The securities market in Tanzania emerged in the 1990s as a result of the government policy to liberalize the financial sector, which included a 1990 study on monetary issues.
One of the recommendations outlined in the study was that there should be a Tanzania capital market in order to assist in mobilizing Tanzanians to save and to channel them into long-term investments.
Within such framework, the Capital Markets and Securities Authority (CMSA) was established in Tanzania in 1994 under the Capital Markets and Securities Act.
The purpose of the Capital Markets and Securities Authority is to regulate and supervise the capital markets in Tanzania by promoting their development; regulating the whole industry in terms of the capital markets; licensing the brokers, investment advisors, stock exchanges, and the conduct of business and financial disclosures; and advising the government on the securities business.
Accordingly, two years later, in 1996, the Dar es Salaam Stock Exchange (DSE) was incorporated.
However, the DSE did not start trading operations immediately because the framework took time to develop.
As Mr. Fratern M. Mboya, Chief Executive Officer of the Capital Markets and Securities Authority explains, {xtypo_quote_right}When the Capital Markets and Securities Authority came to be, we existed without a market, market professionals and products{/xtypo_quote_right}“When the Capital Markets and Securities Authority came to be, we existed without a market, market professionals and products—basically without anything to regulate.
Accordingly, our prime responsibility was to establish the market itself.”
Eventually, the Dar es Salaam Stock Exchange began trading operations in April 1998.
Performances of the Tanzania Capital Markets
Currently, the Dar es Salaam Stock Exchange is the only formal trading place for securities in Tanzania.
Eight companies are listed: Tanzania Oxygen Limited, (TOL), Tanzania Breweries Limited (TBL), Tanzania Cigarette Company (TCC), Tanzania Tea Packers Limited (TATEPA), Swissport (formerly DAHACO), Tanga Cement Company (SIMBA), East African Breweries (EABL), and Kenya Airways (KA).
The last two are cross-listed, being primary listed at the Nairobi Stock Exchange.
Treasury and corporate bonds are also listed at the Dar es Salaam Stock Exchange.
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The Market capitalization for the quarter ending December 2004 rose to TShs 2,325 bn from TShs 665 bn the year before.
According to Mr. Mboya, “If you look from 1998, for all the listed companies except for Tanzania Oxygen Limited (TOL), which is under restructuring […], the current market share price when compared with the IPO price has, in most cases, doubled [and] in some cases tripled.
“If you look at the dividend yields, most of the listed companies have been giving dividends of about 20% and none of them below 10%.”{xtypo_quote_right}If you look at the dividend yields, most of the listed companies have been giving dividends of about 20% and none of them below 10%.{/xtypo_quote_right}
Nevertheless, the number of companies listed at the Dar es Salaam Stock Exchange is still considered to be too limited and far below the original expectations.
Furthermore, of the eight companies listed, some are parastatal companies listed for privatization.
The presence of such parastatals at the Dar es Salaam Stock Exchange is the result of the privatization initiatives undertaken by the government.
In that sense, the Dar es Salaam Stock Exchange has proven to be a success.
However, in regards to the overall number of Initial Public Offerings (IPOs) since 1998, Mr. Mboya confirms that “Although the reason behind the need for efficient capital markets was for long-term financing of an emerging economy like ours, it is right to say that the capital markets in Tanzania have not played a major role in the mobilization of resources for investment.”
But Mr. Mboya also adds: “The privatization of the parastatals [is] a proof that the market has the capacity to mobilize resources.”
Challenges of the Tanzania Capital Markets
In order to understand and address the reluctance of Tanzania businesses to go public, the Capital Markets and Securities Authority initiated seminars involving companies with potential for listing.
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| Trading activities at DSE are on the increase and now take place four times per week |
“It came out that companies are fearful of the fact that, if they come to the market, they will have to comply with full disclosure. This has tax implications as these companies may not be extremely transparent in their accounting,” Mr. Mboya explains.
For this reason, the Capital Markets and Securities Authority has made recommendations to the government to implement a tax amnesty for these companies that are interested in being listed.
“Furthermore, private companies to be listed during the 2006–2007 financial year will have a preferential corporate tax rate of 25% for the first three years if they list over 35% of their capital,” Mr. Mboya adds.
But there is another major issue that is undermining the success of the market to welcome new companies: the perceived cost for flotation.
However, it is clear that such fear does not correspond to reality, as explained by Mr. Jonathan A. Njau, Chief Executive Officer of the Dar es Salaam Stock Exchange: “If you break down the cost of going public at the Dar es Salaam Stock Exchange, you will realize that this is less than 4% [which] also includes fees payable to the Capital Markets and Securities Authority, the regulator.” {xtypo_quote_right}If you break down the cost of going public at the Dar es Salaam Stock Exchange, you will realize that this is less than 4%.{/xtypo_quote_right}
According to CORE Securities, included among the top licensed stockbrokers and consultants on capital markets in the country, the cost of going public in Tanzania is even less than the abovementioned 4%.
According to this brokerage house, even though charges depend on negotiation, but, as a rough rule-of-thumb, an all-in cost of an IPO should not exceed 2% to 3% for small IPOs (total proceeds below TShs 5 billion), getting to well below 1% for IPO sizes in excess of TShs 10 billion.
Mr. Njau believes there is also another issue which undermines the development of the Dar es Salaam Stock Exchange—ownership control: “What I believe may have made [companies] hesitant to come for listing is the fear of diluting ownership.
To this extent, I would stress the fact that the benefits they may get through the capital market override whatever they are trying to protect.
Companies can still retain control by offering to the public only part of the capital, rather than 100% of it, i.e., by giving 49% to the public.
So it is very much a question of educating people and entrepreneurs.”
Outlook of the Tanzania Capital Markets
With such a challenging background, trading activities are increasing slowly but steadily at the Dar es Salaam Stock Exchange as the general public in Tanzania is gaining confidence in capital markets.
“The attitude toward the capital markets in this country is changing fast. When we started […] investors had a wait and see attitude [and] the amount of shares available were not entirely absorbed by the marketplace,” says Mr. Njau.
“Now the trend is different. If you now float your capital, shares will be taken the very first day. There is a rush now in buying shares by local investors,” he adds.
In addition, Mr. Mboya states that, “The awareness of the Tanzanian public in terms of investing in capital markets is now very high, and this is demonstrated by the oversubscription of the recent Initial Public Offerings (IPOs).
One example is the DAHACO IPO, which was for only 4 Bn TShs, but where subscription reached 31 Bn TShs with 43,000 subscribers.
Then, we had the more recent completed IPO of TWIGA Cement, which was only 23 Bn TShs but was subscribed by 20,000 for over 92 Bn TShs.
So you notice two things.
One is that the awareness is there.
Second, that the myth for which Tanzanians do not have savings to invest in the capital markets is not that true, in my opinion, and people are crying for more products in the market.
Therefore, there is the need to concentrate on private companies and encourage them to enter the capital markets.
The only way to do it is for them to be able to see that capital markets are an alternative for mobilizing resources and at a cheaper cost.”
Not surprising is the fact that new IPOs are on the way. Twiga Cement, for example, is expected to go public in 2007.
Furthermore, if it is true that the Dar es Salaam Stock Exchange did not have great success in welcoming companies to list in perspective to the initial forecasts, as far as bond market is concerned, the Dar es Salaam Stock Exchange is said to be far ahead of neighboring stock exchanges in Kenya and Uganda.
This why, as Mr. Njau concludes: “[The Dar es Salaam Stock Exchange] further development focus will be mainly on bond listings, {xtypo_quote_right}[The Dar es Salaam Stock Exchange] further development focus will be mainly on bond listings{/xtypo_quote_right} taking into consideration that in any developed economy not less than two thirds of its activities are financed via the bond market.
Also, a big segment of bond market means that there are more economic activities of long term nature that are taking place in the economy.
Furthermore, bonds are more appealing than equities as they overcome the fear of diluting capital commonly cited in issuing shares.”
Not surprisingly, trading activities are on the increase and currently take place four times per week on Tuesdays, Wednesdays, Thursdays, and Fridays, from 10.00 a.m. to 12.00 noon.
This is a definite increase compared to 1994 when the meetings were held once per week.
In addition, the Dar es Salaam Stock Exchange officially states on its website that “The number of trading days will be reviewed in future as will be determined by the level of activity.”
Foreign Investment at the Dar es Salaam Stock Exchange
The growing capital markets in Tanzania are now available to foreign investment as the Dar es Salaam Stock Exchange was opened to foreign capital in May 2003, with the Bank of Tanzania (BOT) regulation allowing foreign investors to hold up to 60% of the ownership of listed companies.
Participation in government securities is barred.
“Certainly foreign investors in the Dar es Salaam Stock Exchange play a major role by building credibility about the capital markets in Tanzania and attracting further Foreign Direct Investment,” explains Mr. Mboya.
However, in real terms, the liquidity is not there, with most of the listed companies’ shares held up to 60% of the capital by strategic foreign investors that are not getting out of the capital.
According to Mr. Mboya, it is also true, however, that “The Stock Exchange can also act as an exit mechanism for foreign investors entering in joint-venture with local partners.”{xtypo_quote_right}The Stock Exchange can also act as an exit mechanism for foreign investors entering in joint-venture with local partners.{/xtypo_quote_right}
For such purposes, the government of Tanzania has introduced an array of incentives to list at the Dar es Salaam Stock Exchange whereby:
• No withholding tax on interest is charged for either corporate or government bonds of three years tenure and above.
• 5% withholding tax is charged on dividend payable for listed equities against 10% charged for unlisted equities.
• 0% Stamp Duty on transfer of listed security against 6% for unlisted security.
• 0% Capital Gain tax on disposal of listed security against 10% for unlisted security.
Finally, to this Mr. Mboya adds, “More recently private companies to be listed during the 2006–2007 financial year will have a preferential corporate tax rate of 25% for the first three years if they list over 35% of their capital.”