Developing Capital Markets in Rwanda

By Jacqueline Irving, John Schellhase, and Jim WoodsomeFebruary 2016

Framing the Issues: Developing Capital Markets in Rwanda

ByJacquelineIrving,JohnSchellhase,andJimWoodsome

February2016

AsummaryreportfromtheMilkenInstituteCenterforFinancialMarketsbasedonthe

RwandaCapitalMarketAuthority’sStrategicPlanningRoundtableonCapital-MarketDevelopmentheldOctober14-16,2015,inRubavu,Rwanda

Overview OnOctober14-16,2015,Rwanda’sCapitalMarketAuthority(CMA)andtheMilkenInstituteCenterforFinancialMarkets(CFM)hostedaworkingStrategicPlanningRoundtableonCapital-MarketDevelopmentinRwanda.FSDAfricaprovidedfundingsupporttotheCMAfortheevent,whichconvenedcapital-marketplayers,privateinvestors,capital-marketregulatoryauthoritiesfromtheregion,officialsfromdevelopmentagenciesandinternationalfinancialinstitutions,andothercapital-marketexperts.Theroundtable’spurposewastoinformthescopeofworkfora10-yearCapital-MarketMasterPlan(CMMP)forRwanda.ThisdocumentframestheissuesandsummarizestheimportantthemesdiscussedforbuildingcapitalmarketsinRwanda’ssmall,openeconomy.Itaimstocaptureboththepointsofconsensusandthedivergentviewsoftherangeofacademicsandexpertpractitionerspresent.

Thesummaryisdividedintoseveralsections.SectionsIII-VIconcludewithanumberofpolicyresearchquestionsgeneratedduringtheroundtablediscussions.

I. SupportingConditionsandPrerequisitesforCapital-MarketDevelopment

II.WhyBother:TheValue-AddedofCapitalMarkets

III.DevelopingInstitutionalandRetailInvestorBasesIV.BoostingSupply:DevelopingtheEquityMarket

V.DevelopingBondMarkets

VI.DevelopingaCommoditiesExchange

VII.ExecutionandImplementation:LessonsFromMalaysia

VIII.ConcludingPointsandNextSteps

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I. Supporting Conditions and Prerequisites for Capital-Market Development Macroeconomicstabilityisthecornerstoneofanationalfinancialsystemthatcanprovidesustainableandaffordablelong-termfinance.ThediscussionduringthissessionfocusedonhowtomoveRwanda’scapital-marketdevelopmentagendaforwardintheprevailinginstitutionalandpolicycontext,notingacknowledgedprerequisitesandsupportingconditionsfordevelopingcapitalmarkets.Evenwhenasoundpolicyframeworkandbusiness-friendlyenvironmentareinplace,asinRwanda,regulatorsmustrisetothechallengeofstrikingtherightbalanceindualandsometimesconflictingoversightandmarketdevelopmentroles.

Rwandahasmadesignificantprogressinestablishingasoundmacroeconomicpolicyframework,underpinnedbyprudentfiscalandmonetarypolicies,asnotedduringtheroundtable’sopeningremarks.1Formorethanadecade,itsmacroeconomicperformancegenerallyhasexceededthatofothereconomiesintheregion.Inflationrateshavebeenkeptlowandaverageannualeconomicgrowthhasexceeded8percentoverthepastdecade.AlthoughriskstoRwanda’seconomicoutlookhaveincreasedinthepastseveralmonthsduetolowerglobalcommoditypricesandslowerexportgrowthprospects,theeconomyperformedmorestronglyin2015thanhadbeenexpected.RealGDPgrowthfor2015isprojectedatarobust7percentandconsumerpriceinflationisforecasttoremainbelow5percent.

Participantsnotedthatsoundandstablemacroeconomicpolicies—includingdisciplinedfiscalpoliciestoavoidcrowdingoutofprivatecapital—areessentialtotheproperfunctioningoffinancialmarkets.Intheabsenceofmacroeconomicstability,notablywhereinflationishighand-orvolatile,thereisadisincentivetosave,becausefutureearningsareuncertaininrealterms.Likewise,whenmacroeconomicstabilityislacking,financialmarketswillmakeavailableonlyshort-termfinanceatvariablerates.Infrastructureprojectsinparticularrequirelong-termfinanceatpredictableinterestrates.“Weseebanksdomorebusinessinfrontiermarketswhereinterestrateshavedroppedandinflationisundercontrol,”summeduponeroundtableparticipantfromaninvestmentfirmactiveinAfrica.Theempiricalliteraturesupportsdiscussants’keypointsthatsoundmacroeconomicpoliciesarelinkedwithfinancial-sectordevelopment.AryeeteyandNissanke(1998)foundthatintheabsenceofmacroeconomicstability,theimpactoffinancial-sectorreformsonfinancialdeepeningwillbeineffective.2Theliteraturealsoshowssupportforcausalityrunningbothways.Alargebodyofliteratureexamineshowfinancialdevelopmentleadstosustainablemacroeconomicgrowth,onepreconditionofwhichisgreatermacroeconomicstability.3

1“IMFStaffCompletesReviewMissiontoRwanda,”PressReleaseNo.15/494,November4,2015.2Aryeetey,Ernest,andMachikoNissanke,1998,FinancialIntegrationandDevelopment,Liberalization,andReforminSub-SaharanAfrica.London:Routledge.3See,inparticular,Levine,Ross,andSaraZervos,1996,“StockMarketDevelopmentandLong-RunGrowth,”PolicyResearchWorkingPaperNo.1582(Washington:WorldBank).Examiningtherelationshipbetweenmacroeconomicstabilityandcapital-marketdevelopment,GarciaandLiu(1999)foundthattheformer,alongwithadequatenationalincomeandsavings,wasa

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WhileparticipantsagreedthatRwandameetstheprerequisiteofhavingarelativelystablemacroeconomicpolicyframework,somecautionedagainstforeign-currency-denominatedborrowingoninternationalcapitalmarkets.SeveralparticipantsfromoutsidetheEastAfricanregionarguedthatitwasbettertoissuelocal-currencydebtbecauseoftheassociatedforeignexchangeriskandtheprospectofhigherdebtservicing.However,afewlocalmarketparticipantsdefendedmovestoborrowinforeigncurrencybypointingoutthatlocalinterestratesaresomuchhigher.OneparticipantnotedthatiftheKenyangovernmenthadborrowedlocallywhenitissueditsdollarbond,itwouldhavepaidlessintheendinrealterms,despitehigherdomesticinterestrates.Movingmoneyfromsaverstoborrowers Asfundamentalasthemacroeconomicpolicyenvironmentis,thegrowthtrajectorythatunderpinsitrequiresdomesticsavings.RaisingdomesticsavingsandinvestmentlevelsisalsoacriticalstepforRwandainmaintainingitsstrongtrackrecordoverthepastdecadeoninclusiveeconomicgrowthandpovertyreduction.4Thesavingsrateisanimportantmacroeconomicindicatorofaneconomy’sabilitytogeneratefinanceforinfrastructureandsocioeconomicdevelopmentoverall.Despitearisingsavingsrate,Rwanda’scapitalmarketsareunderdeveloped,whichimpedestheirabilitytointermediatelong-termfinanceeffectively,movingmoneyfromsaverstoborrowers.5

AkeystepneededtoaddressthiswillinvolveimprovingcoordinationofhowEastAfricanCommunity(EAC)exchangesseektoattractinvestorsacrosstheregion.(SeeBox1andSectionIII.)Andtherewasstrongagreementamongroundtableparticipantsthatinstitutionalinvestorsplayedanimportantroleincapital-marketdevelopment.Thislong-termmoneycanhelpcatalyzeinvestmentfromothersourcestodeepenanddevelopcapitalmarkets.Oneparticipantwentsofarastostressthatit“isabsolutelyessentialthat‘domestic’hastobeEastAfricainthecontextofinstitutionalinvestors.”BecauseRwanda’slocalinstitutionalinvestorbasecurrentlyissmall,aregionalapproachwouldhelpdeveloptheinstitutionalinvestorbase.Asanotherparticipantputit:HowcantheEACbethoughtofasanassetclassforinstitutionalinvestorsacrossmembercountries?

Therealsoisaneedtoscaleupsmallsavers—thelargenumberofpeoplewithrelativelylowearningsoreventhoseemployedintheinformalsector—andadvancefinancialinclusionacrosstheEAC.Therewasbroadconsensusamongparticipantsthatarelatedkeyquestionwashowtomotivatethemanypeopleintheinformalsectorwithconsiderablecashonhandtobegintohaveaneedforsavingsandinvestmentinstruments.Predictable,business-friendlyregulatoryenvironmentasthefoundation Italsoisimportanttolookatcapital-marketdevelopmentinthecontextoftheenablingpolicyenvironment,businessoperatingandregulatoryenvironment,andtheoverallbankingandfinancial

prerequisitefordevelopmentofcapitalmarketsindevelopingeconomies.SeeGarcia,Valeriano,andLinLiu,1999,“MacroeconomicDeterminantsofStockMarketDevelopments,”JournalofAppliedEconomics2:29–59.4SeeIMF,CountryReportNo.14/343:2014ArticleIVConsultation.5AccordingtoWorldBankdata,Rwanda’sgrossdomesticsavingsratewasequivalenttoanestimated10.7percentofGDPin2014,upfrom7.3percentin2010and2percentin2005.ThisputRwanda’ssavingsrateaheadofthatofEACmemberKenyain2014(3.9percentofGDP)butbehindthoseofTanzania(20.6percent)andUganda(19.6percent).

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system.Severalroundtableparticipantsunderscoredthat,wherelargeinvestmentsareatstake,long-termmoneyneedssomekindofcertaintyabouthowthatinvestmentwillbetreatedovertime.

PoliciesandregulatoryreformsinRwandaoverthepastdecadehavestronglyemphasizedinstitutionalcapacitybuildingandabusiness-friendlyenvironment,providingasolidfoundationfordevelopingcapitalmarkets.Infact,theWorldBank’s“DoingBusiness2016”ranksRwandasecondamongallcountriesitcoversgloballyintermsofoverallimprovementinthepast12yearsinthebusinessenvironment.6Asnotedbyoneroundtableparticipant,Rwanda’sapproachtobuildingcapacityandinstitutionalsupportshouldhelpcreateasolidbedrockonwhichstrongfinancialandcapitalmarketscanbebuilt.

BecauseofthestillrelativelysmallsizeofRwanda’sfinancialsector,regulatorshaveaduallinchpinroletoplay:thatofprovidingconsistentoversight,butalsoofregulatingthevarioussubsectorsinawaythatfostersfinancial-sectordevelopment.Inviewofthisdualrole,however,thereareconcernsofoverregulatingandstiflingmarketdevelopment.Afewroundtableparticipantsalsocautionedagainstoverregulatingmarketsinwaysthatstifleinnovation.Onealsowarnedagainstcreatingidenticalcapitalmarketsintheregionandadvisedthatanapproachthatinsteaddefinesunique,yetcomplementary,marketnichescouldfosterinnovation.Participantsdiscussedthesuccessfultake-upofmobilemoneyservicesinKenyaasanexampleofregulatorsstrikingagoodbalanceinmeetingthedualmandateofregulatingandprovidingacontextthatallowsinnovationtothriveandfinancialservicestogrow.

“Inlookingathowtodevelopawell-functioning,efficientcommodityexchange,oneoftheimportantconditionsisaminimumlevelofgovernmentintervention,”explainedoneroundtableparticipant.“Atthesametime,Iwouldalsosaythatthemarketsneedthegovernment,”headded,notingthatthereisaparadoxsituationwherebycommodityexchangeswillnotbesuccessfulifnotbackedupbythegovernment.Achievingscale Aregionalapproachtocapital-marketdevelopmentcanbringseveralbenefits.First,therearetheeconomies-of-scalebenefits:Sharingmarketinfrastructureandintermediationservicescanreducefixedcostsandimproveefficiency.Second,businessesandgovernmentslookingtoraisefundsareabletoaccessabroaderinvestorbase,whichmayresultinlowerfinancingcostsaswellasimprovedliquidityandstabilityoffunding.Andthismayhaveimplicationsforfinancingprivatecompaniestoo,sinceprivate-equityinvestorswillmorereadilyinvestwhentheexitstrategyisclear.Third,investorsareabletodiversifytheirportfoliosmoreeasily,reducingtheirexposuretoidiosyncraticrisks.

ForgingcloserregionallinksacrosstheEAC’scapitalmarketsmayofferawayforRwanda’scapitalmarketstoachieveneededscale.Andmoreregionallyintegratedmarketscanfacilitatethedevelopmentofregionalcompanies,suchasEquityBankHoldings,andregionalinfrastructureprojects,suchastheEAC’sNorthernCorridor. 6Rwandaalsoimplementedthelargestnumberofbusiness-friendlyreformsintheAfricanregioninthepastyear.Accordingto“DoingBusiness2016,”itcurrentlytakes32daysforanentrepreneurinRwandatotransferproperty(lesstimethaninGermany);adecadeagoitwouldhavetaken370days.

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Despitethesepotentialbenefits,thereareseveralbarriers.Nottheleastisnationalpride.“Wecontinuetofragmentandduplicateinfrastructureacrosstheregionintheambitionofeachhavingourown,”saidoneparticipant.ThoughcompetitionhasspurredcountriesintheEACtodevelopbettersystems,theresultisrampantduplicationandahighdegreeofredundancy:“Eachoneofthosesystemscouldrunthewholeregion,”remarkedanotherparticipant.Partofthechallengeistoshiftpolicymakers’focusfromnationalownershiptonationalvalue.“Nationalvaluewillbemuchhigherifweareusingthebestsystemsthatcanattractandconsolidatethehighestnumberofinvestorsanddeliverthehighestlevelofefficiency,”observedthesameparticipant.ThisistruenotonlyforthesmallerEACmembers,suchasRwanda,butalsoforthelargermembers,whosemarketsarestillsmallbyinternationalstandards.

Likewise,institutionalinvestors’mandatesoftenrestricttheirabilitytoinvestabroad.IfamajorinstitutionalinvestorinoneEACmarketisseverelyrestrictedintheamountofoffshoreinvestmentitcanmakeinotherEACmarkets,forexample,thefullbenefitsofregionalizationwon’tberealized.Thesmallestmarketsoftenharborconcernsthatamovetoforgecloserlinksregionallywithothercapitalmarketscarriestheriskthattheywillessentiallybecome“outpostsofaregionalexchange.”Fortheverysmallesteconomies,itsimplymaynotbecommerciallyviabletohavetheirownindependentnationalstockexchanges.Wheresmallmarketscanprosper,however,isbyspecializingtocarveoutuniqueniches,orbecomingmorenimbleorefficient.

Constraintsthatintermediariesandinvestorsfaceinoperatingacrossborderscanposeanotherbarrier.Localownershiplawsshieldbrokeragesandinvestmentbanksfromcompetition,whichcaninhibitefficiencygains,learning,andinnovation.Openingupthesemarketswouldresultinsomeexistingorganizationsgainingmarketshareattheexpenseofothers,andpotentiallyspuranuptickinmergers-and-acquisitionsactivity,asintermediariesconsolidate.Itmayalsoprovideopportunitiesforupstarts:“Whenwetalkaboutregionalization,”saidoneparticipant,“sometimesthere’sapresumptionthattheexistingserviceproviderswillbeabletooperateinalltheothermarkets.”Heurgedashiftinthatthinking,toinsteadasking:“Whoarethenewvoices,thenewperspectivesthataregoingtobenecessarytofullytakeadvantageofthatnewopportunityandgrow?”

Someparticipantsmadecleartheirimpatienceatthepaceofintegration.Oneprivate-sectorparticipantpointedoutthat,withtechnologyhavingmadepossibleadvancessuchasWhatsApp,M-Pesa,andthesaleofbondsbySMStextmessaging,settingupaplatformtolinkbrokersandmarketsshouldberelativelystraightforward.Anotherparticipantcautionedagainstunderestimatingtheoperationalproblems,pointingtothedifficultiesthattheAssociationofSoutheastAsianNations(ASEAN)hasexperiencedoverdecadesinharmonizingmembers’rules,paymentandsettlementsystems,legalandregulatoryframeworks,andfinancialoversightregimes.Shealsoemphasizedthatstrengtheningthedomesticmarketisimportant,nomatterwhatformregionalizationtakes.ThisparticipantsuggestedthatEACmembersapproachregionalizationbyfocusingfirston“smallbutconcretewins,”suchasbilateralagreementsthatopeninvestoraccesstobondandequitymarkets.Inotherwords,donotallowtheperfecttobecometheenemyofthegood.

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BOX1.HowcanEACcapitalmarketsbestleverageregionalization?Indiscussionsontakingaregionalapproachtocapital-marketdevelopment,theactuallinkingofexchangesisafrequenttopic.However,afewroundtableparticipantssuggestedthatanybenefitsfromtheselinkagesmaybeoveremphasized,especiallyatearlystagesofcapital-marketdevelopment.Atleastoneindicatedthattheycouldevenbeadistraction:“Severalhavebeenbuiltovertheyearsatconsiderablecostand,withoneexception—theHongKong-Shanghailink—they’vedoneabsolutelynobusiness.”Infact,toorapidamovetoafullyintegrated,regionalstockmarketcouldmerelycreatealarge,illiquidmarket.Participantsbroadlyagreedthatwhatmattersmostisregulatoryharmonizationandmutualrecognitiontofostercross-borderlistingsandinvestment.Oneprivate-sectorparticipantnotedthathisfirmoperatesinEastAfricaasonezonebuthasthreelicensingregimes,threeauditedfinancialstatements,andthreecapital-marketauthorities(CMAs).“Ishouldbeabletohaveonelicense,sothatIcanoperateinallthreecountries,”hesaid.Anotherparticipantpointedoutthatexchangelinkagesaremostrelevanttoequitymarketsandlesssotobondmarkets,whicharebiggerandarguablymorebeneficialtotheregion.

Otherparticipantswarnedthatindevelopingexchangelinkages,itisimportanttonotoverbuildmarketinfrastructure.Onearguedthatthecostsentailedwerebeingoverestimated,pointingtothesuccessfullinkagebetweenthestockexchangesinSouthAfricaandMauritiusdespitedifferentcentralsecuritiesdepositories(CSDs).Insteadofinvestingheavilyinnewmarketinfrastructure,theStockExchangeofMauritius(SEM)establishedanefficient,cost-effectiveprocedurefortradingsecuritiesbetweenitsowncentralsecuritiesdepositoryandthatoftheJohannesburgStockExchange(JSE).“ThesharesmoveseamlesslybetweenthetwoCSDs,becausetheycommunicatethroughbookentrysystems,”theparticipantnoted,addingthatthisillustratesthatsometimestheremayberelativelysimplesolutionstoproblemsthatseemcomplex.Thechallenge,naturally,wasprotectingagainstcreatingduplicatesecurities.Tothisend,amongothercontrolprocedures,theMauritianprocesslimitsaccesstotheregistrarkeptbybothCSDstoauthorizedregistrarandtransferagentsofthesecuritiesissuers.

Thefollowingprocess*canbeusedbyanyMauritianinvestorwhowantstotransfersecuritiesfromtheMauritianCSDtotheSouthAfricanCSD:1.TheinvestorsendsarequestforthetransfertotheregistrarandtransferagentinMauritius.

2.TheregistrarandtransferagentinMauritiussendswritteninstructionstotheMauritianCSDtodebittheaccountoftheinvestor.

3.TheMauritianCSDdebitstheaccountoftheinvestorafterappropriateverificationandsendsawrittenconfirmationtotheregistrarandtransferagentinMauritius.

4.TheregistrarandtransferagentinMauritiussendsawritteninstructiontotheregistrarandtransferagentinSouthAfricaregardingthetransfer.

5.TheregistrarandtransferagentinSouthAfricasendsaninstructiontotheSouthAfricanCSDtocredittheaccountoftheinvestor.

6.TheSouthAfricanCSDcreditstheaccountoftheinvestorandsendsaconfirmationtotheSouthAfricanregistrarandtransferagent,whoinformshisMauritiancounterpart.Thiscompletesthetransaction.

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BOX1(continued)

Someroundtableparticipantssuggestedthatthebestwaytoregionalizemarketinfrastructureistohavethepublicsectorstepbackandallowtheprivatesectortolead.BoththeNairobiStockExchangeandtheRwandaStockExchangehavedemutualized,andtheDaresSalaamStockExchangeinTanzaniaisintheprocessofdoingso.Accordingtothislineofreasoning,asinvestor-owned,for-profitcorporations,theseexchangeswillapproachdecisionsthatlinkEACmarketinfrastructureasastraightforwardbusinessmatter.*SpecialthanksisowedtoVipinY.S.Mahabirsingh,managingdirectorofCentralDepository&SettlementCo.Ltd.,forprovidingthedetailsoftheprocessfortradingsecuritiesbetweentheSEMCSDandthatoftheJSE.

II. Why Bother: The Value-Added of Capital Markets Roundtablediscussionsonthethemeofthevalue-addedofcapitalmarketshighlightedtheimportanceofsequencingindevelopingcapitalmarkets,whilealsounderscoringthatcapitalmarketsshouldcomplementratherthancompetewiththebankingsector.Participantsalsodiscussedthekeyrolethatwell-functioningcapitalmarketsplayinprovidinginformationonhowmarketparticipantsvaluefirms.Muchofthispartofthediscussionhingedonthefactthatcapitalmarketsbothprovideandneedtherightinformationenvironment.

BankingfinanceisnotsufficientforRwanda Financial-marketdevelopmentmustbeginwithasoundbankingsector,andthebankingsectorhasbeengrowingsteadilyinRwanda.7Businesses,however,cannotrelyonlyonbankloansfortheirfinancingneedsandrequirearangeoffinancialproductsthroughouttheirlifecycles.Rwanda’slargebusinessesaswellasitssmallandmedium-sizedenterprises(SMEs)withhigh-growthpotentialneedaccesstolonger-termfinancingthatbanksmaynotprovideatreasonablerates,ifatall.AsfoundintheCMA-MilkenInstitutesurveyofRwandanbusinesses,themostcommonsourceoffinanceforfirmsisbanktermloans,usedbytwo-thirdsofsurveyedcompanies.However,only22percentofthesurveyedbusinessessuccessfullyraisethefinancetheyneed,with35percentfindingpartialsuccessandtheremainder—morethanathird—notatallsuccessfulinraisingfunds.Forthislastgroup,themostsignificantobstaclecitedwasinsufficientcollateral.

Ideally,asseveralroundtableparticipantsnoted,banksandcapitalmarketsoughttoworkascomplementsratherthancompetitors.Oncelargefirmsinafinancialsystemcanaccesslocalcapital-marketfinancing,bankswillbeforcedtolendfurtherdownthecreditspectrumtoSMEsinneedoffinancing.

BeyondtheneedsofRwandanbusinesses,participantsnotedthatbankfinancingaloneisalsoinadequateforotherimportantfoundationalaspectsofthenation’sgrowthstory.First,Rwandaneedstomakelong-terminvestmentsininfrastructurethatrequiremobilizinglong-termcapital,whichbanksarenotaswell-suitedtoprovide.Onthesavingsside,thegrowthofRwandanandregionalinstitutional

7AccordingtoGlobalFindexdata,between2000and2014,totaldepositshavegrownfrom$225millionto$1.6billion.Today,42percentofRwandanadultshaveabankaccount.

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investorsmeansthereisincreasingappetiteforlong-termsecuritiestomatchtheirinvestmenthorizons.TheroundtablediscussionofbothofthesepointsispresentedbelowinSectionIII.Strengtheningtheinformationenvironmentforthebenefitofall TheinformationenvironmentinRwandaiscurrentlypoor,anumberofparticipantsagreed.“Thequalityoffinancialdataisneitheradequatenorproducedinatimelyway,”remarkedonewhoworksinthelocalbankingsector.“Wesometimesseeevenauditedfinancialrecordsthatcannotbereliedupon,”headded.Anotherparticipantnotedthatthevaluationofpropertycanrangewildly,sometimesasmuchas300percentbetweenvaluators.

Aweakinformationenvironmentcanshiftthefinancialsectorheavilytowardbanking.Whencompaniesdonotorcannotproducetimelyandaccuratefinancialrecords,theybecomemoredependentonrelationship-basedborrowing.Asoneparticipantsaid,“Banksspecializeindevelopinglong-termclientrelationships,andtheyexcelindoingthatinabadinformationenvironment.”Capital-marketinvestors,ontheotherhand,requiredetailedandup-to-datecompanydatatoassessrisksassociatedwithlong-termdebtortakinganownershipstakeinacompany.

Rwanda’sunreliableinformationclimatehasseriousconsequencesfortheeconomy.First,bankspasstheuncertaintyaboutvaluationontohouseholdsandbusinessesthroughhighcollateralrequirements.Thisleavesmanyfirmsunabletopledgethecollateralneededtoaccessbankfinancing.

Theweakinformationenvironmentalsoholdsbackcapital-marketdevelopmentbycomplicatingtheworkofregulators.Asregulatorsfromtwocountriesintheregionnotedduringtheroundtable,companieslackingaccurateaccountsthatplantoissuesecuritieswillrequireextrascrutiny,resultingindelaysintheregulatoryapprovalprocess.Whenregulatorsareforcedtosiftthroughpoor-qualityrecords,theirresponsetimeandoverallcapital-marketdevelopmentareimpeded.

Theironyisthatcapitalmarketsbothprovideandneedtherightinformationenvironment.Inadditiontoprovidinganalternativetobankfinancing,capitalmarketsservetheusefulfunctionofprovidinginformationonfirms’marketvalue.Infact,asthissession’spresenteremphasized,thatfunctionisprobablymoreimportantthanthefunctionofgeneratingfinance,whichcanberelativelyexpensive.Throughprices,marketsrevealimportantinformationaboutthevalueoffirmsaswellasthemarkets’levelofconfidenceinpolicymakers.Asseveralparticipantsnoted,astrategyfordevelopingtheauditingindustryisacriticalshort-termpriorityforimprovingtheinformationenvironment.Standardizingandimprovingtheaccuracyofcollateralvaluationisalsoimportant.

Ingeneral,byprovidingimportantinformationonthevalueoffirms,capitalmarketsareabletoprovideseveralotherfunctions.Capitalmarketsareinstrumentalinmobilizingresources,allocatingthoseresourcestoproductiveinvestments,monitoringtheuseofresourcesaftertheirallocation,andimprovingbusinessmanagementthroughhigherstandardsofcorporategovernance.

Preparingtolistonanexchange—withalloftherequisitedisclosurerequirementsandgovernancerestructuring—needstobepresentedtofirmsasavalueproposition.Inpreparingforalisting,firms

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providetheinformationthatmarketsneedtoassesstheirvalue—whilealsoimprovingcorporategovernanceandoverallcompetitiveness,efficiency,andmanagement.SeveralparticipantsnotedthattherewasaneedforachangeinmindsetsothatRwandancorporatesviewedlistingonthestockexchangeasanaturalstageinthelifecycleofacompany.Afewparticipantsarguedthattargetingprospectivefirmsforlistingonebyone,usingfinancialeducationtoaddressconcernsthatleadtoreluctancetogopublic,couldchangethismindsetandboostlistings.

Afewothersflaggedarolefortargetedtechnicalassistanceinhelpingentrepreneursdevelopabusinessplan,acquirefinancialreportingskills,andimprovecorporategovernanceandtransparency.Participantsdisagreed,however,aboutwhethermarketintermediaries,theRSE,orthegovernment—throughtheCMAorotheragencies—shouldbeleadingtheseefforts.Cautionarycomments Animportantaimofcapital-marketdevelopment,asseveralparticipantsemphasized,istospurgrowthofadiversifiedprivatesectorthatcreatesdecentjobs,improveslivingstandardsacrossthepopulation,andsupportsinclusivesustainablemacroeconomicgrowth.Throughouttheroundtable,participantsreturnedtothepointthatcapital-marketdevelopment“shouldnotbedoneforitsownsake.”Therewasstrongconsensusthat“effortsshouldfocusholisticallyondevelopingfinancialmarketsthateffectivelyintermediatecapitaltomeetenterprises’realfinancingneeds.”Thismustbetheoverridingobjective,ratherthanbuildingamarketplaceandusingthemarketinfrastructurecreated,whichmayormaynotbeusefulandappropriate.

Afewparticipantscautionedthatcapital-marketdevelopmentshouldnotnecessarilybeahighpriorityforRwandarightnow.“Thereisnotnecessarilyaone-type-fits-allapproachforhowyouevolvefromwhatislargelybankfunding,”saidoneparticipant.“Howcanyouusecapitalmarketsasatool?Crowdinginmorefundingdoesn’tnecessarilymeanthatyouneedtogodirectlytoissuingbondsonthemarket.”Anotherparticipant,notingthattheaverageageofRwandanfirmsissevenyears,saidflatly,“Theaverageseven-year-oldfirmdoesnotaccessthecapitalmarkets.It’swhenfirmsgetmucholderandlargerthattheyaccessthecapitalmarkets,eveninthemostadvancedcapitalmarketsintheworld.”

Asoneparticipantnoted,itisnotessentialthatthefullrangeoffinancialservicesbeprovidedbydomesticinstitutions.WithRwanda’smembershipintheEAC,capital-marketstakeholdersintheregionhaveanimportantopportunitytoleverageregionalizationinencouragingnewissuersoncapitalmarkets,developingbuyside,anddevelopingthesupportingmarketinfrastructure.Thissameparticipantdrewananalogybetweencapitalmarketsandairlines.Notalleconomiesneedtheirownnationalairline,buttheyallneednationalgovernmenttoensuresafeandeffectiveoperationoflocalrunwaysandairtrafficcontrol.Inotherwords,Rwandamaybeabletofindmorecost-effectiveroutestomarketdevelopmentbypromotingaccesstoservicesalreadyprovidedbyotherEACmembers.

Capital-marketdevelopmenttakestime.Asoneparticipantsaid,developingastockmarketis“alongandslowprocessanditisdifficulttotakequantumleaps.”Therefore,appropriatesequencingiskey.Whilethe10-yearplantodevelopRwanda’scapitalmarketswillfocusondevelopingformalbondand

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equitymarkets,itwillalsobeimportanttosimultaneouslydeveloparangeofotherfinancingmechanismsforenterprises.Naturally,awell-functioningbankingsectorlaysanessentialfoundationforcapital-marketdevelopment.However,alternativefinancingsourcessuchasprivateequity,financialleasing,invoicediscounting,andfactoringmaybemoreappropriateforcertainenterprises,dependingontheirsizeandlife-cyclestage,aswellastheirparticularfinancingneeds.

III. Developing Institutional and Retail Investor Bases Theroundtablediscussionsondevelopinginstitutionalandretailinvestorbasesfocusedonseveralcriticalconsiderationsfortheroletheseinvestorsshouldplayincapital-marketdevelopment.First,participantsdebatedthe“dualmandate”ofinstitutionalinvestorsinbothfinancinglocaleconomicgrowth,assomeofthelargestlocalpoolsofcapitalavailable,andinprudentiallymanagingthesavingswithwhichtheyhavebeenentrusted.Second,participantsexploredwaysofmatchingRwandanandEACinstitutionalinvestorappetitetodomesticandregionalinfrastructureprojects.Third,theydiscussedtheimportanceofRwandaattractinginvestmentfrominstitutionalinvestorsinotherEACmemberstates,particularlyKenya.Inadditiontothediscussiononinstitutionalinvestors,participantsalsoemphasizedtheimportanceofdevelopingaretailinvestorbase.Thatdiscussion,whichcenteredprimarilyonthedevelopmentofunittrusts(mutualfunds),isalsosummarizedbelow.

Roundtableparticipantsagreedthattheexpansionofcapitalmobilizedthroughpensionandinsuranceschemeswillbeakeydriverofcapital-marketdevelopmentinEastAfrica.Asonenoted,“AsinstitutionalinvestorsbecomethebigsourcesofsavingsinRwanda,thebankingsectorwillnotbeasuitablechannelforthosesavings.Investmentinsteadwillbemadethroughcapitalmarketchannelsofoneformoranother.”Theseinvestorshaveasustainedappetiteforlong-term,capital-marketsecuritiestomatchtheirlong-termobligations.

Indeed,inrecentyears,thegrowthofinstitutionalassetshasacceleratedacrosstheEAC.ThisistrueparticularlyintheKenyanpensionindustry.Asnotedinthepresentationofoneroundtableparticipant,withRwanda’sinstitutionalinvestorbasestillrelativelysmall,thereislikelytobeatendencyfortheseinvestorstocomefromKenyaandforthemarkettobedominatedbyKenyafortheforeseeablefuture.8Debateoverinstitutionalinvestors’‘dualmandate’InRwanda,asinmanycountries,pensionfundsandinsurancecompaniesrepresentthelargestpoolsofprivatecapitalavailableforproductiveinvestmentoutsidethebankingsystem.Forthisreason,severalroundtableparticipantsarguedthattheseinstitutionalinvestorshaveanimportantresponsibilitytofinancethedomestic,private-sectorgrowthstorythroughinvestmentsinpublicequities,publicand

8AssetsundermanagementintheKenyanpensionindustryhaveincreasedfromlessthanUS$500millionin2000toaboutUS$8billiontoday.InRwanda,thedomesticinstitutionalinvestorbasewasestimatedatjustoverUS$1billionattheendof2014(13percentofGDP).Some400,000peoplecurrentlyparticipateinRwanda’spensionsystem.PotentialforfuturegrowthofthepensionindustryinEACcountriesisstrong,particularlygiventheproportionatelyhighpopulationsofyouth.WhiletheRwandaSocialSecurityBoard(RSSB)isbyfarthepredominantlocalinstitutionalinvestor,privatepensionandinsurancefundshavebeengrowingrapidlyinrecentyears,accordingtotheWorldBank.Fifty-threedefined-contributionpensionschemesoperatedinRwandaasofyear-end2014,alongsidetheRSSB,asadefined-benefitscheme.TwelveregulatedinsurancefirmsmanageoverUS$300millioninassetsinRwanda.

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privateplacementsofcorporatedebt,andprivateequity.Asoneparticipantnoted,“Moneyfollowsmoney,”andsopensionfundsinRwandaandotherEACmemberscouldactasimportanttrailblazersforcrowdinginfurtherinvestmentfromabroad.

InRwanda,however,theamountofassetsallocatedtoequitiesandcorporateorprojectbondshasremainedsmall.TheRwandaSocialSecurityBoard,forexample,hasallocatedmorethan60percentofitsassetstobankdeposits,governmentdebt,andrealestate.9Severalparticipantsworriedthat,throughouttheEAC,pensionfundshavebecome“acaptivemarketforgovernmentbondissues.”Afewadvocatedforapolicyinterventionthatwouldpush,inonewayoranother,pensionfundstomoreactivelyallocateassetstoinfrastructureandprivateequityascatalyticinvestmentsfordrivingeconomicgrowth.Asonesaid,“Thereneedstobesomepolicydeliberationastohowthegovernmentsaremakingcriticaldecisionsondirectingcomponentsofthenationalinsuranceorpensionfundstogointosupportingearly-stagefunding.”

Otherparticipants,however,cautionedagainstsuchanactivistapproachbyEastAfricangovernments,fortwomainreasons.

First,theynotedthatinstitutionalinvestorshaveadualmandate.Indevelopingcountriesinparticular,wherecapitalisscarce,pensionfundsandinsurancecompanieshavearoletoplayininvestinginthelocaleconomy.However,theyalsohaveamandatetojudiciouslyinvestthesavingsofothers.Severalparticipantsnotedthatprotectingpensioners’retirementmoneyisafirst-orderpriority.Thissecondpartofthemandatewouldperhapsguidepensionfundsawayfromearly-stagefunding,wherefailureratesareespeciallyhigh.Afewparticipantsarguedfortakingintoconsiderationthe“socialimpactoftheseriskissues.”

Asecondandrelatedpointraisedduringtheroundtablewasthatfundsneedtodiversifyriskbeyondtheirowncountry’seconomicgrowthstory.ParticipantsarguingthispointnotedthatsomeEastAfricangovernmentsalreadyplacestrictlimitsonhowmuchtheirinstitutionalinvestorscaninvestabroad,evenwithinthesubregion.Government-prescribedlocalassetallocationscouldactuallyincreasesystemicriskinthelocalfinancialsector.Ifthejobofthepensionfundsandinsurancecompaniesistosafeguardreturnsforpensionersandshareholders,thentheyneedtodiversifyriskthroughinvestmentsabroad.Asoneparticipantsaid,“Institutionalinvestorsneedtobethesourceoffundsforcapital-marketdevelopment,butthesmallertheeconomy,thelesslocalinstitutionalinvestorsshouldbeprovidingthosefunds.”

Finally,afewparticipantsbelievedthatthereasonpensionfundshavenotdiversifiedmuchbeyondbankdeposits,governmentdebt,andrealestateissimplyduetoalackofproduct.(SeealsoSectionIII.)Asonenoted,theybuyandholdbecausetheydon’thavealternatives.“Iftheyhaveonlythreestockstobuyandtheysell,wherearetheygoingtoputthemoney?”heasked. 9EACSecretariat,EACPensionStatistics,December2014.

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Crowdinginmoreinfrastructurefinancing Muchoftheroundtablediscussionaboutinstitutionalinvestorsfocusedontheirroleinfundinglong-terminfrastructureprojects.Naturally,thisispartoftheirmandateasessentialpoolsofcapitalforfinancinginvestmentsinlocaleconomicgrowth.Pensionfundstendtobebettersuitedthanbankstofinancinglong-terminfrastructureprojectsbecausetheirliabilitiestypicallybettermatchthelongertermsofinfrastructureprojects.Oneparticipantremarkedonaroleforinfrastructurebondsissuedonlocalcapitalmarketsasavehiclethatmayattractpensionfundinvestments,moresothandirectinvestmentininfrastructureprojects.

Participantsdiscussedideasfordevelopingadditionallong-termfinancingoptions,includingforfundinginfrastructure.Muchofthisdiscussioncenteredonthelackofinvestmentvehiclesandotherfinancialinstruments.Asunderscoredbyoneparticipant,amainimpedimenttoaccessingmoreprivatefinanceisashortageofwell-preparedprojects.10Severalparticipantspointedtoalackof“fundable”projects—ratherthanalackofinvestment—asthebiggestimpedimenttocapital-marketdevelopment.“Developingqualityprojectsandpreparingthatpipelineisperhapsmoreimportantthanfocusingtoomuchondevelopmentofthemarketitself,”arguedoneparticipant.Anothernotedthatitwasimportanttoremainmindfulthat,asafrontiermarket,“Rwanda’scapitalmarketisverymuchagrowthmarket,soyou’vegottocreatethatpipeline.”

AccordingtofindingsfromastudybyMcKinsey,anestimatedUS$15billionannuallyininternationalprivatefinancecouldbetappedforinvestmentinAfrica’senergysectoralone.Projectpreparationcanbecostly,time-consuming,andrisky,however.Andtheprocessofpreparingprojectscanbefurtherimpededbytechnicalcapacityandbudgetconstraints.11“Whenacountryhasinfrastructureprojects,whichareessentiallypublic-sector-led,andtheyaretryingtobringinprivate-sectorfinance,gettingthepublic-private-partnership(PPP)structurerightcanbecomplicated,”remarkedoneparticipant.Theprocessofactuallyprocuringinfrastructureinvestmentscanbelengthyaswellascomplicated,anothernoted.

Oneparticipantnoted,moreoptimistically,thatPPPscanprovideimpetusforcrowdinginprivatecapital.PPPscanbridgethefiscalgapwheregovernmentsarenotabletoprovideallofthefunding.“Addingprivatecapitalcanactuallyimprovetimelinesfordeliveringgoodsandservices,andthereforegeneratevalueformoney,”headded.Atthesametime,participantsagreedthatitwasimportanttostrikeabalancebetweenthecommercialinterestingrowingtheventureandanydirect,long-termimpactonthepublic.Allofthecomponentsinvolvedinfinancinglong-termnationalinfrastructureneedtobeexaminedinthecontextofthewiderecosystem.“Nooneplatformisasolutiontoallproblems,”oneparticipantobserved.Andcrowdinginmorefundingdoesn’tnecessarilymeanissuingsecuritiesdirectlyonthemarket,asanotherpointedout.

Theremaybearoleforunlistedproductssuchasprivateplacementsandunlistedinfrastructurefundsandco-investmentinstruments.Tothisend,participantsbelievedtheremightbeanimportantrolefor 10McKinsey,2013,“InfrastructureProductivity:HowtoSave$1trillionaYear.”11In2011,theG-20flaggedinsufficientresourcesforprojectpreparationasamajorimpedimenttolarge-scaleinfrastructureprojectsindevelopingcountries.

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donorstoplayinprovidinginsurancewrappersandothercredit-enhancementproductstolowertheriskstheseprojectsposetoinvestors.Asanexampleofpartiallyde-riskinglong-terminfrastructureprojects,oneparticipantreferencedIsrael’sexperienceofhavingagovernment-ownedinsurancecompanyprovideacreditguarantee.Asimilarideaforproductdevelopmentwouldbemunicipalornationaldevelopmentbondswithacreditwrapsoldtoinstitutionalinvestorsbytheissuingagency.

AnotherattractiveideathatemergedfromthispartofthediscussionwasthecreationofaregionalinfrastructurefundseededbyavarietyoffundsthroughouttheEAC.Throughsuchapooledfund,riskswouldbespreadacrossmultipleprojectsandsharedbymultipleinvestors.Again,participantssuggestedthatdonorscouldassistinthecreationofsuchafundandprovidesomefirst-lossguaranteestoencourageparticipation.Thechallengeofattractinginvestmentfromregionalinstitutionalinvestors RoundtableparticipantswereinagreementthatRwanda’sdomesticinstitutionalbaseisinadequatetomeettheinvestmentdemandsoftheeconomy.Asonelocalparticipantstated,“Rwandacurrentlydoesnothaveenoughinstitutionalinvestorsdomestically.”Participantsbelievedthatacrucialstepforcapital-marketdevelopmentinRwandawouldbetappingthenearlyUS$15billionofassetsundermanagementbyinstitutionalinvestorsinneighboringEACcountries.(SeealsoSectionI.)

Participantsidentifiedfourmainobstaclesthatstandintheway,however.Asexpandedonimmediatelybelow,theseobstaclesare:highreturnsongovernmentdebt,thedifficultyininvestingacrossborders,mandatesthatrestrictcross-borderinvestment,andexchangeraterisk.

1.CAPTIVETOGOVERNMENTDEBTMARKETS.Asseveralparticipantsnoted,manypensionfundsintheEAChavebecomecomfortablebuyingandholdinggovernmentdebt.IfKenyaninvestorscanearn15percentonsafegovernmentassets,theyarenotincentivizedtoinvestinRwandangovernmentorprivate-sectorsecurities.

2.COSTLYREGIONALINVESTINGPROCESSES.TheprocessofinvestinginsecuritiesacrossborderswithintheEACisoverlycumbersome,severalroundtableparticipantssaid.Participantsstronglyrecommendedshiftingtoasystemwhere,whenasecurityislistedononeEACexchange,itautomaticallycanbetradedonallEACexchanges.Whilesomeparticipantsexpressedconcernthatthiswouldinvolveadditionalcostlyinvestmentinmarketinfrastructure,otherssuggestedtherecouldbelow-tech,low-costalternatives.Forexample,onecitedthesimplebook-entrysystemthatlinkstheStockExchangeofMauritiuswiththeJohannesburgStockExchange,allowingfortheduallistingofshareswithoutexpensivenewmarkettechnology.Similarly,severalparticipantsurgedthatan“EACpassport”bemadeavailableforintermediariestoeliminateredundantapprovalprocessesandtradingfeesthatcouldcurtailcross-borderactivity.

3.RESTRICTIVEMANDATES.SomeEACinstitutionalinvestorsarerequiredtoallocatelargesharesoftheirassetstodomesticprojectsorhaverelativelylowceilingsonhowmuchtheycan

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investinforeignsecurities—eventhoseissuedwithintheEAC.OneofthestrongestconsensusrecommendationscomingoutoftheroundtablewasthatsecuritiesissuedbyentitiesinotherEACmemberstatesshouldbesubjecttothesameinvestmentguidelinesasthoseissuedbydomesticentities.InRwanda,foreigninvestment—includingfromwithintheEAC—insecuritiesissuedonthestockexchangeislimitedto30percent.RaisingthisthresholdforEAC-sourcedinvestmentcouldalsohelpaddressbuy-sideconstraintsinRwanda.

4.EXCHANGERATERISK.OneEastAfricanregulatorpointedoutthedifficultyintradingacrossbordersseamlesslywithdifferentcurrencies.“Assoonasyoustarttrading,you’regoingtobelosing5percentjustincurrencyconversion,”hesaid.Severalparticipantsarguedthatestablishingafinancialderivativesmarketthatallowsinvestorstohedgetheircurrencyriskwouldcatalyzefurtherfinancial-marketdevelopmentinRwanda.“Creatinganenablingenvironmentforcurrencyforwardssotherearenosettlementissuesforinternationalinvestorswouldbeanenablingproductforcapital-marketdevelopment,”saidone.DevelopingFXhedgingproductswouldallowRwandanotonlytomorefullyattractEACinstitutionalcapital,butflowsfrombeyondtheregionaswell.

Cultivatingaretailinvestorbase Therewasconsensusamongroundtableparticipantsthatthereisaroleforretailinvestors,althoughsomeparticipantsdescribedthemas“thethirdtier”indevelopingbuyside.Othersagreedthatinvolvingawidernumberofretailinvestorsintheequitymarketshouldlikelybeincludedasamedium-termgoalforcapital-marketdevelopment.Withveryfewpeoplecontributingtopensionschemes,animportantchallengeisdetermininghowbesttomobilizefundsfromsmall-scalesavers—thelargenumberofpeoplewithrelativelylowearningsoreventhoseemployedintheinformalsector.

LowcombinedEACsavingsimpedetheabilitytoattractlargenumbersofsmallsaverstounittrust(mutualfund)products,evenintraregionally.CooperationamongEACexchangesindevelopinginnovativefinancialinstrumentscouldimprovetheabilitytoattractsmall-scaleinvestmentfromacrosstheregion.Afewroundtableparticipantsrecommendedthatcapital-marketplayersacrosstheEACexploresettinguparegionalfundemployingmobiletechnologytodirectlyaccessretailinvestorsandevenverysmall-scalesaversthroughouttheEAC.

Withthegoalofencouragingthedevelopmentofaunittrustindustrytohelpincreasesavingsrates,includingamonglow-incomepopulations,theRwandangovernmentrecentlycreatedtheRwandanNationalInvestmentTrust.TheRNITisanopen-endedfundthatinvestsonlyinlistedsecuritiesandmoneymarketsecurities.Investmenttargetsare30percentinequityand70percentto100percentindebt.Thetrusthasaninitialaimofreaching5,000investors,targetinginstitutionalandretailinvestors.Italsointendstoreach100,000small-scalesaversandwillsellsharesinthetrustforamountsassmallasRWF2,000(approximatelyUS$2.70).

Well-targetedfinancialeducationwillbeakeysupportingstepinscalingupunderbankedsavers.Severalroundtableparticipantsarguedthatintermediariesneedtoplayagreaterroleinleadingeducational

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efforts.Asoneparticipantsaid,“Itisnotonlytheexchangeregulators’responsibilitytogetintopubliceducation…intermediarieshaveanequallyimportantroletoplay.”Bytakingupthisrole,intermediarieswilldrawinnewclientsandgrowtheirbusinesses.Therewasdisagreementabouttheextenttowhichintermediariesshouldtakeonthisrole,however.Oneparticipantpointedoutthatcostconsiderationsmakeitimpossiblefortradingparticipantsorintermediariestocarryoutthistaskalone.Heunderscoredthatgovernmentwasneeded“toprovideleadershipasthemarketgrows.”

IV. Boosting Supply: Developing the Equity MarketTheroundtable’sthirdandfourthsessionsweredevotedtoanexplorationofhowbesttoconnectfirmstocapitalmarketsandboostthesupplyofnewissuesonRwanda’sequitymarkets.Thediscussioncenteredonseveralmain,interconnectedthemes:Howtoincrease“product”byincreasingfundableprojectsandattractingmorefirmstolistontheRSE’smainboard;whethertheRSEshouldtargetSMEsforlistingsatall;and,ifnot,thealternativeformsoffinancethesefirmscouldaccesstobestmeettheirneeds.Indiscussingthefirsttheme,severalparticipantscalledforaregionalapproach.SeveralrecommendedtargetingfirmsfromwithintheEACseekingtoexpandtheirbusinessesregionallyasakeypartofacampaigntoattractnewlistings.

Inadditiontoprovidingaccesstolong-termfinance,alistingonpublicequitymarketscanbringbenefitsofimprovedfinancialreportingandtransparency,relatedefficiencyimprovements,diversificationoftheshareholderbase,andpricediscoveryandabasisforcompanyvaluation.Italsocanprovidecompanieswithanopportunitytoraisetheirmarketprofile,whichcanhelpinexpandingmarketshareandbuildingthebusiness.Thestockexchangealsocanbeappealingasawayforfirmsfromwithintheregiontoraisecapitaltofundregionalexpansion.ObservingthisphenomenonatworkinSouthernAfrica,oneparticipantnotedthatanumberofwell-established,large,andprofitablefirmsinthatsubregionhavegoodbusinessmodelsthataretransferrabletoothercountriesinthesubregion.“Thesefirmsaredoingrightsissuesthatarebeingusedtofinancetheirregionalexpansionprograms,”headded.Butoutreachisrequiredtomakefirmsawareofthebenefitsoflistingonpublicequitymarkets.Andtoenablefirmstoaccessthesemarkets,listingcannotbetoocostlyortooonerous.Targetedoutreachtoattractlistings—domesticallyandwithintheregion Onestepthatcouldhelpincreasemainboardlistingsisoutreachtoboostcompanies’awarenessofastockexchangelistingasavehicleforraisingfinance.Therewasbroadagreementamongroundtable

KEYQUESTIONS:

§ Whatdoinstitutionalinvestorsrequirefromcapitalmarketstoinvestmoreinlonger-termassetsandprojects(achallengenotrestrictedtoRwandaandotherdevelopingmarkets)?

§ Whatareinstitutionalinvestors’minimumliquidityneeds?§ Whatarethebestwaystoleverageregionalizationandattractlong-termcapitalfrominvestorsbasedinotherEACmembers?

§ Whattypesofmutualfund(unittrust)investmentvehiclesareneeded?§ Arethereinvestmentproductsthatcanattractandscaleupsavingsfromthesmallest-scalesavers(peopleintheinformalsector)?

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discussantsthattheseeffortsaremosteffectivewhentheyarecarefullytargeted.Toattractlistings,othercountries’financialmarketauthoritiesandintermediarieshavetargetedindividualcompaniestheyidentifiedaslistingcandidates.“Weassembledalistofabout30to40companiesthatwereofalargeenoughsize,andwentroundandtalkedtothemonebyonetotrytoconvincethemofthebenefitsoflisting,”recountedoneAfricancapital-marketexpert.“Targetededucationratherthanscatter-guneducationtypicallyismoreeffective,”headded.“Weshouldidentifythosefirmsthatarerelativelybigandwouldattractinterestfrombothlocalandinternationalinvestors,”echoedanotherparticipant.

Takingaregionalapproachtoatargetedcampaigntoattractlistingsalsocouldhavemerits.Thisisnotanewidea,buteffortscouldbesteppedupandmorecloselycoordinated.Aslongasadecadeago,theNairobiStockExchangeproposedthattheEACexchangesjointlyconductaregionalpublicawarenessandeducationalcampaign,reachingouttoalistofpotentialissuersacrosstheEAC,compiledperiodicallyonaregionalbasis.Toincreasetheamountandrangeof“product,”oneAfricanstockmarketheadproposedthatEACregulatorsandexchangesgosofarastoagreethatwhateverwaslistedinKenyasimultaneouslybemadeavailablefortradinginRwanda,andviceversa.

Developingcapacityisalsoimportant.Severalparticipantscommentedthattheprivatesectortypicallydoesnotleadincapacitybuildingandeducation,butratherreliesongovernmentinvestmentintheseareas.Atthesametime,intermediarieshavearoletoplayinimprovingthewayfinancialmarketsintermediatecapitalbyinvestinginpubliceducation,aswellassellingtheproductsthatareonthemarkettoprospectiveinvestors.“Itisnotjusttheregulators’responsibilitytogetintopubliceducation,”saidoneparticipant.Atthesametime,severalparticipantscommentedthattheprivatesectorreliesongovernmentinvestmentandleadershipinthisarea.Reducinglistingcostsandcomplexitytoencouragemoreissuers Inadditiontothelistingfeeitself,thereareothercostsassociatedwithgettingandmaintainingastockexchangelisting.Raisingcapitalonastockexchangethroughaninitialpublicofferingcanbeexpensivebecauseofthelargercostssuchasadvisors’fees,reorganizationcosts,andcostsassociatedwithauditingandcompliancewithfinancialreportingstandards.Infact,foramainboardlisting,theactuallistingfeeistrivialrelativetoadvisors’chargesandothercosts.CitingfindingsfromaWorldBankstudy,oneparticipantreportedthat“thedirectcostswerenotnecessarilyveryhigh,butmostoftheissuersfoundtheindirectcoststobeprohibitivelycostly.”Theseindirectcostsincludethetimeittakestogetalistingapproved.

Otherparticipantspointedoutthatwhilelistingcostsmayseemhighinabsoluteterms,whenexpressedintermsrelativetotheamountoffinanceactuallyraised,theymaynotseemsohigh.“Theissueisreallymoresohowtoreducethecomplexityofaccessingcapitalmarkets—andhowtomakeitfastertoaccessthemarkets,”saidoneparticipant.

Onewell-knownfactoronthegroundisthatpotentialissuers—especiallySMEs—fearthedisclosureneededforalisting.“Theylookatthemselvesandassumetheydon’thavethecapacitytoopenuptogopublic,”explainedaparticipantinregularcontactwithRwandanenterprises.

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Afewparticipantssuggestedapossiblerolefortechnicalassistanceinimprovingthetimeandprocessassociatedwithamainboardlisting.“Technicalassistanceforfirst-timeissuerscouldhelpthemwithratings,legalissues,etc.toincentivizethesefirstmoverswhocouldbeotherwiseabitapprehensive,”saidone.

Participantsdiscussedwhethertaxincentiveswereeffectiveasawaytoencouragelistings.AccordingtoakeystakeholderindevelopingBotswana’sstockexchange,duringthefiveyearsthattaxincentiveswereineffecttoattractnewlistings,theydidhelpbuildacriticalmassoflistedcompanies.However,hecautionedthatalthoughthistacticcanworktoattractlistings,itcanalsobecostly.“Ifusedatall,taxincentivesshouldonlybeusedforalimitedperiodoftime,perhapsfiveyears,”herecommended,citingtheexperienceofBotswana.“Eventuallygovernmentrealizedthiswasaveryexpensivewaytogetcompaniestolist,andafterawhiletheywithdrewthisincentive,”headded.

TheheadoftheMauritiusstockexchangeexplainedhismarket’srelativelyunconventionalapproachtobuildingnewlistingsandasecondarymarket.“Ratherthancreatingtheplatformandthenlookingforcompanies,wecreatedanunregulatedplatform,”heexplained.Byofferingtheexchange’stradingandsettlementplatformtothesecompaniesonanunregulatedbasis,theexchangegainedtheabilitytotestmarketappetite.“Itwasonlywhenasubsetofthefirmshadreachedacertainsizethatweaskedthemtojoinandtheysignedoff—andthen,ofcourse,weformallylaunchedtheregulatedmarket.”Inotherwords,beforeitlaunchedtheactualplatform,theexchangefirsttooktheapproachofaskingfirmswhethertheywantedaccesstoaplatformprovidingamarketpriceandmoretransparentwaytotradetheirsecurities.Andthisapproachalsoprovidedawaytohelpdevelopasecondarymarket.“Weapproachedtopmanagementof,say,about80companieswhosesharesweretradingregularlyonthatunregulatedplatform,”theparticipantexplained,pointingoutthestatisticsshowingnumberofshareholdersandtradinglevels,andthenaskingthemto“graduatetothenextlevel”andjointheregulatedmarket.

AsimilarpointwasmadebytheheadofUruguay’sstockexchange,whonotedthatifcapital-marketregulatoryauthoritiesprovidetherightincentives,firmsontheover-the-countermarketmaymovetotheregisteredcapitalmarkets.Thiswouldhelpfostercapital-marketdevelopment.Healsocautionedagainstoverregulationthatcouldstifleinnovation,includingonthepartofstockmarketintermediaries.Canprivatizationhelpkick-startmainboards? Intermsof“gettingproduct”onthemainboard,thegovernmentcanhaveapositiveroletoplaybyprivatizingstate-ownedfirmsandfloatingsharesonthestockmarket.TherewasbroadagreementthatprivatizationcouldbeachannelfordevelopingthemainboardbyprovidingapipelineofIPOs.Afewparticipantscitedcountrycasesinwhichprivatizationshadkick-startedcapitalmarketsovertheyears.Forexample,Malaysia’sprivatizationmasterplanformedakeypartoftheeffortindevelopingthelocalequitiesmarket.(SeealsoSectionVII,ExecutionandImplementation:LessonsfromMalaysia.)Privatizationsoncapitalmarketsalsocanbringbenefitsbyleadingtoimprovementsincorporategovernance,management,andoveralltransparencyofthecompanies.

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Accordingtooneparticipant,drawingontheMalaysiacase,this“kick-starteffect”canoccurevenwithpartialprivatizationsinvolvingsell-offsofassmallas25percentequitystakes.SomeparticipantssuggestedtheRSEandtheMinistryofFinancecouldworktogethertosteadilyrolloutpartialprivatizationsoverthenextseveralyears.Thisstrategycouldalsogeneraterevenuesforthegovernment,particularlywhenthesestate-ownedenterprisesgobacktothemarketforsubsequentofferings.TargetingSMEs:DoSMEboardsmakesenseforsmallfirms? SMEsarethebackboneofmostoftheworld’seconomies,andRwandaisnoexception.“WhenwelookattherealitiesinEastAfricaandotheremergingmarkets,wehavetobeveryconsciousthattheeconomicdriversofoureconomiesare,infact,SMEs,”pointedoutaseniormanagerwithoneoftheregion’scapital-marketregulatoryauthorities.

Morethan80percentofRwandanfirmsrecentlysurveyedjointlybytheCMAandtheMilkenInstitutehavefewerthan100employees.Thefindingsshowedthatonly22percentofthesurveyedfirmscouldaccesstherightkindofcapital—thecapitaltheyneed.Amongthebiggestchallengesisthelackofawarenessoffinancingoptions,includingtherelaxedlistingrequirementsforSMEs.GiventhattheRSEsignificantlyrelaxedlistingrequirementsforSMEsin2013,thisfindingissurprising.Thisseemstopointtoaneedforcapital-marketstakeholderstoengageinmoreprivate-sectoroutreachtoboostawarenessofpublicequitymarketsamongSMEsinparticular.

Overthepastdecade,anincreasingnumberofexchangesacrossemergingandfrontiermarketshavebeensettingupSMEboardsorsegments.RoundtableparticipantsdiscussedatlengthwhatittakestomakeanSMEsegmenteffective—andwhethersuchasegmentisappropriateatall.“There’snotonesingleexampleintheworldtodaywhereaplatformforSMEshasbeenhugelysuccessful,eveninthedevelopedmarkets,”arguedoneparticipant.ManyotherdiscussantsnotedthatcomprehensiveevidenceonhoweffectivetheseSMEsegmentshavebeeninraisingfinanceislackingthusfar.OnepointedoutthatsomecountrycasesshowtargetingSMEsforlistingsthatareinhigh-growth-potential,strategicsectorsmaybeeffective.12Anotherpointedoutthat,evenintheworld’slargestcapitalmarkets,young,early-growth-phasefirmstypicallydonotlistonstockexchanges.

Therealsowasacallforcapital-marketorotherfinancialmarketauthoritiestothinkmorecreativelyaboutstrategicengagementsbetweentheofficialandprivatesectorsthatcouldproducemechanismsthatcouldsupportdevelopmentofanSMEboard.AparallelwasdrawnwithPPPsasanexampleoftheofficialandprivatesectorsworkingtogethertodevelopfinancingmechanisms.Identifyingproductive,high-growthsectorswasseenasthefirststepinidentifyingSMEcandidatesforlisting.

12OnerecentstudybytheWorldBank,drawingonexperiencesofsevenSMEexchangesacrossarangeofcountries,recommendedthatbeneficialapproachesmayincludeoutreach,publicawarenesscampaigns,andtrainingtargetedtoSMEswithasignificantgrowthrate.SeeHarwood,AlisonandTanyaKonidaris,“SMEExchangesinEmergingMarketEconomies:AStocktakingofDevelopmentPractices,”PolicyResearchWorkingPaper7160,January2015.

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AfewotherparticipantssimilarlypointedoutthatSMEscannotbeviewedasa“homogenousgroupofcompanies.”Infact,therewasfairlybroadagreementthatSMEscoverawiderangeoffirmsandthatanSMEsegmentmaybeappropriateonlyfortheuppertier(ifany)ofthesefirms.“WehavetoidentifythepotentiallylistablecompanieswithinthisuniverseofSMEs,”urgedoneparticipant,distinguishingthesefromsmallerfirmsthatwouldhaveproblemsmeetinglistingcriteriaonanongoingbasis.ButcompletelyexcludingtheSMEequationfromthescopeofthecapital-marketdevelopmentagendacoulddiminishcapitalmarkets’potentialroleindrivingeconomictransformation,warnedanotherparticipant.

AlthoughtheRSEhasrelaxedSMElistingrequirements,manySMEsmayhaveproblemsmeetingtheserequirementsonanongoingbasis.“AnIPOinvolvesfixedcosts,prospectuscosts,gettingsponsoringbrokers,etc.,andI’mnotsureit’sreallyacost-effectiverouteforsmallenterprisestogodowntoraisefunds,”advisedoneparticipant.

“Idon’tthinkit’ssomuchthecomplexityofcapitalmarkets,butalsothatinvestorswouldfavorlargerfirms,”saidanother.AndtherewassomedebateonwhetheranSMEsegmentmightbeperceivedasa“lowerquality”listingtierthatfailstoattractinvestors.“Atatimewhenthemainmarketisstrugglingtogetvolumeandliquidityinsharetrading,itwouldseemperversetointroduceasecond-tiermarketwheregettingliquiditywouldbeevenmoredifficult,”warnedoneparticipant.Therealsowasconcernthatanyinvestordisillusionmentpotentiallycouldspreadtothemainboard,givingdevelopingcapitalmarketsa“badreputation”overall.

DoprivatemarketsprovidemoreappropriateSMEfinancingalternatives? SomeparticipantsarguedthattheRSEshouldnotbefocusingonSMEsatallandsuggestedclosingtheSMEwindowandfocusingsolelyonlarge,maturecorporates.Noconsensusdevelopedaroundthispoint,althoughtherewasbroadagreementontheimportanceoffocusingholisticallyondevelopinga

BOX2.CautionagainstoverlycostlymarketinfrastructureAfewparticipantswarnedagainsttheofficialsectorbuildingupcostlyinfrastructureinfinancialsystemsthatwouldbepoorlysuitedatthecurrentstageofthemarket’sdevelopment.“Thechallengeistohavemoreproductivemarketinfrastructurethatworkstointermediatecapital—andavoidasituationwhereyouhaveextensiveinfrastructuredoingverylittle,”observedoneparticipant.Overlycostlyinfrastructurecanleadtohighfixedissuancecosts.ThereisabroadlyacknowledgedneedforfurthercooperationonmarketinfrastructuresoastomovebeyondthestumblingblockofcompetitivenessamongtheEACcountriestogetthe“best”marketinfrastructureonanationalbasis.Howcantechnologybeemployedtocross-linktheEACmarketsinfourcountries—Kenya,Rwanda,TanzaniaandUganda—toencouragemorecross-listingsaswellascross-borderinvestment?Atthesametime,thereisaneedformoreharmonizationandmutualrecognitionofregulations,includingforlisting,trading,licensingofintermediariesacrosstheEACmarkets,andotheraspectsofregulatoryoversight.Therewasacallforspeedynationaladoptionofthesestandards,oncefinalized.Afewparticipantsurgedreformsthatfacilitatetheabilityofbrokersfromonecountrytotradeonanother’smarket,forexample.(SeealsoDevelopingEquityBuySide.)

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financialmarketwitharangeoffinancialinstitutions,whicheffectivelyintermediatescapitaltomeetenterprises’realfinancingneeds.

Afewparticipantsnotedthatalternativestobankcreditandcapitalmarketsmaybemoreappropriateforthefinancingneedsofmanyfirmsthatlackadequatecollateralandcreditworthinesstrackrecords.Inadditiontodiversifyingtherangeofavailablefinancingsources,developingnon-loanfinancinginstrumentscanhelpreducetheriskofloandefault.“Itisworthconsideringhowtoincreaseavailabilityofotherformsofenterprisefinancethataren’tusedmuchinRwandayet,suchasprivateequity,leasing,invoicediscounting,andfactoring,”afewparticipantsnoted.Forexample,factoringandfinancialleasing,withappropriateregulatoryframeworksinplace,canbewell-suitedtoSMEslackingcollateralandcreditworthinesstrackrecordsrequiredfortraditionalloans.Newtechnology-enabledsolutionssuchascrowdfundingmayalsoprovidemoreappropriatewaysforsmaller,youngfirmstoraisefinance,intherightregulatorycontext,andmayplayan“incubator”roleforlaterequitylistings.(SeeBox3.)

AccordingtoarecentWorldBankstudy,venturecapital(VC)andprivateequity(PE)oftenmaybeamoresuitableformoflonger-termfinancethanastockexchangelistingforfirmsatanearlierstageofdevelopmentbecausefirmsstandtobenefitfromgrowth-orientedstrategicadvice,technology,andsupportfromVCorPEpartners.13Anearly-stagefirmmaybeabletodrawonthesebenefitstostrengthenitscorporategovernanceandoveralloperations,preparingitselfforasuccessfulexchangelistingatalaterstageinitsgrowthcycle.

Anumberofroundtableparticipantssimilarlyarguedthatventurecapitalorprivateequityismostsuitedasearly-stagefinanceformostSMEsandthat,atalaterstage,thesevehiclescouldaccessthestockexchangeasaplatformforexit.OneparticipantdescribedthechallengeasfirstfocusingonhowRwandacandevelop“goodandstrongcompanies”andthenbuildingonthatforthenextphaseofprivate-sectordevelopment.“Idon’tthinkweshouldgetsidetrackedbyfocusingonSMEfundingthroughthecapitalmarketsinRwanda,”heargued.Acapital-marketdevelopmentexpertinBotswanasharedhiscountry’sexperienceinintroducingaventurecapitalboardwithlessstringentlistingrequirements.“Thisdidnottakeoff—withtheexceptionofonespecificsector,thekeyminingsector,”herecounted.AnumberofyoungminingcompaniesinBotswanafoundthisboardattractiveandsoughtlatercross-listingsonlargeexchangesintheUnitedKingdom,Canada,andAustralia.AfewotherparticipantsraisedtheideaofusingincentivesfirsttoencourageSMEstoraisefinancethroughprivateequityand,possibly,atalaterstageoftheirdevelopment,alsolistingsontheSMEsegment.(Seebelow.)

13Harwood,AlisonandTanyaKonidaris,“SMEExchangesinEmergingMarketEconomies:AStocktakingofDevelopmentPractices,”PolicyResearchWorkingPaper7160,January2015.

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Privatemarketscancreateinvestmentproductsforretailinvestorsonthemainmarket GiventhequestionsabouttheviabilityofanSMEboardontheRSE,roundtableparticipantsdiscussedhowtoencourageventurecapitalandprivateequityinvestmentinRwanda.Asseveralnoted,VC/PEfundscanbeanappropriatevehicleforfinancingmanySMEs.Institutionalinvestorstypicallywillnotchoosetoassignanexpensiveanalysttocoversmall-capSMEs.Furthermore,institutionalinvestorsmustbeprudentinallocatinginvestmenttoearly-stagefinancing,asfailureratesareoftenveryhigh.Andretailinvestors,asseveralparticipantsnoted,shouldnotbeexposedtohighamountsofriskassociatedwithfinancingearly-stagecompanies.

ApossiblesolutionforbothinstitutionalandretailinvestorswouldbetochannelsavingsthroughVC/PEfundsora“fundoffunds”thatcouldbelistedonthestockexchange.SuchfundscouldpoolriskbydiversifyingtheirportfoliosacrossalargenumberofSMEs.SomeparticipantsbelievethatEACinstitutionalinvestorscouldthemselvesseedsucharegionalfundtofocusoninvestinginSMEsacrosstheregion,perhapswithdonorsprovidingfirst-lossprotection.OtherssuggestedthatgovernmentanddonorscouldencouragedevelopmentofthesefundsbyofferingtechnicalassistancetoimproveSMEfinancialreporting,helpentrepreneursdevelopbusinessplans,andhelpfundmanagersidentifyinvestmenttargets.OneparticipantrecommendedmakingavailablealistofregisteredRwandanSMEstopotentialVC/PEinvestorsasonerelativelyeasystepthatwouldfacilitatedevelopmentofthesefunds.

TheRwandangovernment,throughtheRwandanDevelopmentBoard(RDB),isattemptingtojump-startaVC/PEculturebyseedinganewfundcalledtheAngazaFund.ThegovernmenthasseededthefundwithUS$30millionandisseekingtocatalyzeanotherUS$70millioninprivateinvestment.Thefundwillinvestinearly-stage,high-growthcompaniesinstrategicsectors,suchasinformationtechnology,health,andfinance.

BOX3.EquitycrowdfundingIntherightregulatoryandbusinessenvironments,equitycrowdfundingandotheralternativefinancingsolutionshavesignificantpotentialtonarrowtheSMEfinancegap—financingnewentrepreneurswhohavefiguredouttheirbusinessmodelandproduct-marketfitbutwhosefinancingoptionsaretypicallylimitedtobankloansorfamilyfunding.Bydrawingonnewbusinessmodelsandtechnologies,thesenewfinancingsolutionscanreduceinformationasymmetriesintheearly-stageinvestmentspace,mutualizerisksacrossabroaderinvestorbase,andreducetransactioncostsforinvestorswhiledecreasingpost-transactionoverheadsforSMEs.

Equitycrowdfundingenablesentrepreneurstoraisemoneyfrommultipleinvestorsthroughanonlineplatformwithouthavingtogopublic.Italsomakesitpossibleforsmallinvestorstobuyminoritystakesinunlistedcompanies.Equitycrowdfundingcanbeseenasakintoprivateequityinthesamewaythatmicrofinanceisakintobanklending.

Theonlineplatformalsopotentiallyservesasavehicleforfacilitatingentrepreneurs’compliancewithregulatoryrequirementsandoversight.Insteadofregisteringtheirofferingsdirectlywiththelocalregulatoryauthority,entrepreneurscanapplytoraisecapitalonaregulatedcrowdinvestmentplatformand,aftersatisfyingduediligencerequirements,issueamini-prospectustodiscloseinformationsuchas

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BOX3(continued)

legalstructure,debtschedule,andforecastcashflow.Evenperiodicshareholdermeetingscanbeheldonline.Becausecrowdfundingandotheralternativefinancingsolutionsintroducenewrisks,however,itisessentialthatadequateinvestorprotectionandfinancialeducationbeinplaceascornerstones.Hereagain,theonlineplatformcanserveasausefulvehicle.Retailinvestors,forexample,arerequiredtopassa“suitabilitytest”demonstratingtheirriskawarenessbeforetheycanaccessinvestmentopportunities.

EquitycrowdfundingisnotyetinuseinEastAfricanormanyotheremergingmarkets,andtherecurrentlyarenolocalregulatoryframeworks.Lookingahead,however,equitycrowdfundingcouldprovideapartialsolutiontotheSMEfinancinggap,particularlyforentrepreneurswhosebusinessmodelsdonotfitstandardbankcredit-riskassessments.ThisrepresentsaformidableopportunityforRwandanandEastAfricanregulatorstopositionthemselvestopossiblyactasfirstmoversandpromotecost-effectivelocallegalstructuresandfiscalincentivesforearly-stageinvestments.Atpresent,EuropeancrowdinvestmentplatformstargetingEastAfricanSMEsstilldefaulttooffshorestructuresinMauritius.Onshoringthesetransactionstoaprice-competitive,investor-friendlydestinationsuchasRwandameritsconsideration.

Lastly,thedatatheseplatformscollectcouldbeusedtosupplementSMEcreditregistriesandfurtheraddressinformationasymmetriesthatcontributetotheSMEcreditgap.Importantly,inbuildingathrivingprivatesector,crowdfundingplatformscouldserveasincubatorsforcompaniesthatgoontolistonSMEexchangesorontheregularstockmarket.Creatingsuchapipelineofinvestablecompaniesisequallycriticalinharnessingthelargeprivateequityfundsenteringtheregion.

V. Developing Bond MarketsTheroundtablesessionondevelopingbondmarketsstartedoffwithadiscussiononthemotivesandprerequisitesforsuchamarket.Acentralthemeinthesediscussionswashowbesttoencourage

KEYQUESTIONS:

§ WouldincludingconcretetargetsfornumberoflistingsintheCapital-MarketMasterPlanhelpprovideaneffectivewaytodevelopequitybuyside?

§ Howcanaregionalapproachbestbeemployedto“developproduct”byincreasingnewequitymarketlistings?WoulditbepossiblefortheEACregion’sregulators—andtheexchanges—toagreethatafirmlistedinonecountrywouldsimultaneouslybeavailablefortradingontheotherEACmarkets?

§ Shouldthefocusbeonincubatingfuturelistedcompaniesorontryingtoattractmorelistedcompaniesnow?

§ IsventurecapitalorprivateequityfundingmoreappropriateformanySMEs—whereexchangeplatformscanbeusedforexitatalaterpoint?

§ Istherearolefortechnicalassistanceinguidingfirmsidentifiedaslistingtargetsthroughtheprocess?

§ WhatwouldbethebestwaytochannelsavingsthroughVC/PEfundsora“fundoffunds”thatcouldbelistedonthestockexchange?

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corporatebondissuanceandpreparefirmstoissuebonds.However,therewassomedisagreementontheprioritythatRwandacurrentlyshouldgivetodevelopingacorporatebondmarket.Aheavilydebatedpointconcernedtheroleofforeigninvestors,includinghowandthedegreetowhichbondissuesshouldrelyonthiscapital.

Rwandaisamongagrowingnumberoffrontiermarketcountriesthathaveputdevelopmentoflocalcurrencybondmarketsonthenationalpolicyagendaoverthepastdecadeorso.Participantslistedanumberofcommonmotivesdrivingthis,includingadesiretodeveloplocalcapitalmarketstomakeavailablemoreflexiblefinancingforlocalinfrastructureandothermedium-to-long-termprojectsthatcouldimprovesocioeconomicdevelopment.Awell-functioninggovernmentbondmarketcanfacilitategovernmentdebtmanagement,providingaccesstoastablesourceoffundsatdesirablematuritiesandreasonablecosts.Governmentbondscanserveasaninvestmentalternativewithrelativelylowornoriskofdefault.Asgovernmentandcorporatebondmarketsdevelop,theymaygivethebankingsectoracompetitivespurtodevelopnewfinancialinstrumentsandintermediatefinancemoreeffectively,includingbyreachingfurtherdownthecreditspectrumtocredit-constrainedsmallerfirms.However,theinterestrateonlonger-dated,local-currencybondissuesmaybehigherinrealtermsthanacorrespondingissueoninternationalcapitalmarkets.Rwanda’sbondmarketcurrentlyisilliquidandverysmall.Sofar,onlyonecompany,I&MBank,hasissuedacorporatebondonRwanda’scapitalmarkets:a10-year,RWF1billionissue.TheInternationalFinanceCorporationissuedafive-yearbondin2014withtheaimofdeepeningRwanda’sbondmarket.Thatyear,theRwandangovernmentalsobeganissuingbondsonaregularbasis.

Asseveralroundtableparticipantsnoted,furtherdevelopmentofthebondmarkethasbeenimpededbymanyofthesamefactorsthathaveimpededsecuritiesmarketsingeneral,suchasanunderdevelopedinvestmentbaseandprevalenceofa“buyandhold”attitudeamongexistinginvestors.Developmentofacorporatebondmarketalsohasbeenhinderedbyacontinuingreluctanceamongmanyindigenouscompaniestoissuesecurities,whichcanbeduetosomecombinationofwarinessofthefinancialdisclosureandrelatedcostsassociatedwithissuance,insufficientresources,lackofexperience,andgenerallackofawarenessofthebondmarketasafinancingoption.Moreover,thevastmajorityofRwanda’sfirmsareSMEs,whichlackthescale,resources,andcapacitytoissueabondatthisstageoftheirbusinesslifecycle.

Mostdiscussionparticipants,however,sawdevelopingabondmarketasimportantifnotessential.“Ithinkthereisreallynoalternativetobuildingadeeplocal-currencybondmarket,bothforgovernmentandnongovernmentborrowing,”saidoneparticipant,notingthedangerofrelyingoninternationalmarketsforbondfinancing.“Whenwetrytoconvinceourclientstoborrowinlocalcurrency,it’softenahardsell,becausewhenthemarketiscalm,theinterestratesindollarsjustlooksomuchcheaper.Thenwhenthedollarappreciatesagainstthelocalcurrency,suddenlyallofourclientscometousforhedgingsolutionsatpreciselythemomentwhenit’sbecomingprohibitivelyexpensive.”Anotherparticipantnotedtheroleofabondmarketinattractinglong-termfinancing.“Wehaverealizedthattheshort-termismofbankfundingisnotabletofundlong-terminvestmentsinAfrica,”hesaid.

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Developingthegovernmentbondmarket Developinganddeepeningabondmarketisaninteractive,sequencedprocessrequiringascontextsound,crediblemacroeconomicpoliciesandastableandpredictableregulatoryregime.Roundtableparticipantswereinbroadagreementastotheprerequisitesthatmustbeinplaceforawell-functioning,liquidbondmarket.Theseincludeasoundbankingsystemandanactivemoneymarket.Theroundtablefollowedthediscussionofthelatterwithadiscussionoftheimportanceofadeepgovernmentbondmarket,whichisitselfnecessarytosetthestageforacorporatebondmarket.Bysupportingsecondarymarketactivity,aresilientandefficientrepurchaseagreement(repo)marketisfundamentaltoliquidbondmarkets.“Themoneymarketisthefoundationofthebondmarketbecauseitprovidesawaytorecycleliquidity,”notedoneparticipant.Anotherwarnedthat“withoutafunctioningrepomarket,thesovereignbondmarketisnotgoingtotakeoff.”

Deepeninggovernmentbondmarketsinasequenced,transparentmannerisacriticalstepindevelopingacorporatebondmarketandwell-functioningcapitalmarketsforseveralreasons.First,itraisesthecountry’sprofileamonginvestors.“Acountry’ssovereignbondissuanceishowinvestorsgettoknowthatcountry,”saidoneparticipant.AnotherparticipantrecalledthattheIFC’soffshoreRwandan-francissue“generatedlotsofinterestamonginternationalinvestorswho,previously,couldbarelyspellthenameofthecountry.”

Second,andrelatedly,itsupportstheestablishmentofabenchmarkyieldcurveforpricingcorporatebondissues.“Youneedtohavethatbenchmarkinorderforcorporatestoissue,”explainedoneparticipant.“Thesovereignpricingisalwaysaguideforthecorporatedebtsector.”

Third,thegovernmentbondmarketfacilitatesmarketparticipants’accesstoanadequate,continuoussupplyofliquidityandenablesdealers,marketmakers,andotherinvestorstoplantheirinvestmentstrategies.Areliablesupplyofsafeassetsisespeciallyimportanttoencouraginginvestorstoenterothermarkets.Ifinvestorsaregoingtoholdriskyassets,oneparticipantpointedout,“theyliketohavethatbalancedoffbyholdingsafeassets,andgovernmentsecuritiesprovidethatsafety.”

Tosupportthedevelopmentofagovernmentbondmarket,participantsrecommendedthatthegovernmentadheretoaregularandpredictableissuanceschedule,concentrateissuanceonplainvanillabondswithalimitednumberofmaturities,andconsiderestablishingaprimarydealersystem.Aregular,predictableissuanceprogramforbenchmarkgovernmentbondsalsosendsanimportantsignaltoinvestors.OneparticipantwhoplayedaninstrumentalroleindevelopingMalaysia’sfinancialmarketspointedtothatmarket’sexperienceinthe1980sand1990sasasalutarylesson:“Westartedthemarketforgovernmentbondsquiteearlyintheday,butitwasalwaystiedtothefiscaldeficit,”sherecalled.ShedescribedhowMalaysia’sgovernmentdiscontinuedissuingbondsoncethebudgetwentintosurplusandwasnotinthemarketagainforsome11years.“Whenwere-entered,itwasverytough,becausethemarketnolongerknewusanditwaslikestartingalloveragain,”shesaid.“Theideaistohaveregularissuancesandbeinthemarketallthetime.”

Afewparticipantsalsopointedoutthatkeepingthegovernmentbondmarket“asvanillaaspossible”makessenseintheearlystagesofbond-marketdevelopmentforafrontiermarketsuchasRwanda.

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“Haveasfewgovernmentbondissuesaspossible,atthisstage,”advisedone.“Ifyouissueanewbondateverynewauction,youmayaswellforgetaboutsecondarymarketliquidity,”headded.PointingtothecaseofKenya,whichisdoingfewernewbondissuesthaninthepast,hewentontoadvisethatitmaymakemoresenseto“havefivebondsandkeepopeningthosebondmarkets.”

ARwandangovernmentofficialacknowledgedthatfrom2008through2011,“wewereabitdormant.”However,since2014,Rwandahasbeentakingstepstowarddeepeningthegovernmentbondmarketandestablishingabenchmarkyield,bycommittingtoissuingbondsonaquarterlybasisandgraduallyincreasingtenors.Participantsgenerallypraisedthegovernment’sprogressthusfarindevelopingabondmarket.Oneadvisedthat,goingforward,financialmarketauthoritieswillhavetoensureafreeflowofinformationandeffectivecoordinationbetweenthecentralbankandtheFinanceMinistry,whichoverseesthegovernmentbondmarketandtheinterbankmarket,andtheCMA,whichoverseesthecorporatebondmarket.

Settingupawell-functioningprimarydealer(PD)systemcanbeakeystepinbuildingtheprimarymarketinfrastructureneededtodevelopamoreliquid,deeperbondmarket.Essentiallyanetworkoffinancialintermediaries,primarydealershelpensuresuccessofprimarymarketissuanceandhelpfosterandmaintainliquidityinthesecondarymarket.“Inmovingtoaprimarydealersystem,marketinfrastructureandelectronictradingplatformsbecomeimportant,”saidoneparticipant.HepointedouttheneedforamechanismformonitoringtheperformanceofPDsandmakingsuretherightkindsofincentivesareinplace.Anumberofparticipantsnotedthattheregulatoryframeworkshouldexplicitlyidentifytheprimarydealersasthefinancialintermediariesthatcanparticipateintheprimarymarketforbuyingbonds.“Intheirroleasmarketmakers,theyshouldn’tbepayinganyfees,asameansofencouragingthemtonarrowthespreadsbetweenbidandask,”notedone.

Inthesecondarymarket,liquidityispartlyanissueofscale.Addressingitwillrequirepatience.“GettingliquidityinthemarketissomethingthatRwandacanbuildtowardsandcertainlywillbuildtowards,”oneparticipantremarkedoptimistically.“Ithinkwe’llgettherewithinfiveyears.”Liquidityinthesecondarymarketforgovernmentbondshelpsensurethattheyield-curveismarket-determined.Primarydealerscanplayaroleinensuringliquidityhereaswell.Developingthecorporatebondmarket Aftertheseprerequisitesforacorporatebondmarketareinplace,developinganissuerbaseisthefirstpriority,accordingtoanumberofparticipants.Institutionalinvestorsattheroundtableexpressedtheireagernesstoallocatemoreoftheirportfoliostobonds,butthesupplyneedstobetherefirst.“Werealizethereturnsarebetterwithbondsthanwithdeposits,”saidalocalinstitutionalinvestor.“Wewouldbegladtoparticipateinthismarket,butithastocomefromtheotherside.”

Whatcanbedonetoencouragemorecompaniestoissueabondonthelocalmarket?“Makeitfaster,simpler,andcheaper,”saidatleastafewroundtableparticipantsfamiliarwithRwanda’snascentmarket.“OneoftheaspectsofregulationthathashauntedEastAfricanexchangesisthatthecostsofbondissuancearequitehigh,”saidone.“IthinkRwanda’scorporatebondmarketisactuallyprettygoodinthisrespect,butreducingtransactioncostsisstillsomethingthatcanbeimproved,”saidanother.

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Disclosurerequirementsandissuancecostsarenottheonlyobstacles.InRwanda,observedoneparticipant,“whatwefoundisthatthedirectcostsarenotnecessarilyveryhigh,butmostoftheissuersfoundtheindirectcoststobeextremelyprohibitive.”Timeisoneindirectcost.“Ifit’sgoingtotakeyoutwomonthstogetanissueapproved,thenobviouslyyouhaveanissue,”saidanotherparticipant.“Youaregoingtotrytofindanalternativesourceoffinancing.”

Anotherdeterrentisthepossibilityofgettingonlyaspeculativegraderating,althoughRwanda’ssovereigncreditratingwasupgradedthisyeartoB+/B,reflectingastableoutlookforthepoliticalandmacroeconomiccontext.And,similartoraisingfinanceonequitymarkets,basiclackofknowledge—evenamongbanks—aboutthebenefitsofraisingfinanceonbondmarketsisanotherfactorthathasimpededthecorporatebondmarket’sdevelopment.

Andindirectcostsflowfromtheneedtoobtainacreditratingpriortoissuance.Manycompaniesfindthatinordertosecureagoodcreditrating,theyneedtoreformtheircorporategovernanceorupgradetheiraccountingsystems.Atleastonelocalcompanythatrecentlyconsideredabondlistingwas,intheend,deterredbytheprospectofincurringthesecosts.AlthoughRwandahasadoptedinternationalfinancialreportingstandards(IFRS),mostprivatebusinessesstillarenotincompliancewiththese,andmakingthetransitionrepresentsamajorbarrier.“Asyet,thereisnoregulationthatrequirescompanies,otherthanbanksandperhapsinsurancecompanies,toprovidefinancialsonaregularbasis,”complainedoneprivate-sectorparticipant.Anotherparticipantwentsofarastoproposethatcreditratingsbecomemandatoryforcompaniesaboveacertainsize,inordertospurthenecessaryreformsandinvestments.Severalotherscalledfordonor-sponsoredtechnicalassistanceforfirst-timeissuers.

Anotherissuerelatedtotheweakinformationenvironmentiscollateral.BecauseRwandanbankscannotrelyonfinancialstatements,theymostlyengageinasset-basedlending,asopposedtocash-flowlending.Banks’demandforhighlevelsofcollateralhinderscompanies’abilitytoissuebonds.“Thebondinvestorsareineffectsubordinatedtobankcreditors,”explainedoneparticipant,“becauseallthiscollateralhasalreadybeenpledgedtothebanks.”EncouragingRwandanfirmstoadoptIFRSwouldthereforehaveasecondpositiveeffect:tofreeupcollateralforissuingsecuredbonds.

Participantsdebatedthemeritsofcreditenhancementsandotherformsofgovernmentsupport.Onespokepositivelyofthecredit-enhancementprogramsofferedbypensionfundssuchastheCaliforniaStateTeachers’RetirementSystem,wherebythefunds“lendout”theircreditratingforafee.Otherparticipantsweremorecautiousaboutthisapproach,notingthatsometimescreditenhancementdoesnotofferanoffsettingbenefit.

Beyonddevelopingtheissuerbaseforcorporatebonds,afewparticipantspointedtosomelow-hangingfruitforthegovernmenttoreducetransactioncostsandenticemoreinvestorstoenterthemarket.Inparticular,institutionalinvestorsattheroundtablecomplainedaboutbeingforcedtobuybondsthroughauthorizedbanks,insteadofbeingallowedtodosodirectly.Thegovernmentshouldtemperitsexpectations,though:Participantsobservedthatevenadvanced-economycorporatebondmarketsarenottypicallycharacterizedbyampleliquidity.

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BOX4.Kenya’sM-Akibabond:LeveragingmobiletechnologytoengagesmallinvestorsParticipantsdiscussedtheprospectiveroleofsmallinvestorsinRwanda’sbondmarketandwhetherorhowproductsshouldbedesignedtoaccommodatethem.TheyalsodiscussedhowRwandamightusenewtechnologiestoleapfrogolder,moreestablishedcapitalmarkets.Onbothcounts,Kenyamayofferlessonsforawayforward.

Kenya’sNationalTreasuryhasrecentlypartneredwithSafaricomtolaunchM-Akiba,aninnovative,tax-exemptgovernmentbondthatcanbeboughtinsmalldenominationsandtradeddirectlythroughamobilephone.M-AkibawillbesoldonthenewlydevelopedTreasuryMobileDirectsystem,basedontheM-Pesaplatform.M-Akibabondswillbefixed-rateandhaveafive-yearduration,withaminimuminvestmentamountaslowasKES3,000(aboutUS$30).Investorswillbeallowedtobuyupto140,000Kenyanshillings(aboutUS$1,370)perdayandcancontinuebuyingonsubsequentdaysuntiltheissuecloses.AninauguralofferingofUS$5billiontoraisefinancefordomesticinfrastructurewasplannedforOctober2015,butwassubsequentlydelayed.TheKenyangovernmenthasthreegoalsforM-Akiba:

! Lowerthegovernment’sfundingcosts,withtheM-Akibabondstobepricedsomewhatbelowthemarketinterestrate

! Buildthelocalinvestorbaseandreducerelianceonforeigninvestors! BroadenpublicparticipationinlocalcapitalmarketsandmakeiteasierforKenyanstosave(Kenya’ssavingsrateishalfthatofitsneighbors)

Individualsstillrepresentjust2percentofbondinvestorsinKenya.Foreignanddomesticinstitutionalinvestorscomprisetheother98percent.Onemajorhurdletoattractingmoreretailinvestmentwasaregistrationprocessdescribedbyoneroundtableparticipantas“verycomplex,cumbersome,time-consuming,andexpensive.”Toinvestdirectlyingovernmentbonds,investorshadtoregisterwiththeCentralBankofKenyabyvisitingoneofitsfouroffices,providingseveralmonths’worthofbankstatementsandfillingoutnumerousforms.

WithM-Akiba,thesebarrierstoentryhavebeenreduced.Thereisnopaperworktofilloutandregistration,trading,andsettlementwillallbedonedirectlybymobilephone.AllthatisrequiredisasubscriptiontoamobilemoneyserviceandavalidnationalID.Interestwillbepaidtomobilewalletssemiannually.Investorscanalsousetheirphonestocheckstatementsandengageinsecondarytrading.

TheinitiativehingesonthepopularityofmobilemoneyservicesinKenya.Just20percentofKenyansownbankaccounts,butmorethan75percentownmobilephonesand60percentmakemobilepayments.

SeveralroundtableparticipantsspokeapprovinglyoftheinitiativeandsuggestedthatRwandashouldconsideremulatingit.“There’sarealopportunityforaretailbondalongthelinesoftheKenyanshilling-styleretailbondthatallowsforsmall-scaleinvestmentbymobilephone,”saidaparticipantwithaninvestmentmanagementfirm.“Thiscouldbeaproducttogetthemanonthestreetusedtosavings—andusedtothewholeideaoffinancialinstruments.”

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VI. Developing a Commodities Exchange Commodities,especiallyagriculturalcommodities,areessentialtotheRwandaneconomy.Theagriculturalsectoraccountsforone-thirdofGDPandemploysmorethan70percentofthepopulation.Rwanda’smainexportsarecoffee,tea,andminerals.Theroundtablediscussionondevelopingacommoditiesexchangefocusedonthedifferentwaysspotandfuturesmarketscatalyzeeconomicdevelopment,theregulatorychallengesofsupervisingcommoditiesexchanges,andthepotentialforcommoditiesmarketstodriveregionaleconomicintegration,perhapswithRwandaleadingthewayasthehostofahigh-poweredEastAfricanExchange.

Rwanda’sagriculturalsectorischaracterizedbysmall-scale,subsistencefarmingwithlowproductivity.Untilrecently,whateversurpluswasproducedwassoldthroughinformalnetworksofsmalltraders.Theilliquidityandopacityofthesenetworksmadeithardforfarmerstoobtaincompetitivepricesfortheirharvests.Thispointedtotheneedforamoreorganizedmarket—oneinwhichsmallholderfarmerscouldparticipate.

Asoneroundtableparticipantsaid,“Acommodityexchangeisasimportantasstockandbondmarkets,ifnotmoreso,becauseacommodityexchangeactuallyaffectsthelifeoftheaverageperson.”Thisistrueforsmallholderfarmerswhoaccessmarketstoreceivefairpricesfortheircrops,anditisalsotrueforRwandanbusinessesoperatingintheagriculturalsector,includingthecountry’smanyagriculturalexporters.Furthermore,thegrowthoftheseagriculturalsectors,aswellaseffortstoexploitnaturalresources,motivatesmuchoftheneedforinvestmentintransportinfrastructureinRwandaandtheEAC.Inthiscontext,oneparticipantsaid,“EastAfricancapitalmarketsaregoingtobedevelopedonthebackofdevelopingcommoditiesmarkets.”Howspotandfuturesmarketsinfluenceeconomicdevelopment Asapresenterduringthecommoditiessessionexplained,earlycommoditiesmarkets,suchastheNewYorkMercantileExchange,wereessentiallyfinancialderivativesexchangesfortradingfuturescontracts.Theyfacilitatedpriceriskmanagementandpricediscoveryforbuyersandsellersofagriculturalandextractivecommodities.Thesefuturesmarketswere“monopoliesbydesign,”inthatthecontractscouldoriginateandbesoldonlyviatheexchangeitself.Theywerehighlyliquidmarketsthatarerelativelylow-costtosetupandmanage.TheprimeexampleofthiskindofexchangeinAfricaistheSouthAfricanFuturesExchange(Safex).

KEYQUESTIONS:

§ HowcanawarenessberaisedamongRwandanfirmsofthebenefitsthatcomefromraisingcapitalthroughbondissues?

§ Howcantransactioncostsassociatedwithissuingcorporatebondsbefurtherreduced?§ Whatarethebestwaystospurlargerfirmstomeetthecorporategovernanceanddisclosurerequirementsneededtoobtainacreditratingforissuingabond?

§ HowcanRwandastriketherightbalanceinaccessingneededforeignportfolioinvestmentwhileguardingagainsttherisksofoverrelianceonthisinvestment?

§ Whatarethebestwaystoincreasebondmarketliquidityandaddresstheproblemofscale?

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Unlikefuturesexchanges,thissession’spresentersaid,spotexchangesarenotmonopolies:Theycompetedirectlywiththeopen,informalmarketswherefarmersselltheircrops.Asthisdynamicsuggests,spotmarketstakeastepawayfromthefinancialsectorandtowardthephysicaltradeofgoods.

ThisiscertainlytruefortheEthiopiaCommodityExchange(ECX),thesecond-largestAfricancommoditiesexchange(afterSafex).Asthesamepresentersaid,“TheECXcameupasa100percentspotexchangeandworksmorelikeatradeinstitutionthanafinancialinstitution,inthateverysingletransactionprocessedontheexchangeplatformresultsinaphysicaldelivery.”Hewentontonotethat,duetoitslinkageswiththephysicalmovementofgoods,thearrivalofaspotexchangebringswithitavarietyofeconomicactivitiesandinvestment.“Inanymarketwhereaspotexchangehasemerged,”hesaid,“thereisalsoanemergenceofinfrastructureintermsofagriculturalstorageandqualitycertification.Thisispartofthebusinessmodel.”Withoutcontroloverthewarehousingandqualityassuranceprocesses,thespotexchangecannotmakenecessaryguaranteesaboutthevolumesandqualityofproductsbeingtradedviatheexchange.Forthiskindofexchange,itisalsoessentialtowidelydistributepriceinformationtoasmanyfarmersaspossible,eventhosewhoarenotactivelysellingthroughtheexchange.

In2014,AfricaExchangeHoldingssetuptheEastAfricaExchange(EAX)inKigali,Rwanda’scapital.WhereastheSouthAfricanexchangeisapurelyprivatefuturesmarketandtheECXisagovernment-runspotmarket,theEAXisaprivatespotmarketwithambitionsofdevelopingafuturesmarketinthecomingyears.(SeeBox5.)

BOX5.HowdoestheEAXcontributetoRwanda’seconomy?Sinceitwaslaunchedin2014,theEAXhasquicklyrisentobecomethethird-largestagriculturalexchangeinsub-SaharanAfrica,aftertheSouthAfricanFuturesExchange(Safex)andtheEthiopiaCommodityExchange(ECX).Today,theEAXfunctionsasaspotexchange,facilitatingauctionsandofferingtransparentpricediscoverytoRwandanfarmersgrowingmaize,beans,soy,andrice.Designedasahybridexchange,theEAXwilleventuallytradebothspotandfuturestransactionsinawidervarietyofagriculturalandnon-agriculturalcommodities.InpartnershipwiththeRwandaMinistryofAgricultureandAnimalResources,theEAXalsomaintainsanetworkofwarehousesforcleaning,grading,certifying,bagging,andstorage.Awarehousereceiptsystemtracksinventoryandownership.

Accordingtotheroundtablediscussion,theEAXcurrentlyiscontributingtoRwandaneconomicexpansioninthreemainways.ItbenefitstheRwandaneconomybyimprovingefficienciesintheagriculturalsector,expandingaccesstocredit,andspurringinvestmentandbusinessactivityinwarehousingandqualityassurance.

! IMPROVINGEFFICIENCESINTHEAGRICULTURALSECTOR.Bycentralizingtrading,theexchangefacilitatespricediscovery,enablingfarmerstoobtainfairerpricesfortheirproduceoncommoditiesmarket.BydisseminatingmarketpricestotradersthroughSMStextmessages,itswebsite,newspapers,andothermediasources,theexchangeproducesanimportantpublicgood.AswiththeECXinEthiopia,allmarketparticipants,eventhosewhodonottradeontheEAX,benefitfrompricetransparencyandhaveanopportunityforastrongernegotiatingposition.Throughitsgradingandcertificationservices,theEAXcounterstheadverseselection

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BOX5(continued)

problemandenablesgreaterproductdifferentiation,enablingfarmerswithhigh-qualitygoodstocommandapremium.Asoneroundtableparticipantsaid,“Goingthroughtheexchange,farmersgetahugepremiumwhentheysellbecausethequalitytypicallycomingoutoftheexchangeismuchhigherandbuyerswillpaymore.”

! EXPANDINGACCESSTOCREDIT.ThroughtheEAX,farmersinRwandacannowusewarehousereceiptsascollateral,makingiteasierforthemtoobtainbankloans.Currently,farmerscantakeoutloansforupto70percentofthevalueoftheirwarehousereceipts.WithalargemajorityofRwanda’spopulationengagedinagriculture,loanscollateralizedbywarehousereceiptscanbeapowerfultoolforenhancingfinancialaccessandadvancingfinancialinclusion.

! SPURRINGINVESTMENTANDECONOMICACTIVITY.Asdiscussedabove,spotexchangesaresupportedbyadenseecosystemoflogistics,warehousing,andquality-assuranceservices.ThishasbeentrueinRwandaaswell,wheretheEAXitselfhasinvestedheavilyinwarehousingfacilitiesandvalue-addedprocessing,suchascleaning,grading,certifying,bagging,andstorage,forthecommoditiesthattradeontheexchange.TheseserviceswerepreviouslyunavailableinRwanda,andtheyarefoundationaltothefunctioningofthespotmarket.Furthermore,warehousingandotherserviceshaveemergedasattractiverevenuestreamsfortheexchangeasthemarketdevelops.

Regulatorychallenges Indiscussingtheregulatoryenvironmentforcommoditiesexchanges,roundtableparticipantshighlightedtwoissuesthatthegovernmentmustkeepinmind.Strikingtherightbalancebetweenover-andunderregulationiskey.Ontheonehand,thegovernmentmustprovideaclearandpredictablelegalandregulatoryenvironment.“Thebiggestthingthatacommodityexchangetradesistrust,”remarkedoneparticipant.“Andtrustcomesfromaconducivelegalenvironment.”Atthesametime,thegovernmentmustnotstifleinnovation.Exchangeshavetoinnovatetobesuccessful,andthegovernmentmustbewillingtodrawalineandsay,“Thisiswherewestop.”Further,exchangessometimeshavetomovequickly—quickerthangovernmentcan—totakeadvantageofopportunitiesorfendoffcompetitivepressures.

RoundtableparticipantspointedtoexperiencesinMalawiandEthiopiaascautionaryextremes.InMalawi,internationalbuyersrefusedtocometotheexchangebecauseitoperatedinacompleteregulatoryvacuum.Theexchangeandpotentialparticipantshadtoapproachregulatorsanddemandbasicrulesandprotectionsformarketparticipants.Asoneroundtableparticipantexplained,suchmarkets“needaregulatoryenvironmentandlegalframework,becausetheygiveconfidencetostakeholders.”InEthiopia,ontheotherhand,theexchangesufferedfromoverlyintrusiveregulation,asgovernmentofficialsintervenedindetailsofexchangemanagementasminuteasthevacationtimeofemployees.

Asseveralroundtableparticipantsnoted,commoditiesexchangesmustbeinnovative,comingupwithnewpolicies,newstructures,andnewproducts.Accordingtoseveralparticipants,regulatorsshouldallowroomforexchangestoinnovateandexperiment,butwhenbenefitsandrisksbecomeclearer,theregulatorhasaresponsibilitytostepinandestablishstandardsandboundaries.Acommodities

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exchangewouldnotbesuccessfulifnotbackedupbythegovernmentinthisway.

Oneadditionalinterestingconcernaboutregulatingcommoditiesmarkets,asraisedduringtheroundtable,isthatexchanges,particularlyspotexchanges,operateinagrayareabetweenthefinancialandagriculturalsectors.“Thereareaspectsbeyondthemandateoffinancial-sectorregulators,likequalityassurance,warehousing,andlogistics,”oneparticipantexplained.“Ifnothandledproperly,thiscanleadtodifficultsituations.”ParticipantspointedtothecollapseofIndia’sNationalSpotExchangeLtd.(NSEL)asacautionarylesson.There,ambiguityofregulatoryresponsibilityallowedformassivefraudthatdestroyedthefundamentaltrustnecessaryforathrivingexchange.AconsensusrecommendationfromtheroundtablewasthatRwanda’sCMAcoordinatecloselywiththeMinistryofAgricultureandAnimalResourcestoensurepropersupervisionofalloftheEAX’sactivities.DevelopingaregionalcommoditiesmarketacrosstheEAC Asafewroundtableparticipantsnoted,theEAXmayserveasanimportantdriverofregionalintegrationintheEastAfricanCommunity.Forexample,thedevelopmentofthecommoditiesexchangecanhelpgovernmentsidentifybarriersdelayingthecross-borderdeliveryofphysicalgoods,andthepresenceoftheexchangefurtherprovidesapoliticallyweightymotivationforsolvingsuchproblems.

Furthermore,theexpansionofavibrantcommoditiesmarketcanspurregionalstandard-settingandcapacity-buildingprojects.Asoneparticipantnoted,theEACNorthernCorridor—comprisingRwanda,Kenya,andUganda—iscurrentlyestablishingregionalqualitystandardsanddefinitionsforhigh-prioritycropsintheregion.TheNorthernCorridorcountriesarealsoplanningcoordinatedcampaignstoimprovefinancialmarketeducationamongfarmersgrowingkeycrops.

Finally,theEAXitselfseesitsfutureasaregionalexchange.Whenestablishingtheexchange,theinvestorspurchasedNasdaqOMX’sX-streamplatformwiththegoalofbeingatradingplatformfortheentireEACandothernearbySouthernandEastAfricancountries.Afewroundtableparticipantscalledthesystem“overkill,”andonelocalintermediaryexpressedconcernthatwhatsomemarketparticipantsviewasprohibitivelyhightradingcostsontheEAXweretheresultoftheexpensiveplatform.Supportersofthedecision,however,emphasizedthatthefutureoftheRwandanmarketisregionalandthatfarmersandbuyerswillbenefitfromtheeconomiesofscaleofferedbyatrulyregionalmarket.

RwandangovernmentofficialsandmarketparticipantshopetoleveragethedecisionoftheEAXtolocateinKigaliasadistinctadvantagegoingforward.Asseveralroundtableparticipantssaid,theirhopeisthatbycapitalizingonthecommoditiesexchange’scompetitiveadvantages,includingstate-of-theartITinfrastructureandgoodgovernance,Kigaliwillbecomearegionalcenterfortradeinanumberofeconomicallyimportantcommodities.

KEYQUESTIONS:

§ HowcanRwandastriketherightbalanceinregulatingtheEAX?§ Inrespondingtotheneedtoremaininnovative,whatarethebestnewproducts,policies,andstructuresfortheEAX?

§ WhatshouldthenextstepsbeintakingforwardtheEAX’splanstoestablishitsnicheasthecommoditiesexchangeservingtheEACandbeyond?

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VII. Execution and Implementation: Lessons From Malaysia AsRwandaembarksonthedesignandimplementationofitsCapital-MarketMasterPlan(CMMP),itisworthwhiletodrawlessonsfromothercountries’experiences.Onthefinaldayoftheroundtable,participantsexaminedMalaysia’sexperienceinplanning,coordinating,andimplementingcapital-marketreformduringthepreviousdecade.

InthewakeoftheAsianfinancialcrisis,Malaysia’sMinistryofFinancetappedtheSecuritiesCommission(SC)todevelopandstrengthenthecountry’scapitalmarkets.14Theensuing10-yearCMMP,publishedin2001,wasacomprehensivereformplan.Itcontained152recommendations,organizedundersixobjectivesand24strategicinitiatives.Itfocusedondevelopingamorerobustregulatoryframeworkandonbuildingupmarkets,institutions,instruments,andpublic-andprivate-sectorleadership.Bytheendofthedecade,theSChadimplemented95percentoftheplan’srecommendations.Itisnowintheprocessofimplementingthesecondplan(CMMP2).Thisfollow-upplancontainslessexplicitrecommendationsandmoredirectionalguidance,focusedprimarilyonimprovingcorporategovernanceandintegratingwithinternationalmarkets.

ThedecisiontodrafttheCMMPwasmotivatedbytwofactors,onedomesticandoneforeign.Thedomesticimpetuswastoreducethematuritymismatchinthedomesticbankingsector,byshiftinglong-termfinancingawayfromdepositorsandtowarddirectinvestors.TheAsianfinancialcrisismadecleartheMalaysianeconomy’soverrelianceonbankfinancing,aswellastheneedtodiversifyitsfinancialsector.Theforeignimpetuswastoimprovethecompetitivenessandresilienceofthedomesticfinancialsectorinanticipationoffurtherinternationalliberalization,towhichMalaysiawasobligatedasasignatorytotheGATSFinancialServicesAnnex.

Asseveralroundtableparticipantscautioned,Malaysia’seconomyandfinancialsectorwerebothmoredevelopedanddiversifiedin2001thanRwanda’sisnow,whichhastobetakenintoaccount.Nonetheless,whilethescopeoftheworkdiffers,asdomanyofthedetails,Malaysia’sexperiencecontainsseveraloverarchinglessonsforRwandaandothercountriesatsimilarstagesofdevelopmentlookingtodiversifyawayfrombankfinance.

First,itisimportanttoadoptaholisticandintegratedapproach.TheCMMPwasdevelopedconcurrentlywithaFinancialSectorMasterplan(FSMP).TheFSMPwasoverseenbythecentralbank,BankNegaraMalaysia(BNM),andcoveredbanking,insurance,anddomesticdevelopmentfinancialinstitutions.BoththeCMMPandtheFSMPwereformulatedwithreferencetoMalaysia’seconomicdevelopmentgoals,asoutlinedinthecountry’sVision2020plananditsfive-yearOutlinePerspectivePlans.Itisimportant,notedoneparticipant,“tomakesurethattheplansareimplementedinausefulwaythatjibeswithwhattheeconomywants.”Acapital-marketorfinancial-sectordevelopmentplanthatisnotalignedwiththeeconomy’sneedswillnotbeeffectiveoruseful.

14Indevelopingcountries,financial-sectorregulatorsareresponsiblenotonlyforoversight,supervision,andstability,astheyareindevelopedcountries;often,theyarealsoresponsibleforfinancial-sectordevelopment.

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Second,andrelatedly,thegovernmentneedstohaveaclearandrealisticvisionofwhatitistryingtoachievebydevelopingitscapitalmarkets,aswellaswhatsuccesslookslike.“Youhavetohavearoadmap,”saidoneparticipant.“Andyouhavetomakesurethattheroadmapisactuallylikelytoleadtotheoutcomesyouwant.”InMalaysia,therewasageneralconsensusamongpolicymakersthatthepurposeofthefinancialsectorwastobeanenablerofgrowth,notadriverofit.TheCMMPandtheFSMPweredevelopedwithaclearviewtowardsupportingthegrowthoftherealsectorandMalaysia’stransitiontoafullyindustrializedandhigh-incomeeconomy.Further,policymakershadaclearvisionofwhatcapitalmarketscapableoffulfillingthisrolewouldlooklike.Suchmarketswould,aboveall,effectivelyfacilitatefundraisingandriskmanagement.Theywouldfurtherbecharacterizedbysufficientliquidity;efficientandrobustinfrastructure;adiversityofproducts,investors,andintermediaries;transparency;and,finally,effectiveoversightandregulationsthatmetinternationalstandards.

Third,itshouldberecognizedupfrontthatdevelopingaCMMPisamajorundertakingandrequirescommensurateresources.InMalaysia’scase,theprocesstookmorethanayearandinvolvedmanyconsultativemeetingswithavarietyofstakeholders,policymakers,andoutsideexperts.Thefinalplanrannearly300pages,notincludingsupportingdocuments.CountriesdevelopingaCMMPshouldideallyassembleasmall,dedicatedteam(threetofivepeople)toseetheprocessthroughtocompletion.Theteamshouldbecomposedoftheagency’srisingstars,andshouldincludeindividualswithprojectmanagementandprojectevaluationexpertise;atleastonepersonwithdirectmarketexperience;andatleastonepersonwithlegalexpertise,sincemanyCMMPrecommendationswillrequirenewlegislationandregulationsorrevisionstoexistingones.Outsideconsultantsareusefulforcommunicatingwhathasworkedinothercountriesandforhelpingpolicymakersdevelopacoherentstrategicapproach.However,inoneparticipant’sexperience,theycanhaveahardertimetailoringtheirrecommendationstofitacountry’sspecificsituation.

Fourth,effectivestakeholdermanagementiscritical.Itisimportanttoreachouttorelevantmarketparticipantsandindustryorganizationsearlyandoften.Thisisnotonlytoobtaintheirbuy-in,butalsotoensurethattheultimateplanaccuratelyreflectsmarketconditionsandaddressesrealdeficiencies.DuringthedraftingofMalaysia’sCMMP,theteamattheSCnotonlyconductedregularmeetingswithvariousstakeholders,itwasalsooverseenandsupportedbyastrategiccommitteecomposedofpublic-andprivate-sectorrepresentatives.Priortothefinalizationofmanyspecificreformmeasures,theSCdisseminatedconsultationpapersforpubliccommentandindustryfeedback.Further,implementationproceededonlywithapprovalofthestrategiccommittee.Legislatorsrepresentanotherkeystakeholdergroup,giventhattheirsupportisnecessarytopassnewlaws.Effectivepolicymakersmustbeattunedtopoliticians’perceptionsandconcernsandbeabletocommunicatewhyitisintheirinteresttosupportreform.

Fifth,interagencycoordinationmustbemanagedeffectively,anditdependscruciallyonthetonefromthetop.Financialregulatoryauthoritiesmustcoordinatetoensurethatinthedevelopmentandimplementationofrelatedplans,therearenooverlapsorgapsincoverage.Itisalsoimportanttoknowwhenitisacceptabletofosterinteragencycompetitionandwhencooperationisnecessary.InMalaysia,theCMMPandtheFSMPweredraftedseparately,butthelegalauthoritiesoftheSCandthecentral

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bankprovidedacleardemarcationofresponsibilitiesandjurisdictions.Duringthisstage,interagencycompetitioncouldbechanneledeffectivelytowardmotivatingeachplanningteamtodoitsbest.Interagencycoordinationbecamemoreimportantduringtheimplementationphase,particularlywhenitcametimetoliberalizeinternationaltransactions.

Sixth,specificreformmeasuresshouldbeassignedtargetsandtimelines.“Aplanismeaninglessuntilyouputpropertargetsaroundit,”saidoneroundtableparticipant.Itisalsoimportanttoidentifythe“successfactors”necessarytoreacheachtarget.“Youlistoutthenecessaryandsufficientconditionsthathavetobeinplace,”explainedoneparticipant.“Usually,toachieveonemeasureyouprobablyneedtodo10othermeasures.Youhavetocreatethatpositiveenvironmenttomakesureyourmeasureswillactuallywork.”Policymakersshouldkeepinmindthatsometargetsaresequential,whileothersareinterrelatedandneedtobedevelopedconcurrently.

Seventh,aCMMPshouldbethoughtfullysequenced(asopposedtotakinga“bigbang”approach),withtheplanbrokendownintophases.(SeeTable1.)Malaysia’sCMMPwasdividedintothreephases.Inthefirst,reformsfocusedonenhancingdomesticcapacity.Inthesecond,theyworkedtointensifycompetitionamongdomesticplayers.Inthethirdphase,themarketswerefurtheropenedtoforeigncompetition.

TABLE1.Sequencingframework

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Strengthendomesticcapacityanddevelopstrategicandnascentsectors.

Furtherstrengthenkeysectorsandgraduallyliberalizemarketaccess.

Furtherexpandandstrengthenmarketprocessesandinfrastructuretowardbecomingafullydevelopedcapitalmarket,andenhanceinternationalpositioninginareasofcomparativeandcompetitiveadvantage.

PHASE 1 PHASE 2 PHASE 3Source:SecuritiesCommissionofMalaysia,CapitalMarketMasterplan,p.272.

Eighth,duringtheimplementationphase,adaptabilityiskey.Beforetransitioningfromonephasetoanother,itisimportanttomakesurethattargetshavebeenmet.Iftheyhavenot,thetransitionshouldbedelayed.Rushingtomeetatimetableonceimplementationoftheplanisoutofsequencecancompromisemarketintegrityandinvitefinancialinstability.Malaysia’sSecuritiesCommissionwasadvisedbyaCapital-MarketAdvisoryCouncil(CMAC)duringtheimplementationphase;CMAC’srolewastoindependentlyassessimplantationandprogressand,whennecessary,makerecommendationsfortheplantobeadjusted.Beyondsequencing,adaptabilityiscrucialforabroaderreason:Marketswillevolveoverthecourseofimplementingalong-termplan,andpolicymakersneedtobecontinuallyaskingthemselveswhetherthereformstheyareimplementingarestillrelevantanduseful.

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VIII. Concluding Points and Next Steps InframingthekeychallengesandopportunitiesthatRwandafacesindevelopingcapitalmarkets,thispaperaimstoprovideausefulinputtoinformcapital-marketreformsgoingforward.

Inconcludingtheroundtable,participantsdiscussedproposednextstepsfortakingforwarda10-yearCapital-MarketMasterPlan,includingamarketassessmentdrawingonmainroundtablefindingsandmorein-depthconsultationsheldwithkeyRwandancapital-marketstakeholders.ThisprocesswillculminateinalistofrecommendedimplementingactionsandtimelinesforRwanda’s10-yearCapital-MarketMasterPlan.

Indiscussingcapital-marketreforms,roundtableparticipantsunderscoredtheimportanceofsequencinganddevelopingcapitalmarketstocomplementratherthancompetewiththebankingsector.Akeycross-cuttingissueistheroleofaregionalapproachindevelopingwell-functioningcapitalmarketsthatmoreeffectivelyintermediatelong-termcapital.Reformsandmeasuresthatencouragemorecross-borderlistingsandcross-borderinvestmentacrossEACsecuritiesexchangescouldhelpovercomelocalcapitalmarkets’impedimentssuchasilliquidity,lowmarketcapitalization,andsmallnumberoflistings.Moreover,greatercooperationacrossEACcapitalmarketsindevelopingandsharingmarketinfrastructureandintermediationserviceswouldbringbenefits,includingeconomies-of-scalebenefitsofreducedfixedcostsandgreaterefficiency.

Well-functioning,appropriatelyregulatedlocalandintraregionalinstitutionalinvestorsarekeystonesindevelopingthe“buyside”—aslong-termmoneythatcanhelpcatalyzeinvestmentfromothersourcestodeepencapitalmarkets.Theroleofforeigninvestorswasmoreheavilydebated,however,particularlythedegreetowhichbondissuesshouldrelyonthiscapital.Severalparticipantsflaggedotherbuy-sideprioritiesastheneedtoscaleupsmallsavers,includingintheinformaleconomy,whichalsowouldadvancefinancialinclusion.

Roundtableparticipantsstronglyagreedthatanimmediate-termandongoingpriorityforRwanda’scapital-marketstakeholdersistodevelopapipelineofprospectivelistings.Targetedoutreachiscriticaltoraisingawarenessofthebenefitsofalistingandboostingthesupplyoflistedfirms—onsecuritiesmarketsdomesticallyandwithintheEACregion.

TherewasmuchlessconsensusonwhetherandhowSMEsshouldbetargetedforlistings.ThemeritsofSMEboardsisoneparticularissuethatwouldbenefitfromfurtherevidence-basedresearchacrossdevelopingregions.Therewasstrongeragreementthatcultivatingahigh-growth-potential,strategic-sector“corporatebase”couldprovidean“incubator”forfuturestockmarketlistings.Developingtheventurecapitalandprivateequitymarkets,aswellasothernonbanksourcesofSMEfinancesuchasinvoicediscountingandevencrowdfunding,willbekeystepsin“incubating”firmsforfuturelistings.

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Participant List

StrategicPlanningRoundtableonCapital-MarketDevelopmentHostedbyRwanda’sCapitalMarketAuthorityandthe

MilkenInstituteCenterforFinancialMarketsonOctober14-16,2015,inRubavu,Rwanda

SanjeevAnandAtlasMara

AlexBahiziBankofKigali

GuyBaruch

MarathonCorporationLtd.

SunilBenimadhuStockExchangeofMauritius

EricBunduguCapitalMarketAuthorityRwanda

ClemensCalice

Lion’sHeadGlobalPartners

GerardCaprioMilkenInstitute

YarivCohen

KaenaatInvestmentFirm

AntoondeKlerkInvestecAssetManagement

JendayiFrazerEastAfricaExchange

MichaelFuchsSeniorFinancialConsultant

AndréGashugiRwandaNationalInvestmentTrust

ClaverGatete

RwandaMinistryofFinanceandEconomicPlanning

AmishGuptaStandardInvestmentBank—Kenya

MartinHabelInternationalFinanceCorporation

MuhammedHajatGenesisAnalytics—SouthAfrica

ElizabethHoward

LelapaFund

AnaghaHunnurkarRwandaNationalInvestmentTrust

JacquelineIrvingMilkenInstitute

KeithJefferis

EconsultBotswanaLtd.

IdiInnocentKabandaRwandaStockExchange

KeithKalyegira

CapitalMarketAuthorityUganda

AlexKanyankoleRwandaDevelopmentBank

BobKarinaRwandaStockExchange

ChantalKasangwaNationalBankofRwanda

ShakilaKerreFSDAfrica

LukeKinoti

FusionInvestmentsLtd.

KennethKitarikoAfricanAlliance—Uganda

RichardKitchenMaxwellStampPLC

JohanKrugerAfcapconsult—SouthAfrica

BharatKulkarni

StalwartConsultancyManagementServices—Dubai

KatiaManirakizaCapitalMarketAuthorityRwanda

RobertMathuCapitalMarketAuthorityRwanda

LatifaMerican-CheongProject-BasedConsultantfor

MultilateralAgencies—Malaysia

NicodemusMkamaCapitalMarketandSecurities

AuthorityTanzania

JackyMugwanezaRwandaBankersAssociation

SteveMutabaziRwandaDevelopmentBoard

PaulMuthaura

CapitalMarketsAuthorityKenya

MarkNapierFSDAfrica

JamesNdahiroRwandaStockExchange

ShehzadNoordallyCDHCapital—Rwanda

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AdelitNsabimanaRwandaMinistryofFinanceand

EconomicPlanning

AndrewNyamvumbaNgaliHoldings

EvansOsanoInternationalFinanceCorporation

AndrewOtengoOwinyMBEABrokerageServices—Rwanda

EricRutabana

BusinessPartnersInternationalRwanda

HubertRuzibizaRwandaDevelopmentBoard

PierreCelestinRwabukumbaRwandaStockExchange

JohnRwangombwaNationalBankofRwanda

EricRwigambaRwandaMinistryofFinanceand

EconomicPlanning

JohnSchellhaseMilkenInstitute

JohnBoscoSebabiRwandaSocialSecurityBoard

AlfredOumaShemRetirementBenefitsAuthority—Kenya

TimothyShortleyEastAfricaExchange

RamaSithanen

InternationalFinancialServices—Mauritius

PabloSitjarMontevideoStockExchange

MauriceToroitichKCBBank—Rwanda

EugeneTwahirwaBralirwaLtd.—Rwanda

PervanSwaayCurrencyExchangeFund

StaciWardenMilkenInstitute

StephenWellsBourseConsult

GlennYagoMilkenInstitute

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About the Authors JacquelineIrvingisadirectorwiththeCenterforFinancialMarketsattheMilkenInstitute,wheresheleadspolicyresearchandotherinstituteinitiativesonstrengtheningcapitalmarketsindevelopingcountries.Formoreinformationregardingthispaperorthecenter’sworkintheCapitalMarketsforDevelopmentprogram,contactJacquelineatjirving@milkeninstitute.org.JohnSchellhaseisaresearchconsultantattheCenterforFinancialMarketsattheMilkenInstitute.Hisworkprimarilyfocusesonfinancial-marketdevelopmentindevelopingcountries.

JimWoodsomeisaseniorresearchanalystwiththeCenterforFinancialMarketsattheMilkenInstitute,whereheconductsresearchandhelpsmanageinitiativesrelatedtothecenter’sCapitalMarketsforDevelopmentprogram.

Acknowledgments ThisroundtablewasheldunderChathamHouserules.Rwanda’sCMAandtheMilkenInstitutewouldliketothanktheroundtableparticipantsforsharingtheirinsights,experiences,andperspectives.TheauthorswouldliketothankStaciWarden,executivedirectorofCFM,forprovidingguidanceandcomments.

About the Center for Financial Markets BasedinWashington,D.C.,theMilkenInstituteCenterforFinancialMarketspromotesfinancialmarketunderstandingandworkstoexpandaccesstocapital,strengthen—anddeepen—financialmarkets,anddevelopinnovativefinancialsolutionstothemostpressingglobalchallenges.

About the Milken Institute TheMilkenInstituteisanonprofit,nonpartisanthinktankdeterminedtoincreaseglobalprosperitybyadvancingcollaborativesolutionsthatwidenaccesstocapital,createjobs,andimprovehealth.Wedothisthroughindependent,data-drivenresearch,action-orientedmeetings,andmeaningfulpolicyinitiatives.©2016MilkenInstituteThisworkismadeavailableunderthetermsoftheCreativeCommonsAttribution-NonCommercial-NoDerivs3.0UnportedLicense,availableatcreativecommons.org/licenses/by-nc-nd/3.0/