Stock market integration and Islamic finance advance together

West Africa’s BRVM stock exchange is leading the way in integrating capital markets and developing Islamic finance. Mushtak Parker reports.

Edoh Kossi Amenounve is an executive on the go. As chief executive officer of the BRVM (Bourse Régionale des Valeurs Mobilières), the stock exchange serving eight West African countries, he is forever promoting the institution to potential investors, whether in New York, Dubai, London or Johannesburg.

He stresses that capital markets in Africa urgently need rationalisation and to move towards greater regional integration. As chairman of the West African Capital Markets Integration Council (WACMIC), he knows what he is talking about.

“There are currently 24 separate capital markets in Africa,” he says, “which is far too many for the continent. We are moving quickly, for instance, to link BRVM with the Nigeria Stock Exchange and Ghana Stock Exchange to establish a West African Stock Market, perhaps akin to the framework of the 16-member Economic Community of West African States (ECOWAS). It is very important to work towards a quick integration of capital markets, because linkage will increase the size and volume of listings and trading and thus attract more international investors and in the same process diversify the investor base.”

He sees the same rationalisation for East Africa, where he envisages a similar linkage between the Nairobi Stock Exchange, the Rwanda Stock Exchange, the Dar es Salaam Stock Exchange and the Uganda Securities Exchange.

The integration of the three main West African bourses will create the second largest bourse in Africa after the Johannesburg Stock Exchange (JSE), which is Africa’s largest and oldest stock exchange. And if the same process is followed for East Africa, Amenounve believes the continent’s capital markets offerings would be transformed.

The first phase of integration, involving sponsored access for brokerage firms, is already in place. The second phase will see a “common passport”, giving a regional stockbroker direct access to any market. The third and final phase will emulate the Euronext model, with a single trading platform and a single order book for all the markets.

With the South African economy slowing down and Nigeria overtaking it as the continent’s largest economy, there is every chance that the West African bourse would expand substantially in terms of market capitalisation, especially on the back of a spate of listings led by Nigerian oil and gas companies.

Amenounve is keen that African countries leverage their high GDP growth rates to attract investors through the capital markets, which in turn would impact positively on developing the local economies. But this would require investor education, building the necessary institutional infrastructure and integration and the regulatory and legal frameworks to give investors certainty.

Rise of the Islamic capital markets

Equally interesting is that the BRVM is leading the way in developing Africa’s Islamic capital markets, a nascent market segment which according to Amenounve holds out good potential for fund raising by corporates and for investors interested in entering the growing African market.

BRVM is in the process of launching a shariah-compliant equity index, which it is developing with technical assistance from the Islamic Corporation for the Development of the Private Sector (ICD), the private sector funding arm of the Islamic Development Bank (IDB) Group, which has some 28 member countries in Africa. Part of the brief of the ICD is to help develop Islamic capital markets in member countries.

This would mean the existing BRVM stock universe of 39 companies being screened to establish whether they are shariah-compliant. Companies involved in proscribed businesses such as gambling, breweries, pork production and processing, arms manufacturing or tobacco would automatically be excluded. Similarly, companies with interest income exceeding 5% of their balance sheet and debt ratios exceeding 33% would not qualify. This automatically excludes the stocks of conventional banks and insurance companies.

The ICD in cooperation with the BRVM is also launching a Sukuk Index in October this year for listing African sukuk. Thus far there have been four sukuk issuances in sub-Saharan countries – a N10bn ($32.2m) issuance by Osun state in Nigeria in 2013; a CFA100bn ($167.4m) sukuk by sovereign Senegal in 2014; a $500m benchmark sukuk by sovereign South Africa in 2014; and a CFA150bn amortised sukuk issued by the government of Côte d’Ivoire in 2015. The Senegal and Côte d’Ivoire sukuk were arranged by ICD.

The rationale for both the Islamic equity and sukuk indices is simple – to enlarge the investor base, to attract investment from the Islamic countries, to unlock liquidity in the system and to facilitate the participation of individuals from African countries who have hitherto been unbanked because of their faith considerations.

Amenounve reiterated at the recent London Sukuk Summit that he sees a significant growth in Islamic capital market products in Africa over the next five to 10 years. He expects “more than 10 sukuk issuances in the region coming from six to eight countries in the next two years, which would be listed in the BRVM and would comprise the Sukuk Index universe. Many investors are interested in shariah-compliant instruments and we need to capture them and make them come to our market. But we do need more frequent and bigger issuances and a secondary market for trading to unlock liquidity in the system. This is where BRVM hopes to play a role.”

The trading culture in Africa is not that different to the Middle East, where investors like to buy and hold equities. But this culture is changing since capital gains seem to be more important than dividends to investors because of the growth of the economy and the potential of many of the listed companies and instruments.

Democratising markets

Others, such as Zakiyoulahi Sow, sukuk programme manager at ICD, stress that the sukuk and Islamic equity indexes could help democratise access to capital markets for various individuals irrespective of religion or creed. “The distribution of sukuk is an issue. The Senegal and Côte d’Ivoire sukuk saw most of the uptake of the certificates by banks. Therefore there was not any unlocking of liquidity. But some 400 individuals did buy into the Senegal sukuk and over 300 individual investors bought into the Côte d’Ivoire sukuk.”

The Sukuk Index and listing is important mainly for individuals, to ensure liquidity and to facilitate benchmarking for investors compared to other instruments. According to Sow, “by October we expect to see $1bn sukuk issuances in other BCEAO (Central Bank of West African States) countries, which would bring the total sovereign sukuk outstanding to $1.2bn.”