Rwanda's capital markets at crossroads

As the Rwanda Stock Exchange launched the “Access and Grow” campaign last week, what most policy makers and observers may have missed to appreciate is a deep desire by an enthusiastic institution that has continuously gone out of its way in helping the country achieve the principal tenets of Vision 2020. “Access and Grow” is a financial literacy campaign targeting Small and Medium Enterprises (SME). Closely following other financial literacy campaigns, including the much hyped university challenge last year, one wonders what still remains to be done to attract both companies and investors to the capital markets hence the question, what ails the capital markets in Rwanda? Almost exactly seven years into operations, the opportunities presented by the stock market have not been fully tapped by both investors for returns and companies seeking to raise long term capital. On the equities market for instance, of the eight listed companies, only four are local with the remaining four cross listed from another regional securities exchange. The bond market has not done well either. Apart from Government of Rwanda stocks, only two organisations have recently used the market; that is IFC and I&M Bank. Again the tenures are relatively short with the IFC corporate which is the longest maturing next year. To address the problem of what ails our capital markets, we have to first ask and address a few fundamental but basic questions; one, do companies both small, medium and big need long term capital to grow their businesses? The answer is simple, a resounding yes. Two, do investors need avenues to invest in long term investment mediums? The answer is again yes. If we were to apply the theory of demand and supply, then the capital markets would achieve a balance in this scenario with more companies listing and more investors participating but this is not happening. Perhaps, the other way of asking the same question would be, does the public have money to invest and why are they not investing in the capital markets as it should be? I will now address why the public is not investing in capital markets, why companies are not listing and what in my opinion needs to happen to unlock the potential of capital markets in Rwanda. There are three typical cycles in any investment and I will use the first two stages to illustrate what ails the capital markets. The first stage is early buy-in. In this stage, a group of mostly individual investors get ideas very fast and then invest. Their investments remain relatively flat for a long time but they don’t despair and therefore continue to hold while getting fairly low returns. This is where the general current Rwanda Stock Exchange investor is. This stage is not attractive and most investors perpetually hold on to their investments thus making the market illiquid. The second stage is when institutional investors start to buy in as they accumulate long term capital which must find a home. This stage witnesses the markets picking and rising very fast. This is where the Rwanda Stock Exchange is striving to reach but continues to elude it. The plain reality in my opinion is that there isn’t enough of long term institutional wealth to saturate investments markets. The existing institutional wealth has short term horizon that cannot propel the investment appetite required to spur capital market developments. Until we are able to accumulate substantial long term capital, activity at the stock market will continue to suffer irrespective of the literacy campaigns currently underway. Some of the principal institutions that must change tact to transform the capital markets include the insurance companies. Life insurance companies must shift their focus into developing and growing long term savings products like annuities and endowment policies. With a pool of long term funds, life insurance companies amongst other institutional investors will act catalyst in capital market developments. Significantly, pension schemes are the single major driver of capital market developments all over the world. However, more than two years after the law governing the organization of pension schemes was enacted, there is little impact of pension schemes in the development of capital markets. This can largely be attributed to the lag in enforcing compliance. Immediate compliance with the law governing the organization of pension schemes coupled with policies geared to development of pensions sector is in the best interest not only of the members of pension schemes but the national economy in general. It is only after institutional investors have built long term capital that the capital markets will jump to the next level thus acting as a catalyst required to achieve the economic aspirations of Visions 2020. The views expressed in this article are of the author and do not necessarily represent those of The New Times.

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Rwanda's capital markets at crossroads