Dar es Salaam Stock Exchange (DSE) is the securities exchange of Tanzania, one of the fastest growing economies in Africa. Highly endowed with natural resources, Tanzania has recently invested a lot in governance reforms, progressive policies and legislations to support sustainable development and growth of its fast-evolving private sector.
DSE was incorporated in 1996 as part of the first financial sector reform programme, to facilitate implementation of the government’s economic reforms and encourage wider ownership of economic resources.
By 31 December 2010, 15 companies with a total market capitalisation of $3.37bn, 79 treasury bonds with an outstanding amount of $957.4m and six corporate bonds with outstanding amount $64.9m were listed.
Furthermore, one corporate bond and two companies have recently obtained approvals to be listed. Of the listed 15 companies, five are in the banking and investment sector, three are in the commercial services sector while the remaining seven are in the industrial and allied services sector.
The governance of DSE is entrusted to a 10 member council drawn from the various interested groups of the society. The council business is guided by a council charter which also guides the council committees and CEO. The membership includes the six brokerage firms and 32 associate members, composed of pension funds, insurance companies, commercial banks, professional bodies and listed companies. DSE is a member of the East African Stock Exchanges Association, the Southern African Committee of Stock Exchanges and the African Stock Exchanges Association.
The principal legislation governing the securities industry in the country is the Capital Markets and Securities Act of 1994, amended in 1997, 2000 and 2010. The legislation empowers the Capital Markets and Securities Authority (CMSA) to be the overall regulator of the DSE and institutions dealing with the securities traded at the exchange. Apart from the DSE, six brokerage firms, 13 investment advisory firms and a collective investment scheme with four mutual funds have been licensed by the CMSA. The regulator is accountable to the Minister for Finance and Economic Affairs.
Selling and purchase of securities at DSE is conducted through an Automated Trading System since December 2006. Trading is conducted Monday to Friday, presently between 10am and 12 noon. The trading platform is a modern, SWIFT-ready, wide area network and multicurrency enabled system. Brokers still converge in the trading floor to post their orders, but there are immediate plans to activate the wide area network, allowing brokers to trade from a remote location. Clearing and settlement of transactions is done electronically through an electronic Central Depository System (CDS). The CDS has been operational since 1999 making all securities listed after 1998 held in the form of depository receipts (dematerialised). A programme to link up the DSE CDS to the National Payment System has been in progress. The programme aims at increasing efficiency and cutting down the settlement cycles while achieving the DVP. It is expected that once implemented, a shorter settlement cycle will be achieved at T + 1 for equity and corporate bonds and T + 0 for treasury bonds.
The government has put in place some fiscal incentives to develop the fairly nascent exchange. The country offers zero capital gains tax as opposed to 10 percent for unlisted companies, zero stamp duty on transactions executed at the DSE compared to six percent for unlisted companies, withholding tax of five percent on dividend income from listed companies as opposed to 10 percent for unlisted companies, zero withholding tax on interest income from listed bonds whose maturities are three years and above and tax exemption to the income received by the collective investment schemes’ investors. Further, listed companies benefit from reduced corporate tax from 30 percent to 25 percent as long as they remain listed on the exchange. In addition, all IPO costs are deductible expenses for the purpose of determining the income.
The government has also implemented other far reaching economic reforms aiming at supporting a vibrant private sector that in turn will bring more products in the exchange. Some of the initiatives include: wide ranging second generation financial sector reform programme that target increasing financial literacy, developing bonds market through promotion of long-term financing institutions and instruments, putting in place the private public partnership regime and further reforms in the financial institutions. Other reforms include supporting and providing for better regulations for development of the fast growing mining, tourism, power generation, agro processing and telecommunications subsectors; implementation of legislations supporting sustainable development including on environment, food and drugs, water sewerage and energy, aviation, transport, intellectual properties, and occupational health and safety.
Trading at DSE has recorded positive trends on both the equity and fixed income securities. The equity market has recorded a growing interest from foreign investors. The daily turnover attributable to foreign portfolio investors increased from a daily average of 1.77 percent throughout 2009 to 21.75 percent in 2010. Foreign investors are allowed to invest up to an aggregate of 60 percent of the share capital of any listed company. The All Share Index, which started to decline in 2009, began to recover in May 2010. In August it reached 1174.57, before starting to decline again in November to a new all time low of 1162.02. At close of the year the index had recovered slightly to 1163.89.
Fixed income securities, on the other hand, also demonstrated a very impressive trend – especially on part of the treasury bonds counter. During the last 24 months, the volume increased from $106.56m to reach $147.48m at the end of 2010. It is evident that the fundamentals of the market operations were getting right for the volumes to start picking up.
Looking to the future, DSE will continue to optimise the use of ICT to cut down the cost to investors and increase its efficiency. Through carefully selected information vendors, DSE will make market information readily available to investors worldwide and thus broaden their opportunities. DSE will also implement the wide area network for the trading platform to allow its brokers more trading time.
To increase more products, DSE will continue to invest in the awareness programmes for issuers. During the year 2011, a new market segment for medium scale and fast growth start-up companies will be launched at DSE. Efforts will also be made to increase participation of local investors to increase liquidity and cut down the cost of new and additional issuances. In preparation to regional integration, DSE will work with its members and all key stakeholders to prepare for demutualisation process during the next three years. More importantly, it will work with other stakeholders to set a corporate social responsibility index for the listed companies aiming at rewarding the entities that will be most responsive to environment, society and growth.
On regional integration efforts, DSE has made impressive progress in cooperation with other exchanges in East Africa. The integration model has not yet been firmed up. The discussion, however, has been narrowing down to a phased approach where the immediate initiative shall be linking up the stand alone national exchanges through an ICT platform. The integration platform will allow information exchange between the member countries’ CDSs and the trading platforms. The so called hub and spoke or smart order router solution shall enable creation of a virtual East African capital markets as securities in the five member countries markets will be made available in each country while the exchanges remain national entities. Once this model has been attained and proved to work, the next steps may be considered.
The main challenge going forward is having in place stronger brokerage firms (in terms of capitalisation and exposure) to speed up bringing in new products, trading volumes and ideas. The other challenge is bringing competition to the custodial services. It need not be emphasised that custodians are the gateways for the foreign portfolio investors and local markets. Having one already, it would be healthier to have some competition for volumes and efficiency. Apart from the market intermediaries, the ongoing challenge will remain financial literacy. Public education is both the most expensive and difficult in making the implementation assessment; but these challenges are not insurmountable. Tanzania remains one of the most vibrant emerging market at hand.
