing participation of local institutional investors

In many early-stage markets like where we are, the size of the institutional investor base could be relatively small and often highly concentrated, with relatively low levels of assets under management and limited participation in equity markets.

The reasons for this vary, but for us these include: (i) implementation of mandatory and defined benefit pension schemes that restrict the development of a competitive private pension fund sector; (ii) preference to invest in low-risk financial instruments, thereby limiting pensions participation in equity markets; (iii) restrictions on who manage pension fund assets, thereby limiting the emergence of a competitive asset/fund management industry; and (iv) other restrictions, including restrictions of pension fund investment in listed equity markets, in preference for assets classes.

Many frontier and emerging market jurisdictions have sought to address these by transforming pensions schemes by reducing the size of defined benefit pension schemes, the removal or relaxation of legislative and regulatory barriers to investment in equity markets, and the use of tax incentives to encourage both the allocation of funds to institutional investors and the funnelling of investments into equity markets.

Providing an enabling environment for retail investors

Growing the retail investor base requires investor education, the presence of a suitable investor protection scheme, and the existence of mechanisms to facilitate access to markets.

Tax incentives also encourage increased retail savings and investment. Providing investor education and improving financial literacy are essential to increase retail participation.

They are particularly important where levels of financial literacy are low. A number of markets have introduced successful education programs.

For example, some emerging markets have dedicated education arm. For us, we have not made significant progress in this space.

In addition to providing retail investors with the tools to understand the risks of investment, markets also ensure the existence of relevant investor protection schemes, in our case we have the fidelity fund.

This fund provides investors with compensation in case they suffer financial loss due to misconduct by intermediaries (available as a last resort where the bank/broker is not able to ‘make good’ the client).

Finally, the use of tax incentives can act as a simple and effective method to attract retail flows. In our case, investors are exempted from paying taxes on capital gains from stock trading.

Investors are also partly exempted from dividends taxes, where withholding tax on dividends is half compared to investors in non-listed companies.

Finally, Retail investors can also funnel their investment through indirect market access, for example, mutual funds/unit trust or ETFs, and many Asian markets have enhanced liquidity by using this approach.