Regulatory duplication hurting capital markets - CMA chief
Bank financing constitutes about 95 per cent of the economy and capital markets based financing constitutes 5 per cent financing. File photo
What you need to know:
Uganda’s capital markets – sources of long term funding such as bonds and equities – remain underdeveloped. Government chooses to issue bonds through Bank of Uganda. Also, there are only eight locally listed companies, half of what should be on the market right now. Last week, the Capital Markets 10-year Development Master Plan was launched with the aim of breathing some life into this market segment. On the sidelines of the launch, Mr Keith Kalyegira, chief executive officer of the Capital Markets Authority, talked to Daily Monitor’s Mark Keith Muhumuza.
How will Uganda’s capital markets be reformed to attract local entrepreneurs, the government and local retail investors?
For a long time, the economy has been run by short-term financing and this is common in most African countries. Bank financing constitutes about 95 per cent of the economy and capital markets based financing constitutes 5 per cent financing. We want to see this increase to 10 per cent. Medium sized companies are relying on commercial banks for long-term financing and preparing themselves on governance in order to access capital in terms of long-term financing. This is in form of savings that pension funds both local and international provide. All we have to do is improve the governance and tap all the money out there.
The second pillar is to deepen the pool of savings. I am glad the pension reforms discussion is going on. This is going to help in growing the pool of savings in Uganda. This economy needs savings of over seven years. Many businesses tend to grow when there is patient capital. Uganda Development Bank (UDB) is mentioned in every budget on how they will be further capitalised, but it is still not sufficient. Alternatives have to be found.
The third pillar is improving the efficiency of capital markets. This includes improving the capacity of brokers, improving settlement and trading and the whole regulatory framework without introducing risk into the industry.
Do you think it is possible to carry the conversation of capital markets financing infrastructure and municipal councils being able to raise money?
That explains why we have a 10-year plan. Municipal councils do not have sufficient revenue to issue bonds at the moment. There are a few like Entebbe, Jinja and Kampala that can raise money from the capital markets. Once revenues of municipalities improve, then they will have the capacity to issue municipal bonds to fill the gaps in financing.
Keith Kalyegira
For infrastructure, we have had discussions around the Kampala-Jinja Expressway and having some aspect of local financing to the project. When we rely on dollar financing, we expose projects to dollar risks and especially the tariff. Look at the energy sector and most of the projects are financed in dollars. If you introduce a component in local currency, you will be able to reduce the risk exposure to the US Dollar. Presently, the savings we have are still small yet projects are very huge.
Such plans are always good to read. However, from my understanding, it will require more than just the CMA to fix the slow performance of the capital markets. What will it take for this plan to work?
The first steps have to be taken. If it requires changing the law, then let us take the steps. The faster we do it, the better. I know that through the Finance Bill, a few changes in the principle laws can be made. I am aware that it is possible to change some key laws but if it takes time to go to the ministry of Finance and Parliament, we shall have to quicken that process. We will have to engage MPs on why these laws are important. These processes are very difficult and tedious. That is why we want all parties to be involved.
In first five years of the plan, what should we expect to see in terms of capital market growth?
One of the things is going to be on the pension reforms and that is already in high gear. I think we are coming to a conclusion of that and most parties agree that reforms need to happen. We are simply the veil through which people who need capital go through in order to access this capital. So, we are really speaking on behalf of the pension funds and other long-term savers.
We are also going to improve our regulatory framework. You find that the Uganda Retirement Benefits Regulatory Authority (URBRA), Capital Markets Authority (CMA) and Bank of Uganda (BoU) all regulate the same players in the industry. We just need to streamline our reporting requirements so that our intermediaries don’t have to report several times to regulators. I think there is a lot of duplication in our framework and these are things we need to deal with.
There are companies that government privatised and had a condition of listing. Several years down the road, this has not happened. What needs to be done?
I think government needs to pronounce itself on the formerly government companies that were privatised especially those that made contractual obligations to sell shares to Ugandans. There has to be a discussion and a final decision made on whether they should be compelled to issue shares to Ugandans or we stop the discussion. I am aware of Kakira Sugar, Kinyara Sugar, Tororo Cement and Barclays Bank. These are companies that have been built overtime through employees sweat, Ugandan suppliers and other stakeholders. It is only good for them to contribute to society by issuing shares to Ugandans. If you look at the telecom companies and international banks, the principle is the same; there is nothing wrong with them having local shareholders.
