Financial market in Africa: a real tool for development?

African financial market history

Since the early 1990s, African financial markets have experienced spectacular growth; from a dozen, they now number 23 and cover the entire continent. Market capitalization has increased ninefold, and more than 2000 companies are now listed. In recent years, IPOs have multiplied, enabling some banks and companies to raise considerable capital – which undoubtedly demonstrates the depth of local savings and the interest of national investors in the stock markets.

A few days before Facebook went public on May 18, the social networking giant’s hype was unleashed. The media called it the largest IPO ever for an Internet company. Investors were ecstatic about the rare opportunity to turn a quick profit. The 900 million or so fans who had helped build Facebook into a global behemoth were publicly wondering what they would gain.

Facebook IPO

At the time, Facebook’s supposedly spectacular IPO was a disappointment – and almost a disaster. However, it demonstrated the dual power of financial markets: their ability to attract capital for a company’s growth ($16 billion in the case of Facebook), coupled with the potential to destabilize economies.

As European economies grapple with the debt crisis and growth has slowed sharply in the U.S. and the rest of the world, investors are turning to Africa because of the attractiveness of its growing economy. Indeed, “Africa could be on the verge of an economic takeoff, just as China was 30 years ago and India was 20 years ago,” the World Bank says.

This year, sub-Saharan Africa’s economy is forecast to grow by 5.9 percent, outpacing North Africa’s estimated growth of 4.2 percent, according to the International Monetary Fund (IMF). Seven African countries are expected to be among the world’s top ten performing economies over the 2011-2015 period. Among investors, the perception of Africa “is becoming more positive over the long term,” according to Ernst & Young, an international financial market auditing firm, in its Africa Attractiveness Survey published in 2011, with capital investment forecasts for the continent expected to reach $150 billion in 2015.

Given these growth prospects, the challenge for investors is to identify the best ways to enter the market. Stock exchanges have certain advantages over private equity firms (see Private Equity: Getting Companies off the Ground) in raising investment funds: companies can raise large sums of money to expand their operations without taking out large bank loans, listed companies must publish regular reports, and stock exchanges give individuals the opportunity to invest directly in large companies.

Invest in Africa website, a website that monitors stock markets in Africa, reports that as of May 2012, six stock markets (in Kenya, Mauritius, Namibia, South Africa, Uganda, and Zambia) had risen by at least 27% (in dollar terms) in three years. Zambia led the way with a whopping 57%, thanks to a booming economy supported by rising commodity prices. Last year, however, was a bad year for African stock markets due to the global recession. Nevertheless, the Lusaka stock exchange in Zambia, one of the strongest, rose 18.3% and above-average medium-term returns are expected in the rest of the region.

To date, there are 23 stock exchanges in Africa, up from 18 a decade ago. The most recent is the Rwanda Stock Exchange (where four companies are listed), which officially opened to the public about three years ago. Other countries, including The Gambia and Sierra Leone, have expressed interest in establishing one.

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