Rwanda has added another feather to its cap as one of the Africa’s economically most progressive countries by launching its own stock exchange early this year. While the number of companies listed so far is small, the mechanism to deepen the country’s fledgling capital market is now in place.
Rwanda continues to show that by embracing a new model of economic development it has become a symbol of progress in Africa, receiving praise for the numerous initiatives undertaken to reduce corruption and modernise its economy.
The country was favourably placed in the pages of two renowned international reports, recognising reforms that have created a favourable business environment. Rwanda was ranked as the most competitive economy in East Africa and also the fifth best in Africa in the World Economic Forum’s Global Competitiveness Report. The World Bank’s Doing Business 2010 report also named Rwanda as a leading reformer in creating a business-facilitating climate, jumping 10 places from 67 in 2009 to 57 in 2010.
Yet, landlocked and with limited natural resources, a spiralling population of over 11.1m and turbulent neighbours, it might be thought that the odds are not in the country’s favour as it tries to put behind it its turbulent past and focus on building a stable and promising future.
The country’s economy has an overreliance on its agricultural sector, especially coffee and tea, which many see as a perilous dependence, especially when transport costs are so high.
In the landlocked country, it is estimated that 40% of the price of imported goods derives from the cost of trucking merchandise from Mombasa on the Indian Ocean coast inland to Kigali. The same applies in reverse for the country’s exports, where a significant proportion of the value is expended on transport.
The need to diversify its mainly agricultural economy has encouraged Rwanda to create a credible financial infrastructure. A significant milestone was reached at the end of January, when the Rwanda Stock Exchange (RSE) became the fourth stock exchange in the East African Community (EAC). It joins the Nairobi Stock Exchange (NSE), Uganda Securities Exchange (USE) and Dar es Salaam Stock Exchange (DSE) in Tanzania, leaving Burundi as the only EAC member not to have its own bourse.
By responding to the investment needs of both private and public investors, East Africa’s latest stock exchange plans to further develop its capital markets as a catalyst for economic growth and development.
The first day of trading started with shares in Rwanda’s iconic brewer, Brasseries et Limonaderies du Rwanda SA, also known as Bralirwa, surging 62%, heralding an auspicious start for East Africa’s latest stock exchange.
Bralirwa’s stock was traded at Rwf220 ($35.83), above the initial public offering (IPO) price of $22.15. Co-transaction advisor, Renaissance Capital, which sold 60% of the international tranche offering to international investors across Africa, Europe and the US, reported that the international bid was oversubscribed more than fivefold.
The government, which owned a 30% stake in the brewer, sold a 25% stake through an IPO that closed on 17 March, raising $29.5m from the shares – yet the offer exceeded expectations and attracted $80m in bids. The government sold its remaining 5% of shares, valued at $7.8m, in a private transaction to Heineken NV, which already owns 70% of Bralirwa.
Bralirwa, which has led the local beverage industry since 1959, sells brands such as Amstel, Guinness and Primus as well as bottling other profitable beverages such as Coca-Cola. It is estimated to have a 95% share in the local beer market and generated a reported net annual revenue of around $93m in 2010.
Furthermore, the brewer’s net profit grew at an average annual growth of 56% over the period 2007–2009. Bralirwa is also the largest taxpayer in the country. In 2010 it accounted for 11–12% of domestic tax revenues, mainly through excise duties, which are substantial, being around 60% for beer.
The RSE marks a historic turning point in Rwanda’s developing capital markets, ending the country’s emblematic Rwandan Over The Counter Market (ROTC), established in early 2008. Across many countries, it has become a very common route for a fully-fledged stock market to evolve from an OTC market.
The ROTC was a small-scale trading platform, which started by just selling corporate and treasury bonds, offered by the Central Bank of Rwanda and the Commercial Bank of Rwanda; it later evolved to sell equities. In 2009 the equities listed were Bralirwa and two cross-listed Kenyan companies – KCB Group and Nation Media Group, both of which are now listed on the RSE.
The ROTC had the dual responsibilities of being a trading platform, which allows members to trade securities directly amongst investors and themselves, and also to organise open outcry sessions where member representatives would get together and trade amongst themselves.
Even though some countries keep both an OTC market and a stock market functioning, mainly due to less restrictive listing requirements in an OTC, ROTC stopped its functions at the end of 2010 in order to transfer all responsibilities and capital to the RSE. However, it was seen as essential for a young economy that some of the elements of the OTC remain.
Different from a centralised stock exchanges, such as the New York Stock Exchange or the NASDAQ, where buyers and sellers meet in one place either electronically or in person to do business, the newly formed RSE still carries the characteristics of the OTC method. Buyers and sellers negotiate sales on a one-on-one basis and will not enter a trading floor where prices are broadcast and public.
The RSE requires that all transactions are to be reported to the regulator, the Capital Market Authority, for the purpose of diffusing information to the public. Rwanda is the only country in East Africa to employ this over-the-counter method, seen as the right route for young companies to break into the financial market and match listing requirements for the first time.
The RSE was registered as a dormant company in 2007. The establishment of the Capital Markets Advisory Council (CMAC), which played the role of market regulator and operator for the ROTC, sparked the transition to a fully functioning stock market. The secondary trading triggered by the RSE’s first transaction dissolved the CMAC’s responsibilities and replaced it with the Capital Markets Authority (CMA).
Even though there is a common structure between the ROTC and the RSE, companies that wish to float shares on the stock exchange will be obliged to meet more meticulous requirements than in the past, such as audited financial statements, which many companies used to sparsely complete, that were for taxation purposes. The RSE brings greater transparency, requires fully disclosure as to which accounting system is being used, and the quality of accountancy used, and aims to ensure that companies fulfil the basic tenets of corporate social responsibility.
At first, the RSE was established with only the government and private companies; it was later reformed to also include stockbrokers in its ownership structure. “This basically brings in ownership by the stockbrokers, which is really positive because when you have an ownership in a particular entity, you make sure you protect the interest of that entity,” says one stockbroker.
In the aim of further encouraging a pro-business bourse, capable of providing efficient services to domestic and international investors, the government’s share was reduced to 20%, with stockbrokers and the private sector holding a majority.
The country has also adopted measures to attract investors, cutting taxes in line with recommendations from the East African common market proposals. Out of these incentives was a decrease of withholding tax on dividends for listed companies from 15% to 5% and income taxes were also reduced to lower rates ranging from 20–28%.
For a stock market in its infancy, especially in the developing world, it is crucial that its progress is accompanied by education to improve financial literacy. To help build Rwanda’s capital market, Renaissance Capital and MBEA Brokerage Services Rwanda SA led a groundbreaking IPO campaign for Bralirwa, which focused on investor education with TV and radio advertising and the first ever Rwandan research coverage on market and investor education.
The RSE also has other influential consultants guiding its development. Jimnah Mbaru, which was chairman of the now 50-year-old Nairobi Stock Exchange between 1991–2001, and later an influential Kenyan investment banker with Dyer and Blair Investment, was appointed to consult for the RSE; it is widely believed that his experience in advising capital markets will inject a measure of confidence in Rwanda’s stock exchange.
Kenya’s Central Depository and Settlement Corporation (CDSC), which earned a reputation for handling some of the biggest share offerings in East Africa including Safaricom and the Bralirwa IPO, was contracted for a year to train the staff of Rwanda’s Central Bank to run a depository for its equity market.
One of the crucial pieces of legislation framing Rwanda’s capital market is a law regulating Collective Investment Schemes (CIS), which cover pension funds, insurance funds and collective savings plans – all critical to market development. The Head of CMAC explains the legislation’s importance: “CIS contributes a very significant proportion in the development and deepening of the capital market because without a collective investment scheme, every investor would invest directly in the market.”
Market analysts speculate that good performance on the first day of trading has proven the capacity of the RSE to raise capital in the next round of IPOs. The Prime Minister, Bernard Makuza, has urged financially stable, local private companies to float shares to fund their own expansion needs but also, he says, to encourage the distribution of wealth amongst the population.
Already, major companies are expected to float shares in 2011. It is expected that East Africa’s biggest lender by assets, state-owned Banque de Kigali, plans to sell shares in May, with reports speculating an IPO of 25% of the bank’s equity. There are also talks surrounding MTN Rwanda, which is 55% owned by South Africa’s MTN Group. Additionally, the Rwanda Commercial Bank and Ciments du Rwanda are also expected to take their first steps towards floating on the RSE in 2011.
Rwanda’s bourse may not remain independent for long, as plans to develop a single East African financial market are quickly progressing. The EAC has already started to harmonise capital market regulations in order to ease the movement of money across borders, with the first stage of the union expected to be finished by 2014; a single stock exchange will emerge in the second five-year phase.
Single E Africa exchange on the way
Rwanda has become a member of the East Africa Securities Regulatory Association and East Africa Stock Exchanges Association, two associations which are (with the International Finance Corporation) heavily involved, allplaying a role in generating the momentum necessary to establish a single financial market in the region.
There is a ongoing debate surrounding the impact stock markets can have on economic growth, and economists such as Randall K. Filer et al. have tried to answer this question by using various econometric tools. Filer uses an instrument called the Granger causality test, looking at factors such as privatisation, literacy and economic growth, to come up with evidence of a positive relationship between stock markets and economic growth, especially when applied to less-developed countries.
However, Filer’s experiment identifies one essential factor in determining this causal link: it is of paramount importance to have an institutional framework free from excessive government control and corruption.
The reduction of the government’s stake through the oversubscribed Bralirwa IPO – the first domestic IPO – and the upcoming Bank of Kigali IPO is an indication that the market is heading towards a bright future.
At the opening ceremony, Prime Minister Makuza explained that “building a strong financial system is a key element of Vision 2020; the government will continue to facilitate the development of the capital market.”
Even though most of the population still suffers from poverty, economic growth has averaged 7% over the last decade, indicating that there is money to be invested in some elements of the economy.
What is anticipated, and is part of the government’s ambitious 2020 vision, is for long-term capital to be a reality for many. The government has recognised the country’s capital market as a vehicle for long-term savings and, with the success of the RSE in the beginning of 2011, will hopefully only further prove the country’s potential as an investment destination.