1 Demutualizing African Stock Exchanges: Challenges and Opportunities Presented at the 9 th Annual ASEA Conference, Cairo, September 10-12, 2005 By Sam Mensah SEM International Associates Limited, Ghana

2 Objectives Evaluate factors driving demutualization Relevance in African context Establish preconditions for demutualization Assess readiness of African stock exchanges to demutualize

3 Reasons to Demutualize Improved governance Investor participation Competition Globalization and consolidation Unlocking stock exchange value

4 Implications of Demutualization Regulation Relationship with regulator Self-regulation Financial Viability Process Role of government Role of other stakeholders

5 Preconditions for Demutualization Sufficiently liberalized financial market Market justification based on a critical mass of trading activity that supports financial viability Support of government in managing process

6 African Stock Exchanges Small markets by international standards – Market capitalization to GDP as low as 4% in some markets Low liquidity Limited listings Preponderance of listings by subsidiaries of multinationals has “domesticated” listings i.e. no incentive to migrate or cross list

7 Other Factors Affecting Performance Macroeconomic Setting Regulatory framework Market infrastructure Human resource base Investor base

8 Noneconomic Factors in Africa Government objectives for creating stock exchanges are important: Emerging market fever A badge of inclusion Geography Populist symbolism Politics of economic reform Stock exchanges are national institutions driving policy objectives of government Government policy critical in demutualization decision

9 Assessing demutualization drivers for Africa Relevant drivers Improved governance Investor participation Not so relevant drivers Competition Global consolidation Resource mobilization Unlocking stock exchange value

10 Assessing Preconditions Markets are still not sufficiently liberalized, e.g. Ghana Of 20 exchanges, only about 7 are likely to be financially viable as demutualized exchanges Governments who support exchanges financially are not in a hurry to demutualize if policy objectives are being met in mutual form

11 Conclusion Larger and financially sustainable African markets may be ready for demutualization Majority of stock exchanges should move cautiously Demutualization should be seen as long- run objective

12 In the meantime… Some benefits of demutualization can be captured by reengineering of mutual stock exchanges Corporate governance: increase representation of nonmembers Continue to improve trading and post-trade technology to stay competitive Pursue ongoing market liberalization

13 And finally…. Avoid donor pressure Seize control of the demutualization agenda