There's more money to be made at the stock exchange

This week saw Equity Bank cross-list on the four-year old Rwanda Stock Exchange. With a market capitalisation of $2bn and 9.2m customers across the region, it makes for one of our local blue chip companies, and will be a great boon to the bourse.

This week saw Equity Bank cross-list on the four-year old Rwanda Stock Exchange. With a market capitalisation of $2bn and 9.2m customers across the region, it makes for one of our local blue chip companies, and will be a great boon to the bourse.

It has joined other cross-listed heavy-weights, also Kenyan – the Nation Media Group, Uchumi Supermarkets, Kenya Commercial Bank Group – on the bourse bringing a total of six listed companies.

The RSE holds a huge promise, though it has not been as vibrant as should be expected on the trading floor.

For some reason, as has occasionally been lamented, only the local listed companies – Bralirwa and Bank of Kigali (the other two listed companies on the bourse) – have consistently been registering some activity.

This has raised some concern with the impression the cross-listed companies are not attracting the expected interest.

 Some industry experts generally put down the low activity to there being “less cash in the market” and, at the cross-listed counters, to a cumbersome settlement process of the regional companies’ shares fueling “disinterest”; a disinterest that has, in turn, been driven by lack of awareness by local investors about the potential for attractive returns trading in cross-listed shares.

But the concern is a bit broader, as there also seem to be a dearth of awareness even by local companies, which need to appreciate the potential the stock market holds to grow a business.

The logic should be simple, as a company has only have two ways to raise money; either to expand the business or cover the costs of starting up.

The company can either borrow money in a process known as debt financing, or sell stock, known as equity financing.

The disadvantage of borrowing money is that the company has to pay back the loan with interest, while equity financing distributes the risk of doing business among the stockholders, who comprise a pool of investors.

Even with the element of risk, the bottom line is there is money to be made, both for the investor and the company. And the more companies and investors, the better it is for the industry and the economy. 

To the government’s credit there have been efforts to interest small and medium enterprises (SMEs) in the Rwandan bourse.

This aims to introduce a variance of the concept of “penny stocks”. Penny stocks are, by definition, low value thus trading at a relatively low price and market capitalization. It would be great if this could broaden the pool of potential investors to include even those without deep pockets.

Penny stocks have historically been a sector in local markets that have offered high returns and drive volume.

In this sense, SMEs help in capital generation. To attract SMEs, the government has made listing requirements flexible, compared to large corporations.

To come back to Equity Bank’s entry into the local stock market, it is the regional heft it carries that industry is hopeful it may add in spurring necessary interest.   

Currently among the most influential market leaders in the banking sector in the region – for instance, by having debunked the myth that the low-income unbanked can’t be profitable – Equity turned a profit in Rwanda within three years of market entry.

The bank’s entry marks an important milestone. But the key is regional, working towards the harmonisation of East Africa’s capital markets to create one regional platform.

This featured prominently at the just concluded East Africa Capital Markets Conference in Kigali. Themed “Accelerating Economic Development”, the conference focused on how capital markets can be used to create a foundation for long-term and inclusive economic growth by regional countries.

The conference gave impetus to the projected linking of the regional stock exchanges, which will enable easier shares trading across the region.

Along with raising awareness, integrating the different electronic trading platforms among EAC member states so that it functions as a single bourse will go a long way in realizing the locked potential in Rwanda and the region.

The writer is commentator on local and regional issues

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