Capital Markets in Tanzania: Overview of Dar es Salaam Stock Exchange

Interview with Moremi Marwa, CEO of Dar es Salaam Stock Exchange

What has historically been the cause of the reluctance of the Tanzanian businesses to go public? Was it the perceived cost that they had for floatation? Was it disclosure? Was it ownership dilution or perhaps a combination of all three?

I might say that it is a combination of all three, however, to understand this, we have to look at it from the perspective of history. From independence in 1961 to the early 1990’s we were a socialist country and with that kind of economic and social model, issues of ownership, enterprising, growth, individualism and things of that nature were not there until the 1990’s when we embarked on reforms to respond to the globalization. Therefore economic liberalization, trade liberalization and investment liberalization came into the picture. It was during that time that we, as a country decided to implement reforms in the financial sector and with it came the capital markets as a sub-industry and the Dar es Salaam Stock Exchange originated out of those types of reforms, but it was also in that time that we embarked on privatization. We used to have state-owned entities and enterprises run by the government, central economy and ownership of almost all economic factions and factors of production used to be owned by the government, but with the economic liberalization came the privatization of those state owned entities. Some of them were privatized through trade sale to interested investors. Some of them were meant to be privatized through a wider public ownership and you achieve public ownership through public offerings and releasing into the stock exchange, hence the establishment of the stock exchange to allow for that. Third was to create a platform for capital mobilization or serving’s mobilization for the intent of intermediation and onward investment in private enterprises. These three major causes made the existence of the stock exchange [avirap/acacia] now. What has happened since then is that out of more than 400 state owned entities that have been privatized over the last two decades, only 7 came through the exchange, public offering and then listing in the exchange which happened with the mobilization of savings and capitalization through the capital market and the stock exchange. From the private enterprises we have just over 10 companies that raised capital and listed into the exchange in the last 2 decades. In total, we have 25 listed companies with a total market gap of 10 billion dollars and some of these companies are cross listed from other markets, 6 from the Nairobi security exchange and one from the London stock exchange. We have 18 domestically listed companies whose market capitalization is approximately 4 or 5 billion dollars and the total number of investors is close to 500 000 but probably only 100 000 of those investors are active. Based on these benchmarks, market capitalization, number of listed companies and number of local individuals and enterprises using the exchange, I believe that you can rightly say that the capital market and the stock exchange hasn’t been well used by the government as well as the private sector for capital mobilization that goes into investments, especially in investments that will require long-term sources of financing and therefore, as a country, I think we still have a lot that we can do around this subsector to enable financing of business enterprises and development projects, which is key for our own social economic growth as a country.

Would you say that the general public in Tanzania has gained confidence in their capital markets in recent years?

Despite what I just said, I do believe there has been some development, especially recently. For the past 15 or so years we used to have an average of one listing per annum. In the past 3 years we have had an average of three listings per annum and most of these are coming from the private sector in need of equity financing or debt financing that issues shares or corporate bonds and then get listed into the exchange. That is a significant improvement. Then you have market liquidity that is key to being able to attract companies to use the stock exchange. If you don’t have liquidity then you have valuations which are depressed and it becomes difficult to attract [soft scattered] entrepreneurs and business owners to use the exchange because they don’t see value creation in bringing those companies into the exchange. There has been an improvement in liquid of almost 15 times compared to the historical average. The average annual turnover used to be 50 billion Tanzania shillings of trading turnover per annum and that has risen to 750 billion Tanzania shillings for the moment. I keep mentionning the past 3 years because these are the years I have been with the exchange. I joined the exchange in May of 2013 and since then I have seen us making significant growth, in terms of number of listings, market liquidity and an increase in the number of individuals as retail investors as well as institution investors using the exchange for the purpose of capital raising. This is due to some of the initiatives started. For example, we introduced the Enterprise Growth Market (EGM) which is a second tier market that enables small and medium enterprises as well as new ventures to also access public money for their own growth and expansion.

All of this has happened under your tenure. Do you take credit for that?

No. It’s teamwork. Yes, there has to be a leader but an individual won’t be able to achieve everything alone. What we have been able to do is motivate, encourage and build a team that looks at things differently. Until recently, DSE was still a quasi-government entity and we have now moved more towards private enterprise while also changing the culture over the last 3 years. We have a team that now looks at things differently. In terms of efficiency, productivity and in terms of what we can do as a team running the exchange to encourage the business community and the government to use the exchange for the purpose of growth and development.

Do you have to wield the axe internally?

Not that much. It wasn’t a case of weeding out the non-performers and inefficient people. What we have been doing is to communicate with the team to make them understand that what we had been doing in the past wasn’t working anymore and we couldn’t continue in that way in the here and now or in the future. Therefore we all need to understand these things from a new perspective and prepare ourselves for the eventuality of non-continuing to get government support. We need to become financially independent and for this to happen it has to be done by the team that we have. That is what we have been trying to instil in our team and the result has been significant.

Is there sufficient awareness amongst the Tanzanian public in terms of investing in capital markets? You do a lot of outreach work, seminars and you have a scholars challenge to try and increase the investment literacy of your pupils, but how sufficient is the general level of knowledge in the public?

Despite the almost 7 percent growth that we have been experiencing over the last 20 years, if you look at the GDP per capita, one will see that the GDP growth is not reflected in people’s lives. One of the tools that can be used to bring this reflection is to encourage companies to allow other people within the society to share in the ownership of assets that are key to the GDP growth.

We are not yet there yet. Not only in regards to the capital market or the securities exchange but also the knowledge across the financial sector in general be it related to micro financing, banking or the capital market. I think it goes back to the aspect of the history of our country. If it we looked at it from an individual’s lifespan perspective we would say that two decades should be enough for someone to understand some of the things related to private enterprise, economic liberalization and so forth. But we are talking about a country of over 50 million people as a whole. For these changes to impact the grass roots in the country it requires a bit of time and a bit of effort. What we have been trying to do is to come up with strategies and tactics to see how we can engage with the business community as well as with potential investors, retail and institutions to show them how to use the capital market for their savings and investments and their business and financing needs. We inaugurated the scholars challenge 3 years ago as part of the public awareness and education for students in the higher learning institutions. This is an edutainment program that aims at instilling knowledge of savings and investment in higher learning students whereby they use their mobile phones to buy and sell securities that are listed in the exchange. Through that model they have been able to learn how these things are done in real life and this complement the theoretical knowledge they are taught at colleges and universities. These students will be able to share this knowledge and skills with colleagues, parents and families and the I believe the future will be different if we will have more of these types of educated people and apart from sharing their knowledge with family and friends these are our future entrepreneurs, business leaders and managers so if they leave college or university with this kind of practical knowledge we believe the future will be different. We have also been co-sponsoring the top 100 midsize companies survey that is an initiative by KPMG who are a global accounting firm with their office here in Dar es Salaam as well as Mwananchi Communication Ltd who are part of the National Media Group. Together we have been running an initiative to identify, recognise and reward top midsize companies within our economy and our reason for being part of this initiative is because we also engage with these companies within our economy to enable them to understand that they can use the capital market as part of their growth from a midsize companies to big corporate entities.

The Tanzanian Capital Market and Securities Authority (CMSA) is working on allowing for greater shareholding by foreign investor at the DSC which is currently capped at 60%. To what extent would more investors in the Dar es Salaam stock exchange play a major role in building credibility about the capital markets in Tanzania as well as to encourage further FGI?

This was before October 2014. In October 2014, we lifted the foreign investor limits and currently there is no limit. Previous foreign investors cap in listed companies used to be 60%. The philosophy and argument behind the removal of foreign investors limit is that by limiting who should participate in the stock exchange you depress prices and that doesn’t help even local investors who at some point in their investment cycle and ecosystem will decide to exit from a company they have investment, and for various reasons. So by limiting a certain category of investors from being able to partake in those shares you will definitely depress prices for the local investors whom the country wants to provide benefit by the existence of the stock exchange. We therefore saw the logic and the wisdom of uplifting those limits. Since then there has been significant changes in terms of upward mobility in almost all counters, prices have been performing well, there has been relatively comparable valuations as well as a good market capitalization for listed companies. Currently, foreign investors commends about 70% of the ownership of some of the companies and almost 70% of the trading activities and liquidity creation in our market. So, one can argue that the change of our legal and regulatory environment has also significantly contributed towards the growth that we have experienced in the recent past.

Can the stock exchange then also act as an exit mechanism for foreign investors when entering into a joint venture with local partners?

That’s right. The reason we decided to do this is because there are private equities and venture capital funds that are invested in some of the private entities within our economy and when private equities and venture capital funds want to exit they sometimes want to exit through the capital market. If you limit who can participate during their exit you have a challenge attracting them into the economy and so you will have depressed activities in direct foreign investment, private equities and venture capital funds within the economy. The uplifting of the foreign investment limit gives assurance that investors can use the exchange as an exit mechanism.

What are some of the advantages and disadvantages for a private company to float at the DSC?

I will start with the potential perceived disadvantages. They will have to be more transparent; fortunately, with more transparency companies becomes more efficient because of expectations from various stakeholders to listed companies. For entrepreneurs and business owners with a limited level of understanding and thinking it would be a major roadblock to consider. On the positive side, transparency improves companies governance and with that you are able to attract talent to your company and because you are a listed company people will see the prestige of working for a listed companies that has good media coverage, public scrutiny, transparency and good governance mechanisms within that company. By attracting talented people companies become more efficient organizations. The second advantage is the tax incentives for the companies that are listed in the exchange as well as for the investors investing in those listed companies. Companies will benefit from these fiscal incentives that have been provided by the government to attract more companies into the exchange and to also attract investors to use the exchange for their investment and savings objectives. The third advantage is that being listed in the exchange, the valuation of the company is more efficient. Investors in listed companies don’t have to invite transaction advisors and corporate finance advisors to evaluate your company for you to understand the value of their investments. It takes one click of a button or one call to a stock broker or investment advisor for an investor or business owner to know the value of their company. The fourth advantage is the exit. If an investor is an anchor investor or an anchor shareholder or even a new investor in a company and they want to exit it is much easier and more efficient for them to liquidate their investment. In my opinion the combination of benefits in being a listed company outweighs the disadvantages of being a listed company.

What are the downsides of listing?

The market determines the listed price of a company. They look at factors that are fundamental and factors that are just sentimental. So a disadvantage is that if a company is not doing well or is just not positioned strategically for an investor to be able to understand it correctly, then there is a possibility that prices will go down and if prices go down the value of investors go down and investors will feel cheated by the management and leadership of the company and that might not bode well for the sustainability of that business over the long-term. There is a need for a good and careful balancing between what you do as a company in terms of efficiency and productivity and how you position yourself in terms of sharing that knowledge and information with the existing and potential investors in that company.

It’s fair to say that the private sector has not been over enthusiastic in using the exchange for raising long term capital. As far as I know a total of 12 companies have used the exchange for capital raising purposes. To what do you attribute this lack of appetite?

Cross listed companies definitely did not use the exchange to raise capital. They came to list by introduction. The other 18 companies came via capital raising and then got listed in the exchange and that is on the equity side. Then there’s the debt side where we have over 15 companies that issued corporate bonds to raise capital and have been listed in the exchange. Some of them have matured and some of them are still outstanding and listed into the exchange. Don’t forget that we also have approximately 2.5 billion dollars of government bonds which are also listed into the exchange. This is where the government raised capital from the local market to invest in different development projects within the economy. So yes, your 12-companies listed statistics were on the lower side; but I’m also not implying that 18 equities and 15 companies that have issued corporates bonds are relatively a big number compared to the size of our economy and its potentials. And yes, I concur with you that there has been a lack of enthusiasm by the private sector to use the capital market to raise capital for their growth and development and I think it comes firstly from lack of awareness given the history of the country. Secondly, most of the family owned businesses fear these issues of transparency and they think that by being more transparent they will be required to pay more taxes compared to being non transparent and staying under the radar. I think a combination of lack of awareness and the fear of transparency from entrepreneurs and business owners is keeping the level of growth of our stock market and its contributions to economic empowerment and better social welfare.

To what extent will the establishment of the Enterprise Growth Market (EGM), be an opportunity for SME’s to raise long term capital through the exchange? I believe that so far one company, Maendeleo Bank, has listed EGM. Do you expect new companies to start listing this year?

We actually now have 5 listings into the enterprise growth market. Maendeleo was the first and came into the exchange in 2013. Since then, there have been 5 listings into the EGM raising over 50 billion Tanzanian shillings worth of capital and currently these companies are worth more than a 120 billion Tanzania shillings as measured by market capitalization. Since we established the EGM, it’s approximately 3 years, by my estimate, there has been an improved enthusiasm of businesses to use the market for financing their businesses. The benefits is that with the enterprise growth market the listing requirements are relaxed and given the type of many businesses and the size of our economy most of the businesses operating in our economy are relatively small and some are medium sized. Therefore by providing these companies a platform where they can raise less costly and efficiently priced long term source of capital, there will be a positive change to these companies. What we have seen in the past two and a half years and in the queries that we receive and the enthusiasm that we now see, we think the future will be different from what we have experienced in the past.

The Tanzanian Share Index (TSI), which tracks and measures the performance of domestic listed companies, has grown by about a 150% in the past 3 years. To what extent does this imply that investors are optimistic with the economic fundamentals of the local economy and also the fundamental performance of some of those listed companies? How much of a barometer is it?

As it is, in economics and finance, we understand that indexes are used as barometers for economic activities within the economy and for us I’ll say our stock market indices are probably not that much a reflection of what is happening in the real economy. As an example, we have some of the highest contributing sectors to the GDP of this nation; I am talking about sectors such as mining, where our country is the third largest producer of gold in Africa, we have diamonds, we have Tanzanite and other many extractive minerals, we have recently discovered close to 60 trillion cubic feet of gas — so if such a sector with such contribution to the GDP is not reflected in the stock market — it is difficult to argue that our stock index is a reflection of what is happening in the economy. The other sector is tourism, we have many tourism attractions such as Zanzibar, Serengeti, Ngorongoro, Manyara, Mikumi, Selous, etc — tourism is one of the highest contributors not only in our foreign earnings but also in the GDP. However, this sector is also not reflected in our stock market indices. The same applies to sectors such as infrastructure, telecommunications, agriculture and agribusiness, etc. If all of these sectors are not reflected into the stock exchange’s indices; it is difficult for me to say our indices are a good barometer of our economic activities, like ibis in many other stock exchanges. However, going back to the basics of your question; yes there have been significant improvements in our indexes, and of several reasons. First, because of the fact that we recently changed our legal/regulations framework by allowing foreign investors to participate more and therefore unlocking investment potential and valuations of some of the companies that are listed. Secondly, there has been close to 10 listings in the past 3 years, these have also contributed to the increase in the market capitalization and the indexes. The main sectors that are reflected in the companies that have been listed so far are mainly financials and manufacturing.

Tanzania has experienced very strong economic growth and a greater visibility as a viable investment destination, particularly due to those recent discoveries of natural gas which is a potential game changer for the country. What is your personal message as head of this institution and one of the key spokespersons for Tanzanian business and trade investment? What is your personal message to those investors foreign and local?

It is important that there is an equitable economic development of the country for social prosperity of many. Stock markets are some of the tools that enable many people to participate in the ownership of their economy. Therefore, it is arguably right to encourage local and foreign companies operating in our economy to consider sharing their prosperity and losses with the local community via listing their companies in the local exchange. Currently, the practice is that foreign companies operating in sectors such as mining, extraction, telecommunications, infrastructure, tourism and hospitality, do raise funds from outside the country and these funds gets invested here, therefore operations and profitability will be generated here but the money will go back to investors where those funds were mobilised. For extractives as an example, it will be either Toronto, London, Johannesburg or New York. Therefore, my opinion is that it will be proper, for the sustainability of these businesses and the society in which their operations are based, to consider to use the local capital market. Because we are operating in a globalized economy and the fact is that we don’t limit foreign investors to participate in our local market, I can’t see why companies should not, during their capital raising process, float a relatively small portion of their shares in the local market here and then local investors, retail as well as institutions also participate through ownership in these companies and during that process, investors from across the world will also access these companies via this exchange and I think that’s what will be key in terms of creating an equitable society and for the sustainable existence of these companies, because otherwise people tend to think that since they’re not allowed to participate through ownership in these companies, then they are not part of the economic growth. Despite the almost 7 percent growth that we have been experiencing over the last 20 years, if you look at the GDP per capita, one will see that the GDP growth is not reflected in people’s lives. One of the tools that can be used to bring this reflection is to encourage companies to allow other people within the society to share in the ownership of assets that are key to the GDP growth.