Integration of Capital Markets in West Africa
25 October 2016
Financial system integration is an integral part of the ECOWAS Monetary Cooperation Programme. The ECOWAS (Economic Community of West African States – comprising 15 West African States). The Article 53 of the ECOWAS Treaty (revised in 1993) establishes appropriate mechanisms to encourage cross-border investments through cross-border stock trading shares and other securities. The aim of this provision is to ensure the free movement of capital within the community, through the removal of controls on capital transfers between Member States. The West African Financial Markets integration program (WACMI) is a component of the ECOWAS regional integration agenda and is followed in partnership with the West African Monetary Institute (WAMI).
To boost cross-border investments, the Treaty has recommended the creation of a Committee whose role is to identify the challenges to capital market integration and offer solutions. On January 18th, 2013 the President of the ECOWAS Commission launched the WACMIC (West African Capital Markets Integration Council). This Council was established as an organ responsible for driving the integration of financial markets in West Africa. The WACMIC includes the stock exchanges of the ECOWAS region the Bourse Régionale des Valeurs Mobilières (BRVM), the Nigerian Stock Exchange, the Ghana Stock Exchange, Cabo Verde Stock Exchange and that of Sierra Leone). The Chairman of the BVRM has been the chair of the WACMIC since March 2015.
Inventory of the stock markets in West Africa
There are currently five stock exchanges in the ECOWAS region namely the Cabo Verde Stock Exchange (with a market capitalization of USD658 million and 16 listed companies), the Ghana Stock Exchange (with a market capitalization of USD14 billion market cap and39 listed companies), the Nigerian Stock Exchange (with a market capitalization of USD 53 billion market cap and 175 listed companies), Sierra Leone Stock Exchange (one listed company) and the - Bourse Régionale des Valeurs Mobilières (with a market capitalization of USD 12 billion and 76 listed companies).
Stock Exchanges Market Capitalization
These stock exchanges have each a different rule book. Several studies have shown that the stock exchanges are largely fragmented with low liquidity to absorb large transactions. For example, some stock exchanges do not allow non-resident investors to invest a certain amount, because of foreign exchange controls and regulations specifically on the repatriation of capital and income from foreign investors (including dividend payments interest, etc.). In addition, some regulations of the stock markets do not favour businesses operating dual listing on several exchanges.
The roadmap for the implementation of this integration
For the implementation of financial market integration in the ECOWAS, there are three phases: In the first phase, known as the “Sponsored Access”, any brokerage firm from a given country can access other exchanges provided it is sponsored by a brokerage firm of another market. And so customers of a given stock market will have access to other exchanges in the ECOWAS. The brokerage firm sponsoring another stockbroker is responsible for the activity of the latter on his behalf.
In phase 2 referred to as “Common Passport”, any brokerage firm that meets the criteria for a common passport can directly access the various stock exchanges and place its clients’ orders as the local stock companies. In this phase, the brokerage firms who meet the minimum criteria set by the WACMIC are qualified to get the common passport and are called “West African Qualified Brokers (QWAB).
Finally, in the third phase, that of the integrated market West African Securities Market (WASM), all WACMIC stock exchanges members will be linked to a market of West African Virtual securities (the WASM), with a common trading platform and a single order book by value traded.
The main criteria for the successful integration of markets
The key success factors are: a harmonized framework for trading, clearing and settlement, integrated trading platforms and harmonization of stock exchange quotations and regulatory requirements. The common passport is also a great tool for integration in its role to enable West African licensed brokers (QWAB - West African Qualified Brokers) to have direct access to the trading platforms of the different markets in the sub-region.
The benefits of the integration of capital markets
The integration program has three main advantages:
(i) With regards to financial systems - integration allows the development of different financial systems, promoting greater competition and more innovation, harmonization of regulatory and stock exchange standards and the increase in movement of capital.
(ii) Regarding the issuers - companies that are listed on a wider market have more visibility with access to more investment and funds raised through a broader capital market.
(iii) Finally with regards to investors - with access to a wider market, investors have a choice of more diversified investment and access to greater liquidity.
What will the West African market integrated represent?
If ranked according to the 2015 stock market indicators, the five stock exchanges in the ECOWAS region, namely the Nigerian Stock Exchange, the Ghana Stock Exchange, the Sierra Leone Stock Exchange, the Cabo Verde Stock Exchange and the BRVM, which all put together result in the West African Securities Market (WASM), an integrated virtual market will be the second African Stock Exchange with USD76.89 billion of capitalization after the Johannesburg Stock Exchange, with 273 listed companies and 233 trading companies.
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