ZAMBIA CAPITAL MARKETS DEVELOPMENT MASTER PLAN · 2020-02-25 · i Document Reference: Zambia...
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ZAMBIA CAPITAL MARKETS DEVELOPMENT MASTER PLAN DRAFT FINAL MARKET ASSESSMENT REPORT Submitted to FSD Africa and SEC Zambia 10 January 2020
Transcript of ZAMBIA CAPITAL MARKETS DEVELOPMENT MASTER PLAN · 2020-02-25 · i Document Reference: Zambia...
ZAMBIA CAPITAL MARKETS DEVELOPMENT MASTER PLAN
DRAFT FINAL MARKET ASSESSMENT REPORT
Submitted to FSD Africa and SEC Zambia 10 January 2020
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Document Reference: Zambia Capital Market Development Master Plan - Draft Final Market
Assessment Report
Date: 10 January 2020
Contact Information
Bourse Consult
UK: +44 746 078 1878
web: www.bourse-consult.com
Genesis Analytics (Pty) Ltd
Physical: Office 3, 50 Sixth Road Hyde Park, 2196, Johannesburg, South Africa
Post to: PO Box 413431, Craighall, 2024, Johannesburg, South Africa
Tel: +27 11 994 7000
Fax: +27 11 994 7099
Physical Address: 4th floor, West Park Suites, Ojijo Close, Parklands, Nairobi
Postal Address: P.O. Box 76608-00508, Nairobi, Kenya
Tel: +254 701 945 800
Fax: +27 11 994 7099
www.genesis-analytics.com
Authors
Genesis Analytics
Bourse Consult
Contact person
Genesis Analytics
Shezaad Sunderji
Email: [email protected]
Mobile: +254 72 254 7006
Bourse Consult
Raymond Sabbah
Email: [email protected]
Mobile: +44 746 078 1878
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Table of contents
1. INTRODUCTION .............................................................................................................................. 1
2. METHODOLOGY ............................................................................................................................. 1
3. THE ZAMBIAN EXTERNAL ENVIRONMENT ................................................................................. 2
3.1. PESTLE ANALYSIS ................................................................................................................ 2
3.2. ZAMBIA CAPITAL MARKETS OVERVIEW ............................................................................ 9
3.3. FRAMEWORK OF CAPITAL MARKET PARTICIPANTS ..................................................... 13
4. REGULATORY AND POLICY REVIEW ........................................................................................ 15
4.1. REVIEW OF NATIONAL STRATEGY POLICIES ................................................................. 15
4.2. REVIEW OF KEY CAPITAL MARKETS STRATEGIC PLANS ............................................. 19
4.3. REVIEW OF KEY REGULATIONS AND STANDARDS ....................................................... 23
5. INTERNATIONAL BENCHMARKING ............................................................................................ 28
5.1. PEER IDENTIFICATION PROCESS..................................................................................... 28
5.2. BENCHMARKING EXERCISE .............................................................................................. 34
5.3. CAPITAL MARKET STRATEGIES IN PEER MARKETS ...................................................... 65
5.4. KEY CAPITAL MARKET INNOVATIONS AND TRENDS ..................................................... 70
6. INSIGHTS FROM ASSESSMENT REPORT ................................................................................. 79
6.1. MACROECONOMIC AND DEVELOPMENT INSIGHTS ...................................................... 79
6.2. NATIONAL STRATEGY AND POLICY INSIGHTS ............................................................... 79
6.3. EMERGING PEER GROUP INSIGHTS ................................................................................ 80
7. NEXT STEPS ................................................................................................................................. 85
Table of Tables
Table 1: Structure of the market needs assessment report .................................................................... 1
Table 2: Selection of Economic Indicators .............................................................................................. 3
Table 3: Zambian fund managers and brokerage firms .......................................................................... 9
Table 4: Top 10 listed firms on LuSE by market capitalisation, 2018 ................................................... 10
Table 5: Corporate bonds in circulation, 2018 ....................................................................................... 11
Table 6: Government securities in circulation ....................................................................................... 12
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Table 7: Market supervision .................................................................................................................. 21
Table 8: Market development ................................................................................................................ 21
Table 9: Key regulatory challenges from Zambian Capital Markets Indaba ......................................... 22
Table 10: Corporate tax rates ................................................................................................................ 26
Table 11: Potential peers for international benchmarking ..................................................................... 29
Table 12: IMF financial market development index composition and weighting ................................... 29
Table 13: Selected peers for international benchmarking ..................................................................... 34
Table 14: Zambia and peer market exchange overview ....................................................................... 35
Table 15: Size of mutual fund assets, selected markets ....................................................................... 38
Table 16: Potential products for development ....................................................................................... 39
Table 17: Initial and annual listing fees for equity: Zambia and selected peers .................................... 40
Table 18: Cost of listing for a firm with a market capitalisation of USD 10 million ................................ 41
Table 19: Zambia and Africa peers private equity and venture capital activity overview, 2013 - 2018 45
Table 20: Total M&A deal volume and value by peer country, 2013 - 2018 ......................................... 47
Table 21: MSCI Global Market Accessibility ratings: openness to foreign ownership, 2019 ................ 51
Table 22: MSCI Global Market Accessibility Ratings: capital flows restriction level, 2019 ................... 53
Table 23: MSCI Global Market Accessibility ratings: investor registration and account set up, 2019 .. 54
Table 24: Tax rates across benchmarked group, 2019 ......................................................................... 55
Table 25: Settlement basis across benchmarked group, 2019 ............................................................. 57
Table 26: MSCI Global Market Accessibility: ratings for market infrastructure, 2019 ........................... 58
Table 27: Pension fund assets as a % of GDP* .................................................................................... 62
Table 28: Allowance for short selling and securities lending across benchmarked group .................... 64
Table 29: Selected peer market green bond issuance .......................................................................... 73
Table 30: Alternative market boards across peer group ....................................................................... 75
Table 31: Market structure and landscape insights ............................................................................... 81
Table 32: Regulatory and policy insights ............................................................................................... 82
Table 33: Custody and settlement insights ........................................................................................... 83
Table 34: Capital markets developments, trends and strategies insights ............................................. 84
Table 35: Envisaged next steps ............................................................................................................ 85
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Table of Figures
Figure 1: GDP breakdown by economic sector ....................................................................................... 5
Figure 2: Split of Zambian population by region ...................................................................................... 6
Figure 3: Mobile connectivity market size by internet connection ........................................................... 7
Figure 4: Value and volume of mobile money transactions .................................................................... 8
Figure 5: LuSE market capitalisation by sector, 2018 ........................................................................... 11
Figure 6: Overview of Zambia's capital markets ................................................................................... 14
Figure 7: Split of formal financial product usage ................................................................................... 18
Figure 8: Change in market cap/GDP ratio and IMF financial market development index ................... 30
Figure 9: Change in IMF financial market development index vs GDP growth rate ............................. 31
Figure 10: Change in IMF financial market development index and IMF financial market development
index ...................................................................................................................................................... 32
Figure 11: IMF financial market development index, frontier markets peers ........................................ 33
Figure 12: IMF financial market development index, emerging market peers ...................................... 33
Figure 13: World Bank Ease of Doing Business Index Protection of Minority Shareholders ................ 49
Figure 14: Value of shares traded/market capitalisation of domestic shares ........................................ 61
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1. INTRODUCTION
FSD Africa in partnership with FSD Zambia and SEC Zambia has commissioned Genesis Analytics
(Genesis) and Bourse Consult to develop a Capital Markets Development Master Plan (CMDMP). The
capital markets master plan is a culmination of stakeholders’ views which recognise the importance of
well-functioning capital markets to deliver long term financing as well as insights from global capital
market trends. The key factors in delivering a successful CMDMP extend beyond enhancing market
infrastructure. It includes developing appropriate policy and regulatory frameworks, training, education
and market analysis of the demand and supply-side of the capital markets to ensure the successful
implementation of the master plan. Finally, consensus and buy-in from relevant stakeholders with
regards to the master plan and implementation thereof is fundamental.
This report includes a detailed desktop research of the Zambian macroeconomic environment and
international benchmarking of capital markets. Further to this, we include an analysis of the relevant
legal and regulatory framework. This draft includes insights from stakeholder interviews that took place
in the month of October 2019. Furthermore, consensus-building workshops are planned to be conducted
in January 2020 to ascertain key actionable areas prior to developing the masterplan. Ultimately, this
report will inform the drafting of the Capital Markets Development Master Plan.
The guiding principles of the master plan is to ensure that there is a balanced consideration of public
and private markets. Furthermore, the master plan will consider the existing priorities, challenges and
opportunities facing Zambia’s development agenda.
For the ease of navigation this report is structured into the following key sections:
Table 1: Structure of the market needs assessment report
Section Description of the section
Methodology This section sets out the approach followed to draft the report
The Zambian External Environment This section provides a PESTLE analysis and overview of Zambia’s capital markets
Regulatory and Policy Review The regulatory and policy review contains an analysis of Zambia’s national strategic policies as well as regulations that are relevant to capital market development
International Benchmarking This section compares the Zambian capital markets against those of identified peer nations across a variety of criteria
Insights from Assessment Report The insights from the market assessment report are presented which includes key actionable areas. This in turn will form part of an implementation framework following in-country consensus building workshops.
2. METHODOLOGY
The market assessment report is broken down into a review of Zambia’s external environment,
regulatory and policy review and international benchmarking exercise. The overarching approach was
to conduct an initial desktop assessment which has been supplemented with insights from an in-country
stakeholder meetings. The stakeholder interviews comprised relevant stakeholders ranging from
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government departments, regulators, market intermediaries, investors, investees and donors to ensure
a consultative process which will ultimately inform the final master plan document.
The regulatory and policy review was based on national public policy documents and strategies.
Additionally, a review of the SEC Zambia’s strategic plan was conducted to understand the key
development priorities and proposed implementation plan. Additionally, regulations pertaining to the
capital markets were reviewed to understand the key factors affecting the development of Zambia’s
capital markets. Further to this, market statistical reports and bulletins were analysed.
The international benchmarking section involved identifying suitable frontier and emerging market peers
for a comparative analysis to Zambia. These were identified from both a quantitative and qualitative
perspective. See Section 5 for a more detailed explanation of the approach.
3. THE ZAMBIAN EXTERNAL ENVIRONMENT
This section aims to provide a brief overview of the Zambian external environment and the likely
implications on the capital markets. The PESTLE framework was chosen to conduct the external
environment review as it captures the key areas that are likely to impact the operations of a capital
market. Additionally, an overview of Zambia’s capital markets provides a descriptive view of the equity
and debt securities landscape.
3.1. PESTLE ANALYSIS
Political factors
Zambia gained political independence in 1964. It has operated as a multi-party democracy since 1991
and has run regular elections with the latest being in 2016. Zambia currently has a stable political
environment with no immediate threats to the current political landscape.1 This creates a positive
environment for a well-functioning capital market.
The 2016 presidential election was generally considered peaceful and orderly. While there has been a
petition challenging the outcome of the results submitted to the Constitutional Court, there has been no
hindrance to President's ability to carry out his mandate. The next general election is due to take place
in 2021.
An ongoing case between Vedanta Resources, a London-based mining company, and the Zambian
government regarding the liquidation and winding up of a copper mine has, however, brought about
concerns regarding potential interference of government into the mining sector and some allegations in
the media that the action is a covert attempt at re-nationalisation2. However, the reason for governments
move for liquidation is due to alleged underinvestment and underpayment of tax. In 2017, the Zambia
Revenue Authority initiated a mining industry audit which found that 3 billion USD is lost annually to illicit
financial flows through transfer pricing and over-and under-invoicing.3 Given that the mining sector has
been found to be underpaying taxes, it would be premature to draw inference that the case between
Vedanta and the government is suggestive of a motive to nationalise the mines. However, it would be
1 https://www.bti-project.org/en/reports/country-reports/detail/itc/zmb/itr/esa/ 2 https://www.theguardian.com/world/2019/aug/05/zambia-seeks-to-expel-london-listed-copper-miner-vedanta 3 https://www.ey.com/Publication/vwLUAssets/Zambia_Revenue_Authority_initiates_comprehensive_mining_tax_audits/$FILE/2018G_01741-181Gbl_Zambia%20RA%20initiates%20comprehensive%20mining%20tax%20audits.pdf
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prudent to monitor developments in the mining sector for further examples of the government being
deemed as looking to nationalise the mining sector.
The Zambian Vision 2030 strategy outlines the importance of capital market development as a
necessary enabling requirement for creating the appropriate investment climate consistent with socio-
economic development agenda.4 The prevailing political environment does not have any clear hindrance
to development of capital markets. However, the successful development of a forward-looking capital
markets development plan will depend on the current government's commitment to providing
appropriate resources and creating an environment in which foreign investment is promoted and foreign
investors feel that their interests are respected in law.
Economic factors
Table 2 below highlights some key economic indicators outlining the current state of the Zambian
economy. The GDP growth rate has been relatively stable over the last five years with the 2018 annual
GDP growth rate being 3.8 percent. FDI as a percentage of GDP has dropped off significantly from 7.5
percent in 2015 to 3.2 percent in 2016. This indicates a decrease in foreign investor sentiment for
Zambia potentially linked to the decline in the business environment through adversely affected
electricity generation as a result of poor rainfall. A further decline of FDI to 2.1 percent of GDP in 2018
is likely attributed to uncertainty of mining sector environment, following the Vedanta case, which placed
a damper on activity in the sector.5 The sharp decline in inflation rate from 17.9 percent in 2016 to 6.6
percent in 2017 was primarily driven by the Bank of Zambia maintaining high interest rates to limit the
shock to the terms of trade resulting from a fall in copper prices.6 High interest rates would benefit
financial service companies as they are able to increase the rate of lending, but depress the volume of
lending and economic growth. The increase in interest rates would also see a potential increase in
holdings of government bonds as investors would be able to secure higher returns in a risk-free asset.
However, this would negatively affect capital market development for listed companies in that the cost
of borrowing would increase and potentially limit the expansion of companies.
Table 2: Selection of Economic Indicators
Economic Indicators
2014 2015 2016 2017 2018 2019f 2020f 2021f 2022f 2023f
GDP USD, millions
27,151 21,154 20,955 25,868 26,720 27,254 27,799 28,354 29,204 30,080
GDP growth rate (%)
4.7 2.9 3.8 3.4 3.8 2.0 2.0 2.0 3.0 3.0
Inflation (CPI)
7.8 10.1 17.9 6.6 7.5 9.9 10.0 8.0 8.0 8.0
Central Bank reference rate (%)
11.6 13.3 15.5 12.4 9.8 - - - - -
FDI (% of GDP)
5.6 7.5 3.2 3.3 2.1 - - - - -
4 https://www.mndp.gov.zm/wp-content/uploads/2018/05/Vision-2030.pdf 5 https://www.imf.org/en/News/Articles/2019/08/02/pr19311-imf-executive-board-concludes-2019-article-iv-
consultation 6 https://www.imf.org/en/News/Articles/2019/08/02/pr19311-imf-executive-board-concludes-2019-article-iv-
consultation
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Current Account Balance (% of GDP)
-1.4 -3.6 -4.5 -3.9 -2.6 -3.6 -3.4 -2.9 -2.6 -2.3
Fiscal balance (% of GDP)
-5.7 -9.3 -5.7 -7.5 -8.3 -4.8 -5.1 -3.4 -3.1 -2.9
Official exchange rate (ZK per USD, period average)
6.15 8.63 10.31 9.52 10.45 - - - - -
Net borrowing (% of GDP)
-5.5 -7.9 -5.5 -5.2 - - - - - -
Source: World Bank7, IMF8
Note: 2019-2023 figures based on IMF forecasts
The exchange rate has experienced a sharp depreciation citing the 2008 average exchange rate of ZK
3.74 per USD to 2018 average exchange rate of 10.45 per USD. However, the currency has stabilised
significantly since 2016 around the ZK10 per USD mark. Zambia is running a current account deficit of
2.6 percent of GDP as of 2018 primarily driven by higher imports and servicing of debt. Total public and
publicly guaranteed debt including arrears as at 2018 was 78 percent of GDP.9
The combination of high interest rates and large fiscal deficit, which is -8.3 percent of GDP as of 2017,
has a dampening effect on the ability to develop corporate bond issuance and earnings. Additionally, a
growing fiscal deficit has an effect on the bond yields as has been seen with the Zambian Eurobond
where the yield curve has inverted. This means that shorter term bonds attract a higher interest rate
than the longer-term bonds as is typically seen in countries that are in default.10 Although Zambia is not
in default, the inversion of the yield curve signals increased investor concerns over a sovereign debt
default.
7 https://data.worldbank.org 8 https://www.imf.org/en/News/Articles/2019/08/02/pr19311-imf-executive-board-concludes-2019-article-iv-
consultation 9 https://data.worldbank.org 10 https://www.bloomberg.com/news/articles/2019-04-23/warning-signs-for-zambia-as-eurobond-curve-becomes-
more-inverted#targetText=The%20yield%20curve%20for%20the,than%20those%20with%20longer%20maturities.
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Figure 1: GDP breakdown by economic sector (Sectoral breakdown, share %, 2016)
Source: Zambia in Figures, 201811
Figure 1 provides an overview of the Zambia GDP contribution by sector. The wholesale and retail
industry contributes 22 percent towards Zambia’s GDP as of 2016. The mining sector is the second
highest contributor towards GDP with 14 percent as of 2016 followed by construction at 11 percent.
However, a review of 2017 LuSE market capitalisation by sector indicates that mining and energy only
contributes 12 percent and 4 percent of total market capitalisation respectively.12 This indicates that
there is an under-financing of key sectors like energy which requires more focus in order to develop
demand for financing via capital markets.
Social factors
Zambia is classified as a lower middle-income country with a per capita GDP of USD 1,540 in 2018. The
total population is 16.4 million people and the annual population growth rate is currently 2.9 percent.
Interestingly, 45 percent of the population fall within the 0 and 14 age brackets.13 This is coupled with a
16 percent youth unemployment figure. According to the 2017 Zambian Labour Force Survey Report,
27 percent of the labour force is employed in wholesale and retail trade and 26 percent of the labour
force is employed in agriculture, forestry and fisheries.14
11 https://www.zamstats.gov.zm/phocadownload/Dissemination/Zambia%20in%20Figure%202018.pdf 12 SEC, Annual Report, 2017 13 https://data.worldbank.org 14 https://www.zamstats.gov.zm/phocadownload/Labour/2017%20Labour%20Force%20Survey%20Report.pdf
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Figure 2: Split of Zambian population by region (Population, Millions, 2017)
Source: Zambia in Figures, 201815
Figure 2 displays the split of Zambia’s population by region; 33 percent of the population is concentrated
in Lusaka and the Copper belt region. This is unsurprising as Lusaka is the financial hub of Zambia and
the Copper belt, which is a mineral rich area employing many miners. The proportion of urban population
to total population, is currently 45 percent and the latter is growing at 4 percent as of 2018.16 This implies
that there is a steady growth in the population looking to stay in urban areas and we can expect further
population growth among urban areas in the future.
The Zambia Gini coefficient was reported as 57.1 as of 2015.17 This implies that the wealth distribution
is highly unequal. In terms of the capital market development plan it would be prudent to investigate
potential means in which the capital market can generate sustainable redistribution of capital in order to
address the current wealth gap.
According to the UNESCO Institute for Science, the Zambia literacy rate for individuals 15 years and
older is 86 percent in 2018.18 However, the gender split of literacy is 91 percent male and 83 percent
female. High literacy rates are a key input into the impact of financial literacy.
The FinScope 2015 Zambia report finds that there has been a substantial increase in financial inclusion,
measured by access and usage of financial services, from 37 percent in 2009 to 59 percent in 2015.19
Despite this increase, there is a large portion of the economy that remains unserved or underserved. In
terms of capital market product uptake, only 0.3 percent of adults who have use of formal financial
services make use of capital market instruments. Further to this, increases in formal financial inclusion
is important for increasing contributions towards pension schemes and ultimately increasing the pool of
funds available for deployment into the capital markets.
In devising suitable solutions for capital market development, it is imperative that the demography and
social background of Zambia be catered for. In particular, reviewing the existing attitudes towards
15 https://www.zamstats.gov.zm/phocadownload/Dissemination/Zambia%20in%20Figure%202018.pdf 16 https://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS?locations=ZM 17 https://data.worldbank.org/indicator/SI.POV.GINI?locations=ZM 18 http://uis.unesco.org/country/ZM 19 https://www.fsdzambia.org/wp-content/uploads/2019/03/77_FSD_Zambia_Final-
II.pdf#targetText=The%20FinScope%20Zambia%202015%20survey,Sector%20Development%20Plan%20(FSDP).
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financial markets and ensuring mainstreaming of financial literacy and social awareness of capital
market products for the financing needs of youth.
Technological factors
The Zambian National Development Plan identifies improved production of technology and innovation
through the use of Research and Development (R&D) as a key intervention that will benefit a diversified
economy. Although the importance of R&D is acknowledged, there is currently limited linkages between
research institutions and the industry.
Although internet usage is rapidly increasing, only 14 percent of the total population have access to
internet.20 Zambia has 8 million unique mobile subscribers and 4 million unique mobile internet
subscribers.21 Pre-paid subscriptions make up 96 percent of the total mobile market which is likely due
to a lack of regular income which deters customers from entering mobile phone contracts.
Figure 3 below displays the market size by internet connectivity. Although the coverage of mobile
connectivity is growing, 71 percent of the market still operates on 2G. This indicates that there is still
significant room for growth of 3G and 4G to ensure better quality of internet throughout Zambia.
Figure 3: Mobile connectivity market size by internet connection (Market share, %, 2014-2017)
Source: GSMA, Digital Identity Country Report Zambia, 2019
Despite the low base of quality internet connections, increased penetration of Information and
Communication Technology (ICT) has assisted organisations in its ability to ramp up scale and
efficiencies in their business operations. This is a particularly important feature as availability and access
to timeous information is an important input for capital markets development.
20 https://data.worldbank.org 21 https://www.gsma.com/mobilefordevelopment/wp-content/uploads/2019/02/Digital-Identity-Country-Report-
Zambia.pdf
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Figure 4: Value and volume of mobile money transactions (Value in ZK millions, Volume in millions, 2014-2018)
Source: BoZ, Payment Statistics, 201922
In reference to Figure 4, the value of mobile money transactions has increased at a rate of 71 percent
over the period 2014 to 2018. Additionally, the number of customers making cash-in transactions grew
by 183 percent while the number of cash-out transactions grew by only 20 percent.23 This trend implies
that the choice to leave more money in their wallets could be a sign that customers are willing to make
use of their mobile wallets. In terms of the impact on capital markets, it would be interesting to investigate
the current mobile offerings within the capital market space. DFS related capital market products will be
investigated further during consultations.
Legal Factors
Zambian multiparty democracy was enshrined by the 1991 Constitutional amendment. Attempts to
amend the constitution in 1996 and 2003 were thwarted primarily off the back of lack of popular support
as well as disagreements over the appropriate political system for adoption.
Key issues pertaining to the role of the constitution involves many civil organisations calling for the
inclusion of social, economic and political rights in the Bill of Rights of the Constitution. There have been
calls for increased parliamentary oversight of the executive and overall move towards decentralisation
of power.24
In terms of legal factors affecting the development of capital markets, removal of foreign exchange
restrictions ensure full repatriation of earnings as well as security to investors with statutory rights to full
and fair compensation .25 The Income Tax Act provides an incentive for companies listed on the LuSE
whereby their tax rate is discounted depending on the degree of local ownership in a given company.26
For example, companies where more than one-third of shareholding is owned by a Zambian benefit
from a 5 percent discount on corporate income tax.27
22 https://www.boz.zm/payment-systems-statistics.htm 23 https://www.uncdf.org/article/3903/zambia-the-state-of-digital-financial-services-in-2017 24 http://constitutionnet.org/country/constitutional-history-zambia 25 https://www.africalegalnetwork.com/wp-content/uploads/2015/12/Zambia-Investment-Guide-2015.pdf 26 http://www.parliament.gov.zm/sites/default/files/documents/acts/Income%20Tax%20Act.pdf 27 https://www.pwc.com/zm/en/assets/pdf/zambia-budget-2019.pdf
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The effective rule of law and regulatory framework is an important aspect of the development of Zambia.
However, the enforcement of contracts and concise legal infrastructure underpins a well-functioning
business environment.
A more detailed description of the regulatory and policy environment follows in Section 4.
Environmental factors
Zambia has been experiencing the effects of climate change which has resulted in unpredictable rainfall,
droughts and rising temperatures. Given the importance of agricultural processing to the development
agenda, it is imperative that Zambia manages climate change so as to become resilient in achieving its
desired growth trajectory.
It is estimated that climate change will cost Zambia 0.4 percent of annual economic growth. Furthermore,
the decline of rainfall has significantly contributed to Zambia losing 600 MW given the importance of
hydro-power in Zambia.28 The adverse effects of the prevailing natural environment at the hands of
climate change has nevertheless seen significant steps taken by the Zambian government to mitigate
the long-term effects. In mitigating the water shortages, the Zambian government also sets out to
develop better water resources infrastructure so as to increase the storage capacity of water by
developing dams. A potential path to develop dams and related green infrastructure is the issuing of
green bonds, this is dealt with at a later stage of this document.
The government has also taken active steps to reduce the effects of pollution through banning plastic
bags under the Environmental Management Act in 2011. This law came off the back of mitigating against
the floods and destruction caused by plastic bags clogging drains and indicates the responsiveness of
Zambia’s government towards environmental protection.
The Zambian Seventh National Development Plan sets out to generate plans which reduce
environmental risks such as water shortages and air pollution. For example, the Zambian government
promotes the adoption of agricultural environmentally-friendly practice such as climate smart and
organic techniques in cultivating land.29Additionally, groundwork is currently being undertaken by SEC
Zambia and development partners to develop a green bond framework with the view of enhancing
financing of environmentally conscious projects.
3.2. ZAMBIA CAPITAL MARKETS OVERVIEW
The Lusaka Stock Exchange (LuSE) is the only operational exchange in Zambia and is regulated by the
country’s Security and Exchange Commission (SEC). The LuSE has 24 listed firms, with a total market
capitalisation of approximately ZK 60 493 million at the end of 2018, which represents 21.6 percent of
Zambia’s ZK 279 441 million GDP.30 Trade in the market is underpinned by six brokerage firms and six
fund managers (which are listed in the table below), as well as two custodian banks charged with the
safekeeping of client securities.31,32
Table 3: Zambian fund managers and brokerage firms
Fund managers Brokerage firms
Madison Assets Management Madison Assets Management
Equity Capital Resources Stockbrokers Zambia Limited
Lawrence Paul Pangaea Securities Ltd
28 https://www.mndp.gov.zm/wp-content/uploads/2018/05/7NDP.pdf 29 https://zambia.unfpa.org/en/publications/zambias-seventh-national-development-plan-2017-2021-
implementation-plan 30 https://data.worldbank.org/indicator/NY.GDP.MKTP.CN?locations=ZM 31 http://www.luse.co.zm/fund_managers/ 32 http://www.luse.co.zm/brokerage_firms/
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ABC Securities Autus Securities Ltd
Kukula Capital Equity Capital Resources
African Life Finance Securities Zambia
Source: LuSE website
Table 4: Top 10 listed firms on LuSE by market capitalisation, 2018
Company Industry GDP
contribution
of industry
sector
Market
Capitalisation
(ZK million,
2018)
Percentage of
LuSE market
cap
Shoprite Holdings Consumer goods
and services 21.9% 34,239 56.6%
ZCCM-IH Mining 13.8% 4,852 8.0%
Standard Chartered
Zambia Financial services 4.7% 4,384 7.2%
Zambian Brewery Consumer goods
and services 21.9% 4,100 6.8%
Airtel Telecommunication
s 2.4% 3,640 6.0%
CEC Africa
Investments Energy utility 3.6% 2,365 3.9%
Zambia National
Commercial Bank Financial services 4.7% 1,212 2.0%
Lafarge Cement Industrials 10.8% 974 1.6%
Zambia Sugar Consumer goods
and services 21.9% 854 1.4%
National Breweries Consumer goods
and services 21.9% 774 1.3%
Source: Securities and Exchange Commission Zambia, 2018
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Figure 5: LuSE market capitalisation by sector, 2018 (ZK million and %, 2018)
Source: SEC Zambia, 2018
The value of the exchange is dominated by Shoprite Holdings, a South African firm with multiple listings
on the LuSE and Johannesburg Securities Exchange and the Namibia Stock Exchange, which makes
up over half of the exchange’s market capitalisation. The firm listed on the LuSE in 2003 as part of its
strategy of creating a seamless business across its target markets.33 No other firm makes up more than
10 percent of the exchange’s total value, with the second largest, ZCCM Investment Holdings,
contributing 8 percent to the LuSE’s total market capitalisation. The LuSE exhibits substantial market
concentration, with 94.2 percent of the exchange’s total market capitalisation coming from the top ten
firms. However, this is skewed by Shoprite’s size relative to the other listed firms, which are more closely
matched in terms of size. From an industry viewpoint, the largest firms in the market are split across a
variety of industries, with a skew towards consumer goods/services and financial services.
The market for corporate bonds remains undeveloped, with only a handful of issues currently available
on the market (and all from financial services companies). This is likely partially driven by the low liquidity
in the secondary market for government bonds, corporate bonds derive their yields from the yields on
government bonds, with a risk premium added.
The money market refers to corporate and government debt securities with tenure of less than one year.
Table 5 indicates that there are no commercial paper currently in circulation given that the lowest tenor
on the current array of corporate bonds is 3 years. Table 6 indicates that government Treasury Bills do
not carry the same subscription rate as the longer term government bonds. Nevertheless, the majority
of money market transactions come via the sale of Treasury Bills.
Table 5: Corporate bonds in circulation, 2018
Issuer Tenor (years) Rate Par Value (ZK) Year of Maturity
Madison Finance 5 182-day T-bill + 450
bps 10,000,000 2020
Stanbic 5 182-day T-bill + 400
bps 32,275,000 2021
Atlas Mara 6 22% 150,000,000 2024
33 https://www.shopriteholdings.co.za/articles/Newsroom/2003/africa_s-largest-retailer-lists-on-the-lusaka-stock-
exchange.html
12
Atlas Mara 6 Average of 5 and 7-
year government bonds + 350 bps
150,000,000 2024
Bayport Financial Services
3 182-day T-bill + 300
bps 19,000,000 2021
Bayport Financial Services
5 364-day T-bill + 300
bps 88,370,000 2023
ZNBS 5 364-day T-bill + 320 bps
20,050,000 2023
Source: Securities and Exchange Commission Zambia, 2018
The majority of corporate bonds in issue are for tenors of 5 years or less. In addition, they mostly make
use of the rate on short-term government Treasury Bills (with maturities of less than a year) as a
benchmark for the yield. Thus, price discovery in government Treasury Bills is important in developing
corporate bond market. Generally, it would be expected that corporate yields would equal the yield on
a government bond comparable length, with a risk premium added, i.e. the yields on the five-year
corporate bonds in the table above would be expected to equal the yield on a five-year government
bond, plus some margin. The fact that this is not currently the case in the corporate bond market
suggests the lack of a developed yield curve for government debt for these corporate securities to take
their cue from. This highlights the need for a liquid and well-developed government bond market in order
to underpin the corporate bond market.
Table 6: Government securities in circulation
Security Tenor Amount offered (ZK Bn) Bid Amount (ZK Bn) Subscription Rate (Percent)
91-day bills 2.0 1.2 63
182-day bills 4.2 1.3 31.20
273-day bills 6.2 1.9 29.85
364-day bills 12.4 13.9 112.75
Total 24.7 18.3 74.18
2- year bonds 0.6 0.4 65.10
3-year bonds 2.1 0.7 34.72
5-year bonds 2.7 1.6 59.90
7-year bonds 0.9 0.8 84.71
10-year bonds 2.7 2.3 86.64
15-year bonds 0.9 2.5 273.06
Total 9.9 8.3 83.80
Source: Bank of Zambia Annual Report, 2018
The market for government debt is split across short-term Treasury Bills (maturities of 91 to 364 days)
and longer-term government bonds (maturities of 2 to 15 years). The total outstanding value across
government debt securities has grown over time, from ZK 22.5 billion in 2014 to ZK 58.3 billion in 2018.
Based on subscription rates, investors appear to prefer longer-term T-bills (364 days) and government
bonds (15 years). However, with the exception of these two securities, issues of government securities
13
remained generally under-subscribed in 2018, indicating that despite the overall growth in outstanding
government debt, demand was not as strong as supply in 2018.
Following stakeholder consultations, it became clear that as a result of Zambia’s challenging
macroeconomic situation and the funding needs of its government, the yields on its Treasury Bills and
government bonds have grown substantially. The yield on the country’s 10-year government bond
fluctuated over a range of 19 - 20 percent during the first half of 2018.34 However, as a result of the
government’s growing debt burden and a series of sovereign debt downgrades from the major credit
ratings agencies, the 10-year government bond ended 2018 with a yield of 26 percent. In 2019, further
macroeconomic challenges and another ratings downgrade saw the yield climb to 33 percent in August
of the current year, before declining to 32 percent as of October. While this high interest rate environment
results in a high cost of financing for the country’s government, it also has an effect on the capital
markets. Higher interest rates on government debt effect valuations of equity market securities,
impacting the ability and desire of firms to raise funds in this market. In addition, the availability of high-
yield government securities may create an aversion for public market investments from institutional
investors, since there is a lower-risk instrument available that offers an attractive return.
3.3. FRAMEWORK OF CAPITAL MARKET PARTICIPANTS
This section sets out to provide a brief overview and description of Zambia’s key capital market
participants. The SEC Zambia provides primary oversight and is the regulator for both corporate and
government securities, to the extent of secondary market trading.35 The Bank of Zambia is tasked with
issuance of government securities and oversight of primary market dealings on behalf of the government
of Zambia.36
The mandate for the powers given to the SEC are twofold; firstly, the market development of Zambian
capital markets and secondly; the supervision of the market which includes licencing, registration and
authorisation of financial intermediaries, issuers of debt and equity instruments and collective investment
schemes. In carrying out this mandate, the SEC is actively involved in monitoring stock brokers, stock
exchanges, fund managers, investment advisers and publicly listed companies.
The SEC Zambia, under the powers provided by the Securities Act no. 41 of 2016, is tasked with
regulating and providing oversight for the exchanges in Zambia. The capital markets in Zambia has
three licensed exchanges, the Lusaka Securities Exchange (LuSE), the Bonds and Derivatives
Exchange (BaDEX) and the Pan African Exchange (PANEX). However, the suspension of the BaDEX
and PANEX means that Zambia no longer has alternative exchanges to the LuSE.37 The LuSE is the
principal stock exchange in Zambia and is mandated to provide a fair and efficient platform through
transparent trading of listed securities.
LuSE Central Securities Depository, a subsidiary of LuSE, acts as a central registry and carries out
clearing and settlement of trades completed on the LuSE. The LuSE CSD is partly owned by the LuSE
registered brokers and by sub-custodian banks, Stanbic Bank Zambia and Standard Chartered
Zambia.38
The Bank of Zambia (BoZ) was established under the Bank of Zambia Act No. 43 of 1996. The primary
mandate is to achieve and maintain price and financial system stability to ensure sustainable economic
34 Tradingeconomics.com 35 https://www.seczambia.org.zm/ 36 https://www.boz.zm/Government-Securities-
FAQs.pdf#targetText=Government%20securities%20are%20debt%20instruments,buyers%20of%20the%20debt%20instruments. 37 https://www.seczambia.org.zm/notice-of-suspension-of-badex-and-panex/ 38 http://www.luse.co.zm/ownership_management/
14
development. The BoZ is tasked with oversight of primary market issuance and supervision of
government securities. In this capacity, the BoZ holds securities on its own behalf as well as settling
transactions executed on the secondary market. The BoZ is responsible for the authorisation of
participants onto the CSD and establishment and maintenance of various rules and requirements.39
The BoZ CSD is integrated with the Zambian Interbank Payment and Settlement System (ZIPSS). The
CSD maintains the primary record of ownership and settles transactions in securities issued by BoZ.40
Given that Zambia has two CSDs in a relatively small market, this raises a point of complication around
finality which would need to be addressed in the consensus building workshop.
Figure 6 outlines the key components and stakeholders involved in the participation and regulation of
the capital markets.
Figure 6: Overview of Zambia's capital markets
Note: Adapted graphic from Capital Market Development Strategy and Roadmap for Jordan, 201741
The capital market participants and the various regulations, policies and strategies underpinning them
require a coordinated effort from all stakeholders to ensure alignment of capital market development.
Placed into context, the Zambian government’s national policies and development provide the
overarching framework for the country’s development agenda. This in turn provides strategic direction
to the key stakeholders in the capital market to align their individual strategic plans to the developmental
agenda of government.
The creation of a sound and effective regulatory framework is a key factor in balancing the goals of
investor protection as well as lowering issuer costs, transaction costs and costs affecting capital market
practitioners.42 This could be actioned through the establishment of focused objectives and strong
governance framework. In the Zambian context, this requires the development of a clear plan for the
coordination of regulatory power so as to ensure there is adequate resourcing and a consultative
development plan for Zambia’s capital markets.
39 https://www.boz.zm/Central-Securities-Depository-System-Rules-Jan-2016.pdf 40 https://www.boz.zm/Central-Securities-Depository-System-Rules-Jan-2016.pdf 41 http://www.lc2-reports.com/JordanCM-Roadmap.pdf 42 https://www.bis.org/publ/cgfs62.pdf
15
4. REGULATORY AND POLICY REVIEW
Genesis Analytics and Bourse Consult reviewed key regulations and policies for developing Zambia ’s
capital markets development plan. The aim of the review is to better understand the existing regulatory
landscape and its ability to deliver on the mandate of capital markets development. The review adopts
a top-down approach by reviewing the national strategic development plans pertinent to capital market
development. Thereafter, a review of the key capital market participants’ strategic plans. Finally, a
review of pertinent regulations and standards to understand the key objectives and how they may impact
the mandate of capital market development.
4.1. REVIEW OF NATIONAL STRATEGY POLICIES
The selection of the national strategy policies for review is based on a combination of the overarching
strategies that will drive Zambia towards its development goals. The Vision 2030 provides the highest-
level overview of the government's development plan as it aims to be classified as a strong and dynamic
middle-income country by the year 2030. The Seventh National Development for the period 2017-2021
is aimed at attaining the long-term objectives of the Vision 2030.
The National Financial Inclusion Strategy (NFIS) and National Financial Sector Development Policy
(FSD) were launched together on 8 October 2017 with both seeking to transform the financial sector,
as well as promote inclusiveness in the financial system to support efficient resource mobilization and
investment for sustainable economic development43 In turn, the National Strategy for Financial
Education (NFSE) is a component of the FSD Policy which highlights the importance of a financially
savvy population being a key enabler in financial sector development.
4.1.1. VISION 2030
Vision 2030 aims to transform Zambia into a prosperous middle-income nation by 2030 and to create a
new Zambia which is a dynamic industrial nation that provides opportunities for improving the well-being
of all and embodying values of socio economic justice.44
The Vision 2030 comprises of the following key priority areas:
1. Economic growth and wealth creation
2. Social investment and human development
3. Creating an enabling environment for sustainable socio-economic development
This Vision 2030 also has the following key socio-economic development objectives:
● To attain and sustain annual real economic growth rates of between 6 and 10 percent;
● To attain and maintain a moderate inflation rate of 5 percent;
● To decelerate the annual population growth rate from its 2005 rate of 2.9 percent to a rate of
less than 1.0 percent over the next 25 years;
● To reduce national poverty head count to less than 20 percent of the population;
● To reduce income inequalities measured by a Gini coefficient of less than 40; and
● To provide secure access to safe potable water sources and improved sanitation facilities to
100 percent of the population in both urban and rural areas.
Vision 2030 makes specific mention of improving access to affordable credit and financial services as
well as the development of capital markets in both rural and urban areas for both men and women. The
43 https://www.afi-global.org/news/2017/11/zambia-launches-its-first-national-financial-inclusion-strategy-nfis 44 https://www.mndp.gov.zm/wp-content/uploads/2018/05/Vision-2030.pdf
16
successful implementation of these key objectives depends on well-coordinated efforts of the
government, private sector, donor partners and community at large. The Vision is operationalised
through Zambia’s National Development Plans with the most recent plan being instituted for the period
2017-2021.
4.1.2. SEVENTH NATIONAL DEVELOPMENT PLAN
The Seventh National Development Plan (7NDP) is the overarching development plan that seeks to
operationalise the long-term objectives of the Vision 2030. The 7NDP is a departure from sectoral-based
planning and adopts an integrated development approach under the theme “Accelerating development
efforts towards Vision 2030 without leaving anyone behind”.45 In achieving the goals set under the Vision
2030, the 7NDP highlights the following key priority areas:
1. Economic diversification and job creation
2. Poverty and vulnerability reduction
3. Reducing developmental inequalities
4. Enhancing human development
5. Creating a conducive governance environment for a diversified and inclusive economy
Each of these strategic areas have key development outcomes with an implementation plan and
monitoring and evaluation framework in place to gauge progress. The 7NDP notes that financial sector
development reform aimed at enabling the environment for smooth functioning of financial markets is
needed and that it should be carried out through the identification and removal of bottlenecks that
constrain market operation. Examples of these bottlenecks include reducing transaction costs and
making information available on how best to develop financial products that can best serve underserved
population.
The 7NDP highlights binding constraints to the realisation of the first priority area, economic
diversification and job creation, is predominantly driven by the high cost of finance and limited availability
of long-term finance which could be made available through the capital markets. The 7NDP also cites a
lack of long-term finance, particularly to small and medium businesses, pose limitations for the ability of
businesses to expand.
The constraints and challenges flagged in the 7NDP pertaining to lack of long-term finance highlights
an important point for consideration in the development of a capital market development plan. There is
a need for enabling and building small businesses so that they can graduate into larger businesses to
list on the securities exchange and have their long-term financing needs met by the capital market.
4.1.3. NATIONAL FINANCIAL SECTOR DEVELOPMENT POLICY
The National Financial Sector Development (FSD) Policy developed in 2017 aims to ensure the
development of an inclusive financial system that supports the efficient resource mobilisation and
investment for sustainable economic development.46 The policy is aligned to the Vision 2030 and 7NDP
and is supported by the NFIS and NSFE.
The FSD Policy comes off the back of Financial Sector Development Plan (FSDP) which ran in two
cycles from 2004 to 2009 and from 2010 to 2015. A clear gap following from the development plan
phase was a lack of a comprehensive national policy to steer financial sector development. Under this
banner, the FSD Policy sets out to address this issue with the following specific objectives:
1. To develop a competitive and resilient financial sector
45 https://www.mndp.gov.zm/wp-content/uploads/2018/05/7NDP.pdf 46 https://www.boz.zm/National-Financial-Sector-Development-Policy-2017.pdf
17
2. To develop and maintain an enabling regulatory environment for the financial sector
3. To make the financial sector more inclusive and deepen the financial markets
4. To develop MSMEs and rural finance
5. To enhance financial infrastructure in accordance with international best practice
6. To increase financial literacy and strengthen consumer protection
7. To facilitate effective and sustainable partnership in the provision of financial products and
services
The FSD Policy notes that low issuances, illiquidity and low interest from potential investors and issuers
remain the plight of Zambian capital markets. The FSD Policy aims to address these issues by building
enhanced policy and regulatory frameworks, diversified products and services, efficient infrastructure
and investor education and public awareness.
4.1.4. NATIONAL FINANCIAL INCLUSION STRATEGY
The National Financial Inclusion Strategy (NFIS) 2017-2022 aims to achieve the goal of universal access
to financial products and services and products.47 The NFIS has put together public and private sector
players to address key issues in the financial inclusion space and have earmarked the following financial
inclusion objectives by 2022:
● An overall increase in financial inclusion (formal and informal) from 59 to 80 percent and an
increase in formal financial inclusion from 38 to 70 percent by 2022;
● Improved physical access to high-quality financial delivery channels, including branches,
agents, and automated teller machines (ATMs), such that the number of financial access points
per 10,000 adults will increase from approximately 7 to 10 by 2022;
● Innovative and diverse financial products and services that meet customers’ needs leading to
the percentage of adults with at least a transaction account growing from 36 to 70 percent by
2022;
● Improved outreach and adoption of digital financial services;
● Greater availability of affordable financing for SMEs, smallholder farmers, and agricultural
entities, thereby reducing the number of SMEs reporting access to finance as a major constraint
from 27 to 20 percent by 2022; and
● Enhanced consumer protection and increased financial capabilities of consumers, resulting in
an increase in the percentage of adults with high financial product awareness levels from 36 to
50 percent by 2022.
The FinScope 2015 Zambia report finds that there has been a substantial increase in financial
inclusion48, measured by access and usage of financial services, from 37 percent in 2009 to 59 percent
in 2015.49 Despite this increase, there is a large portion of the economy that remains unserved or
underserved.
Figure 7 provides an overview of the coverage of financial products and services as a percentage of
adults who use formal services.50 25 percent of adults who make use of formal financial services have
bank accounts. Only 0.3 percent of adults who make use of formal financial services use capital market
instruments. The NFIS notes that one reason for the lack of capital market usage is that there is a high
47 https://www.boz.zm/National-Financial-Inclusion-Strategy-2017-2022.pdf 48 Note: Financial Inclusion refers to Individuals 16 years or over who have/use financial services from formal and
informal financial service providers. 49 https://www.fsdzambia.org/wp-content/uploads/2019/03/77_FSD_Zambia_Final-
II.pdf#targetText=The%20FinScope%20Zambia%202015%20survey,Sector%20Development%20Plan%20(FSDP). 50 Formal services refer to financial services provided by a financial service provider that is regulated or officially
supervised
18
concentration of formal financial service providers within Lusaka and the Copper belt which constrains
use of formal financial services for the outlying population.
Figure 7: Split of formal financial product usage (% of adults who have/use formal services, %, 2009 and 2015)
Source: Finscope Zambia, 201551
Although development of capital market is not explicitly mentioned in the NFIS, the development of
financial inclusion is a critical input into ensuring that there is more usage of financial products so that
businesses can move towards the use of capital market products.
4.1.5. NATIONAL STRATEGY FOR FINANCIAL EDUCATION
The National Strategy for Financial Education (NSFE) for the period 2012-2017 sets out the long-term
goals for developing a financially educated Zambian population by 2030.52 The strategic objective of
NSFE is for Zambians to have improved knowledge, understanding, skills, motivation and confidence to
help them secure positive financial outcomes. The NSFE is run by the BoZ, SEC and PIA under the
leadership of the BoZ and a multi-stakeholder steering committee.
The NSFE developed the following three priority financial education programmes:
1. Financial education for children- developed through school curriculum and extra-curricular
activities
2. Financial education for youth- developed through universities, colleges and youth
development centres
3. Financial education for adults- developed through workplace programmes, financial
education for small-scale farmers, MSMEs and teachable moments
The NSFE sought to enhance capital market education through engagement with schools and inclusion
of capital market related content into the curriculum. The incorporation of capital market education is
particularly important as it would increase financial literacy and potentially grow the demand for capital
market products.
51 FinScope Zambia. 2015 52 https://www.boz.zm/National-Strategy-on-Financial-Education-for-Zambia-2012-2017.pdf
Note: National Strategy for Financial Education 2018-2023 is a work in progress
19
4.1.6. KEY THEMES EMERGING FROM NATIONAL STRATEGY PLANS
The review of the national strategic plans show that coordination of efforts and overall alignment of
strategies under the Vision 2030 has been central to delivering the key objectives of attaining middle-
income status by 2030. The key themes central to all the national policies is the development of an
inclusive and sustainable growth path which seeks to reduce wealth inequality.
The NFIS in partnership with the NSFE look to enable financial inclusion through the development of
ground roots financial education targeted at youth and adults. This will reduce inequality by increasing
the provision of financial products to previously excluded portions of the population. Increases in
financial literacy could lead to a larger proportion of the population investing in capital market products
and thereby sharing in the profits of listed companies through dividends.
Based on the emerging themes from the national strategic plans, it is clear that capital market
development will need to engender financial inclusion and be mindful of the overarching strategic plans
which will ultimately facilitate the realisation of Zambia’s Vision 2030.
4.2. REVIEW OF KEY CAPITAL MARKETS STRATEGIC PLANS
4.2.1. SEC STRATEGIC PLAN 2018-2021
The SEC Strategic Plan 2018-2021 is underpinned by the Vision 2030 and 7NDP and seeks to establish
a new direction and key priorities for the coming years.53 The methodology of generating the Strategic
Plan came off the back of a two-phased approach made up of an institutional assessment and
organisational development balanced scorecard approach. The strategic vision of the SEC Zambia is to
be a dynamic regulator that protects investors and promotes capital markets development. In achieving
this vision, the SEC has identified the following key areas of focus:
1. Investor protection excellence resulting in safeguarded investments
2. Market development excellence resulting in well-functioning capital markets
3. Operational and service excellence resulting in satisfied clients
The SEC has an integral role to play in developing the Zambian capital markets and has developed a
comprehensive scorecard approach which details key measures, KPIs and strategies for the period
2018-2021. However, it is useful to draw on the results of the performance over the period 2015-2018
to ensure that key learnings are implemented to ensure the smooth operation of the incumbent strategic
plan.
The SEC Zambia achieved an unsatisfactory score for the objective of developing and deploying
strengthened institutional capacity. The SEC achieved a satisfactory score for establishing and
maintaining effective and efficient regulatory environment for capital markets. This indicates that
attention would need to be paid to the inputs of developing and maintaining the SEC institutional capacity
which is core to the success of carrying out its mandate. The SEC achieved high performance for the
facilitation and diversification of capital markets products, optimisation of market transaction costs and
enhancing investor protection within Zambian capital markets.
Following extensive internal and external analysis, the following key strategic objectives and planned
actions are earmarked to achieve the 2018-2021 SEC strategy:
1. Improve investor protection
a. Develop and implement a Capital Markets Master Plan
b. Develop investor awareness and capability programmes
53 SEC Strategic Plan 2018-2021
20
c. Develop a plan to promote the use of digital platforms
d. Develop legal/regulatory frameworks
e. Develop enhanced regulatory capacity
2. Promote diversified and customer centric-products
a. Drafting rules and regulations to promote the development of diversified and customer-
centric products’
b. Developing and implementing a stakeholder engagement strategy
c. Advocate for fiscal and monetary incentives
d. Enhancing participation in the Medium-Term Debt Management Strategy
3. Improve Stakeholder relationships
a. Developing and implementing a stakeholder engagement strategy
b. Developing and implementing a Monitoring and Evaluation mechanism
c. Strengthening sensitisation and enforcement programmes
4. Improve sources and management of financial resources
a. Optimising financial management and controls
b. Developing and implementing a resource mobilisation strategy
5. Improve operational processes and systems
a. Enhance service delivery charter
b. Re-engineering, integrating and automating requisite systems
6. Enhance human capital and work culture
a. Develop and implement capacity building programme
b. Review and implement organisational structure
c. Developing and implementing a programme to create a positive work culture
d. Enhancing the staff grievance handling procedure
e. Enhancing the existing appraisal system
f. Developing and implementing a staff welfare programme; and
g. Developing and implementing a staff retention programme
7. Improve office, tools, equipment and infrastructure
a. Enhancing the service delivery charter
b. Strengthening procurement procedures
c. Enhancing legal and regulatory frameworks
The successful implementation of these objectives would rely on addressing institutional capacity
problems as well as maintaining a well-coordinated effort with other stakeholders to ensure that the key
objectives are achieved by 2021.
4.2.2. DMSD ACTIVITY PLAN 2019
The Directorate of Market Supervision and Development (DMSD) Annual Activity Plan (DAAP) has been
prepared to operationalise SEC Strategic Plan 2018-2021.54 The DMSD is responsible for carrying out
two broad functions of the Commission, namely, market supervision and market development. The
Directorate of Enforcement and Legal Services (DELS) is responsible for enforcement of the Securities
Act. Their activities involve ongoing identification and recommendation of law reform and development
in the securities sector, ensuring legal and regulatory compliance. Finally, the DELS is also responsible
for ongoing legal advisory services and undertakes litigation on behalf of the Commission.
The DAAP has proposed that the Commission will focus on achieving the following KPIs in 2019:
1. Increase investor base from 30,000 to 80,000 by the end of 2019
2. Issue five regulations in 2019 - driven by Directorate of Enforcement and Legal Services
54 SEC, DMSD Annual Activity Plan 2019
21
3. Enhance revenue mobilisation by achieving revenue targets as per the 2019 approved budget
4. Resolve 70 percent of complaints annually
Table 7: Market supervision
# Project Name Potential Partners
1 Risk-based supervision Toronto Centre
2 Anti-money laundering Toronto Centre/ World Bank/ Financial Intelligence Centre
3 Collective Investment Schemes- Enhanced governance framework and creation of Unit
FSDA
4 Regulatory framework for green finance BIOFIN/UNDP
Source: DMSD Annual Activity Plan, 2019
Table 7 outlines the key market supervision tasks the DMSD are seeing to undertake in 2019. The Risk-
based supervision item is looking to shift the current supervision approach from a compliance based
and industry centred approach towards a risk-based approach. This capacity building exercise will be
conducted in partnership with the Toronto Centre.
Table 8: Market development
# Project Name Potential Partners Status
1 Capital Markets Development Master Plan (CMDMP) - to be implemented under CEOs office
FSD Africa Ongoing
2 Development of Regulatory Assessment Module
Chartered Institute for Securities and Investment
Ongoing
3 Stakeholders Engagement Strategy
Consultant to be identified To be confirmed
4 Capital Markets Schools Challenge
Bongohive To be confirmed
5 Investor Awareness Media Campaign (TV/social media/radio)
N/A *To leverage on FSD Africa funds
Ongoing
6 Development of Recommendation Paper to implement tiered KYC for Securities sector
World Bank To be confirmed
7 Update of National Strategy on Financial Education (revision of curriculum on capital markets)
World Bank Ongoing
Source: DMSD Annual Activity Plan, 2019
Table 8 outlines the market development tasks to be carried out in 2019. Although the priorities are not
exhaustive, the resourcing of priority projects will take preference due to resource constraints. The
Commission’s challenging financial position means that the criteria of choosing the priority areas for
2019 were based on areas where the Commission could leverage existing partnerships to provide both
financial and technical support.
22
In summary, the DAAP highlights the importance of improving the current financial position of the
Commission in order to carry out the functions of the directorates. The Plan also highlights the
importance of increasing human capital and calls for a hastening of a proposed reorganisation structure
which has yet to be implemented.
4.2.3. KEY REGULATORY THEMES FROM THE CAPITAL MARKETS INDABA
The Zambia Capital Markets Indaba themed “Repositioning the Zambian Capital Markets as an Enabler
to achieving Sustainable and Significant Economic Growth” was held in Livingstone from 3-5 April
2017.55 The key regulatory challenge that were highlighted at the Indaba is the current division of
regulatory responsibility. This refers to the roles played by the BoZ for issuance of government
securities, SEC Zambia for market oversight and the PIA for oversight of the pension and insurance
markets. The overarching conclusions on regulatory framework is for creating improved coordination
amongst regulators so as to ensure the smooth functioning of regulatory oversight and enforcement
across the capital markets. This will need to be explored through consensus-building workshops. A
broader list of regulatory-related challenges and reforms are outlined in Table 9 below.
Key areas of development from the Indaba indicate Public-Private Partnerships (PPPs) as a useful
avenue to leverage public funding with private sector investment in an effort to bring down costs and
enhance efficiency, however putting in place workable legal, regulatory and implementation frameworks
has proven to be challenging. A key lessons learnt from Zambian context is that there is a need for
dedicated commitment of political, technical and financial resources to ensure the success of PPPs. On
the potential avenues for capital market growth, the Indaba also raised potential avenues of growing
capital markets through potentially extending PIA investment guidelines to NAPSA which in turn would
stand to grow listed equities as an asset class. However, it may be more prudent to promote freedom of
asset classes and instead review existing asset management landscape to allow for more active
management of the NAPSA funds and thereby growing trade in equities.
In addition to the regulatory challenges, the Capital Markets Indaba also drew attention to the small size
of Zambia’s capital markets relative to peers and neighbouring countries of otherwise similar economic
structure. The Indaba also noted that liquidity in equity and bond markets are weak and that there is a
pattern to buy and hold securities.
Table 9: Key regulatory challenges from Zambian Capital Markets Indaba
# Regulatory challenges Key stakeholders
1 A need for coordination and clarity around regulation- A clear mandate is needed to develop domestic long-term financing. This would require coordination of regulators and key ministries
Boz, SEC, PIA, MoF, other ministries
2 Efforts to restructure state-owned enterprises are confronted with regulatory challenges- LuSE listing requirements which requires enterprises to demonstrate a track record of profitability for 3 years.
SEC, LuSE
3 Deepening secondary-trading requires extension of PIA oversight- The PIA would need to have regulatory authority over the National Pension Scheme Authority to observe investment guidelines. This will in turn allow for greater trade on secondary markets for fixed income government securities
PIA, NAPSA
Source: Zambia Capital Markets Indaba Summary notes, 2017
55 Zambia Capital Markets Indaba- Summary of deliberations and outcomes, 2017
23
Over and above bolstering of the regulatory framework and coordination of efforts, the Indaba resolved
that a development of a capital markets master plan would be able to create focus and maintain
momentum among key stakeholders.
4.3. REVIEW OF KEY REGULATIONS AND STANDARDS
A review of Zambia’s regulatory landscape is conducted with the view of understanding the key
objectives established under each Act. Key challenges and recommendations for regulatory changes
would follow a consultative process to be carried out under stakeholder interviews as well as consensus
building workshops. The inputs from the various phases will feed into the drafting of the legal and
regulatory write-up in the Capital Markets Master Plan.
4.3.1. SECURITIES ACT NO. 41 of 2016
The Securities Act No. 41 of 2016 was promulgated into law on 24 December 2016 and repealed and
replaced the Securities Act of 1993.56 The objective of the Act is to:
a) regulate the capital markets so as to foster fair and efficient trading;
b) continue the existence of the Securities and Exchange Commission and provide for its functions
and powers;
c) license and regulate securities exchanges, clearing and settlement agencies and self-regulatory
organisations;
d) ensure the financial integrity of transactions and avoidance of systemic risk in the capital
markets;
e) provide for licensing and regulation of capital markets operators;
f) provide for licensing and regulation of credit rating agencies and protect the integrity,
transparency and reliability of the credit rating process and credit ratings;
g) provide for registration of securities and conduct of securities business;
h) provide for regulation of collective investment schemes;
i) prohibit insider dealing in securities and other offences;
j) provide for auditing and corporate responsibility of listed companies and companies whose
securities have been registered with the Commission;
k) provide for mergers and take-overs of listed companies and companies whose securities are
registered with the Commission;
l) continue the existence of the Compensation Fund;
m) establish the Capital Markets Tribunal;
n) repeal and replace the Securities Act, 1993; and
o) provide for matters connected with or incidental to the foregoing.
The Act is central to the development of capital markets as it gives power to the SEC to carry out its
mandate of capital market supervision and development. The Act also provides regulatory guidance for
capital market related activities such as licensing of capital market players and regulation of securities
exchanges. Although the Act is extensive in dealing with issues pertaining to securities in Zambia, the
successful implementation of the law depends on the resourcing and capacity that the key stakeholders
have to implement the Act.
56 http://www.parliament.gov.zm/sites/default/files/documents/acts/The%20Securities%20Act,%202016.pdf
24
4.3.2. BANK OF ZAMBIA ACT NO. 43 OF 1996
The Bank of Zambia Act was promulgated in 1996 and gives power to the BoZ to carry out its functions.57
The Bank of Zambia Act sets out to:
a) revise and consolidate the provisions of the Bank of Zambia Act;
b) revise the law relating to the composition, duties and powers of the Bank of Zambia and its
Board;
c) revise and consolidate the law relating to the issuance of the currency of the Republic and the
formulation and implementation of a monetary policy that will ensure the maintenance of price
stability; and
d) provide for matters connected with or incidental to the foregoing.
The Bank of Zambia Act plays a direct role in giving power to the BoZ to engage in the capital market
through issuance of bonds on behalf of the government of Zambia. Additionally, the Act plays an
important role in maintaining a stable macroeconomic environment for capital markets by providing
power to the Bank of Zambia to carry out the mandate of formulating monetary and supervisory policies
that will ensure the maintenance of financial systems stability.
4.3.3. BANKING AND FINANCIAL SERVICES ACT NO. 7 OF 2017
The Banking and Financial Services Act of 2017 was assented on 12 April 2017.58 The Banking and
Financial Services Act sets out to:
a) provide for a licensing system for the conduct of banking or financial business and provision of
financial services;
b) provide for the incorporation of standards, principles and concepts of corporate governance in
institutional systems and structures of banks and financial institutions;
c) provide for a licensing system for the conduct of banking or financial business and provision of
financial services;
d) provide for sound business practices and consumer protection mechanisms;
e) provide for the regulation and supervision of banking and financial services;
f) repeal and replace the Banking and Financial Services Act,1994
g) provide for matters connected with, or incidental to the foregoing.
The sound governance and supervision of banks is imperative in ensuring the banking industry
continues to grow in its role as an institutional investor which holds capital market products. Additionally,
banks and financial service providers are also significant issuers of share capital given that 9 out of the
24 listed companies fall in the financial sector.
4.3.4. NATIONAL PENSION SCHEME (AMENDMENT) ACT, CAP 256
The National Pension Scheme Amendment Act of 2015 gives power for the establishment of the
National Pension Scheme Authority.59 The functions of the authority are to implement the National
Pension Scheme in accordance with the Act and control and administer the scheme.
57 http://www.parliament.gov.zm/sites/default/files/documents/acts/Bank%20of%20Zambia%20Act.pdf 58
http://www.parliament.gov.zm/sites/default/files/documents/acts/The%20Banking%20and%20Finance%20Act%20No.%207%20of%202017.pdf 59 https://zambialaws.com/principal-legislation/chapter-256national-pension-scheme-
act#targetText=to%20establish%20the%20National%20Pension,or%20incidental%20to%20the%20foregoing.&targetText=Act%2040%20of%201996%2C,Act%207%20of%202015.
25
Membership to the National Pension Scheme is compulsory for all employed persons. Additionally, the
Scheme is an important source of investment for the capital market as it invests members’ savings into
government securities, corporate bonds and listed equity. NAPSA currently has shareholdings in 16 of
the 24 listed companies.60
4.3.5. PENSION SCHEME REGULATION ACT 27 OF 1997
The Pension Scheme Regulation Act 27 of 1997 is an Act to provide for regulation of all pension
schemes other than the National Pension Scheme.61 The Act sets out to:
a) provide for the prudential regulation and supervision of pension schemes;
b) provide for the appointment of the Registrar of Pensions and Insurance;
c) provide for the Registrar's powers and functions; and
d) provide for matters connected with or incidental to the foregoing.
The Act is particularly important for the development of Zambia’s capital markets as it gives power to
Registrar of Pensions and Insurance and in turn the Pension and Insurance Authority (PIA). As of 2017,
31 percent of private pension funds and insurers were comprised of listed equities which indicate that
pension and insurance funds remain an important source of funding for the Zambian capital markets.62
However, given that the National Pension Scheme operates approximately two-thirds of total pension
funds, there is an argument to be made for outsourcing fund management to private investment
managers which could aid in stimulating more participation in the non-government bond markets and
equity markets.63 This would imply a change in regulation to the Pension Scheme Regulation Act
whereby the PIA investment guidelines is extended to the National Pension Scheme. Although
membership to the National Pension Scheme is compulsory, Non-Zambians employed by international
organisations are exempt as well as workers earning less than ZK 15 per hour.
4.3.6. COMPANIES ACT OF 2017
The Companies Act 2017 is aimed at providing regulatory standards for matters relating to incorporation,
management and administration of different types of companies.64 The object of the bill is to:
a) promote the development of the economy by encouraging entrepreneurship, enterprise
efficiency, flexibility and simplicity in the formation and maintenance of companies;
b) provide for the incorporation, categorisation, management and administration of different types
of companies;
c) provide the procedure for the approval of company names, change of name and conversion of
companies;
d) provide for shareholders’ rights and obligations, the conduct of meetings and the passing of
resolutions by shareholders;
e) encourage transparency and high standards of corporate governance by providing for the
functions and obligations of company secretaries and directors;
f) provide for issue of shares, share capital requirements, procedures for alteration and reduction
of share capital and disclosure requirements of companies;
g) provide for the public issue of shares, the issue and registration of charges and debentures;
h) incorporate financial reporting provisions, maintenance of accounting records, and access to
financial information of companies;
i) provide for amalgamations;
60 https://www.napsa.co.zm/1152-2/ 61http://www.parliament.gov.zm/sites/default/files/documents/acts/Pension%20Scheme%20Regulation.pdf 62 PIA, Annual Report, 2017 63 Capital Markets Indaba summary note, 2017 64 http://www.parliament.gov.zm/sites/default/files/documents/bills/Companies%20Act%202017_0.pdf
26
j) provide for the registration of foreign companies doing business in Zambia;
k) provide for the deregistration of companies;
l) repeal and replace the Companies Act, 1994; and
m) provide for matters connected with, or incidental to the foregoing.
The Companies Act is relevant to the capital markets development as it provides for the regulation of
issuing of public share capital and oversight of share capital requirements. Although there is currently
good coverage of provisions of shareholder rights and governance, the enforcement of the Company
Act is essential for maintaining good corporate governance under the functions and obligations of the
company secretaries and directors.
4.3.7. INVESTMENT ACT
The Investment Act No.5 of 1996 sets out various procedures and requirements for investment in
Zambia.65 The Act sets out to:
a) revise the law relating to Investment in Zambia so as to provide a comprehensive legal
framework for investment in Zambia;
b) repeal the Investment Act, 1991;
c) provide for matters connected with or incidental to the foregoing.
The Investment Act outlines various general tax incentives as well as income tax exemptions for
investment into certain sectors. The Investment Act provides incentives based on investing in certain
sectors. For example, there is currently a payment holiday on dividends derived from investments in
farming. The Act also details income tax allowances for buildings used for manufacturing or hotels or
machinery bought for the purposes of farming. The existence of this mechanism implies that it could be
an avenue to explore for the propagation of capital markets.
4.3.8. INCOME TAX ACT
The Income Tax Act No.3 of 1997 sets out to provide regulations for the taxation of incomes.66 The Act
requires every person (business entity, enterprise or individual) receiving income to notify the Zambia
Revenue Authority in writing within thirty days from the date of first receiving such income.
The Zambia Revenue Authority levies corporate tax at a rate of 35 percent. However there are
exceptions based on the sector as shown in Table 10.
Table 10: Corporate tax rates
Business category Tax rate
Mining operations 30%
Charitable organisations 15%
Farming 10%
Non-traditional exports 15%
Chemical manufacture of fertiliser 15%
Rural enterprises Tax chargeable reduced by 1/7 for first 5 years
Banks and mobile phone companies: First 35%
65 http://www.parliament.gov.zm/sites/default/files/documents/acts/Investment%20Act.pdf 66 http://www.parliament.gov.zm/sites/default/files/documents/acts/Income%20Tax%20Act.pdf
27
K250,000m Above K250,000m
40%
Source: Zambia Development Agency, Investment Guide67
Companies listed on the Lusaka Securities Exchange follow a tax rate of 30 percent if more than a third
of shares are held by Zambians.68 The mechanism of adjusting corporate tax rates could be used to
encourage more firms to list. For example, there could be a further reduction of listed company tax rates
on the basis that more than half of the shares are held by Zambians. However, tax incentive mechanisms
would need broader consultation to ensure that changes to tax frameworks are able to sustain
government revenue and expenditure needs.
4.3.9. VALUE ADDED TAX (VAT) ACT
The Value Added Tax Act 4 of 1995 sets out the list of taxable supplies and all matters relating to the
institution of VAT in detail.69 The Act sets out to:
a) impose a tax on the supply of goods and services in Zambia and the importation of goods into
Zambia;
b) repeal the Sales Tax Act and the Insurance Levies Act;
c) provide for matters connected with or incidental to the foregoing.
VAT is currently levied at 16 percent although some items are zero-rated or exempt. Despite a proposal
for VAT abolishment in favour of a Sales Tax Bill, the proposal has been reversed and Zambia will
continue under the existing VAT regime.
4.3.10. SALES TAX BILL OF 2019
The Sales Tax Bill of 2019 was set to replace the VAT Act and has however been reversed.70 The
objective of the Bill was to:
a) introduce a sales tax on the supply of goods in the Republic on manufacturers, producers,
distributors, wholesalers, and retailers and importers of goods into the Republic;
b) impose a sales tax on the supply of services in the Republic by service providers and
importers of services into the Republic;
c) exempt certain supplies, imports and exports of goods and services from sales tax;
d) provide for the registration and de-registration of taxable suppliers;
e) provide for the use of electronic devices, equipment or any other devices;
f) provide for the collection of sales tax;
g) repeal and replace the Value Added Tax Act, 1995; and
67 http://www.zda.org.zm/cost/en/Investment/Doing%20Business%20IN%20Zambia/Taxation#targetText=TAXATION,Tax%20Act%201966%2C%20as%20amended. 68 https://www.pwc.com/zm/en/assets/pdf/zambia-budget-2019.pdf 69 http://www.parliament.gov.zm/sites/default/files/documents/acts/Value%20Added%20Tax%20Act.pdf 70 http://www.parliament.gov.zm/sites/default/files/documents/related_documents/The%20Sales%20Tax%20Bill%202019%2C%20NAB%207.pdf
28
h) provide for matters connected with or incidental to the foregoing.
The Sales Tax was due to be 9 percent on domestic goods and services and 16 percent for imported
goods and services. However, a key issue of Sales Tax is that it presents a compounding effect for each
point that an item is sold. This presents the key difference between VAT and Sales Tax as there is no
refund under Sales Tax. Although it will not be enforced, it would have placed higher tax incidence on
companies which could have negatively affect capital markets as it could deter firms from entering
Zambia or inhibit growth of existing companies.
4.3.11. THE MINES AND MINERALS ACT NO.11 OF 2015
The Mines and Minerals Act No.11 of 2015 sets out to repeal and replace the Mines and Mineral Act of
2008.71 The Act sets out to:
a) revise the law relating to the exploration for, mining and processing of minerals;
b) provide for safety, health and environmental protection in mining operations;
c) provide for the establishment of the Mining Appeals Tribunal;
d) repeal and replace the Mines and Minerals Development Act, 2008;
e) and provide for matters connected with, or incidental to the foregoing.
The new Mines and Mineral Act brought about an increase in royalties payable on underground mining
from 6 percent to 8 percent, and the royalties payable on open-pit mining from 6 percent to 20 percent.
The Act also applies a 30 percent income tax to tolling and processing – beforehand, this was only
imposed on production.72 The amendments to the Act indicate a move from government towards
increasing revenue out of the mining sector.
5. INTERNATIONAL BENCHMARKING
In order to inform recommendations for Zambia’s capital markets development plan, an international
benchmarking exercise was conducted. The aim of this exercise was to identify appropriate peers for
Zambia and to assess these peers in terms of their capital market development, taking into consideration
their regulatory frameworks, institutions and governance, infrastructure and general policies, amongst
others. These indicators were then compared to the current state of the capital markets in Zambia in
order to identify key areas of development and learnings for the Zambian capital market.
This section is split into two subsections i.e. the peer selection process and the benchmarking exercise
for the selected peers.
5.1. PEER IDENTIFICATION PROCESS
To identify peers for benchmarking, a qualitative analysis was conducted to identify a likely group of
peers before performing more formal quantitative analysis. Zambia is not classified as a frontier market
in the MSCI Global Investable Market Indexes Country Classification.73 It was consequently decided to
focus on emerging and frontier markets, omitting developed markets, in order to ensure that insights
gained would be realistic for Zambia to implement.
71 http://www.parliament.gov.zm/sites/default/files/documents/acts/Mines%20and%20Minerals%20Act.pdf 72 https://www.nortonrosefulbright.com/en-mo/knowledge/publications/8664762c/mining-arbitration-in-
africa#targetText=In%202015%2C%20Zambia%20adopted%20the,6%20percent%20to%2020%20percent. 73 https://www.msci.com/market-cap-weighted-indexes
29
Geographically, the exercise aimed to ensure that the final group of peers was varied across Africa,
Latin America and Asia. Within an African context, Genesis and Bourse Consult sought markets that
are smaller than Zambia (measured by GDP) but that have higher levels of market development. Based
on the MSCI classification above, this led to the identification of Mauritius and Namibia as potential
peers, while Botswana was specifically identified by the Zambian SEC and was therefore included.
Globally, emerging and frontier market peers were identified that had been mentioned notably in third-
party research. This was in order to ensure accessibility of information around these potential peers
before formally including them in the sample. A high-level study of reports mentioning potential peers,
which allowed for the identification of a group for further quantitative analysis was also conducted.74
Based on the above analysis, the following group of frontier and emerging markets was identified for
quantitative analysis:
Table 11: Potential peers for international benchmarking
Potential frontier market peers Potential emerging market peers
Argentina Brazil
Botswana Chile
Kenya Colombia
Mauritius Indonesia
Namibia Malaysia
Peru
South Africa
Turkey
Source: Genesis Team Analysis
To quantitatively analyse these potential peers, the overall financial market development, historical GDP
growth and growth of stock market capitalisation to GDP of potential peers was assessed.
Overall financial market development was assessed using the IMF’s index of financial market
development, which considers three sub-indices, namely 1) depth, 2) access and 3) efficiency of
financial markets. These three sub-indices are constructed from eight variables, as set out in the table
below:
Table 12: IMF financial market development index composition and weighting
Sub-index: financial market depth Weighting within sub-index Weighting in index
Stock market capitalisation to GDP 25%
37%
Stocks traded to GDP 24%
74 These included, for example: Absa (2018). Absa African Financial Markets Index. Absa.,
CFA Institute Research Foundation (2017). Latin American Local Capital Markets. São Paulo,: CFA Institute Research Foundation. London Stock Exchange Group (2018). Attracting passive investment flows to African markets. London Stock Exchange Group. World Economic Forum (2016). Accelerating Capital Markets Development in Emerging Economies. Geneva: World Economic Forum.
30
International government debt securities to GDP
6%
Total financial corporation debt securities to GDP
22%
Total non-financial corporation debt securities to GDP
23%
Sub-index: financial market access
Weighting within sub- index Weighting in index
Percent of market capitalisation outside of top 10 largest companies
50%
33% Total number of issuers of debt (domestic and external, non-financial and financial corporations)
50%
Sub-index: financial market access
Weighting in index: 30% Weighting in index
Stock market turnover ratio (stocks traded to capitalisation)
100% 30%
Source: IMF75
The final index score falls between 0 and 1 and allows for a consolidated view of overall development
based on the metrics above. All the index scores were multiplied by 100 for computational and graphical
convenience. A score closer to 100 represents a higher level of market development, while a score
closer to zero represents a lower level of market development.
Figure 8: Change in market cap/GDP ratio and IMF financial market development index (2010 - 2017 for market cap/GDP ratio, 2017 for IMF financial market development index)
Source: World Bank Development Indicators, IMF
Notes: Identified likely peers labelled and highlighted in orange, bubble size shows 2017 market cap/GDP ratio
75 https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Introducing-a-New-Broad-based-Index-of-Financial-
Development-43621
31
After initially identifying the most likely peers based on qualitative measures such as being mentioned
in third party research and being sufficiently geographically varied, the quantitative measures above
were combined in order to measure the position of potential peers relative to Zambia. The first
quantitative measure used was an assessment of the value of the IMF financial market development
index in 2017 and changes in stock market capitalisation as a percentage of GDP, as shown in Figure
8 above. Data was not available for all nations, leading to a total sample of 62 nations for the analysis
The analysis showed that for most potential peers, the ratio of stock market capitalisation to GDP
declined between 2010 and 2017 but remained noticeably larger than that of Zambia, which has a
market cap to GDP ratio of approximately 12 percent. As a result, the change in the market cap to GDP
ratio was not used to disqualify any potential peers, i.e. the focus was on identifying peers with a higher
level of financial market development than Zambia. Hence, when analysing the sample, the y-axis value
carried more weight than the x-axis value. All potential peers scored higher than Zambia on the IMF
financial markets development index, implying greater overall trading activity in these markets, as well
as a more liquid market for both government and corporate debt, driven by a larger number of issuers.
In addition, the higher IMF financial market development index scores of the potential peers indicates a
less concentrated market overall, with a greater portion of total market capitalisation lying outside the
ten largest companies on the exchange. Given the small number of firms listed on the LuSE and the
dominance of Shoprite in terms of size, this was to be expected.
Figure 9: Change in IMF financial market development index vs GDP growth rate (2018 for GDP growth rate, 2010 - 2017 for change in IMF financial market development index)
Source: World Bank Open Data, IMF
Notes: Identified likely peers labelled and highlighted in orange, bubble size indicates 2017 market cap/GDP ratio
The change in the IMF financial market index across 2010 - 2017, and the latest GDP growth rates for
2018 were assessed for the same sample of 62 nations, as shown in Figure 9 above.
The majority of peers exhibited GDP growth rate comparable to or faster than Zambia (3.8 percent) in
2018, specifically Botswana (4.5 percent), Chile (4.0 percent), Kenya (6.3 percent), Mauritius (3.8
percent) and Peru (4.0 percent). The notable exceptions were Namibia (-0.1 percent) and South Africa
(0.7 percent), where growth was largely flat. Argentina (-2.5 percent) suffered a substantial contraction
in 2018, which counted against it as a potential peer, but was redeemed by positive financial market
development growth. Botswana, Colombia, Peru and Turkey regressed in terms of financial market
development, while Zambia showed marginal improvement, as did Indonesia. However, the remaining
peers displayed positive growth in their index values, indicating a widening of the financial development
32
gap between these nations and Zambia. Notably, this includes both Namibia and Mauritius, two African
peers that are roughly half the size of Zambia by GDP. This indicates that Zambia could benefit from
these two smaller peers as far as capital market development goes, and that these lessons should be
realistic to implement, given Zambia’s larger size.
Figure 10: Change in IMF financial market development index and IMF financial market development index (2010 - 2017 for change in IMF financial market development index, 2017 for IMF financial market development
index)
Source: IMF
Notes: Red circle represents frontier group, Blue circle represents emerging group, Cyan bubble is Zambia
Genesis and Bourse Consult then proceeded to assess which potential peers had both more developed
financial markets than Zambia and had registered a higher rate of development in this regard since
2010. This assessment included 183 nations, with all data sourced from the IMF’s financial market
development index. As shown in Figure 6 above, a red “frontier” bubble and a blue “emerging” bubble
was constructed in order to provide a guide of where potential peers should fall based on the assessment
criteria.
The analysis reinforced the earlier findings that while all potential peers enjoyed a more developed
financial market overall than Zambia, several of them, like Turkey, Peru and Colombia, had regressed
in terms of development since 2010. While these nations retain higher levels of market activity and larger
market capitalisations relative to GDP than Zambia, this regression counted against them in the final
peer selection.
33
Figure 11: IMF financial market development index, frontier markets peers (2010, 2014, 2017)
Source: IMF
Figure 12: IMF financial market development index, emerging market peers (2010, 2014, 2017)
Source: IMF
In order to accurately gauge financial market development progress amongst potential peers, Genesis
and Bourse Consult also assessed their IMF financial market development index scores over time, as
shown in Figures 11 and 12 above. Despite an overall decline in its index score, Peru has demonstrated
a recovery in recent years. Similarly, Chile and Indonesia have reversed declines in recent years and
have returned to a similar level as in 2010. In the cases of Botswana, Colombia and Turkey, however,
the declines showed little sign of reversal, counting against them as potential peers.
Based on the above qualitative and quantitative analysis, Genesis and Bourse Consult selected a group
of ten peers for benchmarking, with five frontier markets and five emerging markets, as shown in the
table below. The criteria for selection correspond to the columns labelled “IMF development”, “GDP
growth”, “Change in market cap to GDP ratio” and “Recovery in market cap to GDP ratio”. Based on the
quantitative analysis, countries that scored favourably in a given criterion have the relevant cell
highlighted in green, while an unfavourable score is shown in red. The group that was ultimately
selected scored favourably on the majority of the criteria, with the exception of Botswana, which was
specifically identified by SEC Zambia.
34
Table 13: Selected peers for international benchmarking
Country Classification IMF
development GDP growth
Change in market cap
to GDP ratio
Recovery in market cap to GDP (if relevant)
Selected
Argentina Frontier
Yes
Botswana Frontier Yes
Brazil Emerging N/A Yes
Chile Emerging Yes
Kenya Frontier N/A Yes
Namibia Frontier N/A Yes
Indonesia Emerging Yes
Malaysia Emerging N/A Yes
Mauritius Frontier N/A Yes
South Africa Emerging N/A Yes
Colombia Emerging No
Peru Emerging No
Turkey Emerging No
Source: Genesis Team Analysis
Notes: Red = unfavourable score, Green = favourable score
5.2. BENCHMARKING EXERCISE
The next section proceeds to benchmark Zambia against the group of peers identified above, splitting
the analysis across four areas: market structure, market and regulatory environment, custody and
settlement and dealing landscape. Within each area, Zambia and the peers were assessed across a
variety of criteria. These criteria range across the market’s regulatory structure, protection of minority
shareholders, its attitude to foreign ownership and tax rates. In addition, the peer’s clearing and
settlement timeframes and market infrastructure were considered, as well as the level of liquidity in the
market and their attitudes towards short selling and securities lending.
35
5.2.1. PEER CAPITAL MARKET STRUCTURE
5.2.1.1. OVERVIEW
Table 14: Zambia and peer market exchange overview
Country
Exchanges
Instruments Traded
Equity Debt Other
Zambia Lusaka Stock Exchange
Yes Yes None
Argentina Bolsa de Comercio de Buenos Aires Mercado Abierto Electronico Salta Stock Exchange
Yes Yes Derivatives, Futures/forwards Trust certificates, Asset-backed securities, Guaranteed loans GDP-linked units
Botswana Botswana Stock Exchange
Yes Yes Tradable certificates of deposit Exchange-traded funds
Kenya Nairobi Stock Exchange
Yes Yes Real estate investment trusts Exchange-traded funds
Mauritius Stock Exchange of Mauritius
Yes Yes Exchange-traded funds
Namibia Namibia Stock Exchange
Yes Yes Derivatives Unit Trusts
Brazil Brasil Bolsa Bacao (B3)
Yes Yes A large number of investment and mutual trust funds
Chile Bolsa de Comercio de Santiago Bolsa de Electronica de Chile Bolsa de Corredores de Valparaiso
Yes Yes Relatively undeveloped derivatives market
Indonesia Indonesia Stock Exchange
Yes Yes Commodity futures Futures contracts Currency and interest rate derivatives
36
Malaysia Bursa Malaysia Labuan International Financial Exchange
Yes Yes Real estate investment trusts Exchange-traded funds
South Africa Johannesburg Securities Exchange (JSE)
Yes Yes Commercial paper Unit Trust certificates Open and closed end trusts
Source: RBC Investor and Treasury Services Market Profiles, 2019 Notes: Green = security is traded, yellow = security trade is restricted or limited
Across the group, the norm is to have one stock exchange, especially in frontier markets, likely as a
result of the relatively low liquidity in these markets. The exceptions to this are Argentina, Chile and
Malaysia, which have multiple exchanges. However, in each case, the country’s main stock market is
clearly defined, with the other exchanges being regional, or in the case of Malaysia, virtual and web-
based. All peers allow trades in both equities and debt. The peer group has varying levels of
sophistication in terms of other instruments, with different peers offering exchange-traded funds, real
estate investment trusts, futures and forwards, amongst others. These markets are not equally well
developed across peers, with Botswana and Mauritius offering only three listings of exchange-traded
funds.76 Chile’s derivatives market remains amongst the least developed in Latin America. Zambia,
however, is the only country offers a low number of products in the “Other” category, after the suspension
of the licenses both the Panex Commodity Exchange Zambia and the Bonds and Derivatives Exchange
Zambia Plc.77
In addition to the variation in securities offered across the peer markets, there are differences in the
structure surrounding their share and bond markets. In Argentina, both shares and bonds are traded on
exchange. The majority of bond trading is done over-the-counter (OTC), but is only available to domestic
investors. Namibia allows for both listed and unlisted securities to be traded OTC. By contrast, Botswana
and Kenya have informal OTC markets that are not accessible to foreign investors.78,79 Zambia requires
all registered securities to trade on an exchange and requires that OTC transactions are reported to the
exchange.80 Mauritius closed its OTC market in 2007, but has established the Development and
Enterprise Market (DEM), which is designed for SMEs, newly-founded companies and for companies
that were previously traded OTC. As may be expected, off-exchange trading is more prominent amongst
emerging market peers. Brazil allows both government and corporate bonds to be traded OTC. Chile
does not have a formalised, regulated OTC market, but does have regulated OTC dealers who
participate in trading fixed income and money market securities. Similarly, Indonesia does not have a
formal OTC market, but allows all securities to be traded in this manner. Malaysia primarily trades
government securities OTC, while South Africa allows for OTC trading of all securities.
As shown in the table above, the Zambian market’s offering of investment products pales in comparison
to the products offered by the peer group. This was confirmed during stakeholder discussions, in
particular around collective investment vehicles, such as exchange-traded funds (ETFs), Real Estate
76 https://www.stockexchangeofmauritius.com/products-market-data/etfs 77 https://www.seczambia.org.zm/notice-of-suspension-of-badex-and-panex/ 78 https://www.rbcits.com/en/gmi/global-custody/market-
profiles/market.page?dcr=templatedata/globalcustody/marketprofiles/data/botswana 79 https://www.rbcits.com/en/gmi/global-custody/market-
profiles/market.page?dcr=templatedata/globalcustody/marketprofiles/data/kenya 80 https://www.sbz.com.zm/luse-market-structure/
37
Investment Trusts (REITs), and Collective Investment Schemes, specifically mutual funds. Globally,
there has been substantial development in these asset classes.
As of April 2019, the total value of global assets invested in ETFs equalled USD 5.57 trillion, up from
USD 417 billion in 2005, which represents a ten-fold growth in total size. The USA retains the lion’s
share of ETF assets under management, with a total exceeding USD 4 trillion in 2019. The European
ETF market trails far behind this figure, with assets under management of approximately USD 700 billion
as of the end of 2018. Consequently, it is clear that the bulk of ETF assets remain concentrated in
developed markets, with data on the market sizes of smaller markets generally difficult to find in isolation.
Regardless, there has been some evidence of activity in frontier emerging markets as far as this asset
class is concerned. In Indonesia, the total asset value of the ETF market reached USD 570 million in
2017, up from USD 490 million the year before. Similarly, the value of ETF’s on Bursa Malaysia equalled
USD million at the end of 2018. In South Africa, the total market capitalisation of ETF’s was just shy of
USD 6.7 billion as of September 2019. Smaller, frontier members of the peer group generally have
nascent ETF markets, but the first shoots have been witnessed in locations such as Kenya, with the
country’s CMA publishing a policy guidance note in 2015 to allow the introduction of ETF’s to the Nairobi
Stock Exchange. The country’s first ETF was consequently listed in 2017. Similarly, Mauritius published
Securities Rules in 2013 to make provision for ETFs on its exchange, which currently has three ETFs
available for trading. Botswana has four ETFs trading on the Botswana Stock Exchange, though the
total asset under management value is only USD 58 million, as of the end of 2017.
Similar to ETFs, the global market value of REITs has grown in recent years, reaching a size of USD
1.7 trillion as of August 2018. As with ETFs, the bulk of REIT activity occurs in developed markets, which
can be seen in the fact that only 39 countries worldwide have a REIT regime. While the number of REIT
markets remains small, the current total is nearly double what it was a decade ago, with seven new
countries having joined in the last four years. However, despite this global growth, the majority of REIT
markets remain relatively immature. Amongst the 39 REIT markets, only the USA is classified as a
mature market, with a further 11 developed markets carrying an “Established” classification. A group of
10 “Emerging” REIT markets follow (including Malaysia, Brazil and South Africa), with the remaining
markets (including Kenya) are classified as “Nascent”. As a result, the majority of REIT markets are still
grappling with the legislation around their markets and aiming to better understand the features of more
mature markets. From a size perspective, however, there has been some growth in the REIT markets
of the emerging peers that offer them (Malaysia, South Africa and Brazil). Brazil’s REIT market has
grown from a size of USD 580 million in 2005 to a total of USD 21.4 billion as of April 2019. Similarly,
the South African REIT market’s current market capitalisation is USD 19.2 billion, while the Malaysian
market trails somewhat with a size of USD 9.9 billion. Amongst the frontier peers, Kenya’s CMA formally
approved the country’s first REIT in 2015, following the implementation of the required regulations in
2013. Given that the Kenyan market currently only contains one REIT, the total assets under
management remains small at USD 36 million. However, the presence of the required legislation for the
market to develop is a positive first step.
The final collective investment vehicle asset class for consideration is the mutual fund market. Despite
impressive growth in the markets for both ETFs and REITs, the mutual fund market remains far larger,
with the total value of mutual funds in the USA alone equalling USD 20 trillion at the end of 2018. As in
the markets for ETFs and REITs, there is generally some correlation between the size of a country’s
GDP and the total size of its mutual fund market.
38
Table 15: Size of mutual fund assets, selected markets
Country Mutual fund assets as a %
of GDP (2017)
Size of GDP (USD billion,
2017)
Inferred size of mutual fund
assets (USD billion)
Brazil 60.2% 2,056 1,237.7
South
Africa 52% 349 181.7
Malaysia 31.6% 314 99.3
Chile 27.1% 277 75.1
Indonesia 3.2% 1,016 32.6
Argentina 4.6% 636 29.3
Namibia 31.7% 13 4.2
Kenya 0.8% 75 0.6
Mauritius 4.4%* 12* 0.5*
Zambia 0.1% 26 0.029
Source: World Bank world development indicators, Zambia SEC 2017 annual report. * Data from 2015 was the latest available
As shown in the table above, there is a sizeable difference in the total size of mutual funds across the
selected group of peer markets. The mutual fund asset pool is largest in the emerging market peers,
with Brazil by far reporting the largest asset value, followed by South Africa and Malaysia. In Zambia,
as in Kenya and Mauritius, the market remains nascent, with all three nations reporting asset sizes of
below USD 1 billion. Though Zambia has the smallest mutual fund asset pool of the peer group, the
presence of the required regulatory framework to allow for this asset class in the market is a positive
step. In addition, the Zambian mutual fund market has seen some growth in recent years, with total
asset value increasing by 18.7% between 2016 and 2017. While unlikely to grow beyond that of other
frontier peers such as Mauritius or Kenya in the short term, this provides a platform for future growth in
the market. As such, Zambia should look to encourage the uptake of this product in order to continue
broadening the market’s product offering.
While there is some investment in government bonds and listed equity, the markets for corporate and
green bonds, ETFs, REITs and unlisted equity (such as private equity) remain nascent.81 In particular,
the lack of a developed corporate bond market, which follows as a result of the lack of liquidity in the
81 Institutional investor
39
government bond market, has resulted in institutional investors being underweight in corporate bonds.
The lack of asset classes for investment was identified as an area of concern during the international
benchmarking phase of the market needs assessment report, with peers having made further strides in
developing their capital markets to include products such as derivatives, futures and exchange-traded
funds.
In addition to the nascent state of the above asset classes, one stakeholder also recommended a greater
role for Collective Investment Schemes (CIS) in order to provide liquidity in the market.82 Currently, the
Pension Act’s pension scheme regulations compel pension funds to hold between 2 percent and 5
percent of their portfolios in CIS. Holding a greater share of pension fund portfolios in CIS could facilitate
greater liquidity, as securities are bundled together into units and traded, thus increasing trading activity
in the market.
Table 16: Current state of Zambian regulation, selected products
Product/activity type Framework/regulation in place? Market active?
Real estate investment trusts (REITs) No No
Collective investment schemes (CIS) Yes Yes
Mergers and acquisitions Yes Yes
Securities lending No No
Short selling of securities Yes Yes
Derivatives No No
Project bonds Yes No
Green bonds Yes No
Source: SEC website
Table 16 above summarises a selection of products for development in the Zambian market. While the
SEC has put the required frameworks/regulations in place to allow for the existence of some products,
in most cases, the markets are not yet active, indicating that broad facilitation of greater activity will be
required as the market develops. While the preceding discussion focused on some of the products listed
above, the remained are discussed later.
In addition to the need to develop a broader base of asset classes, there is also scope for the
development of innovative products to attract greater public interest in the capital markets, such as
issuing retail bonds, which is already being done in some peer countries, such as Kenya and South
Africa. In particular, Kenya’s approach issuing of mobile bonds (which are bought and traded entirely on
an individual’s mobile phone) is something that Zambia could look to replicate. While the funds raised
from retail bonds are usually small compared to government bonds issued by the central bank, the
creation of a simple, accessible product for the public to invest in could aid in a more robust capital
markets landscape.
5.2.1.2. COST OF LISTING
During stakeholder engagements multiple listed companies mentioned that they perceive the costs of
listing to outweigh the benefits.83 Genesis and Bourse Consult compared how Zambia’s initial and
annual listing fees compare to those of selected benchmarking peers. The specific group of five peers
were selected based on their IMF Financial Markets Access Index score, which assigns a score for
financial markets access based on two equally-weighted criteria: the proportion of the exchange’s
market cap that is represented by the ten largest firms listed on the index, as well as the number of listed
issuers. The five best-performing peers based on this metric were then selected for the comparison that
82 Development finance institution 83 LuSE listed firms
40
follows.
Table 17: Initial and annual listing fees for equity: Zambia and selected peers
Country Main market: initial listing fee**
Main market: annual listing fee**
Alternative market listing fee**
Alternative market: annual listing fee**
Malaysia 0.01%, capped at a range of USD 4,765 - 47,650
0.0025%, capped at USD 2,383 -
23,825
0.01%, capped at USD 2,383 -
4,765
0.01%, capped at USD 2,383 -
4,765
South Africa USD 99 - 206,309 USD 3,186 -
28,041 USD 83 - 2,085 USD 2,385
Mauritius USD 2,660
1,587 - 21,261 + 0.001% above market cap of USD 1 billion
USD 1,995
952 - 5,556 + 0.001% above market cap of
USD 250m
Brazil USD 15,574 9,816 + 0.005% of
market cap No data No data
Indonesia 1,762 + 0.001%, capped at USD 1,762 - 17,620
0.0005%, capped at USD 3,524 -
17,620
1,762 + 0.001%, capped at USD 1,762 - 10,572
0.0005%, capped at USD 3,524 -
17,620
Zambia 0.25%, capped at
USD 9,000 - 22,500
0.125%, capped at USD 4,500 -
7,500
0.125%, capped at USD 1,889 -
3,023
0.125%, capped at USD 944 -
1,511
Source: Exchange websites
Notes:
*Green: Zambia has lower minimum AND maximum fees than peer, yellow: Zambia has EITHER lower minimum
OR lower maximum fees than peer, red: Zambia has higher minimum and higher maximum fees than peer
**All currency values in USD, all percentages represent a proportion of market capitalisation of firm to be listed
As shown in Table 17 above, there is substantial variation in the initial and listing fees across markets.
Most markets charge an initial listing fee based on some proportion of the issuer’s market capitalisation,
generally capped to a range. Subsequent annual fees are generally lower than initial fees, both in
percentage terms and in terms of the capped range. There are, however, a few exceptions. Both Brazil
and Mauritius have a flat fee for an initial listing, irrespective of size, while South Africa has different
market capitalisation bands that dictate the fee to be paid depending on which band applies to the firm
to be listed. Generally, however, most peers follow a similar approach to Zambia, albeit with a lower
proportion of the firm’s market cap being used to calculate the fee.
Due to the initial listing fee calculation being dependent on each firm’s individual market capitalisation,
comparisons across markets for a given firm are difficult. However, the lower end of Zambia’s range is
higher than the corresponding lower ends of ranges for Mauritius, South Africa, Indonesia and Malaysia.
Similarly, the upper end of the range is higher than the maximum values for Indonesia, Brazil and
Mauritius. In terms of both initial and annual fees on its Main Board, Zambia is generally at least as
expensive or more expensive (based on minimum and maximum fees) than the selected peers. Given
that Zambia’s capital markets are less developed than these peers, it could be argued that having
comparable or higher fees is a substantial disincentive to listing on the LuSE compared to alternatives.
One area in which Zambia performs well is the annual fee for being listed on the Alternative Market fees.
However, the fee for the initial listing remains relatively high compared to the selected peers, and
considering that no SMEs have listed on the Alternative Market to date, the focus should be centred on
the comparatively high Main Board fee structure.
41
By way of an illustrative example, we may consider the case of a hypothetical firm with a market
capitalisation of USD 10 million and calculate the total listing fee that they would pay on each of the
above-mentioned countries’ Main Boards.
Table 18: Cost of listing for a firm with a market capitalisation of USD 10 million
Country Cost of listing (in USD) for a firm with market
capitalisation of USD 10 million
Zambia 22,500
Brazil 15,574
South Africa 7,165
Malaysia 4,765
Mauritius 2,660
Indonesia 1,862
Source: Genesis Team Analysis
As shown in the table above, the cost of listing for such a hypothetical firm would be highest in Zambia,
where it is reaches the upper cap of range, due to the larger emphasis that Zambia places on market
capitalisation compared to these peers. Brazil, which charges a flat rate, is a distant second, followed
by a gap to South Africa in third place.
In addition to the costs associated with offering products on the market, there are also brokerage and
settlement fees to be paid by investors for trading on the LuSE.84 The LuSE charges its own clearing
and settlement fee of 0.375% of the transaction value for equity trades, with a further 1% brokerage fee,
as well as a fee of 0.125% to be paid to the SEC.85 While trading fees (payable to the exchange and/or
clearinghouse) are common across the selected peer group, further fee payments to the respective
regulators are a rare occurrence, with only Mauritius apportioning a part of the trading fee to its Financial
Services Commission. In the case of Mauritius, this is limited to a total of 0.05% of the transaction value
for equities, and 0.0025% for debt securities, both of which are noticeably lower than Zambia’s 0.125%
SEC fee. The trading of bonds attract fees at a marginal rate depending on the size of the transaction,
starting at 0.300% for trade sizes of ZK 10,000 up to a marginal rate of 0.180% for trade sizes between
ZK 500,000 - 1,000,000. In addition to this, there is a commission fee equal to the marginal rate
percentage, applied to the upper limit of the trade size range.
During in-country stakeholder discussions, a potential avenue for improving the number of listed firms
by obliging certain sectors (such as banks, telecommunications and energy suppliers) to list on the
exchange was tabled. In practice, however, this is a rare phenomenon, not only within the peer group,
but globally. The United States Securities and Exchange Commission has the right to compel a firm to
issue financial reports under certain conditions, in accordance with the country’s Securities Exchange
Act of 1934.86 Specifically, a firm may be obliged to publicly report its results if it has assets valued at
more than USD 10 million, as well as having more than 500 shareholders of record. However, it should
be noted that although publicly listed firms are required to report their results, the converse is not
84 LuSE fee schedule 2017 85 International bank operating in Zambia 86 https://dealbook.nytimes.com/2011/01/03/facebook-and-the-500-person-threshold/
42
necessarily true, i.e. firms may be compelled to report their results, but cannot be forced to list. In
addition, the government of Uganda compelled South African telecommunications firm MTN to list on its
exchange in 2018 after operating in the country for 20 years.87However, this decision appears to have
been taken on the merits of the MTN’s success in the market (the firm is the dominant player in its sector
in Uganda) rather than on the basis of fixed guidelines or legislation. As a result, the idea of compelling
certain firms to list on public markets does not appear to have much of a precedent, and consequently
does not appear to be necessary for the development of Zambia’s capital markets. There may, however,
be scope to mandate that firms of a certain size should report their results, which would also provide a
way of introducing them to the requirement of preparing audited financial statements.
5.2.1.3. ISSUANCE OF GOVERNMENT DEBT
Amongst African peers, there is some variance in the manner in which government bonds are brought
to market, despite the general use of primary auctions.88 Zambia allows for all financial institutions and
non-bank entities to participate in the primary market for government bonds, though the country does
not make use of a primary dealership system as of yet, while individuals are also able to participate in
the primary market through the non-competitive bid process. Botswana allows for participation by
individual investors, while also allowing these investors to invest through the use of the Central Bank-
approved list of primary dealers, with a minimum investment amount of BWP 10,000 (approx. USD 917).
One of the similarities between Zambia and Kenya is that the latter allows for individual participation in
the primary government bond market after the investor in question opens an account with the Central
Bank of Kenya’s Central Securities Depository. These investors may then submit application forms to
formally bid for government securities. Investors and corporates may also investment as a nominee of
a commercial or investment bank. Kenya also has a list of authorised securities dealers.89 Namibia does
not have a primary dealer system, but rather issues invitations to tender ahead of new bond issues, with
minimum bids of N$ 10,000 (approx. USD 682). Mauritius allows for direct bidding for government
bonds, as well as via primary dealers, though direct participation is only open to Mauritian citizens or
residents, while foreign investors can participate through primary dealers or licensed stockbrokers. Bids
in Mauritian government bonds are placed in multiples of Rs 100,000 (approx. USD 2,753). In South
Africa, primary issues of government bonds are limited to primary dealers and selected banks, though
the country allows for individual investors to purchase retail bonds in small denominations of as little as
ZAR 1,000 (approx. USD 68).
Amongst remaining global peers, Brazil similarly makes public offers through the Banco Central do
Brasil, with any institution registered with SELIC (the Central Bank’s electronic system for executing
open market operations) eligible for participation.90,91 Individuals and companies can in turn participate
in the market through these registered entities. Similarly, Chile allows for participation in primary
auctions by all SOMA (Chile’s Open Market Operation System) participants, which generally includes
banks, mutual and person funds and insurance companies.92 In addition, Chile sometimes makes use
of book-building, in which both local and foreign investors can participate through specified underwriter
banks. Indonesia makes use of both public auctions (usually for local currency debt) and private
placement (usually for foreign currency debt).93 Participants include commercial banks and securities
87 https://thenerveafrica.com/21161/uganda-joins-list-of-countries-forcing-ipos-on-mtn/ 88 https://www.africanbondmarkets.org/en/ 89 https://www.cma.or.ke/index.php?option=com_phocadownload&view=category&id=49&Itemid=254 90 https://www.bcb.gov.br/conteudo/home-en/FAQs/FAQ%2006-
Public%20Securities%20and%20Public%20Debt%20Management.pdf 91 https://www.nasdaq.com/articles/what-exactly-selic-anyway-2012-09-09 92 https://www.hacienda.cl/english/public-debt-office/frequently-asked-questions/who-participates-in-the-treasury-
bond.html 93 https://asianbondsonline.adb.org/documents/abmf_ino_bond_market_guide_2017.pdf
43
companies appointed by the Ministry of Finance, as well as the Indonesia Deposit Insurance
Corporation. Malaysia largely offers government securities through the auction method and are
purchased by the approved primary dealers, who are banks.94
Zambia’s approach to issuing government bonds is broadly similar to that of the peer group, with the
BoZ conducting auctions. The government bonds auctioned on a competitive basis follows the Dutch
auction model. Under a Dutch auction model, the auction begins with the bonds being offered at a high
price (and a low yield), with the price gradually lowered in order to attract greater bidding activity.
Eventually, the offered price is sufficiently lowered to entice the desired total bid size for the bonds on
offer, at which point the auction ends. The price at which the bonds are sold is set equal to the highest
price (and lowest yield) that attracted the desired level of bidding activity, i.e. the highest price at which
the desired value of funding is raised. This price is subsequently paid by all successful bidders in the
auction. The benefit of a Dutch auction system is that it encourages greater participation over a
traditional auction model, because all participants know that, if successful, they will pay the same price
as all other successful bidders. Differences in information amongst participants are mitigated, because
the uniform price reduces the risk that one or more participants with an informational disadvantage will
end up paying an inflated price. From this point of view, making use of a Dutch auction model to sell
government bonds is an efficient approach. At present, the BOZ holds an auction every 4 to 6 weeks
depending on government borrowing needs. The auction takes place at 10:00, followed by a delay, after
which the results for the auction are released in the afternoon. The delay in the release of the auction’s
results, however, represent a lack of transparency in the BoZ’ process. This could lead to the benefits
associated with the Dutch auction model being eroded, with potential questions around the democratic
nature of the auction acting as a disincentive to participants. In addition, concerns around a lack of
transparency in publishing the prices of successful bids means that the second benefit of the auction
process, the dissemination of information across all participants, is eroded. As such, while the BoZ’
approach around the sale of government securities has potential benefits for participants, the lack of
transparency around the end of the auction and the publication of the results brings inefficiency into the
process.
However, despite a similar framework to its peers, the appetite for Zambian government debt remains
low at present, at least in the secondary market. This is driven in part by unfavourable elements in the
country’s macroeconomic environment. However, the appetite for government debt does appear to have
been low historically. The Zambian government has rapidly accumulated debt in the current decade,
with public debt growing from 21 percent of GDP in 2011 to 59 percent at the end of 2017.95 This has
led to concerns surrounding the government’s ability to meet its medium-term debt commitments, in
particular due to the country’s dwindling credit reserves, all of which culminated in a series of recent
credit downgrades from Moody’s Investor Services.96 As a result, foreign investor interest in Zambian
securities remains subdued, which contributes to lower secondary market trading activity in its
government bonds. Despite having the foundational framework for a vibrant government debt market in
place, Zambia’s macroeconomic realities in the current decade, coupled with low credibility from the
government as a result of ballooning debt and low liquidity, have resulted in low interest in its government
debt.
Despite similarities in the initial manner of bond issuance (i.e. through a central bank), Zambia’s
government debt systems have considerable areas for development. In particular, the absence of a
robust market for government bonds inhibits price discovery, given that the returns on corporate bonds
94 https://www.adb.org/sites/default/files/publication/198601/asean3-bond-market-guide-2016-mal.pdf 95 https://www.economist.com/middle-east-and-africa/2018/09/13/zambia-slumps-towards-another-debt-crisis 96 https://www.lusakatimes.com/2019/05/24/moodys-downgrades-zambia-credit-rating-to-negative-says-risk-of-
debt-default-on-the-increase/
44
and other private sector fixed income securities are typically expressed as the return on government
bonds, plus a premium reflecting the additional risk taken on by the investor. In addition, there is a buy-
and-hold culture amongst the institutional investors that hold government bonds, resulting in low
secondary market activity, even after material market developments.97 This is driven in part by the
attractive yield on government bonds, which means that simply holding the bonds to maturity provides
a safe method of earning a high return. As a result, efforts to promote a true primary dealership system
have not had the desired effect, since the primary dealers tend to hold the bonds after purchasing them,
rather than trading them in the secondary market. This feeds into poor price discovery, since the lack of
a liquid secondary market means that material price developments are not reflected to the public by way
of changing prices, driven by higher/lower trading activity.
The establishment of a primary dealership system in the Zambian capital markets could help facilitate
greater trading activity (and hence liquidity) in government bonds. This is because primary dealers are
required to quote both buy and sell prices for government bonds at all times, leading to a constant source
for other market players to buy and sell bonds. At present, government bonds are distributed by the
BoZ, which sells the bonds via a Dutch auction model, with a variety of financial institutions, including
commercial banks and stockbrokers being allowed to bid for the securities on offer. As a result of other
financial institutions (apart from the banks) being allowed to participate in the auction, members of the
public effectively have the ability to purchase bonds directly via their stockbroker. Having such a broad
number of players participating in government bond auctions undermines the establishment of a primary
dealership system for Zambian government bonds. Under a true primary dealership system, the BoZ
would sell government securities exclusively to the banks under a transparent Dutch auction model. The
banks would then be incentivised to act as market makers, buying and selling the issued securities in
the secondary market, with the difference in the spread of buy/sell prices representing their profit for
acting as market makers. This, in turn, could facilitate greater trading activity in the market for
government bonds.
5.2.1.4. PRIVATE MARKETS
Private markets represent investments made by private firms, such as private equity (PE) or venture
capital (VC) funds, which are in contrast to investments made in securities traded on public markets. In
addition, private market investments may include mergers and acquisition (M&A) activity, i.e. the
consolidation of separate companies. Private market investments have grown strongly since the turn of
the century, with total global private market fundraising reaching USD 778 billion for 2018, resulting in
total private markets assets under management of USD 5.8 trillion, with more than half belonging to
private equity or venture capital investments.98 As such, these are key investment classes to consider
when discussing private markets. The terms “private equity” and “venture capital” are often used
interchangeably, or combined to form one investment class, which is also called private equity. As a
result, it is often not possible to split the total PE/VC pool into its two constituent components. M&A
activity, however, is distinct from these two.
97 Association stakeholder 98 https://www.mckinsey.com/~/media/McKinsey/Industries/Private%20Equity%20and%20Principal%20Investors/Our%20Insights/Private%20markets%20come%20of%20age/Private-markets-come-of-age-McKinsey-Global-Private-Markets-Review-2019-vF.ashx
45
5.2.1.4.1. PRIVATE EQUITY/VENTURE CAPITAL
Global data on private equity activity was difficult to find. However, the data from the African Private
Equity and Venture Capital Association (AVCA) gives insight into PE and VC activity across Africa from
2013 to 2018, including for Zambia and its peers.99
Table 19: Zambia and African peers private equity and venture capital activity overview, 2013 - 2018
Country Value of reported deals (USD, million)
Number of reported PE/VC deals
Main sectors by value of deals
South Africa 2,450 194 • Communication services
(27%)
• Utilities (21%)
• Energy (14%)
• Consumer staples (8%)
• Financials (7%)
• Consumer discretionary
(6%)
Kenya 1,416 113
Mauritius 455 15
Zambia 280 35
Botswana 70 3
Namibia 35 9
Rest of Africa 20,994 653
Total 25,700 1,022
Source: African Private Equity and Venture Capital Association, 2018 Annual African Private Equity Data Tracker
Notes: AVCA defines private equity as both private equity and venture capital
The total value of PE/VC fundraising between 2013 and 2018 across Africa totalled USD 25.7 billion
across 1,022 deals. Though a sectoral split was not available by country, the key sectors in terms of
number of PE deals between 2013 and 2018 were consumer staples (15 percent) and discretionary (14
percent), as well the industrial (13 percent) and financial sector (12 percent). However, the largest
shares of the value of deals went to the communications (27 percent) and utilities (21 percent) and
energy sectors (14 percent).
Across Southern Africa, the total value of PE/VC deals reported between 2013 and 2018 was USD 3.5
billion. The lion’s share of this went to South Africa, which attracted 70 percent of all PE/VC deals over
that period when measured by value, and 66 percent when measured by volume. The rest of the
Southern African region trails far behind with Mauritius and Zambia following in distant second and third
places in the region. Interestingly, Mauritius and Zambia’s PE/VC markets appear to mirror each other:
Mauritius attracted only 5 percent of deals by volume, yet attracted 13 percent of deals by value, while
Zambia attracted 12 percent of deals by volume, but only 8 percent by value. This implies that Mauritius
generally attracted larger deals than Zambia, despite attracting fewer. Behind these two markets,
Namibia (3 percent by volume, 1 percent by value) and Botswana (1 percent by volume, 2 percent by
value) round out the sample.
The East African region attracted a lower amount of PE/VC funding over the period than Southern Africa,
at USD 2.4 billion. This region was dominated by another peer, Kenya, which attracted a total of 58
percent of PE/VC deals by value and 59 percent by volume, which gave it second place overall amongst
the African benchmarked group. Despite the lower overall amount attracted by East Africa compared to
Southern Africa, capturing such a sizeable share of the deal flow demonstrates a far more active PE/VC
market in Kenya than in Zambia. Overall, Zambia ranks in fourth place amongst African peers by value
99 https://www.avca-africa.org/research-publications/data-reports/2018-annual-african-private-equity-data-tracker/
46
of PE/VC deals between 2013 and 2018, and in third place by number of deals announced to the public
by members of private equity associations.
Information for the rest of the peer group was limited. Data from the Association for Private Capital
Investment in Latin America shows that Brazil was the largest recipient of PE/VC funding in 2017,
attracting USD 4.1 billion spread over 170 deals in 2017.100 Of this total, approximately USD 775 million
came specifically from venture capital. Chile lagged behind other markets in the region, but still attracted
USD 631 million over 48 deals, with Argentina attracting USD 380 million in 2017. In addition, Ernest
and Young’s Private Equity briefing on Asian nations states that Southeast Asia attracted a total of USD
8.9 billion in PE funding in 2018, with an additional USD 5.2 billion coming from venture capital, for a
total of USD 14.1 billion. Across the PE space, financial services (17.8 percent) and information
technology (15.7 percent) represented the largest individual sectors by value of PE investments in the
region.101 By contrast, the majority (73.6%) of VC deals by value flowed to the information technology
sector, followed by manufacturing (12.7%). Of the total USD 14.1 billion PE/VC investment activity in
the region, Indonesia attracted USD 1.5 billion in PE and USD 1.7 billion in VC for a total of USD 3.2
billion, with Malaysia attracting USD 465 million in PE and approximately USD 200 million in VC in the
same year.
While Zambia has attracted some PE/VC activity over the past five years, overall interest in the country
as a destination for PE/VC remains low. Though it would be unexpected for Zambia to attract a similar
level of PE/VC activity as South Africa or Kenya, the country also trails behind Mauritius terms of the
value of deal sizes. Zambia has a welcoming regulatory framework with low barriers to PE entry and
exit and which should establish it as an attractive PE destination. In addition, the country has begun to
diversify its economy away from being copper-dependent, with a pivot towards sectors such as
renewable energy, tourism and textiles. Despite the lack of PE/VC activity in Zambia over the 2013 -
2018 period, the total of USD 280 million that was raised exceeded the value of new listings on the
LusE. For comparison, it is worth noting that over the five-year period in question, the only new listing
on the LuSE was Madison Financial Services, which raised USD 10.2 million through its August 2014
initial public offering.102 This suggests that the Zambian private equity landscape, nascent as it may be,
has enjoyed origination activity far in excess of that of the LuSE over the same time period. The country’s
Securities Act (2016) makes provision for the establishment and regulation of venture capital funds,
though private equity is not explicitly mentioned. While the recognition and inclusion of some measure
of unlisted equity indicates that there may be future policy developments in this space, the current
provisions represent basic guidelines, rather than evidencing clear intent to develop policy to ensure
that unlisted equity, and specifically private equity, has a growing role in the capital markets.
However, barriers to the development of PE funding remain.103 During our in-country discussions, some
stakeholders felt that there is a lack of sufficient recognition in Zambia’s laws and regulations to
recognise the role of PE in the capital markets. Under current regulations, PE is bracketed together with
unlisted equity, with a limit of not more than 5 percent of private sector pension fund assets under
management to be held in unlisted equity.104 As a result of not being explicitly recognised as an asset
class in the capital markets, there is limited scope for PE to flow to businesses that need it most, i.e.
those that are not yet ready to list but are progressing in that direction. The regulation around unlisted
equity is framed negatively - that pension funds’ holding of this asset class should not exceed a 5 percent
100 https://lavca.org/press-release/private-equity-venture-capital-deal-making-reaches-record-high-latin-america/ 101 https://www.ey.com/Publication/vwLUAssets/ey-private-equity-briefing-southeast-asia-may-2019/$FILE/ey-
private-equity-briefing-southeast-asia-may-2019.pdf 102 http://www.daily-mail.co.zm/madison-ipo-hits-k62m/ 103 https://www.kenakocapital.co.za/wp-content/uploads/2019/03/SAVCA_A-journal-of-activity-and-trends-in-
Southern-African-PE-and-VC.pdf 104 International developmental organisation
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threshold. This is in contrast to other securities, which have minimum rather than maximum thresholds
prescribed to them, thus encouraging the development of these asset classes. Due to the risk averse
approach of the banks, there is little appetite for funding private investments. While deal structuring
capacity does not appear to be a specific constraint, from a ticket size viewpoint, the capital needs of
Zambian firms, which fall between USD 500,000 and USD 5 million, tend to be too small for large PE
funds to consider. In addition, PE investors are concerned about the liquidity of the LuSE, which would
normally serve as an exit route for PE investors once the company in question had grown to a sufficient
size to be listed. As a result, the development of a robust PE environment in Zambia remains limited by
the low liquidity of the broader capital market. Ideally, the development of the PE environment would
stimulate greater listing activity on the LuSE, creating a virtuous cycle of growth. At present, however,
this does not appear to be the case, with PE firms generally selling to other PE firms, without the
underlying firm being listed on the exchange. As a result, while desirable, it appears that firms that make
use of private equity are not graduating to listing on the exchange, which is a point worth discussing in
more detail during the in-country visit in 2020.
5.2.1.4.2. MERGERS AND ACQUISITIONS
Mergers and acquisitions (M&A) refer to the consolidation of two different companies, either by two
companies combining to form one, larger company (merger) or one company taking over another
(acquisition). M&A is a key component of corporate finance, and is therefore an aspect worth considering
when assessing the level of development of Zambia’s capital markets. M&A activity can benefit the
participant, by creating cost efficiencies or sparking a new period of growth.
Table 20: Total M&A deal volume and value by peer country, 2013 - 2018
Country Total volume of M&A
deals
Total value of M&A activity
(USD, billion)
Average annual
M&A as % of latest
GDP
Brazil 1,950 258.6 2.3%
Chile 323 101.6 6.1%
South Africa 770 75.6 3.6%
Malaysia 523 62.3 3.3%
Indonesia 440 56.2 0.9%
Argentina 253 32.1 0.8%
Mauritius 36 6.9 8.6%
Kenya 115 6.5 1.4%
Namibia 19 1.1 1.4%
Zambia 24 0.7 0.5%
Botswana 19 0.7 0.7%
Source: White & Case M&A statistics
As shown in the table above, the total volume and value of M&A deals across the benchmarked group
varies widely. As expected, the emerging peers reported the larger total deal value, with Brazil reporting
more than double the total deal value of Chile, with South Africa, Malaysia and Indonesia relatively close
together. Amongst the frontier group, Argentina reported the largest total deal value by some margin,
followed by Mauritius and Kenya. Zambia falls in the middle of Namibia and Botswana, and has the
smallest average annual M&A activity as a percentage of its latest GDP. Notably, however, M&A activity
in Zambian between 2013 and 2018 was nearly triple the size of PE/VC activity by value. From a
Zambian viewpoint, the largest sectors for M&A activity over the period in question were consumer
spending (36%), following by energy, mining and utilities (21%) and agriculture (20%). Overall, the
Zambian M&A space is still comparatively nascent, and avenues to further foster growth in this area
should be explored.
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5.2.2. MARKET AND REGULATORY ENVIRONMENT
5.2.2.1. OVERSIGHT BY A REGULATORY AUTHORITY
A foundational requirement for a successful capital market is oversight by a regulatory authority. As a
result, it is unsurprising that both Zambia and all peers have such authorities in place.105 Across both
frontier and emerging markets peers, there are differences in approach as far as regulatory oversight is
concerned. Argentina’s market is regulated by the Comision Nacional de Valores (CNV), which is the
nation’s security and exchange commission. Similarly, Kenya has a Capital Markets Authority (CMA),
while Mauritius has a Financial Services Commission (FSC). Namibia’s Namibia Stock Exchange (NSX)
is self-regulated, with the Namibia Financial Institutions Supervisory Authority (NAMFISA) regulating
non-banking financial institutions. Similarly, Botswana has a Stock Exchange Committee, but non-bank
financial institutions are regulated by the Non-Bank Financial Institutions Regulatory Authority. Amongst
the emerging peer group, Brazil’s securities markets are regulated by the Comissão de Valores
Mobiliários (CVM). Chile’s Superintendencia de Valores y Seguros (SVS) is the main regulator of the
country’s securities market, while the banks have their own regulator, which includes their provision of
custodian services. Ultimate responsibility for regulating Indonesia’s capital markets lies with Otoritas
Jasa Keuangan (OJK), while Malaysia’s markets are regulated by the Securities Commission (SC).
Finally, like in Namibia, South Africa’s Johannesburg Stock Exchange (JSE) regulates its own trading
activity through the JSE Market Regulation division, with market abuse reported to the Financial Sector
Conduct Authority (FSCA) for their consideration.106 The single-regulator examples resemble the current
Zambian structure, which concentrates regulatory oversight in the Securities and Exchange
Commission. It is worth noting that before the Securities Act (2016) was ratified, the LuSE was deemed
to be a self-regulating organisation (SRO). The new Act makes provision for the existence of SROs,
though in practice LuSE has yet to apply for this status in line with the requirements of the new Act. As
seen from the peer group above, there is some evidence of the exchange being self-regulated. In
addition, the practice of self-regulating exchanges is relatively uncommon in modern capital markets,
particularly given the aftermath of the global recession of the previous decade. Overall, there is
substantial variation in approach across more developed peers. As a result, having multiple regulatory
authorities is not necessarily a negative aspect. However, each regulatory authority must have a
sufficiently broad mandate to carry out its function without creating an overlap in responsibility across
regulators as well as the ability to coordinate their activities and work together through formal
mechanisms.
In addition to the differences in regulator structure across different peers, there are also differences in
their funding models, specifically in the level of support that they receive from the state. In Botswana,
the NBFIRA received a government grant equal to almost a quarter of its total revenue in 2018, which
represented the second largest source of revenue after a variety of supervisory levies. In Indonesia, the
OJK used to be funded by funds from the state, though these became a smaller portion of its income
over time, before being phased out in 2016, with OJK now financed from levies. In Kenya, the CMA
receives funds from a variety of sources, including deriving a minor but significant portion of its funding
indirectly from government via donor programmes. This follows from a previous direct injection from
government for the establishment of the CMA. In Malaysia, the SC does not explicitly report government
grants, but recognises them under “other income”, which makes up a small portion of its total revenue.
In Mauritius, by contrast, there appears to be no formal contribution to the FSC from the government,
which also appears to be the case in Namibia and South Africa. On the whole, results from selected
peers for this measure were mixed, with most of the larger peers being funded largely through levies,
though this may have come on the back of earlier investments by government. In addition, it is likely that
105 https://sseinitiative.org/data/ 106 https://www.jse.co.za/services/market-regulation
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their higher level of trading activity allows them to generate the required funding without government
assistance. Based on this, it seems possible that, as the market develops, the Zambian SEC may be
able to sustain its operations purely through trading fees and annual/new listing fees. In the more
immediate future, however, the regulator would likely benefit from committed governmental support to
supplement its funding needs during the early stages of market development. The aim behind this would
be to ensure that the required capacity is built and maintained at the SEC in order to allow it to focus on
its primary functions, namely market development and supervision. In effect, this would allow the
government to play a role in incubating the capital markets by assisting in ensuring that regulatory
capacity for oversight and supervision is built and maintained to keep pace with the capital market’s
growth.
5.2.2.2. PROTECTION OF MINORITY SHAREHOLDERS
Though majority shareholders broadly control the direction of a company, the protection of minority
shareholder rights are important in order to ensure that there is no abuse, oppression or cases behaviour
where the concerns of the minority are unfairly ignored, or that actions are taken that would
unreasonably disadvantage them.
Specific data on protections afforded to minority shareholders was difficult to obtain, particularly for
frontier markets. By way of proxy, Genesis and Bourse Consult used the World Bank’s 2019 Ease of
Doing Business reports to gauge Zambia’s effectiveness in this area relative to its peers based on a
scenario surrounding a hypothetical publicly listed company.107 The final score for each nation on its
protection of minority shareholders is obtained by considering the extent of the country’s conflict of
interest regulation as well as its level of shareholder governance.
Figure 13: World Bank Ease of Doing Business Index Protection of Minority Shareholders (Index, 2019)
Source: World Bank Notes: Higher scores mean that greater protection is afforded to minority investors, with scores
ranging from 0 to 100.
As shown in the figure above, Zambia scores 50 out of 100 on this measure, the lowest rating amongst
the group of benchmarked countries. This lower score is driven primarily by a low score (4.3 out of 10)
on the shareholder governance index, with several concerns identified in this area. These include a lack
of regulatory obligation for the inclusion of independent or non-executive directors on the company’s
board, as well as a lack of provision for shareholder approval before issuing new shares. Furthermore,
the company is not obligated by law to distribute profits within a fixed timeframe. In addition,
shareholders representing 5% of the company’s share capital are not allowed to put items on the
meeting agenda, nor is the company obligated to disclose employment or compensation figures for its
board members or managers. In addition, while a board member with a conflict of interest is required to
107 https://www.doingbusiness.org/
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disclose the fact before a transaction, there is no requirement for an external body to review the
transaction before it takes place. The company is also not compelled to disclose the transaction to the
public, nor to the regulator or stakeholders. Finally, the sale of 51% of the company’s assets does not
require shareholder approval.
The emerging group tends to score more highly on this measure, as would be expected. However,
Kenya and Mauritius, two other African frontier markets, outperform not only Zambia, but most of the
emerging group as well. Kenya’s Companies Act (2015) significantly enhanced minority shareholder
rights by formally stating the general and specific duties of directors and providing enforcement
mechanisms of those duties.108 In addition, the Act states explicitly what amounts to oppressive conduct
and the remedies available to shareholders that have been subject to such conduct. Similarly, the
Mauritius Companies Act (2001) clearly sets out the liability of shareholders, as well as prohibiting the
rights of any class of shares to be altered unless approved by a special resolution or by at least 75
percent of the holders of that class of shares, representing an important protection to shareholder
rights.109 Furthermore, the Act sets out the compulsory disclosures that the company must make to
shareholders, as well as allowing for court orders by shareholders that feel that any company action has
been or will be prejudicial to them. Shareholders may also enforce their right to have their shares
repurchased by the company at fair value if they disagree with major decisions taken by the majority,
which is an important protection, given that it gives the shareholders in question a clear way of
disassociating with the company if they disapprove of its course of action.
Malaysia’s Companies Act (2016) offers extensive protections to minority shareholders, such as the
right of a shareholder holding at least 10 percent of a company’s share capital to call a shareholder
meeting.110 In addition, the fees and benefits paid to company directors are subject to shareholder
approval. Further provisions may allow existing shareholders have a right of first refusal when new
shares are issued, as well as allowing minority shareholders to sell their shares on the same terms as
the majority.111 Similar to the above examples, South Africa’s Companies Act (2008) allows for
shareholders to bring legal action against oppressive conduct, as well as to sell their shares back to the
company at fair value if the company takes actions that they do not agree with.112 Finally, the Act allows
minority shareholders to bring a derivative action in order to address a wrong done to the company that
has not been sufficiently addressed by its directors. Zambia’s Companies Act of 2017 requires that a
company, when purchasing the shares of a given subset of another company’s shareholders, inform the
remaining shareholders of the same class of shares. The remaining shareholders shall then have 90
days to compel the purchasing company to acquire their shares on the same terms, similarly to the case
of Malaysia. Shareholders also have pre-emptive rights, and no action may be taken that affects their
rights unless there has been a special resolution by each interest group to allow such action. In addition,
shareholders have the right to bring legal action against the company in the event of any breach of duty
or illegal action on the part of the company.
While Zambia’s Companies Act provides some fundamental protections to minority shareholders, the
country’s relatively low score compared to peers on the World Bank’s measure indicates that there is
scope for improvement. As mentioned above, these relate to the extent to which company directors are
required to disclose conflicts of interest and their other employment, the approval of shareholders to
issue new shares or sell a majority of the company’s assets, the appointment of independent or non-
108 https://www.oraro.co.ke/wp-content/uploads/2018/06/Legal-Kenyan-issue-7.pdf 109 https://uk.practicallaw.thomsonreuters.com/7-638-
6356?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 110 https://themalaysianlawyer.com/2017/03/13/7-changes-to-shareholders-rights-and-remedies-under-the-
companies-act-2016/ 111 http://www.conventuslaw.com/report/malaysia-minority-protection-of-shareholders/ 112 https://www.findanattorney.co.za/content_minority-shareholders-rights#_ftn1
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executive members to the board, as well as disclosure on the compensation of the company’s
managers.
5.2.2.3. RESTRICTIONS ON FOREIGN OWNERSHIP
A lack of restrictions on foreign business ownership provides an incentive for foreign investors to
participate in a country’s private sector. This in turn, may lead to a greater number of multinational firms
making use of the country’s capital markets, increasing liquidity and providing a broader set of
investment opportunities for domestic investors. Genesis and Bourse Consult assessed the
benchmarked group’s stance towards foreign ownership via the MSCI Global Market Accessibility
Review 2019 report.113
Table 21: MSCI Global Market Accessibility ratings: openness to foreign ownership, 2019
Frontier Group
Country/ Criteria
Zambia Argentina Botswana Kenya Namibia Mauritius
Investor qualification requirement
++ ++ ++ ++ No data ++
Foreign Ownership
Limit ++ ++ ++ ++ No data ++
Foreign Room Level
++ ++ ++ ++ No data ++
Equal Rights to Foreign Investors
++ + ++ ++ No data ++
Emerging Group
Country/ Criteria
Zambia Brazil Chile Indonesia Malaysia South Africa
Investor qualification requirement
++ ++ ++ ++ ++ ++
Foreign Ownership
Limit ++ + ++ ++ + ++
Foreign Room Level
++ ++ ++ ++ ++ ++
Equal Rights to Foreign Investors
-/? -/? + + + ++
Source: MSCI
Notes: ++: no issues, +: no major issues, improvements possible, -/?: improvements needed, extent to be
113 https://www.msci.com/documents/1296102/1330218/MSCI_Global_Market_Accessibilty_Review_June_2019.pdf/511b8357-58a5-4992-3774-47f60baa1505
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assessed, Zambia rating based on Genesis analysis, green = good performance, yellow = mixed performance,
red = poor performance
Zambia is not included in the MSCI assessment. The country regulations have had a favourable
relationship with foreign ownership.114 However, fresh concerns exist around the perceived political
appetite for nationalisation, particularly in the mining sector, with recent steps taken to liquidate the
foreign majority company that owns the country’s largest copper mine, via the state’s minority share.115
In addition, the Zambian government is in the process of formulating a national land policy, which will
entail land being made available to investors for specific projects, while remaining under state
ownership. While land being made available for specific investment purposes is a positive development,
this may be tempered by a potential perception from investors that a lack of ownership of the land is
less than ideal. However, this must be counterbalanced by an understanding that each nation’s context
surrounding land ownership is unique, and therefore land policy does not lend itself to generic solutions.
In reality, concerns surrounding nationalisation are likely based more on perception than on reality.
However, the perception of nationalisation as a threat may still negatively impact the country’s
relationship with foreign investors, particularly in light of the country’s history of post-independence
nationalisation. While the perceived threat of nationalisation appears to be perceived rather than actual,
its existence may contribute to the idea that Zambia is not fully committed to the protection of foreign
investors’ rights.
As can be seen from Table 21 above, the benchmarked group (including Zambia) scores highly on the
investor qualification requirement. This means that within these markets there is no need for a qualified
foreign institutional investor license, implying that there is no discrimination between foreign investors
across different nationalities. The peer group generally places little/no restrictions on foreign ownership,
with Malaysia and Brazil being the exceptions. Brazil limits foreign investors to buying non-voting shares
in Brazilian banks, with media and transportation industries also subject to 49 percent foreign ownership.
Over time, Brazil has generally relaxed or abolished limits on foreign ownership, suggesting a move
towards no limits. Similarly, Malaysia limits foreign ownership in some industries, such as brokerage,
insurance and telecommunications to a range of 30 to 70 percent, but has made progress on this front,
leading to an upgrade in its rating compared to 2018. Based on the above, it appears that the peer group
largely allows for total foreign ownership, which is a crucial component of attracting foreign investment.
An area of some concern amongst the peer group occurs where equal rights for foreign investors are
concerned. This includes restricting the voting rights of shares available to foreign investors, equal
treatment in the case of corporate actions and availability of information in English. Brazil, in particular,
allows foreigners to purchase only non-voting shares in its banks, limiting their voting rights, and also
does not make always make company-related information available in English. The lack of company-
related information in English is also a concern in Chile and Indonesia. Malaysian investors holding
shares that exceed its foreign ownership limits do not receive the same voting rights as those of domestic
investors. From a Zambian viewpoint, the property rights of investors are protected by the Zambian
Development Agency (ZDA) Act, which states that property may only be expropriated by an Act of
Parliament. Zambia has also signed Investment Protection and Promotion Agreements with 11 other
countries, though only two of these have been ratified. While these agreements are a positive indicator
of Zambia’s attitude to investors, they do not feed into a broader, coherent investment policy. As a result,
despite the ZDA Act’s non-discrimination based on the origin of investment, the protection of foreign
investor rights remains a grey area, as evidenced by the perceived political appetite for nationalisation.
114 https://en.portal.santandertrade.com/establish-overseas/zambia/investing 115 https://www.dailymaverick.co.za/article/2019-06-27-is-zambia-defaulting-to-nationalisation/
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Ensuring that the rights of foreign investors are enshrined in law is therefore a key consideration for
Zambia to supplement its attitude to foreign investors.
5.2.2.4. EASE OF CAPITAL FLOWS
Ease of capital flows refers to the existence of restrictions on capital flowing into or out of a country’s
equity markets. Restrictions on the flow of capital, which makes it difficult for foreign businesses to
repatriate capital and income, are negative. Genesis and Bourse Consult assessed the benchmarked
group’s performance concerning capital and exchange controls via the MSCI Global Market Accessibility
Review 2019 report.
Table 22: MSCI Global Market Accessibility Ratings: capital flows restriction level, 2019
Frontier Group
Country/ Criteria
Zambia Argentina Botswana Kenya Namibia Mauritius
Capital Flows Restriction
Level ++ ++ ++ + No data ++
Emerging Group
Country/ Criteria
Zambia Brazil Chile Indonesia Malaysia South Africa
Capital Flows Restriction
Level ++ ++ + ++ ++ ++
Source: MSCI
Notes: ++: no issues, +: no major issues, improvements possible, -/?: improvements needed, extent to be
assessed, Zambia rating based on Genesis analysis, green = good performance, yellow = mixed performance,
red = poor performance
As shown in Table 22 above, the peer group performs well, with minimal restrictions on capital flows
across the group. Zambia performs well on this measure, with no exchange control restrictions of any
kind, allowing investors to repatriate any funds after paying the required taxes and duties.116
Namibia is a noticeable exception to this trend, with the Bank of Namibia maintaining an extensive
control regime.117 Namibia forms part of a Common Monetary Area (CMA) along with South Africa,
Lesotho and eSwatini, meaning that there are no exchange controls between Namibia and these
countries. However, the Bank of Namibia remains committed to using exchange controls to control the
demand for foreign currency. Chile requires a minimum investment period of one year, after which firms
are able to repatriate funds, though this repatriation process may take up to two weeks. While Argentina
scored well on the assessment, recent political developments have seen a sharp drop in the nation’s
foreign exchange reserves.118 As a result, the country has imposed capital controls in order to stem the
outflow: exporters must repatriate earnings within 15 days and businesses will require permission to
repatriate funds overseas or to purchase USD.
116 https://www.google.com/search?q=doing+business+in+Zambia+ENSafrica&rlz=1C1EJFC_enZA832ZA832&oq=doing+business+in+Zambia+ENSafrica&aqs=chrome..69i57j33.6999j0j9&sourceid=chrome&ie=UTF-8 117 https://www.bon.com.na/Bank/Exchange-Control/Frequently-Asked-Questions.aspx 118 https://www.ft.com/content/46856ab4-cd6b-11e9-b018-ca4456540ea6
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5.2.2.5. REGISTRATION PROCESSES FOR FOREIGN INVESTORS
Foreign investors may need to comply with certain registration requirements, as well as requirements
for setting up local accounts. Genesis and Bourse Consult assessed the benchmarked group’s
registration requirements for foreign investors via the MSCI Global Market Accessibility Review 2019
report, which assigns countries a score based on the type and number of documents required for asset
owners and managers to register as investors.
Table 23: MSCI Global Market Accessibility ratings: investor registration and account set up, 2019
Frontier Group
Country/ Criteria
Zambia Argentina Botswana Kenya Namibia Mauritius
Investor registration and account
set up
++ + ++ + No data ++
Emerging Group
Country/ Criteria
Zambia Brazil Chile Indonesia Malaysia South Africa
Investor registration and account
set up
++ -/? -/? ++ ++ ++
Source: MSCI
Notes: ++: no issues, +: no major issues, improvements possible, -/?: improvements needed, extent to be
assessed, Zambia rating based on Genesis analysis, green = good performance, yellow = mixed performance,
red = poor performance
The peer group generally scores well on this measure. Argentina’s requirement that all investor
documents are filled in Spanish is somewhat unwelcoming for global investors. In Kenya, the process
of registering may take up to a week, which is a minor inconvenience, but not a make or break issue.
By contrast, there are two examples amongst the emerging group of registration processes that are
hostile to foreign investors. Brazil requires foreign investors to appoint a tax and legal representative,
as well as to receive clearance from the CVM (the market regulator) before entering the market.
Similarly, Chile requires foreign investors to set up a tax ID as well as submitting other documents, such
as power of attorney, or a letter of good standing from the investor’s local authority. These added
requirements lead to account setup times of up to 15 days. There appear to be few barriers to restricting
on the LuSE. New investors are required to open a brokerage account, providing proof of both residence
and identity, as well as the relevant application form to open the account.119 As a result, Zambia
compares well to the peer group on this measure.
119 http://www.luse.co.zm/investing_for_beginners/
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5.2.2.6. CORPORATE AND INVESTOR TAX RATES
Most jurisdictions levy some form of tax on corporate and investor earnings. These taxes range across
corporate profits, which may be charged at a national level. In addition, corporates may be subject to a
branch profits tax, where they are taxed by a foreign country when repatriating profits back to their
headquarters. Corporates and investors may also be subject to withholding taxes on dividends, interest
and royalties received. Genesis and Bourse Consult benchmarked Zambia and its peers across the six
taxes mentioned. In each case, Zambia’s tax rate for each tax was ranked relative to both the frontier
and emerging group.
Table 24: Tax rates across benchmarked group, 2019
Frontier Group
Country/ Tax
Zambia Argentina Botswana Kenya Namibia Mauritius
Tax Rate Rank Tax Rate Tax Rate Tax Rate Tax Rate Tax Rate
National Corporate
Rate 35%* 6 30% 22% 30% 32% 15%
Branch 20-35% 3 0%/7%/30
%/35% 30% 37.5% 32% 15%
Capital Gains
0% 1 (tied) 5-15% 16.5% 5% 0% 0%
Dividends 15/%20%** 5 7%/35% 7.5% 0%/5%/10
% 10%/20% 0%
Interest 15%/20%** 5 15.05%/35
% 15%
5%/10%/15%/25%
0%/10% 0%/15%
Royalties 15%/20%** 4 (tied) 35% 15% 20% 10% 15%
Emerging Group
Country/ Tax
Zambia Brazil Chile Indonesia Malaysia South Africa
Tax Rate Rank Tax Rate Tax Rate Tax Rate Tax Rate Tax Rate
National Corporate
Rate 35%* 6 34% 25%/27% 25% 24% 28%
Branch 20-35% 4 34% 25%/27%/3
5% 20%/25% 24% 28%
Capital Gains
0% 1 (tied) 15%-22.5% 0-35% 5-30% 0% 0-18%
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Dividends 15%/20%** 3 (tied) 0 0%/35% 20% 0% 20%
Interest 15%/20%** 3 (tied) 15%/25% 4%/35% 20% 0%/15% 15%
Royalties 15%/20%** 3 (tied) 15/25% 0%/15%/30
% 20% 10% 15%
Source: Deloitte Corporate and Withholding Tax Rates, 2019120,121
Notes: In the case of variable tax rates for peers, a decision was made on the likely impact on the overall tax rate
in order to determine ranking, green = good performance, yellow = mixed performance, red = poor performance
* Sector dependent
** 15% for residents, 20% for non-residents
Zambia’s tax rates are generally moderately competitive compared to both the frontier and emerging
market peer groups with the country’s tax rates generally occupying the middle ranking spots across
both group comparisons. Its national corporate tax rate is the highest in the entire group, while its
dividend and interest taxes compare poorly to the emerging group, and reasonably to the frontier market
group. However, given that the emerging group generally represent more well-known and attractive
investment opportunities, they are increasingly able to justify higher taxes in these areas. Zambia’s
branch tax falls in the middle to lower-middle range across the two peer groups.
It is worth noting that Zambia’s tax rates are relatively rigid, with the tax rate clearly defined across all
taxes, except for the branch tax, which is lowered to 20 percent for the farming, telecommunications and
mining sectors, as well as for new companies. By contrast, some peers allow for considerable contrast
in their tax rates, based on a variety of criteria. Argentina’s dividend and branch taxes vary depending
on the fiscal year in which the profit was earned, with more recent profits attracting a lower rate.
Kenya allows for lower dividend, interest and royalty tax rates for special economic zone entities, while
Brazil’s interest and royalty tax is generally set at 15 percent, except for payments made to residents of
tax havens, which attract a tax of 25 percent. Chile makes use of a dual income tax system that allows
for taxation either on annual accrued profits, or when the profits are distributed. This system, however,
has faced criticism and will likely be phased out.122 Given that several peers, such as South Africa and
Indonesia, also maintain relatively rigid tax structures, variable tax rates are not necessarily required for
Zambia. However, given the country’s relatively high tax rates across the board, it should consider either
a reduction in tax rates (while maintaining rigidity) or incentivise specific investments by offering lower
rates under certain circumstances, such as for certain sectors or for new companies, or through the
development of double tax agreements (DTAs) with key FDI partners in order to ensure that foreign
firms operating in Zambia (and potentially listing on the LuSE) only pay one set of taxes.
120 https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-corporate-tax-rates.pdf 121 https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-withholding-tax-rates.pdf 122 https://www.taxathand.com/article/10268/Chile/2018/Tax-reform-bill-would-introduce-new-integrated-
corporate-tax-regime-
57
5.2.3. CUSTODY AND SETTLEMENT
5.2.3.1. CLEARING AND SETTLEMENT
Settlement and clearing refer to the actual exchange of ownership and money when trade in securities
takes place and the updating of the relevant accounts to reflect the change in ownership. Shorter capital
market settlement cycles are generally viewed positively, with shorter settlement cycles leading to a
reduction in counterparty risk.123 They indicate improved operational efficiency and reduced
counterparty risk. In addition, shorter settlement cycles allow for greater market liquidity by reducing
margin requirements, which allows for more trading to take place.
Table 25: Settlement basis across benchmarked group, 2019
Country Equity Settlement Debt Settlement
Zambia T+3 T+3
Argentina T+0, T+1 or T+2 T+0, T+1 or T+2
Botswana T+3 T+3
Kenya T+3 T+3
Namibia T+5 T+3
Mauritius T+3 T+3
Brazil T+2 T+0/T+1
Chile T+2 T+0/T+1
Indonesia T+2 T+2/T+3
Malaysia T+2 T+2
South Africa T+3 T+3
Source: RBC Investor and Treasury Services Market Profiles, 2019, green = good performance, yellow = mixed
performance, red = poor performance
Zambia compares reasonably favourably with the peer group on the above metrics, without being
outstanding. Settlement of debt and equity take place on a T+3 basis, which is the timeframe adopted
by most frontier peers, except Argentina, which settles on a T+0, T+1 or T+2 basis depending on what
is agreed between the participants. In addition, Namibia settles equity on a T+5 basis. Emerging market
peers, however, have generally shortened the settlement cycle to T+2, except for South Africa, where
settlement remains on a T+3 basis. This shortening follows a general global trend of shortening credit
cycles, with the associated benefits mentioned above. Globally, however, the cycle is approaching real-
time settlement, suggesting that both Zambia and the peer group have ground to make up in order to
meet international standards.
5.2.3.2. MARKET INFRASTRUCTURE
A key aspect of the proper functioning of capital markets is the infrastructure that underpins trade in the
market. Proper infrastructure mitigates operational risk, which is an important consideration in
123 https://www.sec.gov/news/statement/benefits-of-shortening-the-securities-settlement-cycle.html
58
encouraging investors to trade in the market.124 Features of an efficient market infrastructure include an
efficient custody system, with a sufficient number of custodian banks to ensure competition. In addition,
a foundational element of capital markets is a well-functioning registry or depository system that keeps
records of security ownership in non-physical form.
Table 26: MSCI Global Market Accessibility: ratings for market infrastructure, 2019
Frontier Group
Country/ Criteria
Zambia Argentina Botswana Kenya Namibia Mauritius
Custody ++ ++ ++ ++ No data ++
Registry/ Depository
-/? ++ + + No data ++
Emerging Group
Country/ Criteria
Zambia Brazil Chile Indonesia Malaysia South Africa
Custody ++ ++ ++ ++ ++ ++
Registry/ Depository
+ ++ ++ ++ ++ ++
Source: MSCI
Notes: ++: no issues, +: no major issues, improvements possible, -/?: improvements needed, extent to be
assessed, green = good performance, yellow = mixed performance, red = poor performance
The peer group all score well on the custody criterion, indicating the existence of custodians across all
markets, which is unsurprising given the foundational nature of this aspect of the markets. Data on the
number of custodian banks across all peer markets was not readily available. However, both Botswana
and Zambia make use of two custodian banks. In both countries, these are Standard Chartered Bank
and Stanbic Bank.125 It is likely that other markets, particularly in the emerging group, will have more
custodians. However, like Botswana, which received a “++, no issues” rating from the MSCI, Zambia’s
two custodians are two internationally known banks, suggesting that the available custody services are
appropriate for the market.
The peer group scores well on the Registry/Depository criteria, with minor issues in the cases of
Botswana and Kenya. In both cases, there is no central registry in the market, with some registration
handled by financial institutions (Kenya) or by the issuers of securities (Botswana). Zambia makes use
of two central securities depositories (CSD) for government bonds, overseen by the Bank of Zambia
and the Lusaka Securities Exchange Plc. The existence of multiple CSDs is not optimal for the market,
given the difficulties in creating a reliable and reconciled record of ownership between the two.
Integrating or linking the two depository systems in order to create one, centralised and reconciled
record of ownership is likely to address this concern.
124 https://www.msci.com/documents/1296102/1330218/MSCI_Global_Market_Accessibilty_Review_June_2019.pdf/511b8357-58a5-4992-3774-47f60baa1505 125 http://www.luse.co.zm/custodian_banks/, http://www.bse.co.bw/brokers_n_participants/custodians.php
59
The CSD approaches taken by the peer group may be further supplemented by insights from a report
by the International Monetary Fund, which explores the organisation of CSDs in developing countries. 126 The report acknowledged that two key issues faced by developing markets in organising their CSDs
relate to the number of CSDs that a market should have, as well as the ownership structure of the
CSD(s), i.e. whether it/they should be owned by, for example, a central bank or a private sector actor.
There is no officially recognised international best practice surrounding CSD organisation, suggesting
that each nation’s decisions in this regard should be guided by its own context, prioritising efficiency and
market safety as the key decision-making guidelines. However, there are several considerations that
the IMF recommends in reaching the answer. From an efficiency viewpoint, the key consideration is that
efficiency allows for a reduction in the costs passed to capital market users, which is influenced by the
number of CSDs that the market has. The concentration of depository services into a single CSD can
bring efficiencies in the market through economies of scale, as well as reduced funding and market
infrastructure needs. In addition, this approach allows market users to connect to one CSD, with one set
of standards and procedures, as well as creating a single gateway to the market for international banks
and investors. However, these benefits may be eroded in larger, more developed markets, which can
lead to multiple, competing or linked CSDs providing the greatest benefits. The key benefits of multiple
CSDs is that they allow different securities that have different needs (such as government bonds and
equities) to be handed in an optimal fashion. However, there are additional costs associated with
multiple CSDs, which includes a duplication of the CSDs’ central costs, such as IT systems and staff,
as well as leading to multiple regulatory oversight regimes. In addition, market participants need to
maintain two sets of interfaces to interact with two different systems, which may have different operating
procedures. In addition, the existence of multiple CSDs requires market participants to maintain
separate pools of liquidity for each CSD.
The question of CSD ownership comes to the fore where safety considerations are concerned, since
safe CSDs are critical for the development and safety of securities markets. The ownership of the CSD
therefore depends on where capacity is most concentrated. The CSD should promote public interests,
such as financial stability and market development, and consequently, this role should only be
undertaken by a private sector actor if it is capable of doing so, as well as supporting the implementation
of monetary policy, government debt management and supervision of financial institutions. If not, there
is scope for a role for public authorities, such as a central bank or other public authority, who may take
a stake in the CSD’s ownership, occupy seats on its board, or contribute in an advisory role. Linked to
these capacity issues is the consideration that the CSD operator should have sufficient financial and
human resources, in order to allow for sufficient investment in modern IT system and to cover any
operational expenditures, as well as credit and liquidity risks. In smaller markets, a private sector actor
operating may lead to financial constraints, unless a public authority provides financial support, though
this should only be undertaken in cases where the private sector is fundamentally capable of operating
a safe and efficient CSD. Furthermore, the operator of the CSD should ensure compliance with
international standards, such as addressing operational risks and minimising the risks of security
custody (in dematerialised form). This is a pertinent point, since the assets held in a CSD represent a
significant portion of national wealth. In addition, the CSD should manage credit and liquidity risks,
ensure safe cash settlement and use international communication standards, such as SWIFT. Finally,
the CSD operator should have a strong reputation for integrity in order to promote trust and confidence
amongst both market participants and authorities.
There are three key cornerstones that ultimately underpin and decision about CSD organisation. The
first of these is sound legal and regulatory framework, in order to ensure that the CSD and market
126 https://www.imf.org/en/Publications/WP/Issues/2018/03/20/Organizing-Central-Securities-Depositories-in-
Developing-Markets-7-Considerations-45687
60
participants do not face unintended credit, liquidity or operational costs. The legal framework therefore
need to prescribe CSD oversight and supervision, as well as the regulations that apply to it and the
requirements that it must fulfil. This legal framework, which should include the CSD’s rules and
procedures, should also be aligned with international standards. Secondly, the CSD requires effective
supervision and oversight. While the CSD has the responsibility of promoting public interests, it requires
regulatory oversight of its own to ensure that it adheres to requirements. This role is generally fulfilled
by central banks, though there is room for multiple regulators, provided that there is clear communication
amongst them and that their respective responsibilities are clearly outlined. Finally, the organisation of
the CSD should include coordination and cooperation from all stakeholders, including relevant public
sector authorities and private sector stakeholders such as banks, brokers and the exchange. These
stakeholders could be bought together through a forum of sorts, allowing decisions to be taken with the
input of all stakeholders.
A key point of development for Zambia that emerged during the in-country stakeholder discussions
centred on the lack of true delivery versus payment (DvP) settlement model in the capital markets. There
is, practically speaking, a large amount of manual work as far as settlement of securities is concerned,
meaning that delivery of securities does not occur at the same time as payment is made.127 The
settlement of bonds and equities involves the manual delivery of physical forms by custodian banks or
brokers to both the LuSE/BoZ CSDs.128 Both parties to the transaction are required to physically sign
the instruction documents detailing the transaction, before returning these to their custodian banks for
manual delivery to the relevant CSD. This manual work leads to counterparty risk, i.e. the failure of one
of the parties to the transaction to meet their obligation. This is a serious gap in Zambia’s capital markets
infrastructure and is not conducive to bolstering the confidence of capital markets participants. In
addition, the presence of two central securities depositories (CSDs) is seen as a major obstacle to
creating a transparent, reconciled record of bond ownership.129 The above is in contrast to most markets,
where settlement is electronic and there is one CSD, thus creating a clear record of ownership and
avoiding counterparty risk.
5.2.4. DEALING LANDSCAPE
5.2.4.1. MARKET LIQUIDITY
Market liquidity refers broadly to the ease with which securities can be bought and sold, i.e. the existence
of sufficient supply and demand in the market. Higher market liquidity allows for the ability to buy and
sell more quickly, mitigating risk, which is an attractive feature from an investor perspective. A common
proxy for market liquidity is the stock market’s turnover ratio, which can be measured by the total value
of shares traded over a given period divided by the average market capitalisation of shares over the
same period. A higher ratio implies more trading activity relative to the size of the exchange, i.e. a more
liquid market.
127 Market oversight authority and association stakeholder 128 International bank operating in Zambia 129 International bank operating in Zambia
61
Figure 14: Value of shares traded/market capitalisation of domestic shares (%,2018)
Source: World Federation of Exchanges Annual Statistics Guide (2018), Zambia Securities and Exchange
Commission (2018), Capital Markets Authority Statistical Bulletin (Q4, 2018).
As can be seen in Figure 14 above, there is a marked difference in average turnover ratios for 2018
across the benchmarked group. Zambia records similar ratios to both Botswana and Mauritius, and a
higher value than Namibia, all of which are frontier markets. At the same time, amongst the frontier
group, Argentina has noticeably higher liquidity, with a ratio of 9.5. However, this group represents the
low end amongst the peers. While there is considerable variation across the emerging market group,
they all possess far higher turnover ratios than Zambia, with Brazil a particular outlier. Given that the
value of the ratio is influenced by more trading activity, surpassing its frontier market peers in liquidity
will require greater incentives for investors to trade in the market. Across a sample of 73 exchanges
including frontier, emerging and developed markets, the average share turnover ratio was 37.6 percent
in 2018.130 While there does not appear to be a formal global benchmark for share turnover, the global
average suggests that both Zambia and most of the peer group are relatively illiquid. In practice, an
increase in turnover closer to the emerging market group’s average would represent a substantial
increase in liquidity for the Zambian market.
The low level of liquidity identified in Zambia’s capital markets identified above was confirmed by our in-
country stakeholder discussions and spans across a variety of asset classes, including listed equity and
corporate bonds.131 There have been few new listings on the LuSE in recent years, and trading activity
is generally subdued. Similarly, few listed firms have issued any corporate bonds, and there is little
activity in these bonds.
The illiquid market for corporate bonds is likely driven in part by the lack of liquidity in the secondary
market for government bonds. Corporate bonds derive their yields from the yields on government bonds,
plus a risk premium to reflect the inherently greater risk associated with corporate debt when compared
to government debt. As a result, greater liquidity in the corporate market is dependent on greater price
discovery. To achieve this, a sufficient level of liquidity in the secondary government bond market is
required in order to facilitate the development of a well-defined yield curve for government bonds. This
is likely to lead to greater price discovery in the market for corporate bonds, leading to the establishment
of a similar yield curve for corporate bonds, and hence facilitating greater activity in the market for this
130 World Federation of Exchanges, 2018 Annual Statistics Guide 131 International development organisation
62
asset class.
As shown in the discussion above, the Zambian secondary market is generally characterised by low
liquidity, a concern which spans across the markets for both equities and bonds (government and
corporate). While efforts to generate greater trading activity in currently listed securities is an important
facet of developing the country’s capital markets, our stakeholder discussions revealed additional
concerns around the development of the primary market. These two goals would likely need to occur in
conjunction with one another in order to drive development across the market. On the one hand, liquidity
would be improved by stimulating greater trading activity in the currently listed securities. At the same
time, placing some emphasis on attracting more primary issuers to the market would contribute to a
larger total free float. In addition, the development of new products (as discussed earlier) for listing on
the exchange would contribute to a broader set of market-ready opportunities for investors to invest in,
which may indirectly contribute to a greater level of secondary market trading activity.
5.2.4.2. PENSION FUND LANDSCAPE
In light of Zambia’s challenges concerning market liquidity, it is worth considering the pension fund
landscape across the peer group, as the theoretical potential for pension funds to contribute to capital
market liquidity and depth has been argued extensively.132 Pension fund contributions, distributions and
assets vary substantially across nations, which affects the unique structure of each nation’s pension
sector. However, we proceeded to assess the relative size of pension fund assets to GDP for the
benchmarked group.
Table 27: Pension fund assets as a % of GDP*
Country Pension fund assets as a
% of GDP
Insurance company assets
as a % of GDP
Stock market
capitalisation as a % of
GDP
South Africa 87.5% 65.8% 352.8%
Namibia 86.7% 34.1% 22%
Chile 72.0% 23.3% 106.4%
Malaysia 59.9% 20.3% 144.8%
Botswana 46.0% 14.5% 23.8%
Kenya 13.1% 6.6% 23.6%
Brazil 12.8% 14.7% 46.5%
Mauritius 4.6% 25.5% 73.4%
132 http://documents.worldbank.org/curated/en/217121499259303193/Pension-funds-capital-markets-and-the-
power-of-diversification
63
Zambia 3.5% 1.3% 12%
Indonesia 1.9% 4.4% 51.3%
Argentina No data 4.8% 17.1%
Source: World Bank Open Data
* Data for some countries (including Zambia) was not available up to 2018. In all cases, the most recent figure is
reported
As can be seen in Table 27 above, pension fund assets as a proportion of GDP vary significantly over
the benchmarked group. Though, on average, the figure is higher for emerging markets, this is not
always the case, with Indonesia having the (relatively) smallest pension fund base, whereas Namibia,
one of the smallest nations in the sample by GDP, has one of the largest relative asset bases. Overall,
nations that are comparatively wealthier per capita generally have access to a larger pool of pension
fund assets as a result of higher rates of saving from the population. As such, this suggests room for
Zambia to encourage higher rates of saving in order to grow the pension fund pool as the economy
develops.
Overall, the size of the Zambian pension fund pool remains relatively small, since it represents a small
portion of a relatively small economy, as evidenced by the table above. However, the pension sector
could still play a substantial role in the development of the Zambian capital markets if these assets are
utilised effectively. In particular, our in-country stakeholder discussions revealed the potential
significance of NAPSA, the largest institutional investor in the market, in developing the Zambian capital
markets, given its size relative to the rest of the sector. Our in-country discussions brought to light that
approximately half of NAPSA’s portfolio is currently held in government bonds. By contrast, private
sector pension funds, which fall under the guidelines of the Pensions and Insurance Authority (PIA) have
portfolios that lean more towards listed equity. This creates potential room to explore greater alignment
between NAPSA’s investment approach and those of private sector funds, which could lead to a greater
flow of funds into the capital markets, thus boosting liquidity.
Based on the above analysis and the respective countries’ market capitalisations to GDP, there appears
to be some correlation between larger market capitalisation to GDP ratios and larger pension fund to
GDP ratios, particularly in the cases of South Africa, Chile and Malaysia. However, this does not seem
to be a hard and fast rule, as in the cases of Indonesia, Mauritius and Brazil.
As shown in the final column of the table above, there is substantial variation in the size of insurance
company assets relative to GDP. As with the pensions fund assets measure, there is a general trend for
more developed markets to have a larger share of insurance company assets (relative to GDP) than
smaller peers. As with pension funds, the pool of Zambian insurance assets is the smallest in the group
relative to its GDP. However, development of this sector could still have an impact on the development
of Zambia’s capital markets, since a greater pool of insurance company assets could provide a greater
flow of funds into the capital markets.
5.2.4.3. SHORT SELLING AND SECURITIES LENDING
Short selling refers to a process whereby an investor sells a security with the expectation that its value
will decline in the future. In practice, the investor usually does not own the security. Instead, the security
is borrowed, sold on the market, and repurchased at a lower price once the price has declined in order
to be returned to its original owner. This allows for a benefit to the investor in the form of the profit made
between the (high) selling price and (low) repurchase price, while also allowing for higher market activity.
64
Related to short selling is the idea of securities lending, in which the owner of a security temporarily
transfers ownership to a borrower in return for agreed upon fees. Securities lending plays a role in short
selling as naked short selling (selling a security without having ownership) is not allowed in certain
jurisdictions, such as South Africa. Securities lending therefore allows short sellers to temporarily own
the security that they intend to short in return for compensating the original owner and offering sufficient
collateral to cover the risk of the transaction. At the same time, securities lending acts as a useful
generator of liquidity in the market, since a security that may originally have been held for the long term
can effectively be traded on the market.133 In effect, securities lending allows two market participants to
exchange liquidity under a transaction covered by collateral.
Table 28: Allowance for short selling and securities lending across benchmarked group
Country Short selling allowed? Securities lending allowed?
Zambia Yes No
Argentina Yes, by brokers only Yes ,by brokers only
Botswana Yes, by brokers only Yes, but not formalised
Kenya No Yes
Namibia No Yes, but not formalised
Mauritius No Yes, to cover delivery failures
Brazil Yes Yes
Chile Yes Yes
Indonesia Yes Yes
Malaysia Yes Yes
South Africa Yes Yes
Source: RBC Investor and Treasury Services Market Profiles, 2019, green = good performance, yellow = mixed
performance, red = poor performance
Short selling is permitted in Zambia, as evidenced in the Securities Act of 2016, though this is subject
to certain conditions. The short-seller must have a right to vest the securities in the issuer, and therefore
must own the security, as opposed to engaging in “naked” short selling. In addition, the seller must have
deposited collateral to 100 percent of the value of the security, and either own another security that can
be converted into the security being sold, or must have entered into a fully secured borrowing transaction
that would render them able to deliver the security as promised.
Short selling is either not permitted or restricted to brokers in other frontier markets, with the exception
of Kenya, which passed a law allowing the practice in 2018.134 Emerging markets generally allow short
selling, but certain limitations remain. South Africa does not allow for naked short selling, requiring
evidence of security ownership, while Brazil allows short selling only for securities included in the Special
Settlement and Custody System (SELIC) or B3 securities lending programmes. Similarly, Chile only
allows short selling of “List A” shares on its exchange. Indonesia has comprehensive regulations
surrounding short selling, including that the company in question has at least 600 shareholders, along
133 https://www.kasbank.com/en/about-us/news/2016/three-advantages-of-securities-lending/ 134 https://www.businessdailyafrica.com/markets/capital/NSE-upgrade-to-enable-Kenyans-borrow/4259442-
4267504-irqsifz/index.html
65
with required daily minimum transaction values depending on whether a share has been listed for more
or less than six months.
Across the group, it is slightly more common for stock lending to be permitted than short selling. Stock
lending is not permitted in Zambia, and like short selling, is only permitted by brokers in Argentina.
Botswana allows for bilateral stock lending agreements, but without a formalised central securities
lending facility, while Namibia also allows the practice, though it is uncommon. Amongst the frontier
group, Kenya is the only peer that, like Zambia, does not permit short selling at all.
While the practice of securities lending is commonly allowed across the emerging peer group, it is
controlled to some extent. Brazil makes use of a securities lending programme, with the BM &
FBOVESPA Central Securities Depository acting as the counterparty to the transaction in order to
guarantee operations. Only shares issued by listed companies and fixed income securities eligible for
trading on BOVESPA (a benchmark index of Brazil’s most traded shares). Malaysia takes a similar
approach, with Bursa Malaysia Clearing (the exchange’s clearing house) acting as a Central Lending
Agency (CLA), i.e. an intermediary between lenders and borrowers. Lending of stocks to the CLA is
permitted for anyone, but only approved local stockbrokers are allowed to borrow. Chile’s restrictions
on securities lending mirrors those of the short selling restrictions mentioned above. Indonesia has a
stock lending and borrowing programme that regulates the shares that can be borrowed, with a
maximum tenor of 90 days. South Africa has an active securities lending market, with transactions
initiated through a South Africa institution requiring ZAR-denominated collateral, though this is not a
condition in cases where both the lender and borrower are non-residents and the transaction is initiated
offshore.
Both short selling and securities lending are a feature of reasonably developed markets, as indicated by
these practice’s presence across all emerging market peers. While these practices can act as useful
drivers of liquidity by encouraging trade in unused securities, more developed markets retain some level
of control over them. As seen from the emerging group peers above, there may be restrictions on
qualifying securities (likely those that most well-known and liquid), limits on the tenor of the transaction.
In addition, transactions may be controlled by the oversight of an intermediary body (such as in Brazil
and Malaysia), or restrictions on the participants permitted to enter into these practices.
5.3. CAPITAL MARKET STRATEGIES IN PEER MARKETS
Explicit capital market development plans are not common amongst the peer group. Amongst the group,
Botswana, Kenya and Malaysia are the only markets that appear to have a comprehensive capital
market development plan. As a result, the majority of developments taking place across the peer group
are not formally outlined in any strategy or aligned to a timeline, but still provide useful indicators for
areas of potential development for Zambia. Discussions for those peers that have dedicated strategic
plans or have made substantial developmental changes to their capital markets follow.
5.3.1. BOTSWANA
The development of Botswana’s capital markets is being driven by the BSE’s Strategic Plan 2017 -
2021. Botswana has attempted to increase stock market awareness through the offering of Open Days
in order to simultaneously promote stock market literacy from the public and convince prospective
issuers of the value of listing on the market. In addition, since 2016, the country has held an annual
Listings and Investment Conference with the aim to drive economic growth by providing a gateway for
raising capital. During these conferences, the focus lies on educating potential issuers on the importance
of access to the stock exchange over the short, medium and long term. From an infrastructure viewpoint,
66
Botswana is in the process of implementing a new CSD system that will allow for borrowing and lending
of securities, primary market processing, online investor access and e-voting for shareholders. The BSE
also reviewed its requirements for both equity and debt listings in order to align them to international
best practice, including the adoption of the King 3 Code of Corporate Governance for new equity issuers.
The updated listing requirements were communicated to market participants at a Listings Requirements
Refresher Workshop in 2018, which allowed for a discussion around the integrated reporting and ESG
disclosures required by the King Code. Botswana’s efforts to develop its capital markets have borne fruit
as the BSE was designated as a “Recognised Stock Exchange” by the United Kingdom’s Her Majesty’s
Revenue and Customs (HMRC). Such a designation from HMRC provides UK investors with tax
incentives when investing in securities on a recognised exchange, in accordance with the nation’s tax
legislation. Botswana is one of only three African (Mauritius and South Africa are the others) countries
to receive this designation. The BSE’s approach in the coming years appear to be geared towards
attracting greater trading activity through a thorough education campaign on the benefits of exchange
listing on both the supply and demand side, coupled with a commitment to international best practice
where corporate governance regulation is concerned.
5.3.2. KENYA
While Kenya’s Capital Market Authority (CMA) has a Capital Markets Strategic Plan, spanning 2018 -
2023 (discussed below), the country’s Nairobi Stock Exchange (NSE) is equally proactive and has
implemented a variety of initiatives in recent years.
In order to spread greater awareness of exchange activity and to disseminate information to the public
more effectively, the exchange launched an NSE Media Studio, which delivers radio and TV
programmes to the public. In addition, these programmes deliver market data and profiles of listed
companies in order to spread public awareness and enhance public visibility of the role that the
exchange is playing. This was further supplemented by the launch of the NSE App to further enhance
access to the market. At a regional level, the NSE, in its capacity as a founding member of the African
Securities Exchange Association (ASEA) signed a five-year Memorandum of Understanding (MoU) with
the African Development Bank (AfDB) in order to amplify the impact of their strategically aligned
objectives to fund Africa’s economic growth. In order to encourage greater listing activity from Kenyan
businesses, the exchange has launched an incubation and acceleration programme aimed at easing
the journey to listing for these businesses.
The NSE has also driven innovations in the product development space. In 2017, the exchange, in
partnership with National Treasury, launched M-Akiba, a retail bond aimed at raising funds for
government infrastructure projects, and which investors can access and trade entirely on their mobile
phones. In addition, the exchange, in association and Kenya Bankers Association, hosted a green
finance session with key market players in order to discuss the development of the green bond asset
class within the country. These stakeholder discussions ultimately led to the launch of Kenya’s Green
Bond Programme, which the exchange undertook in partnership with the Central Bank, CMA and
National Treasury, with the aim to develop the country’s green bond market and encourage the listing
of green bonds on the NSE. The exchange also launched its ETF market and listed its first ETF on this
new market, in 2017. The NSE intends to continue supporting the development of the ETF market
through its dedicated business development and public awareness campaign, in order to encourage
investor participation and increase the number of issuers. In addition, the exchange boosted global
integration by signing a MoU with both the Qatar Stock Exchange and Nasdaq Dubai to enhance
cooperating in knowledge sharing and capital markets development, including in infrastructure, products
and services. The NSE also hosted its first National Real Estate Investment Trusts Conference in
association with the REITs Association of Kenya (RAK) with an aim to spur activity in the REITs Market.
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At a regulator level, Kenya’s CMA is currently guided by its Capital Markets Strategic Plan, spanning
2018 - 2023. The plan is underpinned by six strategic objectives, which centre on the market’s regulatory
framework, the development of capital market products and services, sound infrastructure, use of
technology to drive efficiency, the CMA’s general institutional efficiency and effectiveness and
enhancing strategic influence. The first four of these are of the most interest and offer the most tangible
examples of Kenya’s capital market development goals.
A key driver of Kenya’s developing regulatory environment lies in educating investors on capital markets
in order to reduce customer vulnerability. At the same time, the CMA is looking to fully enforce corporate
governance and stewardship codes to protect investors from unethical behaviour, thereby boosting
confidence in the market. In addition, the CMA intends to establish a spot commodity unit in order to
regulate the spot commodity market. More broadly, Kenya’s strategic direction is currently driven by its
Big 4 Agenda, which centres on the sectors of agriculture, manufacturing, housing and healthcare. To
this end, the CMA has become aware of how capital markets may influence the development of these
key sectors and regulation of the spot commodity markets is one of the activities to ensure alignment
between the CMA’s development goals and the broader direction of the country.
The second strategic objective of the CMA revolves around the development, diversification and uptake
of capital market products. Similar to Botswana, this involves promotional campaigns for investor
education, targeting the youth and those with surplus funds, as well as potential issuers. The CMA’s aim
is that this education programme will be driven by market intermediaries, and as such intends to build
capacity within these intermediaries so that they, in turn, can engage investors and issuers. At an
international level, the CMA intends to engage international investors in order to understand their needs
as far as investment in Kenya is concerned as well as investigating the appetite for introducing ESG
principles within the capital markets. The number of funds with a core focus on ESG indicators has
increased globally in recent years, with the value of assets under management in such growing from
USD 280 billion in 2013 to USD 354 billion in 2017, an annual growth rate of 8 percent. While the CMA
already requires companies to disclose governance information, the renewed focus on ESG principles
will broaden these disclosures to include social and environmental activities. In order to ensure stronger
uptake of products, the CMA will review regulations around investment products, such as, for example,
a regulation limiting collective investment schemes to investing a maximum of 80 percent into equities,
thus restricting the development of equity-only funds. At the same time, the CMA wishes to engage the
country’s sizeable private equity market to identify firms that are ready to graduate to public listing and
to engage them directly.
The CMA has taken steps to develop electronic platforms for the trading of Treasury bills and
government bonds, allowing for greater price discovery as trades are reported and published. This, in
turn, would likely lead to a more established yield curve, which represents a benchmark for the returns
on other securities. In addition, the CMA has since finalised rules surrounding securities lending and
borrowing.
The CMA has recognised that there is considerable scope for technological disruption in capital markets
as a result of fintech, which would influence the market’s core structure, through, for example,
automating a number of currently manual post-trade functions. The CMA is, therefore, constantly
conducting an assessment of potential disruption caused by fintech in the capital markets, as well as
how regulation and policy can adapt to ensure that robust oversight of these new technologies.
However, the CMA recognises that Kenya’s traditional market structure still requires development and
that the incorporation of fintech is not a high priority in the short term. More broadly, the CMA will look
to assess the level of technology use within the capital markets, which will culminate in the development
of an Information, Communication and Technology (ICT) strategic plan.
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5.3.3. MAURITIUS
Despite the apparent lack of a formal capital markets development plan, the Stock Exchange of
Mauritius (SEM) has recently implemented initiatives aimed at strengthening its competitiveness.
Similar to Botswana, the SEM has begun to hose open-day events in order to ensure greater capital
market awareness. In addition, the SEM has begun to develop its green-bond ecosystem by defining
the key attributes of a green bond and how to verify whether a given instrument meets these attributes.
Furthermore, the exchange has extended its trading hours by a further hour in order to better cater to
foreign investors from different time zones. The SEM has also aimed to take advantage of observed
demand for dual-listing on its exchange from foreign companies by creating a fast-track listing route.
This fast-track route allows for companies that are primarily listed on a foreign exchange to submit the
same documents that they had originally submitted to their primary exchange, to the SEM. The SEM is
also looking to establish links with international CSDs. The aim of these links would be to allow
international issuers to list products on the SEM, while allowing investors in these securities to hold
these securities in international CSDs.
5.3.4. BRAZIL
Since 2018, Brazil’s B3 exchange and ANBIMA (the Brazilian Financial and Capital Markets Association)
have partnered together to develop the country’s capital markets, based on five key objectives:
development of new sources of long-term financing, expanding the number of issuers, expanding the
base of investors with market access, increased liquidity and encouragement of high savings. While
some of the intended actions refer to specific objectives, many of them are cross-cutting. A key objective
revolves around simplifying the processes surrounding public listing in order to minimise costs for new
issuers, such as removing the need for audited statements for the previous year, as well as reducing
information disclosure requirements for new issuers. This objective also entails reducing the
bureaucracy surrounding foreign investors and their investments in Brazil, as well as a reduction in red
tape for investors in general. In addition, in order to boost liquidity, limited companies will be allowed to
issue debentures (provided they meet certain disclosure and transparency requirements) to investors
who are comfortable with carrying a higher level of risk. Furthermore, a key aim in stimulating the market
lies in simplifying registration requirements for SMEs in order to increase the number of issuers in the
market.135 B3 and ANBIMA are also looking to improve access to information by ensuring that
information on capital markets regulation is available in English, easily accessible and clear. Finally,
Brazil is prioritising broad education of capital market participants in order to ensure a thorough
understanding of the benefits of public listing amongst issuers, as well as increasing the pool of savings.
5.3.5. MALAYSIA
Malaysia’s exchange (Bursa Malaysia) continues to aim for the development of the country’s capital
markets under four key pillars, which centre on increasing available products, diversifying the investor
base, providing an enabling ecosystem and regional expansion.
Under the first pillar, the exchange continues to market the benefits of listing, meeting with identified
potential companies in order to ensure a greater understanding of the benefits of listing. In addition, the
exchange conducted a sectoral index reclassification towards the end of 2018 to ensure that these
indices are comparable to those of global equity markets. This is aimed at ensuring that investors, asset
managers and researchers can make fair comparisons between Malaysia and other markets.
135 https://www.anbima.com.br/data/files/0A/D6/9F/C5/D9A956105B26D856A9A80AC2/Relatorio-Agenda-
Mercado-de-Capitais-ANBIMA-B3-Digital.pdf
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Diversification of the investor base largely revolves around investor education, with the exchange using
its Invest Malaysia programme to engage with institutional investors locally, as well as across ASEAN.
In addition, the exchange has continued to make use of social media and digital marketing to target
retail investors, as well as making use of the Bursa Marketplace online platform to provide local retail
investors with all the information they require to learn about the exchange and how to invest.
The exchange implemented an intraday short selling (IDSS) programme in 2018, in an attempt to boost
market liquidity and improve investor flexibility, as well as bringing the exchange into closer alignment
with developed markets. In addition, a new Volume Based Incentive Programme (VBIP) provides
rebates on clearing fees for eligible investors for investors trading above minimum thresholds. After the
introduction of the VBIP in early 2018, the eligible investors average daily trading values increased by
RM 40 million (USD 9.56 million) per day. The exchange has also aimed to improve liquidity by allowing
for a variety of new exchange-traded funds (ETFs) to be listed on the market, as well as allowing the
listing of inverse and leveraged ETFs.
From a regional expansion viewpoint, Bursa Malaysia continues to work with other ASEAN exchanges
to expand its own exposure, with the aim of stimulating greater market liquidity as a result of greater
awareness and trading activity amongst foreign ASEAN investors. This has included events for listed
issuers to market themselves to ASEAN investors, as well as providing incentives for domestic brokers
to attract more ASEAN investors to the Malaysian market.
From a regulator point of view, Malaysia’s capital market development goals are driven by its second
Capital Market Masterplan (CMP2), launched in 2011 with a ten-year timeframe. CMP2 focuses on two
key pillars, namely Growth and Governance in order to drive development of the country’s capital
markets. The Growth pillar identifies the need to promote greater capital formation, expand
intermediation efficiency and scope to give rise to a broader set of investment strategies, deepen market
liquidity, prioritising global expansion and building capacity and a strong information infrastructure in
order to promote efficiency. Under the Governance pillar, CMP2 emphasis enhanced product regulation
to manage risks, ensuring a robust regulatory framework to adapt to a changing market landscape,
building of regulatory capacity to ensure effective supervision, stronger corporate governance and
promoting active participation of shareholders in shaping corporate behaviour.
Malaysia’s exchange (Bursa Malaysia) drives the development of the country’s capital markets, with its
current focus centring on increasing available products, diversifying the investor base, providing an
enabling ecosystem and regional expansion.
Under the first pillar, the exchange continues to market the benefits of listing, meeting with identified
potential companies in order to ensure a greater understanding of the benefits of listing. In addition, the
exchange conducted a sectoral index reclassification towards the end of 2018 to ensure that these
indices are comparable to those of global equity markets. This is aimed at ensuring that investors, asset
managers and researchers can make fair comparisons between Malaysia and other markets.
Diversification of the investor base largely revolves around investor education, with the exchange using
its Invest Malaysia programme to engage with institutional investors locally, as well as across ASEAN.
In addition, the exchange has continued to make use of social media and digital marketing to target
retail investors, as well as making use of the Bursa Marketplace online platform to provide local retail
investors with all the information they require to learn about the exchange and how to invest.
The exchange implemented an intraday short selling (IDSS) programme in 2018, in an attempt to boost
market liquidity and improve investor flexibility, as well as bringing the exchange into closer alignment
with developed markets. In addition, a new Volume Based Incentive Programme (VBIP) provides
70
rebates on clearing fees for eligible investors for investors trading above minimum thresholds. After the
introduction of the VBIP in early 2018, the eligible investors average daily trading values increased by
RM 40 million (USD 9.56 million) per day. The exchange has also aimed to improve liquidity by allowing
for a variety of new exchange-traded funds (ETFs) to be listed on the market, as well as allowing the
listing of inverse and leveraged ETFs.
From a regional expansion viewpoint, Bursa Malaysia continues to work with other ASEAN exchanges
to expand its own exposure, with the aim of stimulating greater market liquidity as a result of greater
awareness and trading activity amongst foreign ASEAN investors. This has included events for listed
issuers to market themselves to ASEAN investors, as well as providing incentives for domestic brokers
to attract more ASEAN investors to the Malaysian market.
5.4. KEY CAPITAL MARKET INNOVATIONS AND TRENDS
Capital markets are a well-ingrained part of the modern financial system, and one of the key vehicles in
bringing the supply of and demand for excess funds together, to the benefit of both investors and
borrowers. However, the industry is poised to undergo significant disruption in the coming years, driven
by changes in technology and greater digitisation. While these disruptions have the potential to alter the
shape of the global capital markets landscape, they will require careful management and adaptable
regulation in order to ensure that they are not abused or destabilising.
5.4.1. ARTIFICIAL INTELLIGENCE
Since the global financial crisis, a key development in capital market has been a greater focus on data
as a result of changes to the regulatory landscape that require market participants to generate and
analyse large amounts of data related to trading, risk and financial activity.136 Continued growth in the
amount of data available has the potential to lead to significant changes in the industry in the coming
years, once participants develop the analytical tools to effectively make use of it.
In particular, increases in the amount of data gathered has led to a variety of use cases for Artificial
Intelligence (AI), or the simulation of human intelligence processes by machines.137 A transformative
aspect of AI lies in its ability to “learn”, i.e. the ability to make use of previous real world experiences to
make future decisions faster and more accurately. In effect, the more data AI technologies process, the
better they are able to deal with a wide variety of situations. This may be especially useful in the
automation of low-value tasks, such as document analysis and pre-checks related to investor
registration, automated creation of investor statements, and AI voice assistants that are able to handle
relatively routine investor questions on a 24/7 basis. Use of AI to improve these tasks improves back
office efficiency and improves the investor experience.
The ability of AI to process large amounts of data quickly and efficiently may also contribute to analysis
of firms that are growing, but at the pre-listing stage of their development.138 For example, AI could
analyse data surrounding the listings and conditions of established firms and identify trends that give an
idea of the unlisted firm’s future direction, improving the decision-making process of future investors.
Further development of AI’s role in capital markets will have benefits for investors, participants and
regulators. The ability to process large amounts of data is likely to assist in the development of products
136 https://www.afme.eu/Portals/0/globalassets/downloads/publications/afme-pwc-tech-and-innovation-in-europes-
capital-markets.pdf 137 https://www.fintech2019.eu/wp-content/uploads/2019/02/afme-tao-ai-adoption-in-capital-markets-18-apr-
2018.pdf 138 http://www3.weforum.org/docs/WEF_New_Physics_of_Financial_Services.pdf
71
that more accurately match the needs of clients.139 Analysing client behaviour allows for greater
customisation of the products on offer to the client, more efficiently and cost-effectively than would be
possible by a human decision-maker. At the same time, participants can make use of real-time
transaction analytics to predict how certain actions (such as buying or selling certain volumes of
securities) are likely to affect the market in terms of, for example, liquidity. This improved understanding
of the effects of decisions on the broader market can, in turn, improve the decisions of market
participants. Furthermore, predictive AI models will allow for better risk analysis, resulting in early
identification of threats before they spill into the broader ecosystem. In addition, AI offers opportunities
for the automation of back office functions, thus driving cost-effective efficiency across areas such as
compliance and risk, as well as the review and reconciliation of trades.
As the role of AI in capital markets continues to expand, regulators will need to adapt to new
developments by ensuring a framework of regulations exists to effectively govern the use of AI, both in
terms of its technical ability and from an ethical viewpoint. As the rate of innovation in this area outstrips
the rate of regulatory adaption, there are likely to be regulatory and policy gaps in future, both in terms
of the data gathered by AI and the way it is put to use. On the whole, however, the continued
development of AI has the potential to greatly affect how capital markets participants, ranging from
investors through to regulators, interact with one another and how they make decisions based on the
amount of data being processed.
Zambia has made an effort to spread greater awareness of the effects of new and emerging
technologies on the future of the financial sector. This was undertaken through the launch of capital
markets master classes, as well as a discussion forum with stakeholders from the business community,
which represents a first step in a longer-term process of bringing these technologies to the Zambian
market.
5.4.2. ALTERNATIVE SOURCES OF FUNDING
5.4.2.1. CROWDFUNDING
The manner in which growing firms have chosen to finance their expansions is undergoing changes.
Established start-ups, eager to avoid the perceived scrutiny and stricter disclosure requirements
associated with being publicly listed, have embraced alternative sources of private funding, such as
private equity (PE). More recently, however, crowdfunding of private businesses has become a more
prominent feature of the markets. Crowdfunding is similar to PE in that it is a private source of funding,
but the ultimate source of the funding is unique. While PE investments tend to come from single firms
or funds specialising in these areas, crowdfunding allows firms to seek funding online from a “crowd” of
investors, all of which contribute small amounts in order to meet the firm’s funding needs. Despite the
crowdfunding industry’s small current size, demand from both investors and entrepreneurs has seen
strong growth in this area.
A specific example of the emergence of crowdfunding in capital markets recently occurred in Kenya.
The CMA has approved the testing of an internet-based crowdfunding platform developed by a fintech
company, specifically targeted at SME debt financing.
The capital markets master classes mentioned earlier also served to raise awareness in Zambia of the
potential role of alternative sources of funding, such as crowdfunding. Following this first step, the SEC
undertook a high-level study on the potential of facilitating greater crowdfunding in Zambia, based on
the activity in selected other jurisdictions.
139 https://www.accenture.com/_acnmedia/pdf-65/accenture-artificial-intelligence-capital-markets.pdf#zoom=50
72
Globally, the industry was worth USD 10.5 billion in 2018, but is expected to grow at 16 percent per year
through to 2024, which would see it more than double in size, to USD 21.3 billion.140 Globally, regulators
have looked to strike a balance between embracing a new and attractive source of capital, while also
protecting investors, which has led to considerable divergence in crowdfunding regulations across the
globe. In general, however, regulators have taken a light-touch approach in order to allow non-
accredited investors to take part in the industry, while also keeping disclosure requirements for private
firms less onerous than for listed companies.
5.4.2.2. MOBILE BONDS
The idea of issuing retail bonds, allowing governments to raise money in small amounts directly from
individuals, is not new, with South Africa, for example, making use of the practice. However, Kenya, in
particular, has implemented an innovative way of taking advantage of the public’s high adoption of
mobile phone usage to issue retail bonds entirely on a mobile platform. The M-Akiba bond, first
introduced in 2017, can be purchased by Kenyan retail investors in denominations as small as KSH
3,000 (USD 29), with a tenor of one to three years.141 Registration, purchasing, selling and the payment
of coupons to the investor all take place on their mobile phone. Since the initial offering to the public in
2017, the Kenyan government has conducted two further issuing rounds. All three issues have been
undersubscribed, but the total amount raised across the three issues crossed KSH 1 billion (USD 10
million) as of September 2019.142 Despite the modest amount of funding raised to this point, the
development and successful introduction of a mobile bond is an innovative way to increase the public’s
financial literacy and comfort level when dealing with the capital markets in general.
5.4.2.3. GREEN BONDS
Green bonds are a relatively new instrument, with the first being issued by the World Bank a decade
ago. As global concerns around the climate have grown, so has the market for this alternative form of
funding. The idea behind a green bond is that the proceeds raised to issuers (such as governments and
corporates) are used to finance projects that have a positive impact on the climate. To that end, the
largest part of green bond proceeds are used for renewable energy and energy initiatives projects (44
percent), as well as clean transportation (25 percent) and agriculture (11 percent).143 After an initially
slow uptake, the global market for green bonds has grown rapidly, with the cumulative value of green
bonds sold reaching USD 580 billion at the end of 2018, of which approximately USD 440 billion came
from green bond sales in 2016 to 2018.144 While green bonds still make up a small portion of the global
bond market, the market is expected to continue growing.
Emerging markets have been issuing green bonds since 2012, with the first issue coming from South
Africa. Since then, other members of the peer group, including Argentina, Brazil, Chile, Indonesia,
Malaysia, Kenya and Namibia have joined the market. While the issuance from these peers remains
small in the global context, their participation in the market is undeniable, with Brazil, Indonesia and
South Africa all exceeding USD 1 billion in green bond issuance between 2012 and 2018.
140 https://www.marketwatch.com/press-release/153-growth-for-crowdfunding-market-size-to-reach-21380-mn-
usd-by-2024-2019-07-22 141 http://www.m-akiba.go.ke/ 142 https://sokodirectory.com/2019/09/overall-m-akiba-bond-subscription-hits-1-billion-shillings/ 143 https://www.worldbank.org/en/news/immersive-story/2019/03/18/10-years-of-green-bonds-creating-the-
blueprint-for-sustainability-across-capital-markets 144 https://www.bloomberg.com/news/articles/2019-03-24/what-are-green-bonds-and-how-green-is-green-
quicktake
73
Table 29: Selected peer market green bond issuance (2012 - 2018, USD million)
Country Value of green bond issuance (USD million)
Brazil 4,167
Indonesia 1,952
South Africa 1,438
Malaysia 979
Chile 946
Argentina 610
Source: International Finance Corporation, 2018
Green bond activity amongst smaller peers is more modest, but the first shoots have been witnessed.
Bank Windhoek, a Namibian commercial bank, issued the country’s first green bond in December
2018.145 Mauritius has yet to issue a green bond, but the Stock Exchange of Mauritius organised a
workshop on green bonds aim at potential issuers and investors in 2018.146 In Kenya, the CMA
authorised the country’s first green bond issue in August 2019, with a property developer aiming to raise
KSH 5 billion (USD 4.8 million) in order to finance sustainable and climate-resilient student
accommodation.147 Zambia has taken the first steps towards a Green Finance Policy, with the SEC, in
conjunction with the LuSE and BIOFIN, hosting a Green Finance Orientation workshop for key
stakeholders, including members of government and the financial sector.148 The importance of green
finance and its role in addressing climate change were shared with those in attendance, with the
potential role of government in drafting legislation and creating and enforcing green standards were
explained. This workshop came on the back of an understanding that investors are placing greater
emphasis on ESG standards in their decisions, and the subsequent potential for green bonds to be
attractive to investors. While still nascent, this represents a first step in the country’s potential use of
green bonds.
While the green bond market globally (and in particular amongst the peer group) remains small, there
is little doubt that it is an expanding market, particularly as warnings around the future of the planet’s
climate grow more urgent.
5.4.2.4. PROJECT BONDS
Project bonds are related to green bonds in that they are fixed debt instruments earmarked for a specific
purpose, though the purpose is directed at infrastructure projects rather than at climate-friendly
initiatives. Globally, infrastructure has come to be viewed as an asset in its own right, leading to a greater
appetite for this type of bond.149 At present, the key focal areas for project bond issuance are power
(USD 25.5 billion raised in 2017), infrastructure (USD 23.8 billion) and natural resources (USD 14.9
145 https://www.african-markets.com/en/news/southern-africa/namibia/namibia-bank-windhoek-issues-first-green-
bond 146 https://www.un-page.org/mauritius-embark-ambitious-green-bond-strategy 147 https://www.standardmedia.co.ke/business/article/2001338262/cma-approves-kenya-s-first-green-bond 148 https://www.zm.undp.org/content/zambia/en/home/presscenter/articles/2019/towards-the-development-of-a-
green-finance-policy-implementation.html 149 https://www2.deloitte.com/za/en/pages/finance/articles/project-bonds-an-alternative-to-financing-infrastructure-
projects.html
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billion). Globally, project bond issuance totalled USD 64 billion in 2017.150 Though the majority of this
total came from North American and European sources, Latin America contributed USD 9 billion of the
2017 total, with the likes of Argentina and Chile contributing USD 1.9 billion between them. Despite a
slowdown in its issuance in 2017, Brazil issued a total of USD 592 million in project bonds between 2010
and 2017. Despite limited data on project bond issuance values in Africa, the instrument has seen some
use on the continent, with South Africa issuing project bonds as far back as 2013.151 In addition, in
December 2018 the Kenyan government issued an intention to raise KSH 50 billion (USD 481 million)
to fund infrastructure spending, on the back of a KSH 40 billion (USD 384 million) bond issue in January
of the same year.152 Zambia has taken note of the potential merits of project bonds, with the Capital
Markets Indaba highlighting the potential use of these instruments as part of a broader public-private
partnership initiative as far as investment in infrastructure is concerned.
While project bonds remain a comparatively small part of global debt markets, especially in Africa, they
represent another example of earmarked debt financing gaining traction globally.
5.4.3. ALGORITHMIC AND HIGH-FREQUENCY TRADING
In contrast to market participants consciously making buy and sell decisions, global markets have seen
an increase in algorithm-based trading, which make up between 50 percent and 60 percent of trading
activity on Wall Street on a given day.153 Under algorithm-based trading, powerful computers make
decisions to buy and sell securities based on certain predefined parameters, such as an instruction to
buy or sell a given instruction once it reaches a given price level, or based on another indicator, such as
market volatility. This approach to trading is driven by the ability of computers to scan a wide variety of
market indicators and to subsequently carry out an instruction far more quickly and efficiently than a
human being could do manually.154 One of the benefits associated with this ability is that, due to the
increased speed of trading, there are unlikely to be significant fluctuations in price. In addition, the use
of algorithmic trading reduces the possibility of human errors when executing trades, such as purchasing
the incorrect security. Furthermore, because the algorithms are not subject to emotions, fear or doubt,
they execute trades based on their predefined instructions, rather than being swayed by panic or
euphoria in the markets, which are liable to affect human decision-makers. In addition to the speed and
accuracy benefits associated with algorithm-based trading, there is also a cost benefit. Human traders
do not have to spend as much time manually monitoring the markets, looking for signals to buy or sell,
since trades can be executed when necessary without continuous supervision. The benefits in terms of
speed, reduction in human errors and lower costs are being recognised by the global capital markets,
with the global algorithm-trading market expected to grow from its 2019 value of USD 11.1 billion to
USD 18.8 billion by 2024, an annual growth rate of 11 percent.155
High-frequency trading (HFT) is linked to algorithm-based trading due to the lack of direct human
intervention, but differs in terms of its speed, volume and low latency, which are possible due to the HFT
facility’s close physical distance from a trading venue.156 HFT makes use of these advantages to quickly
process incoming information, which allows the trader to rapidly trade in the relevant securities, and
equally rapidly to liquidate their position. The result is a high number of trades over a short period of
150 https://www.ca-cib.com/sites/default/files/2018-11/Project%20Bond%20Focus%20-
%20Fundamentals%202018%20FINAL%20v2.pdf 151 https://www2.deloitte.com/za/en/pages/finance/articles/project-bonds-an-alternative-to-financing-infrastructure-
projects.html 152 https://www.the-star.co.ke/counties/2018-11-12-state-to-borrow-sh50-billion-for-infrastructure-projects/ 153 https://money.cnn.com/2018/02/06/investing/wall-street-computers-program-trading/index.html 154 https://www.nasdaq.com/articles/advantages-algorithmic-trading-2019-06-07 155 https://www.marketsandmarkets.com/Market-Reports/algorithmic-trading-market-179361860.html 156 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3097723&download=yes
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time, with advantage being taken of almost imperceptible differences in bid/ask spreads, and thus
making small profits on each transaction. As a result, traders can find more trading opportunities and
make use of arbitrage to take advantage of tiny price differences between different markets for the same
asset. Due to the higher market activity associated with HFT, it is possible that this approach adds to
market liquidity, since high-frequency traders are effectively acting as market makers in the securities
that they trade in. However, because the securities in question are held for only a short period of time
(such as a few seconds), it may be that the increased liquidity offered by HFT is not practically available
to regular investors, since the security has been traded amongst high frequency traders in the time it
takes a regular investor to place an order.157
5.4.4. ALTERNATIVE LISTING BOARDS FOR SMEs
It is often difficult for smaller businesses to satisfy the requirements for listing on an exchange. As a
result, some exchanges have alternative boards specifically targeted at SMEs, with correspondingly
lower listing requirements.
Table 30: Alternative market boards across peer group
Country Board Name Share Capital (USD)
Market Capitalisation (USD)
Public Ownership Limit (%)
Other
Zambia Alternative Market
N/A N/A 10% Five years of operation
OR
Proof of increased revenues for three years and/or 1 year
audited financial statements
AND
Trading turnover
between USD 19,000 and USD 1.5 million
Argentina N/A N/A N/A N/A N/A
Botswana TSME Board 45,000 N/A 5% Ability to project above average returns
Kenya Growth Enterprise
Market Segment
96,000 N/A 15% Must have been in operation for >12
months
Namibia Development Capital Board
No data No data No data No data
Mauritius Development & Enterprise
Market
N/A USD 500,000 10% Published and audited financial statements for
1 year
Brazil No data No data No data No data No data
Chile No data No data No data No data No data
157 https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/high-frequency-trading-hft/
76
Indonesia Development Board of the Indonesia
Stock Exchange
N/A Various: USD 7 million and operating
profits of USD 70,000
OR
USD 14 million and revenue of USD 2.8 million
N/A Published and audited financial statements for
1 year
Net tangible assets of USD 350,000 if market cap conditions not met
Malaysia ACE Market N/A N/A 25% N/A
South Africa Alt-X 130,000 N/A 10% Profit forecast for current and following
financial year
Source: Exchange websites
Listing requirements for SMEs as far as alternative boards are concerned vary significantly across the
benchmarked group. The most common requirements are associated with share capital or market
capitalisation, as well as a requirement around the proportion of shares that are to be held by the public.
However, even these vary substantially across markets. Botswana, Kenya and South Africa all have
minimum share capital limits, all of which are different. Mauritius and Indonesia do not have share capital
requirements, but do have certain minimum market capitalisations, with Indonesia also requiring certain
profit or revenue values. Most of the peers also have prescribed minimum public ownership levels for
shares issued on these alternative markets. In terms of requirements, Zambia places no conditions on
prospective businesses in terms of market capitalisation or share capital, and the public ownership
requirement of 10 percent is in line with or lower than the requirements for the peer group. However,
the country has other requirements which are more stringent than for the peer group. For instance,
prospective issuers are required to have been in operation for five years, or to have shown increasing
profitability for three years, or to have audited financial statements for the last year, as well as having
prescriptions in terms of turnover. Some peers only require profit projections rather than audited
statements and have no or low requirements in terms of time of operation. In addition, in order to list on
the Alternative Market, prospective issuers are required to appoint a designated adviser, who will assess
the feasibility of the business and ensure that it meets listing requirements. As a result, the designated
advisers effectively drive the pipeline to listing, a point that was not identified across peer markets.
Overall, despite the generally reasonable requirements for SMEs to list on Zambia’s Alternative Market
Board, it has proven unappealing to Zambian SMEs.158 The ability of small businesses to meet these
requirements may be lower than in other, more developed peers, i.e. the requirement differences
between the Main Board and Alternative Market Board may not be big enough to materially incentivise
SMEs. In addition, there is a lack of clear understanding on the benefits of listing amongst Zambian
SMEs, with the requirements seen as too onerous relative to the benefits. As a result, a rethink of the
place of the Alternative Market and its practicality in terms of getting small firms to list is required in order
to provide an effective bridge between SMEs and an ultimate listing on the Main Board.
Box 1: Alternative measures to drive SME investment
Funding for SMEs remains a global challenge, with constraints on both the supply and demand side.
From an investor viewpoint, the inherent risks associated with small businesses often discourage
158 https://zambianbusinesstimes.com/alternative-market-tier-not-attractive-enough-for-smes-broker/
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investors, while asymmetries in the information between SMEs and potential investors create
difficulties in assessing the feasibility of the investment. From the SME side, the ability to provide
sufficient information to investors, as well as the cost of doing so, are often a challenge.
Despite their laudable aim of broadening access to the market for SMEs, alternative listing boards
across the globe have battled these same issues. SMEs are often unable to meet the compliance
requirements for listing, or do not wish to be subject to stringent requirements associated with being
listed. In turn, alternative markets have often struggled to generate liquidity and trading activity in the
SMEs that do list, again due to informational asymmetry from the investor side.
While the goal of creating an effective path to financing for SMEs is an important goal, the challenges
faced by alternative markets, including in Zambia, suggest that it is not sufficient to simply treat SMEs
as smaller corporates. However, there may be scope for a change in approach. There have been
examples of the establishment of funds that have a mandate of channelling investment funds to
SMEs, either by investing directly, or by investing in private market vehicles (such as private equity
and venture capital funds) that are committed to travelling funds to SMEs. For example, the South
African SA SME Fund has identified eight SME-focused funds to which it will distribute its
approximately USD 100 million pool of capital. The fund is capitalised by 54 JSE-listed companies,
with the Public Investment Corporation (which manages government employees’ pension savings)
contributing about USD 34 million of the total. On a larger scale, Norfund is a private equity fund
backed by the Norwegian government. The aim of the fund is to invest in a variety of initiatives aimed
at driving development. This includes investing in SMEs operating in Norfund’s target sectors, either
directly or through funds that can channel funding to SMEs.
Based on the above, there scope for Zambia to drive investment in SMEs despite the challenges of
the country’s Alternative Market. This may involve the formation of a fund, capitalised by, for example,
funds from NAPSA, which could serve as a conduit to investing in SMEs and could serve as a source
of diversification for NAPSA’s portfolio. Alternatively, there may be merit in the creation of a holding
company that lists on the LuSE and has a mandate to invest in SMEs, using its position as a listed
firm to raise funds and channelling these to deserving SMEs in order to drive their development while
securing an appropriate return for investors. This may be funded, for example, through contributions
from donors with a mandate to promote SME development in developing markets. The development
of SMEs through this method may then, in time, lead to these small businesses listing on the LuSE.
An attempt to develop Zambia’s SME sector through the above method should go beyond simply
providing financing. In addition, such an initiative would need to focus on capacity building and
advisory services for SMEs in order to develop their accounting and governance structures, with the
understanding that this will aid them in developing to a size where they are ready to list on the LuSE’s
Main Board and raise funds from the market.
Our stakeholder discussions revealed a potential role for the SEC in encouraging viable unlisted firms
to list on the LuSE. In order to drive the development of capital markets, the SEC has drawn up a list of
firms that could potentially list on the exchange in the foreseeable future. These firms are mostly SOEs,
with one private firm currently on the list. At this point, the rationale for the potential listings is based on
the firms’ own expressions of interest, as well as citizen empowerment in the case of the SOEs. The
existence of a potential pipeline of firms for listing is a positive building in the SEC’s overall goal of
developing the capital markets. However, the key factor in the success of such a pipeline lies in the
ability to ensure the firms in question to formally complete the listing process. A foundational requirement
in achieving this, it is likely necessary to set up a formal framework for assessing the readiness of firms
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to list. Identification of firms could take place, for example, in conjunction with the ZRA to identify which
unlisted firms are the largest taxpayers in the country, which would serve as an initial assessment of the
overall size of these firms and the viability of listing on the LuSE. In addition, the pipeline could focus on
strategically important sectors, in order to ensure alignment with the country’s broader development
vision. Since becoming a public company places a number of compliance and bureaucratic requirements
on a firm, it would be important to assess these firms in terms of their current readiness to meet these
requirements. Such an assessment could include, for example, an appraisal of the firms’ current
governance structure, its ability to prepare audited financial statements, its compliance with
environmental, social and corporate governance (ESG) regulations, the total value of its assets, etc.
Based on this, potential firms would clearly understand any gaps in their readiness, which could be
addressed through capacity building initiatives. At the same time, the nature and extent of the gaps
would inform a realistic date for formal listing. While the formal identification of firms for listing will play
a role in developing the capital markets, this initiative will need to be underpinned by appropriate
incentives to make being listed an attractive proposition for the targeted firms.
5.4.5. PEER GROUP EXAMPLE: KENYA’S REGULATORY SANDBOX
It is clear from the above trends that capital markets globally are undergoing significant disruptions and
innovations. While these innovations will have an effect on the entire peer group, a specific example of
a peer that has embraced this process is Kenya, where the CMA opened its regulatory sandbox for
applications in March 2019. The objective of the regulatory sandbox is to facilitate the CMA’s
understanding of emerging technological developments across global capital markets and how they can
contribute to Kenya’s own capital market development.159 Under the regulatory sandbox, the CMA will
allow the relaxation of certain regulatory restrictions (to be assessed on a case-by-case basis) for
successful, innovative applicants. This will allow for the testing of new and innovative technologies on a
closed group of relevant capital markets participants for a period of 12 months. In effect, the sandbox
allows for the controlled testing of a new (but operationally achievable) idea within a controlled
environment. After the testing period, approved participants may qualify for grants to roll out their ideas
on a broader scale.
In August 2019 the CMA admitted its first three applicants to the sandbox, with a goal for a further two
by 2023.160 Of the three firms admitted, one is the operator of the crowdfunding platform for SMEs
mentioned above. The second fintech to join the sandbox is the creator of a cloud-based data analytics
platforms aimed at investors, fund managers, custodian banks, actuaries, pension administrators and
regulators. While a third fintech has been admitted to the sandbox, the firm will remain anonymous
during the opening months of its testing period.
The regulatory sandbox is a way for the CMA to keep abreast of the latest technological developments
that are likely to affect global capital markets going forward, while also fostering innovation locally, to
the benefit of its own market. In addition, the CMA will be able to make use of learnings from the process
to better inform regulation and policy around emerging market trends going forward.
In Zambia, the high-level study undertaken by the SEC was also intended to provide broad insights for
the potential establishment to a regulatory sandbox. Similar to the Kenyan approach, this would likely
involve new developments (such as crowdfunding) being introduced to the market, allowing the SEC to
gain further insights on the potential merits of these developments on the country’s capital markets in a
controlled environment.
159 https://cma.or.ke/index.php?option=com_content&view=article&id=531:cma-regulatory-sandbox-ready-to-
receive-applications&catid=12:press-center&Itemid=207 160 https://ventureburn.com/2019/08/kenya-fintechs-admitted-regulatory-sandbox/
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6. INSIGHTS FROM ASSESSMENT REPORT
The key findings are presented thematically and highlight the main insights stemming from the final
assessment of the market, as well as the insights gathered from the stakeholder interviews that were
conducted during the in-country visit.
6.1. MACROECONOMIC AND DEVELOPMENT INSIGHTS
Although Zambia’s political climate is relatively stable, the current macroeconomic environment
characterised by high government debt and an outlook of subdued economic growth for the coming
years. This may in turn lead to deterioration of investment sentiment as there are concerns surrounding
a potential sovereign debt default.
There is also increased market concern surrounding the potential nationalisation of mines. Although it
is premature to draw these conclusions, it is clear that there is an effect on market sentiment and may
impact the number of potential future listings, pointing towards a need for more incentives towards
attracting listings from other sectors.
The Zambian population is youthful and has access to burgeoning mobile connectivity. Further to this,
increased uptake of digital financial services as well as faster growth in cash-in transactions versus
cash-out transactions suggests that the Zambian population has increased the adoption and are more
trusting of mobile wallet. This suggests that there is potential to explore digital innovations to increase
penetration of capital market products through mobile-based channels. Additionally, sustaining uptake
in digital financial services would also require continued support of financial education policies which
are currently being rolled out via the NFIS and NSFE.
In terms of contribution to GDP, the wholesale, mining and construction sectors contribute nearly half of
Zambia’s GDP. This implies that in order to successfully grow issuance of corporate equity, the financing
needs of these sectors would need to be appropriately matched to the availability of financial products
currently on the market.
6.2. NATIONAL STRATEGY AND POLICY INSIGHTS
The review of national strategies and policies have indicated that they are generally well-aligned and
co-ordinated. The Vision 2030 provides the overarching strategy of the Zambian government and it is
evident that all other strategies are in place to operationalise the plan and ultimately realise Vision 2030.
Financial constraints are limiting the scope of rolling out capital market development initiatives. This is
evidenced by the prioritisation of plans DMSD Action Plan for 2019 where projects have been
sequenced according to availability of financial and technical expertise with existing partners.
The review of regulations and standards also indicated that there is potential to amend laws to become
more investor friendly. Following from the existing tax incentives, one example of this would be to
introduce further tax discounts for new listed firms on the condition that the 50 percent of shares are in
the hands of Zambians. Additionally, there is potential for reviewing current process for issuance of
corporate bonds and equities to understand the key pain points.
Although there are clear strategies in place for the development of financial inclusion as well as financial
education, the regulations around access to finance and developing appropriate financial products for
the Zambian population need to remain a priority. A review of regulations affecting financial access
would benefit the capital markets development in aiding growth in formal financial product uptake and
ultimately longer term financing through securities. This will be supplemented with an understanding of
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stakeholder appetite from upcoming consensus-building workshop developing regulations that
encourage growth of innovative financial products and foster financial inclusion.
6.3. EMERGING PEER GROUP INSIGHTS
Comparisons of Zambia with the identified peer group during the international benchmarking section led
to the identification of several emerging insights across the different criteria, several of which were
confirmed during the in-country stakeholder discussions, and which consequently led to the
development of actionable areas for the future.
6.3.1. MARKET STRUCTURE AND LANDSCAPE
Zambia’s market structure is similar to that of most of the peer group, with one exchange (the LuSE), a
single regulator (the SEC) and the Central Bank responsible for the primary market issuance of
government securities. However, Zambia’s market landscape remains underdeveloped compared to its
peers. The markets for equity, government and corporate bonds are characterised by low liquidity. In
addition, there is a shortage of products on offer, nor an emerging derivatives market, which further
exacerbates the lack of activity in the markets.
Stakeholder consultations also highlighted an underdeveloped environment for green bonds, REITS and
CIS products. In addition, Zambia’s private equity market, which can serve as a bridge between SMEs
and listing on the LuSE, is not the smallest amongst the peer group, but remains in its infancy.
Stakeholder interviews revealed concerns around the lack of regulatory provision for the role of PE in
Zambia’s capital markets. This included PE not being recognised as a separate asset class from unlisted
equity, as well as there being an upper threshold of a 5 percent PE allocation in private sector
institutional pension funds. Further concerns surrounding the Zambian PE market and its role in the
broader capital market is linked to the low liquidity levels of the LuSE: the PE market remains small
partially as a result of low LuSE liquidity, and LuSE liquidity remains low partially because not enough
businesses are graduating to listing (which is part of the role of PE).
One of the barriers to attracting more listing activity on the LuSE (for both its Main and Alternative
Boards) appears to be the relatively high initial and annual listing prices, which are generally as high as
or higher than more developed peers. These high fees contribute to a perception, confirmed during
stakeholder discussions, that the costs of listing are greater than the benefits. The existence of the
Alternative Market is a positive feature of the Zambian capital markets. However, its failure to attract
listings since its introduction suggests that its value proposition is not properly aligned with the country’s
small businesses, a suspicion confirmed by the comparatively high initial fee of listing. In addition, there
may be a lack of understanding on the part of small businesses around the potential benefits afforded
by listing, suggesting that a review of the LuSE’s cost versus benefit offer is required.
A key area of concern identified during both the desktop review phase and stakeholder discussions
relates to the environment surrounding government bonds. Liquidity in the secondary market remains
low, with a buy-and-hold culture from institutional investors being driven in part by the attractive returns
on government bonds, the yields of which have grown at a rapid rate over the past two years.
Furthermore, inefficiencies around Zambia’s primary dealership system are foundational concerns
around the development of the government bond market. These include the BoZ’ less than optimal use
of the auction model when selling newly-issued government securities. In addition, a wide-variety of
parties participate in the primary auction. In a true primary dealership system, participation in the auction
would be restricted to the country’s large banks, who would be incentivised to act as market makers.
The implementation of a primary dealership system would likely aid in developing the secondary market
for government bonds, provided that it contains the hallmarks mentioned above. This would assist in
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developing the market for government bonds, which, as discussed earlier, is a foundational aspect of
spurring capital market development.
An additional area of concern is the potential crowding out private sector investments. The high and
growing yields on government bonds has the potential to crowd out private sector investment, due to
the ability for institutional investors to earn a high return through a relatively low risk government asset.
In addition, the prevailing high interest rate environment has an effect on the equity market as a whole
as it influences the ability and desire of firms to raise capital and the broader market’s desire to invest
in this equities. This crowding out effect is evidenced by NAPSA, the country’s largest institutional
investor, which has a portfolio consisting of roughly 50 percent invested into government bonds.
Based on our in-country discussions, we identified the need to ensure capacity is built and maintained
across the capital markets as a whole. This may include an investor education programme, as well as
capacity building initiatives for market participants, in order to ensure that both the supply and demand
side of the market grow together in this regard. This broad-based approach to capacity building may
include, for example, ensuring that capacity is built amongst political stakeholders and law makers, as
well as ensuring that the capacity of auditors is maintained in line with international best practices and
standards.
Finally, our in-country stakeholder discussions revealed that there is an imbalance of information
between the primary and secondary markets. Specifically, there is a comparative lack of information
being published for secondary market trades, which led to an insight that secondary market trades could
be published online in order to ensure timely and transparent dissemination of information around
trading activity.
Table 31: Market structure and landscape insights
Insights Urgency
Review the potential for greater freedom of asset selection from NAPSA, which could
potentially be achieved by building greater asset management capacity in the private
sector to assist NAPSA in their mandate while simultaneously facilitating investment in a
variety of asset classes, such as unlisted equity.
Short-term priority
Review of BoZ government auction process. The BoZ’ use of the Dutch auction model
should be transparent, with results and the prices/yields associated with the issued bonds
announced as soon as possible.
Short-term priority
Review of the primary dealership system. At present, there are a number of actors who
are able to participate in the BoZ’ primary auctions. Instead, primary auction participation
should be restricted to the banks, who should subsequently be incentivised to act as
market makers in order to facilitate greater trading activity in government bonds.
Short-term priority
Explore avenues to attract a larger number of primary issuers in order to expand the
market, rather than focusing purely on secondary market activity Short-term priority
Review the products offered in the market in order to expand the number of assets
available for investments, by developing, for example, retail bonds, REITs and ETFs and
encouraging greater development in the CIS market.
Medium-term priority
Review of the regulatory provision for private equity. This includes the recognition of
private equity as a stand-alone asset class, rather than bundling it together with unlisted
equity, and removing the minimum threshold for private equity, which is currently set at
5%. In addition, review the incentives around private equity exists into the LuSE in order
to encourage greater exit activity. Further encourage M&A activity in the private markets.
Medium-term priority
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Review of government bond trading mechanism in order to drive greater digitisation of
government bond trading and develop a more robust market.
Medium-term priority
Review the costs of listing on the LuSE. The cost of listing on the LuSE is generally as
high as or higher than those in other peer nations. In addition, the extra fees payable to
the SEC for trading (which are in addition to those paid to the LuSE) are not commonly
found across the peer group.
Medium-term priority
Develop broad-based capacity building initiatives, spanning investors, market
participants, and broader stakeholders, such as lawmakers and politicians as well as
auditors.
Medium-term priority
Review post-trade reporting requirements to ensure that transparency is developed and
maintained. Long-term priority
Develop and implement study on corporate bond dealing landscape in order to
investigate the causes for the corporate bond market’s relative lack of activity. Long-term priority
6.3.2. REGULATORY AND POLICY LESSONS
Zambia has some of the key foundational regulations in place to make its capital markets attractive to
investors. The country is open to foreign investors, with no material restrictions on foreign ownership
and relatively simple registration processes compared to some members of the peer group. However,
Zambia’s protection of minority shareholders is an area of concern, having scored the lowest on this
criterion amongst the benchmarked group. In addition, while it is open to foreign investment, the rights
of foreign investors are not formally enshrined in law, which creates a grey area as far as investment in
the country is concerned. Zambia’s tax regime performs at a mixed level compared to the peer group.
There is scope for tax rate reductions, or for greater flexibility in terms of incentivising foreign investors
with lower tax rates depending on their sector of investment or nation of origin, which could be aligned
with Zambia’s broader strategic objectives. More generally, there is also a need for reviewing LuSE
listing requirements to understand the costs and benefits and incentives for firms to ultimately create a
responsive regulatory environment. In addition, from a regulator point of view, there may be value in the
SEC receiving funding from government in order to ensure that capacity is built and maintained, with a
gradual move to being more self-sufficient.
Table 32: Regulatory and policy insights
Insights Urgency
Improve coordination amongst regulators over the short term, e.g. conduct periodic
meetings with key regulators to ensure alignment and cooperation in carrying out capital
market development. In the long term, select one regulator to oversee secondary market,
with a view of potentially consolidating regulatory powers.
Short-term priority
Review of current regulatory landscape, i.e. the BoZ, SEC and PIA to align powers and
ensure consistent regulatory enforcement Short-term priority
Develop ongoing capacity building for regulators based on international best-practice and
review of BoZ, SEC and PIA capacity needs. Explore avenues for SEC to be supported
with government funding in order to ensure that the built capacity is maintained over time.
Short-term priority
Review of the regulatory protections afforded to minority shareholders, such as
mandating the presence of independent directors on company boards, ensuring that
transactions including a potential conflict of interest are reviewed by an external body,
and ensuring that directors do not have the power to the majority of the company’s assets
without shareholder approval.
Medium-term priority
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Reassure foreign investors of the security of their investment by making the protection of
foreign investor rights explicit rather than implicit, such as by strengthening property
rights.
Medium-term priority
Review the tax regime, with potential reductions for both firms and investors that are
involved in strategically significant sectors, promote local ownership or practice good
ESG governance.
Medium-term priority
Review and developed DTAs with key FDI countries in order to incentivise foreign
investment. Medium-term
priority
Review LuSE listing requirements to understand the costs and benefits and incentives for
firms to list, taking into account insights from listed firms and prospective firms. Specific
consideration to be made to review incentives for sectors of strategic importance.
Medium-term priority
Review policy around requiring firms of a certain size to prepare audited accounts for
public availability in order to get them used to the idea of preparing audited financial
statements.
Long-term priority
6.3.3. CUSTODY AND SETTLEMENT
The existence of a security depository is a foundational building block of capital markets. The concern
in Zambia’s case is that the country has two CSDs for government bonds, which our research suggests
may not be optimal for a smaller market, due to the increased costs and inefficiencies associated with
having multiple CSDs. Integrating or linking the two depository systems would assist in the creation of
a reliable and reconciled record of ownership, though the question of Zambia’s CSD structure should
be addressed holistically, using efficiency and safety as guiding principles, with all stakeholders having
a voice. LuSE trades for debt and equity generally settle on a T+3 basis, while many markets, including
some of the emerging peers, have moved to T+2 settlement. This is an area that could be improved but
is a relatively minor component of the overall capital market development process.
An area of concern surrounds Zambia’s lack of a true DvP system, with a substantial amount of manual
work surrounding the physical delivery of transfer instructions at one of Zambia’s two CSDs. The lack of
true DvP creates settlement risk, potentially having a negative effect on Zambia’s investor confidence.
This is a sizeable gap in Zambia’s market infrastructure, as is the lack of a clearly reconciled record of
ownership that stems from the existence of two CSDs, which is not conducive to investor confidence.
This gap should be addressed through modernisation of the CSD infrastructure. As this requires a costly
investment in infrastructure, it would appear more efficient to carry out the modernisation just once for
the benefits of both equity and government bond markets. This could be achieved either by merging the
two CSD or at least by developing a shared infrastructure.
Table 33: Custody and settlement insights
Insights Urgency
Review the current custody and settlement structure, which involves both the LuSE and
BoZ maintaining a CSD for market securities. This makes it difficult to maintain a
reconciled record of ownership. Following from stakeholder consultations in order to
ensure buy-in, the two CSDs should be integrated, or make use of a shared
infrastructure.
Short-term priority
Implement a true DvP system in order to eliminate the manual/physical delivery of
transfer instructions and reduce the settlement risk that currently exists between capital
market participants.
Short-term priority
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6.3.4. CAPITAL MARKET DEVELOPMENTS, TRENDS AND STRATEGIES
There are a number of disruptions and innovations happening across global capital markets, including
in developed nations. As the role of data and effective data analytics becomes ever larger, there is a
greater role for algorithmic and high-frequency trading. In addition, artificial intelligence is allowing for
greater tailoring of products to meet client needs, as well as better risk analysis and automation of back
office functions. Business’ access to financing is also continually evolving, with the development of
crowdfunding platforms offering small businesses another form of private financing. Overall, some of
these developments may be too advanced for integration into the Zambian capital markets at this point
in time, but concepts such as crowdfunding may be useful in order to meet the market’s needs. However,
there is scope to create a sandbox environment in order to stay abreast of new developments with the
potential to impact capital markets, as in the case of Kenya. Even if such new developments are not
appropriate for immediate adoption in the Zambian context, a good understanding of how these
developments might impact the capital markets would allow the Zambia to take the next steps quickly
as the market progresses. In addition, there is scope for the development of a pipeline of potential
companies for listing, similar to what the NSE has done in Kenya with its acceleration and incubation
programme, and similar to the role that the Industrial Development Corporation (IDC) plays for SOE’s
in Zambia. Furthermore, as described for peer markets above, there is some scope for exploring regional
integration with continental peer markets in order to foster greater capital markets insight and
development locally.
Table 34: Capital markets developments, trends and strategies insights
Insights Urgency
Conduct periodic monitoring of international trends in capital markets and examine the
applicability for the Zambian context (retail bonds, block chain, crowdfunding etc., AI,
Retch, Speech etc.)
Medium-term
priority
Review the developing of securities to finance specific projects, such as green or project
bonds, which will simultaneously expand the number of securities available on the
market, while also allowing for funds to be earmarked for specific purposes.
Medium-term
priority
Explore ways of developing a pipeline of potential listed companies for incubation in order
to make their journey to listing on the exchange easier.
Medium-term
priority
Explore avenues for incorporating certain appropriate capital market developments into
the Zambian market, specifically surrounding crowdfunding or a sandbox environment.
Long-term priority
Explore the development of an investor education programme in order to convey the
benefits of capital market investments to the public at large, while also making them aware
of existing opportunities in the market
Long-term priority
Review the developing securities to finance specific projects, such as green or project
bonds, which will simultaneously expand the number of securities available on the
market, while also allowing for funds to be earmarked for specific purposes.
Long-term priority
Continue to explore the nascent space of establishing SME funds in order to incubate these
firms ahead of listing. Long-term priority
Explore regional integration with continental peers in order to drive local capital markets
development. Long-term priority
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7. NEXT STEPS
Following in-country stakeholder consultations, Genesis Analytics and Bourse Consult have formed a
strong understanding of Zambia’s capital markets, resulting in this market needs assessment report.
Table 35 below outlines the envisaged next steps. The next step in the process is for a consensus
building workshop to take place. These discussions will allow for a more comprehensive view of
Zambia’s capital markets and to align stakeholders on the key implementation surrounding Zambian
capital markets development. This will ultimately inform of the capital markets development master plan.
Table 35: Envisaged next steps
Activities Tentative timelines
Consultative Workshop 21-27 February 2020
CMDMP Development 27 March 2020
Implementation Plan 17 April 2020
Close-out/Launch CMDMP 30 April 2020
