MARKET DATA REVIEW : Investment banking crucial to industrialisation

Last week I had an opportunity to attend in an investors’ event that was well organised and coordinated by a local firm.

A high-level delegation of industrial and strategic investors from outside the country with the intent to participate in our industrialisation plan attended. These were prospective investors in some of the flagship projects as identified in our Five Year Development Plan (FYDP-II) were in the exploration mission.

I then participated in the C-Suite business development panel discussion whose objective was, among others, to engage with leading government and business decision-makers in Tanzania so as to enable this group of investors get first hand, relevant and reliable information and also help them gain the exposure to business development opportunities and evolving investment climate in Tanzania’s markets. I thought this was an encouraging move by this firm.

During a panel discussion, the panelist requested my response to a question that intended to gain an insight as to what do I think are the key cornerstone that will jumpstart (in a big way) and sustain the industrialisation plan as detailed in the FYDP-II.

In my quick response, I indicated that — we need some elements of industrial technologies (some of which might be imported, probably via foreign strategic/industrial investors), we need enough energy to power industries, we need relevant-efficient local skills/competences.

I said I think we have political willingness and good leadership, I also said we need good monetary and fiscal policies accompanied by relevant financial institutions, I finally said we need a more focused industrialisation strategy that have taken into consideration the desires of both the state and private sector.

In elaborating my point particularly on the sources of finances to finance our industrialisation, I said we need monetary and fiscal policies that tries to balances trade offs between the need of private sector and the state as well. I said I thought we need more diverse financial structures and infrastructure that will include sector-based financial institutions as well as investment and more development banks.

I provided further details by saying we, as a nation in collaboration with others who shares and understands our ambitions should think of the possibility of establishing specialist banks/financial institutions i.e., industrial development bank (targeting the manufacturing component of industrialisation) and infrastructure development bank, as is the case with Tanzania Agricultural Development Bank (TADB) that provides wholesale lending for agricultural projects. I said that these specialist banks/institutions should be tailored to support industry-led projects and enterprises and that ownership and governance of such financial institutions should be strategic so as to enable accountability and efficiency.

I suggested that these institutions should be public-private owned with clear mandates, among others, to provide long-term credits/capital at subsidised financing costs for projects identified in the FYDP II; that in their structure and set-up, the government should provide seed capital, while private sector (local and foreign investors) should participate via a combination of private placement and IPOs. With IPOs and listing, these institutions will be able to efficiently raise future capital by way of rights issues and/or bonds issuances.

Soon as the panel discussion ended, one of the local executives present at this meeting posted at his twitter account a twit that was based on my suggestions. Some of his followers wanted to know more about my idea of an investment banking in our local context especially being mindful of the fact that we had an investment bank that has in recent years changed into a development bank. Therefore, in the next few paragraph I will try to explain the concept of investment banking and its relevant, especially at this time and age of our economy.

Our current financial market structure is basically that which is almost totally tilted into commercial banking which makes a total assets base of about $10 billion; our stock exchange’s total market capitalisation is about $10 billion, and our total bonds size is about $2.5 billion.

We almost lack private capital and venture capital funds. We have one development bank and we have relatively minimal investment banking activities which are currently provided by a few commercial banks. So — what do investment banks do, why are they relevant? Investment banks are institutions that typically provide various financial-related and other financial/investment services to individuals, corporations, and governments.

These services are such as corporate finance and transaction advisory and sometimes acting as client’s agents in the issuance of securities (shares and bonds) for capital raising. Investment banks may also provide ancillary services such as market making in trading of shares, bonds and derivative instruments. And, one of the major functions of investment banks is their participation as underwriters in securities issuances, in a way guarantees the success of capital raising for issuers of financial instruments.

The balance sheet of an investment bank is somewhat different to that of a commercial bank. Investment banks do not (generally) hold retail deposits — unless they are part of a universal bank, like the current case in our market. Investment banks’ liabilities come in the form of promises to pay on securities such as bonds or short term wholesale money market instruments — in some cases they use money placed in the company by shareholders; and instead of holding deposits with central banks, investment banks tend to place cash at the commercial banks or buy money market instruments, if they have temporary surplus cash. Based on these, it is clear that investment banks are different from commercial banks.

Why are investment banks relevant to an economy like ours, especially now? — companies and state entities, in their evolution in line with economic growth of a country, they reach a point when they need to raise significant amount of capital; during this point, companies and SOEs face an array of alternative types of finances and ways of raising that finance. from syndicated loans to issuance of bonds to selling of new shares, etc. In such cases, the role of investment banks, their skills, knowledge, contacts and reputations helps in bringing the needed potential investors. They assist in pricing financial instruments, they assist in selling the securities, they may underwrite new securities issued — guaranteeing its successful uptake.

One of the signs of a vibrant and growing economy is the amount, size and activities of enterprises changing hands between investors.

In the process of enterprises growth, there comes a time when some investors would wish to exit from the business and liquidate their investment as they seek other investment and financing opportunities; while at the same time others may wish to make and entry into such businesses — in these cases, investments banks advises companies contemplating in such transactions i.e. in mergers, takeovers, acquisitions and other corporate restructuring activities.

The non-existence of investment banks, their negotiation skills, deal structuring, relationship management, etc makes existing and flow of such transactions limited, which feeds into minimal growth-oriented business financing activities. Thus, whether it is risk management, syndicated lending activities, privatisation of state-owned-entities, the role of investment banking is significant.

In the case of stock market related activities, along side their great skills in assisting companies with primary market issuance of bonds and shares, investment banks would normally have superior capability in secondary market dealings being for equities, bonds, money market instruments, derivatives, currencies, etc.

In this space, investment banks may play the role of brokers — acting on behalf of investing clients to try and secure the best buy or sale deal in a market place.

Or, they may be market makers — quoting two-sided prices for securities, the price which they are willing, using their balance sheet, to buy securities and a price at which they are willing to sale the same securities. Market making is a very important aspect for the creation of liquidity in a stock market and eventually for the growth of a stock market.

One may therefore argue that one of the reasons as to why our bonds and equity market haven’t achieved the growth in line with the need for investment financing within our economy is the general lack of investment banking activities.

It is on these basis, and others, that I said in that investors’ meeting — we need sector specific and specialised financial institutions, such as investment banks to finance our industrialisation.

Mr Marwa is chief executive officer of the Dar es Salaam Stock Exchange Email: [email protected]