Uganda Stock Market- Experts Speak out

Thursday July 14, 2011

SOME economists have reported that there are no significant roles stock markets or securities exchanges play in fostering economic growth and development in Least Developed Countries (LDCs).

However, Joseph Kitamirike, chief executive officer Uganda Securities Exchange defends the exchange saying it is a place where investors can come to ensure their participation in companies that are significant actors in the economy, thus participating in major productive activity and sharing in the benefits.

Ushad Subadar Agathee, University of Mauritius speaking during a conference on 'Economic Perspectives of Least Devleoped Countries held at the Economic Policy Research Centre, Makerere University, recently, said many stock markets like those in Uganda are young and small in size.

“They need active trading volumes. You need a high number of shares to be bought and sold. There is not enough campaign to go to the public. They go to small groups of knowledgeable investors asking them to invest,” Agathee noted.

Agathee said for cultural reasons many people in LDCs use traditional banks. “People put money in traditional banks and do not look at stock markets as an opportunity to invest though they know how stock markets work,” he remarked.

Agathee observed that in many cases there was a low level of financial literacy which works against the stock market.

He noted the stock market challenges in LDCs include having a low number of foreign participants.

“Given that the structures of the financial sectors in least developed countries are mostly banking oriented the contribution of stock market development towards economic growth is relatively lower when compared to developed or developing countries,” Agathee says.

Agathee called for new policies to be implemented in LDCS to encourage more participants to increase the dynamism of the local stock markets. “In particular policies should be geared towards more local and foreign investors’ participation as well as the increase in the number of listing companies,” he asserted.

MP Frank Tumwebaze says the Parliament’s finance committee had noted that in a bid to make the Uganda Securities Exchange more profitable and effective as a stimulant to economic, there is need to demualise the stock exchange.

The demualise of a stock exchange refers to the process by which a member owned exchange is recognized as a shareholder owned exchange thereby switching from private to public ownership.

A report of the finance committee presented to Parliament in February says a demutualized stock exchange doesn’t face the same conflict of interest that a member owned stock exchange faces. “As more exchanges demutalise the heightened competition drives exchanges to improve technologies and fee structures.

Another benefit is that by going public an exchange has access to more capital and the ability to expand into new markets,” the report read.

Kitamirike responded: “Once demutualized, an exchange can prepare to become a publicly listed entity. Demutualization has recently been approved by the USE governing council. USE is currently mutually owned by the member firms of the exchange.”

He pointed out that trading activity is a function of economic activity within the jurisdiction within which the exchange may operate. “Buyers and sellers do deals on an exchange, with both sides looking to maximise benefit.

If economic activity is low, there will be slow transmission of information on the benefits available, thus limiting the participation of the masses. It doesn’t, however, mean that exchanges are not justified,” Kitamirike observed.

He added that a stock market that can act as a barometer for the whole economy and provide a reading of the state of the economy at any single time.

“The stock market is also a place where broad ownership of shareholding can be engendered and correct sizing of companies carried out,” he asserted.

Jan Rielander, economist, OECD Paris warned the manufacturing sector in UK suffered from financing problems because they were using stock markets to finance their activities. He explained that shareholders demand for high dividends or higher share values in a short time, which cannot allow manufacturing companies plan over a long time.

“Managers had a short term orientation for share value rather than long term orientation,” he said.

He said France in the past used more of banking sector to finance its industries rather than stock markets which enabled them get a long term perspective because many industries need a long term period to grow.

Prof. Dr. Martin Breitenbach, University of Pretoria says a stock market presupposes a certain level of sophistication of consumers. “We should cross a certain threshold of development to give incentives to investors.

It requires a certain level of domestic savings and interest by foreign investors to invest in the stock market for the stock market to lead to economic development,” he said.

By John Odyek: The New Vision Newspaper