Evolution of Capital Markets in Tanzania and the Benefits ... - CiteSeerX

International SAMANM Journal of Marketing and Management ISSN 2308-2399 July 2013, Vol. 1, No.2

Evolution of Capital Markets in Tanzania and the Benefits for Investors Dr. Norman A.S.K Teofilo Kisanji University, Directorate of Research Publications and Postgraduate Studies, P.O. BOX 1104, Mbeya, Tanzania Email: [email protected] Abstract The stock exchange in Tanzania has been growing fast since its establishment in 1998. This paper traces the economic transformation of Tanzania since independence in 1961 through Arusha declaration of 1967 with a view to revealing the importance of capital markets business. It further narrates the reasons for the creation of the market. It avails opportunities and threats if any, and does compare the investment portfolio among investors‟ particularly foreign and local investors. The paper concludes by revealing that Tanzania is potentially an investment port, stocks included, to both local and foreign investors, and that there are a number of factors which range from relief for investors not to pay taxes during the first five years of operationalization of the business, and the stability of the governing regimes as experienced from the four regimes that have amicably transferred power from each to another, which is now considered as culture of the country. Keywords: evolution, capital markets, benefits, investors 1.0 Introduction to the Evolution of Capital Markets in Tanzania The history of organized capital markets in the country dates back to 1995 when CMSA was established (CMSA, 1994). Its formation followed comprehensive financial sector reforms in the early 1990s that were aimed at, among other things, developing capital markets to provide appropriate mechanisms for mobilizing long-term savings and ensuring its efficient allocation to the productive sector, thus fuelling economic growth (CMSA, 2001). When CMSA came into being, Tanzania had just started moving from centralized economic policies to open market policies. The country then was characterized by about 700 poorly performing parastatals1 amidst a very small private sector (CMSA, 2005) characterized the country then. The public was also not enlightened of the opportunities available in the capital markets as none had been formalized. In 1996, after assessing the demand by the corporate sector as well as prospective investors for long-term securities, CMSA concluded that a 2-tier 1

Parastatals refer to the public owned firms. In centrally planned economy most of the so called parastatals are firms owned by

the government.

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equity securities market structure was suitable. However, it was considered prudent to start with a less risky, Tier One, equity securities market, which gave investors some assurance of returns (CMSA, 2006). The Dar es Salaam Stock Exchange (DSE) was established in 1996 and started admitting companies in 1998 in rented premises (DSE, 2001). Four years later DSE started listing debt securities by allowing Treasury bonds and less risky corporate bonds. At this point the market structure was composed of a 2-tier equity securities market; Tier 1, which is operational; and Tier 2, which is not operational. The third market established was the Fixed Income Securities Market Segment. Further breadth and depth of the market was to await development of both the supply and demand sides of the market (CMSA, 2005; Norman, 2006; 2007). 1.1 The Changing Market Conditions There have been significant changes in the economy since the establishment of DSE. The privatization process is now ending. About 300 parastatals have now been privatized through the Public Sector Reform Commission (PSRC), with facilitation from the Tanzania Investment Centre (TIC), out of which only five were partly privatized through DSE. Privatization and open market policies have facilitated rapid development of the private sector that includes the Small, Medium, and Large Enterprises (URT, 2010; Norman, 2008). Different indicators show growth in both numbers and impact of the Small and Medium Enterprise (SMEs)2 and large enterprises in the country. After a fall in rate of capital formation in early 1990s, the level of investment as a percentage of GDP picked up and recorded growth during the last decade. At the macro level, the Government instituted the following measures as revealed in the report of Capital Markets Securities Authority (2009): Liberalized the financial sector including removal of currency exchange restrictions, allowing establishment of both commercial and microfinance institutions;  Allowed full appropriation of the net profits or dividends from investments under the Tanzania Investment Centre (TIC). That means, institutions such as National Microfinance Bank (NMB), which was owned by the government, were allowed to run as separate entity without interference from the government and in that regard listed shared with the DSE to increase share capital and improve its performance.  Enacted both the Land and Village Land Acts in 1999 providing for, among others things, mortgaging of land  Put in place the Mining Act of 1998 and the Financial Law, Miscellaneous Act No. 27 of 1997 providing for tax incentives to investors in mining which boosted mining activities, causing multiplier effects on other sectors;  Provided for the agricultural export revival support schemes;  Supported establishment of trade associations and umbrella associations for the business entities. In 1998, the Tanzania Chamber of Commerce and Industries (TCCIA) was formed as

2

See The Report of United Republic of Tanzania, Poverty Reduction Strategic Paper (PRSP). In Tanzanian context the Small and

Medium Enterprise (SMEs) refer to firms with financial capital not exceeding Tanzanian Shillings 100 Million, which is about USD 75,000 exchange rate of June, 2013.

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an apex private sector interest organization. TCCIA‟s membership is about 8,000 and is represented in 20 regions and 60 district centers;  Sector specific promotional initiatives by the Government have also been successful. Taking tourism as an example, 135,000 people were directly or indirectly employed in that sector in 19993 earning foreign exchange amounting to USD 750.0 million, a nine fold increased since 1989 (World Bank, April, 2001). The commercial banking sector has undergone a virtual metamorphosis since the implementation of the 1991 Nyirabu Commission recommendations on reform and financial sector liberalization (DSE, 2010). This process has allowed more competition and an increased number of players in recent years. The commercial banking sector now includes a total of 21 banks4, where banks account for about 80% of the financial system‟s assets, and by far the largest number of customers (BOT,2003). While privatization and the subsequent growth of commercial banks have occurred, the banking system is small relative to the economy. Bank deposits total only about 14% of GDP. Bank credit to the private sector is about 6% of GDP, among the lowest in Sub-Saharan Africa (CMSA, 2010). This indicates that, apart from the low level of savings, allocation of these savings to productive entities is still very low. It is thus apparent that Banks are not providing efficient intermediation between savers and investors. Accordingly, domestic savings mobilization and dispensation of credit to the private sector remains a crucial element for promoting investment and economic growth. Much could be discussed to indicate the relationship between economic growth and financial intermediation. However, what has been disclosed in this paper is just a nutshell, since the central course of the paper is to show the imbalance between the foreigner investors versus local investors in stock exchange, among others. As part of its recognition of the importance of SMEs to the successful improvement of the national economy, the government adopted a policy on SMEs in 2003 aiming at instituting a conducive environment to foster development and growth of the SMEs (URT, 2003). All income generation activities, including those opportunities created by the private sector and SMEs, affect the government‟s policy on economic empowerment of Tanzanians. Despite some obstacles to doing business that still need to be fixed, Tanzania was ranked as the first and the second of 24 African countries in the year 2000 Improvement Index and Optimism Index respectively (World Economic Forum, 2000). 1.2 The Growth Of Companies Listed Shares With The DSE The DSE, as indicated earlier registered the first company in 1998(DSE, 2000). The first company to list shares with the DSE was the Tanzania Oxygen limited (TOL), which changed its 3

In 2009, the figure had increased to 357,000 people who are working in the tourism sector. It is anticipated that the figures will

double by the year 2013 (estimates as noted in the budget of the Minister for tourism July /August, 2009. 4

At the time of preparing this article, the number of banking institutions was 30.

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name later and is now known as Tanzania Gas limited (Norman, 2010; 2011). In the same year Tanzania Breweries was listed hence, two firms were listed as of the end of the year 1998(DSE, 2010). The reluctance of firms listing at the DSE can be associated with immaturity of the market, rather than unwillingness of the firms. Tanzania, one of the few advocates of socialism in Africa, had prepared no room for improvement of private sector as the same was nationalised in 1967 (King, 2011). 1.2 Companies Listed With The DSE The findings reveal that seventeen companies have listed shares with the DSE as of December 2012 with six firms cross listed in Nairobi, Kenya and Kampala, Uganda stock markets (DSE, 2013). The findings further reveal that total number shares invested by all companies is 7,573,961,567 which implies that with estimated Tanzania population of 45 million(URT, 2013) if every citizen was to be accorded shares then each Tanzanian will be able to posses 18 shares. The trend has also revealed that about 2/3 of shares of all companies that are fairing well in terms of growth of shares and those that have managed to distribute shares annually are owned by foreign investors. The companies with foreign shares in brackets include Tanzania Breweries Ltd (72.83), Tanzania Tea Packers (62.67), Tanzania Cigarette Company LTD (75), Tanga Cement Company Ltd (62.50), Swissport Tanzania LTD (58.98), and Tanzania Portland Cement Company LTD (69.25) (DSE, 2011). An analysis of the most profitable companies indicates that on average foreign investors own 66.87 percent. Hence, local investors in the profitable companies own only 33.12 percent of shares on average, which indicate that although most of the stock exchange business brings together firms looking for finance with huge amounts of capital from investors, most of the shares belong to foreign investors (Norman, 2010; DSE, 2010). Local investors own 95. 25 percent of the shares of Tanzania Oxygen LTD (TOL), which is the only company that, has not been fairing well if compared with the rest. Several reasons can be associated with the dominance of local investors in the TOL (DSE, 2010). However, only four are narrated in this article. First, TOL was the first firm to list shares at the DSE in the history of Tanzania, hence very few foreigner were aware of the stock market, barring them from accessing the shares of the TOL. Second, the official launching of TOL shares was made by the President of the United Republic of Tanzania, which in a way assured local investors on the prudence of the firm. By mere being officiated by the President, the business was perceived by investors as risk free or close to risk free. Third, information asymmetry (some people know more than others) was in favor of the local investors. No efforts were made to advertise the launching beyond the borders of Tanzania, as Stiglitz (2002) puts it, even small variation in terms of information can have huge impact on the market, because markets are imperfect. Fourth, is the philosophy behind Capital Asset Pricing Model (CAPM), which reveals that investors are generally risk averse; hence investing in a new portfolio such as TOL which was the first company to list shares in the history of Tanzania, can suggest more risk averse demonstrated by the new investors in a new investment venture such as that of Tanzania which is now ten years old.

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2.0 Literature Review Several literatures indicate the benefits for investing in capital markets/stock exchange. The list includes (Festein, 2003, 1999; Festein and Campbell, 2003; Norman, 2009; French et al., 1991; Kacherlakota, 1996). These benefits have been narrated to signal the importance of enabling money increase its value through investing in stocks (Benning, 2007). In this regard, Norman(2010) asserts that stock exchange which is most cases is used interchangeably with Capital Markets has made more people to invest in the business which allows the owner of the business to reap through other people who are employed in that firm. Although the business in capital markets has huge benefits, yet there is still an observable trend where local investors prefer to invest in local firms compared to those that are perceived international or cross-listed shares in other countries other than the country of origin. The trend is known as equity home bias or equity home bias puzzle (Mehra et al., 1985; Vannieuwerburgh and Laura, 2005; Tesar et al., 1995). Norman (2009) study comparing the use of financial analysis by local and foreign investors helps to explain why it is that local investors own a minimum number of shares in the Tanzania Cigarette Company TCC, which is 25 percent, and in the Tanzania Breweries Company LTD, which is 27 percent. On the other hand, foreign investors own minimum shares in the Tanzania Oxygen Company LTD, which is 4.75 percent. Arguably accessing information to the companies is a duty of an investor. Firms are compelled to provide financial information to share holders or through the decision of the board of directors on behalf of members. Hence the use or none use of information can be associated with other factors such as “newly business”- stock exchange is about 10 years old in Tanzania, hence most Tanzanians are at learning stage commonly termed in marketing as “growing state” (Norman, 2008; Benartz et al., 1995). This appeal for further studies to find out the variation among foreign and local investors in the use of financial information as a consideration for decision making investment, through the use of multiple case studies, with bigger sample and coverage, which can allow easy generalization. The second study could venture into finding out marketing tools used to influence investors of stock exchange. It is worth, noting that total shares owned by foreign investors is 483,605,509.6 while total shares owned by local investors is 238,193,758 which is about half of the foreign investors. Much can be learned from the figures provided. For example, although the total shares of the local investors is about half of the foreign shares, the difference in terms of value could be more than triple. The performance of the shares, particularly of TOL, of which local investors own 95 percent of the shares, was about 300 Tanzania shillings, while TWIGA cement was about 1400, and the TBL was 2500. all the companies when listed had an initial price offer less than 300 Tanzania shillings, which imply that the economically successful companies have shares which have the increased in value, and more than 60 percent of those companies are owned by foreigners. The total shares could be said to be „foreign biased‟, as opposed to „home biased‟ (Norman, 2012). Literally, as discussed early, „home bias‟, which is the phenomenon that people in every country tend to buy shares of companies that are local, and they to be buy-andhold or long-term investors, whereas Martin Feldstein, Harvard Economist and President of the famous think-tank called the National Bureau of Economic Research (NBER) in Cambridge, Massachusetts, claims that a lot of International Capital is “hot money” or short-term money that can be pulled quickly from a country by international investors, while “patient money” is like 107


long-term investing, which can help a country to develop since it is long-term (Feldstein, 1999). The case of Feldstein holds in Tanzania investment in general and in stock exchange in particular. In Tanzania about 95% of firms, which were privatized are found in the hands of foreigners, with the United Kingdom taking a leading role, followed with Kenya and South Africa (TIC, 2004). The case is also evident in the stock exchange investments, where, as indicated above, about 60 percent is „foreign biased‟. 3.0 Materials and Methods This article is a review, and thus has used documentation as the main data collection strategy. In addition, it is a case study with Tanzania being the case. It has further used qualitative design to present the findings and the analysis of the same. Tanzania has one stock exchange centre known as Dar es Salaam Stock Exchange (DSE), hence benefits discussed relate to the same. 4.0 Discussion of the Findings The discussion of the findings has observed both theory and praxis of the capital markets. Hence, this part reveals some important information concerning the benefits for investing in the market. It has further eluded the benefits in relation to fiscal policy benefits, benefits to issuers and incentives to investors. Hence, the following part narrates the benefits for listing securities. 4.1 Benefits of Listing Securities With the ever-increasing techniques in terms of investment and technological advancement, the choice to allocate finances as a strategy for investment is crucial. It has been however noted in this literature that there are potentials of investing in securities such as bonds and shares compared to the cardinal practice of depositing finances with the financial institutions such as banks and wait for the accrued money through interests(Cover and Maskowiz, 1999; Day, 1986). The vitality of investing in the stocks is a reality that no sane person can deny. Thus, this part provides advantages for listing securities specifically at the DSE as disclosed in the DSE blue print: a) The company can raise capital relatively cheaply from the public. While the normal practice for financial increases of the firms are raising capital through loan acquisitions from banks and other financial institutions, which culminates for the interest of about 16% to 23% in favor of the banks and other financial institutions. b) On the contrary, the Stock Exchange does the same role of raising the capital of the firm without subjecting the entire firm in interest charged against it. Thus, the firm listing the securities with the DSE does so with minimum risk of loosing its capital. c) The performance of the company is monitored by the market and therefore a listed company is likely to perform better to meet the expectations of the public. The qualifications for the companies‟ listed as indicated in this study limits to the maximum the possibilities of a company to perform contrary to the wishes of the investors. Thus, it can be added that it is of paramount importance of the company to list her shares with the Stock Exchange, since it further helps the company to assess itself on whether it has a favourable future survival. 108


d) Listing of securities is a marketing tool for a company as it would be referred to frequently during the release of the market information to the public. The DSE is currently conducting five trading per week. Thus a company listed, would be enjoying marketing benefits whenever trading results of listed companies are announced in either electronic or print media. e) Listed companies are generally considered good performers and therefore are perceived to have the potentials of providing a good return to the investors. Thus, listed companies experience other benefits. f) Listing widens the range of financing choices of the company. Thus, a company is not bound to raise its capital through a certain means only. Rather has variety of options including listing shares, financial institutions, directors, and banks. g) Listing of shares lowers financing cost of the enterprises. This could be associated with raising capital without incurring any substantial amount as a fee to the capital such as interest. Thus, the burden for the company would be reduced. h) Listing facilitates share ownership changes or privatization. The listing company paves a way for transfer of shares from one individual to another. Thus, it enables individuals to enjoy ownership of the company for time they want. i) Listing attracts foreign portfolio investors. Just as local investors are attracted through listing, the same happens to foreign investors. It enables foreign investors realize where to invest. Among the components important for investing is market and capital availability. An assurance of the market and ability to raise capital facilitates foreign investors to bring their intended capital from outside, and raise some capital within. j) Listing enables both firm and individuals to realize the value of the company through the interplay of the demand and supply of the company shares at the SE. Normally, assessing oneself can be a difficult thing, and some time challenging. Since self-assessment means giving value of your self-using the criterion set. Nevertheless, listed companies can easily know their value through the interplay of the markets. This can be termed as facilitates open assessment as opposed to self-assessment. Since it is the market which gives the value of the company, therefore the assessment attained is an open and done by the mixtures of professionals, businesspersons, firms representatives and the public in general. k) Listing of shares enables the company to increase the opportunities to venture into new investments and expansions by having alternative means of raising capital for such investments. Currently there exists cooperation between the East African Securities Regulators as well as cooperation of East African Stock Exchanges. The said cooperation has enabled the company wishing to expand its wings in the region, to list shares in other East African countries such as Kenya, Uganda and Tanzania thus raising the opportunities for raising capital. Today there are three Kenyan companies namely; Kenya Airways, and East African Breweries Limited and Jubilee Holding Limited that are listed in the threes stock exchanges of Kenya, Tanzania and Uganda. l) The listed companies also experience improved marketing of the products(DSE, 2001; 2010; Norman, 2009). Other packages are associated with the listing of the shares with the DSE, and have been listed in the DSE handbook (2007) as fiscal incentives.

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4.2 Fiscal Incentives The Government has deliberately provided several incentives in order to encourage active participation in capital markets by issuers and investors. The DSE hand book (2007) further provides some incentives for the companies that list shares with it. The privileges include: 4.2.1 Incentives to Issuers 1. Reduced corporate tax from 30% to 25% for the period of three years where the Issuer has issued at least 35% of the issued shares held by the public. The reduced rate is applicable for five years starting from listing date. 2. Tax deductibility of all Initial Public Offering (IPO) costs for the purposes of income tax determination. All IPO costs are accepted by the Tanzania Revenue Authority (TRA) as acceptable expenses used in the generation of income and profits, and therefore are taken into consideration when determining profit for tax purposes; and 3. Withholding tax on investment income made by Collective Investment Schemes (CIS) is final tax. Investors in CIS are not charged with tax on the income (DSE, 2001; 2010; Benning, 2007). 4.2.2 Incentives to Investors 1. Zero capital gain tax as opposed to 10% for unlisted companies; 2. Zero stamp duty on transactions executed at the DSE compared to 6% for unlisted companies; 3. Withholding tax of 5% on dividend income as opposed to 10% for unlisted companies; 4. Zero withholding tax on interest income from listed bonds whose maturities are three years and above; 5. Exemption of withholding tax on income accruing to fidelity fund maintained by DSE for investor protection; and Income received by the Collective Investment Scheme (CIS) investors is tax-exempt (DSE, 2001; 2010). 5.0 Conclusion We have noted the trend of performance of Dar es Salaam Stock Exchange from the establishment in 1998. It can thus be concluded that the evolution of capital markets in Tanzania has gone through various stages. The first, being the absence of capital markets which is the period before 1993. The second is the period of preparation for the Capital Markets, which lies between 1994 through 1997. The third is the period from 1998 when the first firms were listed. The evolution of capital market is an ongoing process. Hence, we have observed the increase of share capital from year after year. In addition, we have noted the increase of firms listing shares from two firms in 1998 to about 17 firms in the year 2012. The growth of capital markets in Tanzania is overwhelming, and DSE has listed more firms compared to the East African counterparts if the assessment is made from 1998 to 2013. To date the total number of shares listed is 7,573,961,567. 110


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