A reassessment of stock market integration in SADC: The case of Namibia

ABSTRACT

A major feature of development policy modelled on neoclassical notions of financial market integration is that a wide array of smaller markets can benefit from integration by pooling resources and attracting foreign capital to supplement otherwise low levels of domestic investment. However, evidence from Namibia and South Africa suggest that the smaller markets become regulatory price-takers and to maintain the benefits from integration, face prohibitively high costs. We find evidence that the current policy initiatives of regional integration impose costs on smaller, less developed exchanges, which are ultimately borne by local firms seeking cost-effective sustainable external finance.

KEYWORDS:

• Micro markets
• Emerging economies
• stock exchange financing
• integration
• Africa

1. Introduction

The rapid proliferation of stock exchanges across Africa since 1990 has been driven by two policy objectives: to increase efficiency through privatisation (Irving, 2005) and to achieve economic growth through financial development (Mosley & Chiripanhura, 2009). This has often been accompanied by structural adjustment programmes proposed by the international financial institutions that emphasise economic liberalisation and a reduction of state control over the economy. These policies may be implemented by intervention in product and factor markets, or by external activity, such as trade and foreign investment (Mosley & Chiripanhura, 2009). Much modern development strategy emphasises the central role of market institutions. These are considered necessary to facilitate the free movement of capital from savings and investment to projects where it is most needed with little attention paid to the role of transactions costs.

Consequently, current initiatives developed by The New Economic Partnership for Africa’s Development (NEPAD), the African Union (AU) and the Southern African Development Community (SADC) focuses on the benefits of the integration of many of the smaller African markets with South Africa as the central hub (NEPAD website, 2010). The motivation for this integrated pan-African exchange is to attract foreign investment, increase liquidity and supplement the very low domestic investment rates, reflecting the requirements for financial liberalisation proposed in the early literature on financial liberalisation by McKinnon (1973) and Shaw (1973). Thus, the first contribution of this paper is to review this policy using the example of Namibia, which is the first market to be fully integrated with South Africa. This builds upon earlier research that questions the benefits from establishing very small stock exchanges in Swaziland and Mozambique (Hearn & Piesse, 2010a, 2010b) and the effects of the local political economy in the integrated Francophone West African regional exchange in Cote d’Ivoire (Lavelle, 2001).

The advanced level of financial market integration between Namibia and South Africa is largely due to the closely related legal, political, commercial and government institutions that are a legacy of the past colonial era. This has been strengthened by the shared macroeconomic arrangements that follow from their joint membership of the Common Monetary Area (CMA). However, significant barriers remain. Firstly, there are transaction costs associated with asymmetric information between investors and issuers. Secondly, agency problems exist where firms are reliant on external funds and in developing regions there is a strong emphasis on relationships and physical proximity, which can lead to major spatial concentrations of formal sources of finance (Martin et al., 2005).

In Namibia, the highly concentrated nature of financial activity in the area around Windhoek, plus the high transactions costs related to information search, verification, monitoring and surveillance in the rural areas means that there is a considerable risk premium required if investors are to be attracted to more distantly located projects. The lack of investment opportunities outside the capital is exacerbated by the structure of the banking system. This is highly centralised and draws savings from the rest of the country to the centre, again focussing all economic activity around the stock market in Windhoek and concentrating the power of the political elites (Lavelle, 2001). Furthermore, countries such as Namibia face considerable constraints in maintaining the necessary institutions and commercial innovation to compete with the better capitalised and more developed markets in South Africa. Thus, the second contribution of the paper is to investigate the ability of this smaller market within an integrated area to maintain levels of legal investor protection, regulation and governance equal to those in the dominant market.

The paper is structured as follows. The next section briefly reviews the literature on finance and economic growth. Section 3 presents the theoretical arguments and some of the evidence related to financial market integration, most of which supports the current policy initiatives. Section 4 discusses the characteristics of regional SADC stock markets and provides examples of other integrated African markets with some comments on the extent to which any benefits have resulted. Section 5 describes the Namibian stock market and investigates the impact of financial market integration on the local market. Section 6 concludes.

2. Sources of finance and the impact on economic growth

The literature relating financial development to economic growth and productivity began with Schumpeter (1912) who discussed the relationship between financial intermediaries and entrepreneurial activity. Schumpeter cited the benefits of financial intermediaries in fostering technological innovation through their ability to mobilise savings, monitor firm managers, evaluate projects, manage and pool risks and facilitate trade.

But early in this debate, controversy about the role of finance in economic growth emerged. This is divided between those that consider finance to be irrelevant (Meier and Seers, 1984) or at best follows enterprise development (Robinson, 1952) and those that consider financial markets to be a precursor to economic growth (Miller & Grossman, 1988). The literature has built on the early work of Schumpeter (1912) and McKinnon (1973) who collectively adopted a more liberal approach in ascribing a role for finance in economic growth while remaining ambivalent on the direction of causality (Levine et al., 2008). A related issue focuses on the role of banks compared to stock markets in facilitating financial development and economic growth. Schumpeter supported the role of financial intermediaries and stressed the importance of banks. However, his work emphasises individual entrepreneurship and the benefits of technological innovation and growth while largely dismissing the role of government other than in the promotion and support of the entrepreneurial classes. But, in a developing country context, this does not necessarily favour a bank-based financial system over a stock market-based one (Levine et al., 2008). Rimmer (1961) asserts that government plays a prominent role in developing countries and is more likely to have a role in fostering entrepreneurship although it is important to note that in this model, growth occurs through technology diffusion from developed countries rather than genuine innovative activity.

The case for a bank-based financial system extends beyond merely stipulating the growth-enhancing role of banks into a critique of the role of markets in the provision of financial activity. Banks are particularly well positioned to mobilise savings in the domestic credit markets and engage in intertemporal risk sharing that improves resource allocation, although this is contingent on the level of financial repression and regulation (Allen & Gale, 1997). In contrast, the literature supporting a market-based system largely focuses on the negative aspects of dominance by banks and their control over firms. Firstly, banks are able to acquire information that would be otherwise unavailable in a market-based system and gain enhanced rights over firm cash flows (Weinstein & Yafeh, 1998). Second, levels of dominance and control by banks can lead to the financing of low risk, long-maturity projects at the expense of high-risk ventures that could have a beneficial effect on the wider economy and be more socially and resource-efficient (Weinstein & Yafeh, 1998). Thirdly, the longer-term focus of bank finance can have a detrimental effect on corporate governance where inefficient managers that collude with the banks to retain their position in the firm (Black & Moersch, 1998).

Arguments supporting bank-based systems focus on the merits of the provision of inexpensive risk management services for standard customers although they lack the flexibility that market-based systems have in providing customised financial products. This rigidity has spawned a separate literature on the mutually reciprocal ability of banks and stock markets to provide effective finance and foster economic growth in the economy (Bencivenga et al., 1996). The concept of mutual interdependence is particularly important given the effectiveness of stock market-based systems is dependent on liquidity rather than size determined by market capitalisation. Liquidity is critical for firms that require easy access to capital by equity issues, the optimal allocation of resources and capital within the economy and to attract greater levels of savings that can be used for investment purposes.

While there is considerable evidence for the effect of finance on growth this is generally from cross-section panel studies rather than time series techniques. In addition, the models developed in the growth literature tend to ignore the effects of income distribution and the level of poverty in SADC. This has spawned a more recent literature centring on the political economy and wealth distribution effects although again there are conflicting views on the benefits arising from financial development. Aghion & Bolton (1997) consider the innovative nature of financial development as exerting substantial benefits on the poor where improved access to financial services and products reduce informational asymmetries and ease capital flows to otherwise wealth-deficient entrepreneurs. In contrast, Lamoreaux (1986) cites that access to finance is a critical determinant of the early stages of enterprise development and is limited to those that have political connections. Thus, the political elite have access to financing and can take advantage of entrepreneurial opportunities, technological innovation and capital accumulation, further exacerbating the disparity in the distribution in income and wealth that follows economic growth.

The next section discusses the operational aspects of financial integration. These trading mechanisms have a substantial impact on the success of integration and determine whether the expected benefits from the current policy initiatives are achievable.

3. Financial integration and securities market design

The theory related to security market integration is based on the neoclassical view that foreign investment supplements domestic savings rates to provide effective financial intermediation. The primary function of a stock exchange is to produce accurate and timely information on listed and traded securities and to provide the means for exchange between buyers and sellers. The technology used is to facilitate trading and settlement or clearing systems (Tapking & Yang, 2004). Transactions between the stock market and clearing system involve transaction-specific assets such as human capital, site specificity and parties to the transaction that are mutually dependent. However, as asymmetric information builds up between the two parties, vertical integration is required to align incentives and reduce transactions costs (Crocker, 1983).

Not surprisingly, the design of the trading system will have a major impact on financial integration as security markets play a fundamental role in operating efficiency and on the effective provision of services to both providers and users of capital. The principal function of a trading mechanism is the transformation of demand and supply into transactions achieved through the process of price discovery (Madhaven, 1992). The literature on the design of trading systems contrasts the ability of rival methods to achieve effective price discovery and the effects on liquidity in the market. Since the beginning of the early twentieth century, the majority of stock exchange trading has been by one of three auction methods: open outcry, which uses a system of floor-based traders’ transactions; quote-driven systems where dealers post prices before order submission; and order-driven systems where traders’ submit orders prior to price determination. Order-driven systems can be further divided into continuous auctions with immediate order execution or periodic auctions where orders are stored for simultaneous execution (Madhaven, 1992).

Research on the theory of trading relies heavily on the rational expectations hypothesis where trading is organised into auctions involving large numbers of traders and the price mechanism is used to aggregate information in an efficient manner. However, many developed country markets, such as the US, do not rely on auctions but instead use market makers to provide liquidity by buying and selling on demand. While the literature is somewhat mixed there is considerable evidence to support the use of call auctions for trading and price discovery in the case of smaller and less liquid stocks. However, in the move towards automated trading systems and the introduction of continuous trading, there can be benefits to retaining call auctions because of the aggregation of order flow into stock prices. This is particularly desirable in the case of smaller and less well-known stocks that lack analyst coverage and thus information costs are higher. Examples are the Botswana exchange (Jefferis, 1995), the Bourse Regionale des Valeurs Mobilieres (BRVM) in Cote d’Ivoire (Hearn & Piesse, 2010b) and in Swaziland (Hearn & Piesse, 2009), where in each case the exchange is small and there are few or no institutional investors.

Much of the literature on market integration and relative trading and clearing systems is based on the US and EU. Giddy et al. (1996) studied rival models of settlement and clearing in the event of a fully integrated securities market for the EU and provides an example of the benefits arising from reduced foreign exposure risk following the introduction of a common currency. The Giddy study also assessed relative costs and the effects this may have on increasingly large cross-border institutional order flows. These additional transactions costs drive a wedge between gross and net portfolio returns and are an explicit and implicit tax on trading, which is both a barrier to the development of domestic securities markets and can reduce cross-border order flows. This increases the costs to large institutional investors and shifts the efficient frontier of risk-return portfolio opportunities downwards, reducing the potential benefits from diversification for smaller investors (Levy & Livingstone, 1995).

Thus, one of the major concerns with horizontal integration of clearing and settlement systems as a single integrated market is firstly who would bear the credit and foreign exchange risk. The likelihood is that it would be passed on to investors while simultaneously incurring substantial benefits to the holder of the monopoly position. The credit and foreign exchange risk premiums and the monopoly rents inhibit foreign institutional investment. While there are considerable costs in establishing and retaining national central security depositories (CSDs), horizontal integration is unlikely to reduce costs and are more likely to focus market power in one member state, raising further questions about the benefits of integrated securities markets (Singh, 1999). Baur (2006) finds evidence that vertical integration of trading, clearing and settlement facilities is superior to horizontal integration if the overall market is competitive and regulation, accounting and business standards are common to all participants. However, this is far from the case in Sub Saharan Africa where significant segmentation exists, particularly with respect to differences between legal and governance institutions across markets (Irving, 2005; Quintyn & Taylor, 2007). Indeed, they are not only different but largely uncompetitive as sources of finance (Kenny & Moss, 1998; Grandes & Pinaud, 2004).

Hasan and Malkamaki (2001) studied 38 stock exchanges in 32 countries to investigate levels of cost-saving from the concentration of stock market activity. The findings indicate economies of scale resulting from technology in processing trades and disseminating firm-specific information. The largest exchanges are the most cost-effective but expansion was only feasible in North America and Europe. Similar results were found for economies of scope where there is evidence of benefits from mergers and alliances amongst the biggest exchanges associated with increased standardisation. However, for small- and medium-size exchanges activity pooling may not be cost-saving, suggesting that only mergers to achieve scale economies are a good policy solution but not otherwise.

Schmiedel & Schönenberger (2005) adopt a broader view to the integration of securities markets institutions. While they recognise that stability and macroeconomic harmonisation are the basis for efficient clearing and settlement systems, these are essential for financial stability across the EU and European common monetary area (Eurozone). However, there are still considerable barriers to integration, some in the form of heterogeneous governance, accounting, legal and taxation regimes and others caused by informational asymmetries, such as at the firm level in Scandinavia (Oxelheim, 2001). Irving (2005) reviews the progress towards integrated securities markets in East and Southern Africa and finds that with respect to the harmonisation of national payments systems much remains to be done. The removal of exchange controls, currency convertibility and stable macroeconomic policy are essential to eliminate foreign exchange exposure before a single CSD can be effective. The development of active bond markets is essential to stabilise macroeconomic and fiscal policy for a region where many governments cannot borrow abroad in their domestic currency and are required to accept a potential mismatch as regards the terms of trade and national payments.

The other principal barriers to integration in SADC and the East African Community are regulatory regimes, taxation, political uncertainty over the loss of sovereignty of national assets, vested interests and liquidity-flight to the Johannesburg Stock Exchange (JSE). National regulations and systems of corporate governance remain segmented and there are huge differences in the level of human capital and trading, clearing and settlements technology between the exchanges. Technology through links with developed country exchanges can help to bridge this gap, for example, the use of the London Stock Exchange trading system by South Africa, and by extension, Namibia. However, because of the questionable benefits from full securities market integration there are other more indirect measures available such as cross-listing and memorandums of understanding (MoU) between exchanges. These ease the transfer of technology and innovation between exchanges and enhance the transmission of information thereby fostering regional cooperation without the considerable expense of integration (Irving, 2005).

Apart from trading and settlement, the other major barrier is regulation. The system of regulation and supervision has a significant impact on the effectiveness of financial markets but there are major capacity constraints in the case of less developed countries (Singh, 1999; Quintyn & Taylor, 2007). As with security market integration much of the literature on regulation is focussed on competition and either preventing potential monopolies or reducing market power. However, there is very little discussion of regulatory relationships between closely related markets. A prominent exception is Licht (2001) who studies the relationship between the Israeli and US markets and these findings reflect many aspects pertinent to the example of Namibia and South Africa in this paper. The Israeli market is the second highest source of dual listings in the US, after Canada. Firms’ dual list for various reasons, including the desire to acquire an expanded investor base, access to increased marketing exposure and the facilitation of employee participation and remuneration packages. However, by far the most important is to achieve a lower cost of equity. As firms gain more cost-effective finance that allows investors to diversify risk through a wider choice of stocks the share prices rises. This is commonly a justification for firms to cross list although this does mean they are subject to regulatory regimes with more stringent disclosure and due diligence requirements. This relationship between the small Israeli market and the dominant US one is an example of regulatory competition between two closely related markets. Here, the combination of liberal commercial tax laws in the US, where foreign firms are subject to weaker regulatory regimes than domestic ones, resulted in a substantial loss of listings from the Israeli market to the US and illustrates that the smaller, less developed market is at a competitive disadvantage compared to the dominant market.

In the case of the majority of SSA markets, a further hindrance is their relative undercapitalisation (Kenny & Moss, 1998; Singh, 1999). Smaller developing markets are rarely able to compete with the innovations in regulatory and governance law that take place in South Africa. Thus, for Namibia, it is more cost-effective for domestic firms to accept the additional fixed costs of primary listing on the JSE market where they are more likely to be attractive to South African and international institutional investors thus lowering their cost of equity. This means that the Namibian market is relegated to the role of ‘regulatory price-taker’, which further exacerbates the severe illiquidity in the local primary listings market, as happened in the Israeli and US markets discussed above. The next section considers some of the characteristics of SADC markets before examining the relationship between Namibia and South Africa more closely.

4. Characteristics of African stock markets

Stock market capitalism is a relatively recent phenomenon in Africa with many exchanges established since the end of the Cold War with the support of the international financial institutions (IFI). However, despite this rapid growth, the majority of stock exchanges in Africa have had a very limited impact on economic development due to the general lack of a stock market culture (Kenny & Moss, 1998), weakness in legal protection of property rights (Irving, 2005) and political economies dominated by the narrow interests of social elites (Hearn & Piesse, 2009). These problems are commonly reflected in the lack of liquidity and trading activity in the majority of African markets.

There are considerable differences in the level of development between markets in Africa. South Africa dominates in terms of size, activity and financial innovation followed by the Cairo and Alexandria stock exchange (CASE) and the Nigerian stock exchange (Hearn & Piesse, 2009). However, the number of listed firms and the size of these markets are not necessarily matched by operational efficiency and operational transparency. For example, the dual system of accounting and audit in Nigeria reflects both domestic and international standards and this reduces the effectiveness of the stock exchange (Hearn & Piesse, 2010b). In contrast, the smaller Botswana stock exchange has a sophisticated electronic call auction and robust primary and secondary markets supported by onerous due diligence and disclosure regulation. This market has also retained the primary listings of domestic firms despite the proximity of the JSE (BSE website, 2010) where trading volumes in local listed shares are ten times that of foreign listed firms, although foreign interest is mostly in the form of venture capitalists involved in mining (see Table 1).

Table 1. Characteristics of selected African securities markets, 2008.

	No. of firms	Traded volume (‘000)	Traded value US$m	Mkt. Cap US$m
Panel 1: Selected SADC markets
Namibia
Dual listed	16	247 640.31	1182.31	93 579.70
Local listed	10	26 711.53	18.13	898.85
Development board	4	17 412.09	4.73	296.67
Botswana
Foreign listed	4 (7)	17 065.60	–	42 010.10
Domestic listed	19 (1)	176 242.50	11 666.40	4066.00
Venture Capital	1	4267.00	7.58	79.81
Zambia
Dual listed	1	–	–	–
Local listed	19	1 640 040.61	108.50	1217.84
Quoted board^a	9	159.01	0.01	52.21
Malawi
Dual listed	1	487.14	–	1788.39
Local listed	12	607 526.59	59.71	13 081.65
Mauritius
Dual listed	0	0.00	0.00	0.00
Local listed	40	211 349.38	312.75	3495.94
Development board	47	97 997.10	3.64	115 935.00
Panel 2: Integrated African markets
BRVM
Overall	41	2984.65	214.65	4393.35
Cote d’Ivoire^b	36	2515.00	97.27	2129.18
Senegal	1	448.60	115.69	2116.80
Niger	1	6.02	0.41	15.62
Benin	1	15.08	1.12	64.52
Togo	1	–	–	–
Burkina Faso	1	0.00	0.17	67.23
Egypt
CASE Overall (Matched trades)	333	21 919 567	81 259.00	–
Cairo
Buy Orders	–	21 116 776	79 601.70	–
Sell Orders	–	21 191 768	79 730.60	–
Alexandria
Buy Orders	–	802 791	1657.37	–
Sell Orders	–	727 799	1528.46	–

Source: National exchange websites and Bloomberg; NSX Annual report 2008 for Namibia.

Note: Values in parentheses for Botswana indicate venture capital companies.

^aIndicates that of 10 quoted firms 5 have achieved this status through the privatisation and restructuring of a single former mining parastatal ZCCM.

^bIndicates that 33 of the 36 Ivorian listed firms are headquartered in Abidjan.

The Lusaka stock exchange (LuSE) in Zambia has an automated system of continuous trading. The CSD is 50% owned by LuSE and the remainder controlled by foreign custodian banks, in particular, Barclays and Stanbic, ensuring efficient transfer of technology and human and social capital (LuSE website, 2010). However, the exchange has only attracted one dual-listed firm and while trading volume activity is very high, traded value is low (see Table 1). A quoted board where firms can benefit from the publicity associated with an affiliation to the exchange without the constraints of costly regulations and listings disclosure requirements has had limited success. Trading volumes and market capitalisation in the quoted board are very low compared to the main board. More than half the quoted firms result from privatisation of the former state-owned mining conglomerate ZCCM (ZCCM prospectus, 2007). The Zambian government pension scheme acted as underwriter to the privatisation and issuer of new shares. Due to the limited budgetary independence of the Zambian market regulator, state involvement in the privatisation process brings into question the market-based economy and the ability of the market to operate in a self-sustaining way (Mwenda, 2004).

The Malawi stock exchange (MSE) has 12 listed firms, with one the dual-listed affiliate of Old Mutual South Africa. Trading is by manual call auction and settlement and clearing is organised on a trade-by-trade basis by the clearing banks and custodians of market participants (MSE website, 2010). But despite the considerable volume in traded shares the actual value is low and the dual-listed entity accounts for over 14% of the market total capitalisation (see Table 1). This suggests that stock exchange finance has a relatively minor role in the external financing of firms relative to the banking sector. Further, the small formal sector and the dominance of political and economic activity by Chechewa-speaking social elites limit both the regulatory independence of institutions and their effectiveness. Here too, there is doubtful budgetary independence (Mwenda, 2004) and severe human and social capital constraints impose limits on regulatory innovation (Quintyn and Taylor, 2007).

The Stock Exchange of Mauritius (SEM) has had considerable success with the establishment of its development board with less stringent disclosure regulation. Traded value is low compared with the main board (see Table 1) although levels of market capitalisation are over 33 times as high as the main board. However, trading activity is very concentrated on the main board. Trading is by automated continuous auction for both boards. A CSD and an extended network of well capitalised international custodian banks support the presence of foreign institutional investors and this attracts overseas order flows.

Evidence on the levels of trading and listing on the other two regional integrated markets in Africa in addition to Namibia and South Africa is in panel 2 of Table 1. In both cases, listings and activity are focussed on the dominant market. Ivoirian firms account for 36 of the total 41 listed firms on the francophone BRVM integrated regional stock market, with a further 33 of the 36 located in close proximity to the exchange in Abidjan. Ivorian firms account for the majority of trading volume and capitalisation while only Sonatel, the Senegalese telecommunications company, exceeds the traded value of the domestic Cote d’Ivoire firms. The impact from listed firms from Niger, Benin and Burkina Faso is minimal while the dual listing from the Ecobank financial conglomerate is part of its wider cross-listing strategy between Ghana, Nigeria and BRVM. Similarly, dominance of the integrated Egyptian market is shown by the order flow being 96% of total volume in Cairo and the Alexandria exchange has been reduced to little more than a satellite. For these integrated markets, the hub is thriving while the subsidiaries are simply local outlets. As is discussed in the next section, this pattern also exists in Namibia.

5. The Namibian stock market

The Namibian stock exchange (NSX) was established on 30 September 1992 following national independence in 1990. The exchange institutions were developed with funds contributed by Namibian firms with an interest in attracting capital market finance (NSX website, 2010). This led to a single local stock broker and a dual listing of a local firm that was already listed on the JSE. Trading was by a simple automated system that was expanded in parallel with the growth in local stock-broking firms. This was later upgraded to the technical requirements of the Johannesburg Equities Trading (JET) system (Hearn & Piesse, 2002) and has since been replaced with the JSE-SETS system. However, despite the shared integrated trading link, settlement in South African primary listed securities is through the South African CSD, which uses modern settlement reporting technology SAFIRES and SWIFT international communications and payments software. Namibia does not have a national CSD and settlement is by physical delivery of share certificates between brokers or their agents with payment through the domestic clearing system (Steynberg, 2010).

5.1. Primary market

The primary market listings regulation reflects that of the JSE, in common with all SADC exchanges. Listing is by three principle routes: a placing, an initial primary offering (IPO) and dual listing. A minimum of 30% of issued shares must be offered by the sponsoring broker to other Namibian brokers who allocate tranches of shares to private clients and institutions. As the offers are non-renounceable, that is, they are rights issues that cannot be bought and sold, these differ from straightforward offers to the public and do not require a detailed prospectus, thus reducing the cost (NSX Regulations, 2002). In comparison, the listing requirements for IPOs include a minimum of 150 shareholders with a minimum issued share capital of N$1 000 000, an issued share base of 1 000 000 shares and three previous years of audited financial statements, making this the most costly of the listing alternatives. Dual or cross-listed shares are the least expensive for firms although they are required to adhere to the regulatory laws of the foreign jurisdiction (NSX Regulations, 2002).

Table 2 shows that the NSX has arguably had limited success in attracting new local IPOs and subscriptions even to the newly established development board (DevX) that has weaker regulation. New listings are dominated by dual listings, mostly from South Africa although the 5 firms listed on the DevX have primary listings on European, Canadian and Australian exchanges. Government debt and bonds, such as the Road Fund Administrators and Air Namibia, are significant sources of new security listings, supplemented by a series of issues in 2001 and 2005 by the South Africa Standard Bank Namibia and a 2004 issue by Bank Windhoek. However, between 1999 and 2008 the only issues motivated by raising capital are Oryx Properties, who issued property-linked units, and Trustco’s dual primary listing on the NSX and JSE. This suggests that the NSX does little for Namibian firms wishing to raise funds.

Table 2. Namibian stock market new issues, 1999–2008.

Firm	Listing date	Instruments listed	IPO amount raised	Amount raised (N$)	Dual listing	NSX market segment	Evolution of listing
Air Namibia 15%	29/04/1999	Parastatal bond	220 000 000	–	Local	Debt	Redeemed 29/04/2004
Anglo-American	04/06/2001	Ordinary shares	–	–	UK/ South Africa	Main	Share buy-back scheme: 19/07/06
JD Group Ltd	28/08/2001	Ordinary shares	–	–	South Africa	Main	Delisted: 03/05/2005
Metropolitan Holdings	21/09/2001	Ordinary shares	–	–	South Africa	Main
Standard Bank Namibia 12%	15/11/2001	Corporate bond	150 000 000	–	Local	Debt	Maturity: 20/11/2011
Shoprite Holdings	25/10/2002	Ordinary shares	–	–	South Africa	Main
Oryx Properties	04/12/2002	Linked Units	41 088 918	205 444 590	Local	Main
Namibian Government 12.50%	15/04/2002	State bond	1 195 860 000	–	Local	Debt	Redeemed 15/07/2007
Namibian Government 13%	15/04/2002	State bond	1 409 970 000	–	Local	Debt	Maturity: 15/04/2015
Edgars Cons Stores Ltd	17/09/2003	Ordinary shares	–	–	South Africa	Main	Delisted: 25/05/2007
MICC Property Holdings Ltd	10/10/2003	Ordinary shares	–	–	South Africa	Main	Suspended: 16/05/2006
Stimulus Investments Ltd	03/11/2004	Preference shares	–	123 680 000	Local	Main
Road Fund Administrators 13%	19/10/2004	Parastatal bond	350 000 000	–	Local	Debt	Maturity: 29/11/2010
Bank Windhoek 11%	04/02/2004	Corporate bond	100 000 000	–	Local	Debt	Maturity: 04/02/2014
Namibian Government 8.50%	19/01/2005	State bond	582 200 000	–	Local	Debt	Redeemed 15/07/2008
Namibian Government 10.50%	19/05/2005	State bond	333 000 000	–	Local	Debt	Maturity: 15/10/2012
Trustco Group Holding	27/09/2006	Ordinary shares	133 475 000	427 120 000	Local	Main	Dual Primary Listed on JSE
Standard Bank Namibia 9.65%	07/07/2006	Corporate bond	100 000 000	–	Local	Debt	Redeemed 07/07/2009.
Standard Bank Namibia 10%	07/07/2006	Corporate bond	216 000 000	–	Local	Debt	Maturity: 07/07/2011
Standard Bank Namibia 10%	20/11/2006	Corporate bond	150 000 000	–	Local	Debt	Maturity: 20/11/2016
Standard Bank Namibia 10.49%	07/07/2006	Corporate bond	100 000 000	–	Local	Debt	Maturity: 07/07/2016
Road Fund Administrators 9.50%	31/08/2006	Parastatal bond	330 000 000	–	Local	Debt	Maturity: 31/01/2016
Nedbank Group Ltd	23/02/2007	Ordinary shares	–	–	South Africa	Main
Vukile Ltd	11/06/2007	Ordinary shares	–	–	South Africa	Main
Xemplar Energy Corp.	24/10/2007	Ordinary shares	–	–	Canada	Dev. Board	Listing motivated by acquisition of mineral exploration rights
Forsys Metals Corp	14/12/2007	Ordinary shares	–	–	Canada	Dev. Board	As above
Deep Yellow Ltd	23/01/2008	Ordinary shares	–	–	Australia	Dev. Board	As above
Paladin Energy Limited	14/02/2008	Ordinary shares	–	–	Canada/ Germany	Main	As above
Bannerman Resources Ltd	02/04/2008	Ordinary shares	–	–	Australia	Dev. Board	As above
Namibian Government 9.50%	19/06/2008	State bond	80 000 000	–	Local	Debt	Maturity: 15/07/2018

Source: Compiled by authors from data procured direct from Namibian stock exchnage (NSX) in 2009.

5.2. Secondary market

Table 3 shows that since inception activity on the NSX has been dominated by dual-listings. A significant proportion is Namibian firms cross listed on the JSE because it is a cheaper source of external finance while retaining a presence in the domestic market. Others such as Anglo-American and Old Mutual are major multinationals seeking to indigenise their operations while being listed in London. While the number of local listings is a third of the total overall market the local traded value is generally less than 3% of the overall market. Similarly, capitalisation on the local market is less than 1% of the overall market, reflecting that the local market is not a source of external equity finance. The DevX market is more recent and while all entities are dual listed the capitalisation in 2008 was more than double that of the local market although traded value was less than 7%.

Table 3. Namibian secondary equity market, 1992–2009.

	Panel 1: Equity market									Panel 1: Debt market
	Overall market			Local market			Development market			State (via BoN)	State (via NSX)			Corporate (via NSX)
	N	MCap (US$m)	Traded Value (US$m)	N	MCap (US$m)	Traded Value (US$m)	N	MCap (US$m)	Traded Value (US$m)	Cumulative Outstanding (US$m)	N	Cumulative Outstanding (US$m)	Traded Value (US$m)	N	Cumulative Outstanding (US$m)	Traded Value (US$m)
1992	4	1147.09		3	8.39
1993	6	2008.44	0.02	4	12.52
1994	14	5195.05	7.75	8	92.67
1995	23	9271.55	30.88	10	91.74
1996	29	10 126.20	89.44	12	294.93	23.49
1997	38	20 607.20	120.14	12	446.59	14.92
1998	40	21 221.30	138.07	15	334.87	11.29
1999	41	44 461.10	268.25	14	566.96	19.72				562.89	3	319.75	1.61	1	1.62	–
2000	36	44 943.30	332.59	14	313.70	19.86				620.32	3	216.68	2.31	1	1.1	–
2001	37	68 126.60	270.31	14	240.34	8.30				708.82	3	162.28	3.87	2	13.18	0.93
2002	35	51 478.30	183.78	12	230.08	1.80				842.83	4	373.75	32.15	2	17.69	0
2003	35	61 291.20	271.19	11	273.49	2.44				1079.52	4	504.75	61.8	2	23.9	1.47
2004	32	76 412.20	379.15	9	294.53	15.04				1376.81	4	644.96	75.48	2	43.23	1.33
2005	28	102 471.00	448.32	9	350.19	4.65				1398.86	7	698.39	232.74	4	69.29	10.12
2006	28	148 136.00	894.01	11	508.64	16.22				1417.41	6	585.07	126.51	8	126.73	5.13
2007	25	1 186 365	1450.30	7	636.59	18.69	2	928.99	0.03	1165.11	5	427.72	136.63	8	128.95	10.57
2008	26	98 098.20	1211.19	10	761.62	18.29	4	688.26	4.14	–	7	497.16	70.75	8	93.16	1.33
2009	33	136 363.00	1160.41	7	948.83	24.52	7	3116.12	1.75	–	6	548.59	170.81	7	116.87	17.18

Source: Compiled by authors from Namibian Stock Exchange.

Notes: N is number of listings; MCap is market capitalisation and traded value, where both are denominated in US$ millions; State includes parastatals (include Air Namibia, Road Fund Administrators and Nam Power) as well as State (Government includes various maturities between 3 and 20 years); Corporate include Bank Windhoek, FNB and Standard Bank Namibia; Finally State (via BoN) indicates Government Treasuries, short and long term maturity bonds issued through auction via Bank of Namibia.

The NSX is unique is having such a high proportion of dual-listed firms. Anglo-American has a primary listing in London and accounts for over 40% of market capitalisation and over 29% of traded value on the local market.¹ South African dual-listed firms account for a further 48% of capitalisation and 60% of traded value while dual-listed firms on other markets, with the exception of Anglo-American, account for over 10% capitalisation and 9% traded value. The local market is a mere 0.31% of aggregate market capitalisation and 0.42% traded value.

Finally, the evidence from Table 3 shows that government debt issued through the exchange in order to retain economic viability has decreased and the level of total outstanding government debt issued by auction through the Bank of Namibia is now over three times that issued through the NSX. This is a clear change since 2001, when the cumulative outstanding debt issued accounted for half of that administered by the central bank. While the outstanding debt, the number of listings and level of trading activity is lower for parastatal and corporate bonds than for government debt markets these sectors have achieved reasonable growth since 1999. Together, they accounted for 12% of traded value of government stock and 44% of cumulative outstanding value of listed government debt in 2009.

5.3. Ownership, governance and performance of Namibian listed firms

The ownership and governance structure of locally domiciled listed firms is in Table 4. This clearly shows the severe limitations on the view that stock markets promote the dispersed ownership model of governance. The free-float market capitalisation percentages, that is, the proportions of issued shares not held by block-shareholders and thus freely available for trading, are generally less than 10% which is in line with similar findings from other small SADC markets in Swaziland and Mozambique (Hearn & Piesse, 2009). While all listed NSX firms have absolute numbers of shareholders well in excess of the required minimum 150, the vast majority have a fractional holding only. Thus, despite the dispersion across a wide number of shareholders this is offset by controlling ownership, which is actually highly concentrated on a handful of block-shareholders. These tend to be insiders such as corporate block entities whose investments are restricted by the domestic asset retention requirements (Regulation 28) (Steynberg, 2010).

Table 4. Ownership, governance and activity in the Namibian local market over the millennium.

	African Portland Industries	CIC Holdings	FNB/ FNK Namibia	Gendor	Namibia Harvest Invest	Namibia Breweries	Namibia Sea Products	Oryx Properties	PEP Namibia	Stimulus Invest	Trustco Group Holdings
Panel 1: Ownership in 2001
No. Shareholders	133	880	884	224	338	1302	1834	–	683	–	–
No. holders >3%	6	7	2	7	7	3	4	–	3	–	–
No. holders <1%	124	863	882	217	331	1298	1829	–	680	–	–
Top 3 owners holding (%)	61.04%	60.46%	96.37%	58.77%	70.23%	87.79%	72.15%	–	96.90%	–	–
Block holders	34.17%	71.05%	96.37%	74.51%	57.72%	90.18%	85.96%	–	96.90%	–	–
Directors/ Insiders	9.59%	7.23%	–	–	–	–	–	–	–	–	–
PE/ VC	43.59%	–	–	19.39%	35.10%	–	–	–	–	–	–
Free Float (%)	12.65%	21.72%	3.63%	6.10%	7.18%	9.82%	14.04%	–	3.10%	–	–
Activity measures, 1998–2002
Bid-Ask spread (%)	39.43%	26.22%	12.09%	28.08%	19.72%	5.91%	24.53%	–	17.87%	–	–
Zero Return (%)	97.99%	90.82%	87.09%	96.44%	90.52%	79.61%	89.79%	–	93.41%	–	–
Volume (‘000)	447	587	368	1672	793	868	253	–	110	–	–
Panel 2: Ownership in 2007
No. Shareholders	Delisted	578	2484	Delisted	312	1197	Delisted	225	Delisted	27	2871
No. holders >3%	–	5	3	–	7	4	–	7	–	7	4
No. holders <1%	–	572	2480	–	305	1192	–	215	–	20	2867
Top 3 owners holding (%)	–	83.74%	88.71%	–	73.58%	87.33%	–	72.91%	–	94.18%	91.13%
Block holders	–	91.09%	88.72%	–	70.39%	93.24%	–	65.08%	–	89.25%	24.27%
Directors/ Insiders	–	–	–	–	–	–	–	–	–	–	69.86%
PE/ VC	–	–	–	–	22.60%	–	–	17.36%	–	8.49%	–
Free Float (%)	–	8.91%	11.28%	–	7.01%	6.76%	–	17.56%	–	2.26%	5.87%
Activity measures, 2003-9
Bid-Ask spread (%)	–	29.77%	–	–	39.05%	18.93%	41.25%	7.65%	–	–	25.18%
Zero Return (%)	99.86%	95.79%	–	–	97.53%	88.86%	85.10%	96.73%	–	–	91.67%
Volume (‘000)	6160	1970	–	–	719	497	368	209	–	–	1605

Source: Compiled by authors from Namibian stock exchange Transfer Secretaries (Pty) Ltd, and from Bloomberg, Datastream and National stock exchanges.

Worsening informational asymmetries that result from concentrated insider block ownership and weaker regulatory protection of minority investors are reflected in measures of secondary market illiquidity in Table 4. Quoted bid-ask spreads are typically over 20%, which reflects prohibitively high transactions costs associated with investors entering positions in listed firms. Furthermore, price rigidity is also exceptionally high as shown by the monthly average of daily zero returns between closing prices. These are frequently in excess of 95% implying an almost non-existent price impact associated with each traded volume. This in itself suggests prohibitive costs (and risks) associated with asymmetric information between minority informationally disadvantaged outside investors and their informationally privileged insider counterparts.

Finally, for Namibian stocks, there was an increase in bid-ask spreads between the two periods. This suggests that the technological and financial innovation gained by adopting the JSE-SETS system has put Namibia at a disadvantage. The NSX is unable to comply with the necessary regulatory, legal and technical challenges to compete with the JSE. This questions the purported benefits from following the current NEPAD and AU development policy on financial market integration. The smaller and less developed markets face prohibitively high costs in maintaining legal and regulatory standards to match those in the dominant market and will continue to be forced into the role of regulatory price-takers.

6. Conclusion

This paper challenges the established view that there are benefits to financial integration in SADC by reviewing the implications of this policy for smaller stock exchanges using Namibia as an example. South African and Namibia are already linked to a considerable extent by an integrated trading system and shared macroeconomic, legal and regulatory institutions. Both countries are members of the CMA, which should mitigate against currency exposure and allow Namibia to benefit from internationally recognised credit ratings for debt instruments as these countries share an institutional structure. Thus, of all the SADC countries, Namibia should be best placed to develop the necessary regulatory and legal systems to achieve the perceived benefits of financial integration.

However, this paper suggests that the prohibitively high costs imposed on smaller markets result in them inevitably taking the role of regulatory price-takers as they quickly fall behind with respect to the standards required to compete with a dominant market that is positioned to operate internationally. This inability to keep up with the necessary technological and regulatory innovation reduces the perceived benefits from financial market integration. In common with the experience of other integrated markets in Africa, such as Egypt, and BRVM in Francophone West Africa, the smaller markets effectively become satellites of the dominant one with trading activity, share value, listings and capitalisation concentrated in the latter at the cost to local exchanges. In particular, the very high costs imposed on smaller markets limits their development options as seen in the case of Namibia where the strategic focus is on attracting dual- or cross-listed stocks rather than primary listings.

Policy recommendations for such smaller exchanges should focus on the intended role of the exchange within the economy. Indigenous governance environments that are typically dominated by extended family involvement in corporate activity and large conglomerates or business groups are ill-suited to stock market financing and the involvement of minority investors. Furthermore, local firms lack the capitalisation and formality of governance structure necessary to meet the prohibitively costly exchange listings requirements. Smaller exchanges also face policy dilemmas. They can become regulatory price-takers and implement ever more costly initiatives to meet the technological sophistication of the dominant market in an integrated platform. These costs would inevitably render the exchange uncompetitive as a source of cost-effective development finance in the local economy. Alternatively, smaller exchanges would benefit from promoting a variety of other measures that fall short of the high costs involved in full integration. These range from the endorsement of dual and affiliate listings to simple innovative financial contracts such as depository receipts, where packages of Namibia local stocks can be traded as a receipt in the dominant market, such as the JSE. Further, given the exclusive recognition of the Namibian exchange by South Africa, plus the shared legal, judicial and monetary arrangements, there is potential for the fledgling exchange to act as a preferential listings venue where this entails acting in a broader offshore financing role to South African firms. Adopting such a niche offshore strategy may enhance the visibility of the exchange as a potential location for a variety of instruments where these enable the exploitation of efficiencies in corporate tax management strategies. Finally, the emphasis on enhanced disclosure and transparency should advance by adopting internationally recognised accounting and reporting standards such as IFRS and GAAP. Such a universal policy would mitigate the potentially adverse impact of costs being levied on ever more stringent listings requirements. It would also involve a closer relationship with local authorities to promote such a policy at the national level.

Namibia is the most developed of the small markets in SADC with a very high level of dual listings and there is evidence that domestic investment retention regulations do maintain the economic viability of the exchange. This imposes costs on institutional savers, such as contributors to insurance and pension funds, although these are minimal compared to the costs that would be incurred in the absence of dual listings.

Acknowledgements

The authors thank Keith Jefferis, Kate Phylaktis, Ven Tauringana and Collins Ntim for valuable help and comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 These values are the authors’ calculations from data sourced from the Namibian stock exchange and Bank of Namibia.