By Ronnie Wonder
According to the 2014/15 budget speech, former Finance Minister Maria Kiwanuka said government intended to reach an additional 20,000 investors in the securities market through a focused capital markets development campaign.
As of June 2014, active number of shareholders on the market stood at 40,000 meaning that the involvement of Ugandans in placing funds in the securities of public listed companies is still largely ailing.
Despite the universal recognition that stock exchanges are the most pragmatic and cost effective method of raising capital, firms, especially private sector firms in underdeveloped economies like Uganda have consistently shunned the stock exchanges.
Fast forward, the capital markets sector is still limping with the regulator, the capital markets authority exerting efforts to increase awareness and uptake of investment opportunities available in the lucrative capital markets?
In light of the above, The CEO Magazine caught up with Joseph Kitamirike, the Chief Executive Officer, ALTX Uganda and sought his views on the security industry’s prospects.
Come May this year, ALTX Uganda will introduce derivative instruments on Uganda’s securities market in a bid to address the shortage of attractive investment opportunities the market. What is the progress so far?
ALTX plans to introduce derivatives later. We shall likely start with some of the more familiar offerings and vary them gradually until we are able to offer derivatives. In order to trade derivatives, there are certain additional investments we shall need to make in terms of software and training. We still anticipate being ready to start operation in May, but the uncertainty regarding the outstanding regulatory approvals on the product rules is diminishing our ability to predict the start date with accuracy. The regulator has to do their job.
What are asset backed securities, exchange traded funds, depository receipts? How are these instruments going to disrupt or compliment efforts being made by ALTX among other financial service players in increasing access to financial products?
Asset backed securities, exchange traded funds, and depository receipts are securities created by structuring existing securities or commodities into another security that will be tradable on ALTX.
Asset backed securities are mostly created against an anticipated cash flow generated from a loan book. For example several loans may be placed in the same structure in which the repayments provide the cash asset against which the asset backed security is issued.
Exchange traded funds are created out of pooled securities, index assets or commodities that are traded internationally. Those pooled assets are divided into shares that are then tradable on an exchange like ours.
Depository receipts, on the other hand are in the simplest description, copies of securities traded on other markets that are issued on the local market by the local depository. If the depository company acquires securities as an investor on another market, it would place a line on those securities in that market so that they cannot be traded on the mother market.
Pearl Bank Made Christmas Feel Personal Again with Pearl Santa
Once secured, the copy is issued on ALTX for purposes of trading. Each of those products enables the exchange to diversify the products available to the market.
Skeptics insist derivatives will be a hard sell in an industry with few investment choices that are dominated by equities and government securities and a market characterized by unsophisticated investors. What strategies will be adopted to allay fears of the doubting Thomas’s?
None of the things we have offered to do as ALTX should be considered simple or easy. We promised a world class experience and we are on the eve of ensuring that Uganda gets there. On the question of derivatives, today you may find people who do not realize that their forex complaints or their interest rate complaints can be alleviated by use of a derivative.
We do not expect to sell derivatives by the spade when we start, but as the market starts to get benefit from these instruments, we know we shall grow that business. Our game in this case shall be a long and patient one.
With the capital markets sector still limping, what do you see as the challenges and opportunities in derivatives coming on to Uganda’s security market?
I am not sure I agree with your characterization. Liquidity is improving in the equities markets and in the debt markets. We think we understand how and why.
There are some structural changes that have to be made to make the markets more vibrant and to free them from the unnecessary regulatory cover, which is currently in place.
There are also market development actions we hope to take that will, if successful, change the impression you might have. Derivatives trading will be a long game; people need to be a little patient.
Among items due for harmonization is setting up uniform capital adequacy rules applicable to stockbrokers, investment banks, fund managers and all other intermediaries licensed to operate across the region. How will this impact on ALTX’s operations in Uganda and elsewhere?
If the rules will make the market stronger, they are very welcome. Rulemaking must always move the markets forward. So the regulators must be mindful of the effect on firms that are new to the market but that are making a solid contribution in terms of trading.
