African capital markets are pushing for combined efforts to reduce market concentration risk, as part of reforms to improve governance and avert crashes in case of domestic or external shocks.

The African Securities Association (Asea), the continental lobby for capital markets, says reducing the risk associated with the dominance of a few big firms in equity trade will allow diversification of product offerings and give investors wider investment options.“We need more products to reduce market concentration risk and that means reducing barriers to list and allowing more companies and particularly the Small and Medium-sized Enterprises (SMEs) to list their shares on the stock market. It is about diversity,” the association’s president Celestin Rwabukumba told The EastAfrican.“Innovation will come from diversification, but we are not seeing that in our markets and investors have limited choices. What we are trying to push collectively is to bring the assets of the people in their own hands through the stock market.”

Concerns about the risk of dominance of African stock markets by a few large companies featured discussions by stakeholders during the 27th Asea Conference in Gaborone, Botswana, from November 28 to 29 themed “Fostering Transformation in Capital Markets through Innovation”, “Market concentration/dominance by few big players could stifle innovation,” said Oduetse Motshidisi, Chief Executive of Non-Bank Financial Institutions Regulatory Authority of Botswana.

Concentration risk is the potential for loss in the value of an investment portfolio as a result of an exposure to, either economic or political shock, usually with unlikely recovery.

On the other hand, a stock market crash is usually characterised by a drop of at least 10 percent on a stock exchange or major stock index within a single trading day and this usually starts within a particular sector or industry with the possibility of expanding to the wider stock market, depending on the situation.“Our collective efforts focus on strengthening transparency, boosting investor confidence, and creating environments conducive to both regional and international investment,” Mr Rwabukumba said.

In Kenya, for instance, 10 companies led by I&M group, Safaricom, Equity group, KCB Group and EABL, controlled 94.41 percent of the equity market turnover in the three-month period to June 2024, according to data from the Capital Markets Authority (CMA).

Other dominant companies were Co-operative Bank, BAT Kenya, Stanbic Bank (Kenya), Absa Bank (Kenya) and Standard Chartered Bank (Kenya).

The Central Bank of Kenya warned in 2019 that leaving the Nairobi Securities Exchange (NSE) in the hands of foreign investors, and just five large firms would expose it to serious risk of crashing in the event of shocks, which could either be domestic or foreign.

CMA says although market concentration remains a significant risk there is a positive trend towards better distribution of wealth in the market as investors eye other companies that can offer capital gains.

Market concentration“Over the past year, there has been a continuous reduction in market concentration by five specific companies, indicating a growing openness among investors to explore opportunities beyond these select entities,” CMA says in its Market Soundness report.

During the Gaborone conference, the stakeholders noted that Africa’s capital markets are facing serious challenges that are hindering their growth prospects, including the high cost of trading, increased cost of raising capital, smaller exchanges that remain illiquid and struggle to attract local and foreign investments and limited product offerings that have reduced diversification opportunities for investors.

Other challenges for African stock exchanges include low returns, lack of growth and depth of the markets, capital control and restrictions on cross-border investing, forex management, currency convertibility risks and prohibitive taxation on investments or securities dealing and capital gains.

In addition, education and information on investing in capital markets remains a challenge. The conference noted that though Africa remains the final frontier for growth with unparalleled opportunities in infrastructure, technology, renewable energy, and agriculture but global foreign direct investment inflows to the continent hovers around four percent of the global total demonstrating a huge untapped potential.

The major challenges to Africa’s investment landscape include political instability, corruption, inadequate infrastructure, regulatory uncertainties and rising protectionism and consolidation.“These issues demand immediate and sustainable solutions if we are to shift the narrative. Together, we must chart a clear, actionable course to position African Countries as magnets for global investment,” said Keletsositse Olebile, CEO of Botswana Investment & Trade Centre.

FDI flows to Africa declined by three percent to $53 billion in 2023.

According to Prof Onkutlwile Othata, vice-chairperson of the Botswana Stock Exchange, innovation has emerged as a critical driver of transformation, and capital markets are at the forefront of this change.“Across the continent, we are witnessing the rise of digital platforms, fintech solutions, and alternative asset classes that are redefining the way we invest, trade, and raise capital,” Prof Othata said.“This transformation is not only about technology but also about inclusivity—creating markets that are accessible to all, from individual investors to large institutions, and from urban centres to remote regions.”

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