Despite being in existence for nearly three decades, Uganda’s stock market, the Uganda Securities Exchange (USE), has struggled to make a significant impact, registering few tangible wins for the general public and the broader economy.
This comes as a surprise because the necessary conditions: law, personnel, corporations, prospective clients, market framework, technology, and the need for credit which would support a vibrant stock market, are all there.
To get to the bottom of the muddle in the stock exchange, there’s need to understand what it is. A stock market is a market where financial securities are traded to raise capital for corporations. These securities are parts of companies that have been broken down into shares and put on the market for the public to buy.
This exercise is done by companies to raise cheap capital for research, and expansion from the public who now become investors in the companies they buy into without having to borrow at a high rate from banks. And as a result, when the value of the company goes up, so does the profit for the shareholder.
In Uganda, capital is a problem not only for the average person but for corporations alike. And many companies cannot function meritoriously without the direct support of the government. This has crippled the financial ecosystem, stunted the expansion of corporations, and denied the populace a meaningful avenue of investment.
In general, the stock market in Uganda has been a fiasco because the regulatory body, Capital Markets Authority [CMA], functions according to government’s fiscal and monetary policy because it is part of the ministry of Finance, Planning and Economic Development. And because of that, CMA has failed to boost the domestic investment market because government policy prefers trade sales instead.
At a fundamental level, policymakers’ interests are skewed to promoting poor- quality Foreign Direct Investments [FDIs] over capital markets because, with FDIs, they are not held accountable. These same policymakers have been reluctant to unlock the money of the masses for fear of being held accountable by the public.
Up to the present, CMA has failed to work well with industry players to promote domestic savings which could be used to advance investment in the stock market. This has stymied the development of capital markets.
The Absa Africa financial markets index 2023 established that there was a shallow [capital] market depth in Uganda. The report, which was based on consultations with more than 50 institutions in Africa including central banks, stock exchanges, and market regulators, concluded that the size and liquidity of domestic equity, and bond markets; along with the fewness of listed assets, and the absence of standard features contributed to the lack of depth in the financial ecosystem of Uganda.
This, the report explained, led to a below-average domestic stock and bond market, and unsalable domestic shares on USE. It is important to note that being listed on the stock market comes with a lot of oversight from regulatory bodies like CMA, and multiple shareholders, which implies that everyone working in the publicly listed company is dispensable if the entity performs poorly.
Decision-makers at prospective corporations who would have then pushed for the listing of their companies on the stock market do not want that type of pressure and choose to stay clear of the bourse.
As a matter of fact, before an entity is listed on an exchange, its financials are taken through a rigorous auditing exercise. This process would most likely unveil glaring gaps in the balance sheets of a manifold of local corporations that survive on bailouts, government handouts, insider trading, and corruption.
So, to avoid this scrutiny and exposure, many corporations shy away from the stock market. Additionally, there is the reality that businesses, local and foreign, don’t see potential in any sector to justify their listing on the stock market to get cheap capital to exploit that sector; because in the last two decades, a host of major corporations have closed shop, and divested out of the Ugandan economy.
It is more so evident that there is a general ignorance about financial markets among domestic investors. This has brought prospective corporations to the realisation that for them to fully maximize the markets, they will first have to embark on a massive educational drive to teach local investors the advantages of equity markets.
Such an assignment would bear a lot of costs, and be time-consuming; this partly explains the avoidance of the stock market. Stock markets thrive on timely data. In Uganda, there are poor data collection mechanisms, and the information collected can be erroneous and misleading. Even for the companies that are listed on the stock market, important metrics of financial securities are left out, which makes it hard for the market to thrive.
It’s common knowledge that government retains a controlling stake in the majority of listed companies on USE like: Stanbic bank, Uganda Clays, New Vision, Development Finance Company of Uganda, and many more. Private investors don’t have confidence in government because the establishment has over the years shown itself to be terrible at doing business.
This makes investing in the listed companies less lucrative. Likewise, the absence of active market makers in USE has played a key role in keeping it underwater. Market makers are individuals, firms and brokerages that provide liquidity in the market by taking the risk to buy, and hold the securities.
Liquidity in the stock market is a measure of how fast, or easily shares can be exchanged, or turned into cash. When market makers are docile, investors stay stuck with shares they want to sell off longer than desired.
With respect to the liquidity issue and market makers challenge, CMA’s CEO Josephine Okui Ossiya had this to say: “While we have numerous brokers, the limited number of market makers—who are critical to providing liquidity by buying and selling securities from their own books and on behalf of others—is a gap we are addressing. We recognize that liquidity challenges vary by security type, investor class, and market conditions. Market makers can specialise in specific securities or operate across the entire market”.
“CMA has identified the need for active market makers and is exploring incentive schemes to attract and sustain their operations some of which are: introducing short-selling and securities lending, enhancing electronic trading technology, introducing new products like: exchange-traded funds [ETFs], exploring regional market collaborations, championing pension sector reforms, and so much more”.
“We recognize that liquidity challenges are not a one-size-fits-all problem and they require strategic initiatives tailored to the unique needs of the local market, taking into account the regulatory environment, investor base, product diversity and regional integration”.
Whether the assurance by CMA to implement the mentioned incentives to make capital markets efficient is one of those well-drafted plans that stays in the drawers as is the case with many government plans, only time will tell. Until then, many local companies will continue to raise capital through expensive bank loans and corporate bonds.
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