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Issue 2 | 2013 Display until August | 31st 2013

Fast-tracking Regional Integration through Virtual Marketing

Who Owns the System

A Taxing Leson

East Africa Trading and Technology Developments

Technology- The Solution to

Regional Integration

We Share Lake Victoria | We share Swahili Language | Now we share The Exchange

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GARDEN fresh Fruits & Vegetables

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CONTENTS Features

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REGIONAL ANALYSIS

The quarterly trends on the EAC markets and their likely impact on other markets.

FAST-TRACKING REGIONAL INTEGRATION THROUGH VIRTUAL MARKETING

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WHO OWNS THE SYSTEM

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BRICK AND MORTAR SOUP

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EAST AFRICA TRADING AND TECHNOLOGY DEVELOPMENTS

Technology brings efficiency, but technology also introduces a host of new and interesting issues.

Information and Communications for Development.

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A TAXING LESSION

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MOBILE TECHNOLOGY

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The striking of commercially viable oil in Northern Kenya elicited excitement and was tagged as a key variable for Kenya’s economic takeoff.

Virtual offices, virtual trading and virtual meeting have all been made possible, thanks to technology. This is the era of the virtual customer and the virtual community.

CAPITAL MARKET THEORIES IN PRACTISE Relationship between dividends, earnings, share prices, assets and liabilities among the companies listed on the Nairobi Securities Exchange.

A central objective of regional integration is providing a platform on which common challenges in the member countries can be discussed and solutions developed.

The movement of securities across boarders has for a long time been a very cumbersome process for investors in East Africa.

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WHY WE CAN’T WAIT AND SINCE I GOT LISTED We focus on Nairobi Securities Exchange, Chief Executive, Mr. Peter Mwangi and Uchumi Supermarkets Chief Executive Officer, Mr. Jonathan Ciano.

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EXCHANGE TEAM Chief Editor Carol Karugu ckarugu@nse.co.ke Sub Editors Waithera Mwai wmwai@nse.co.ke Fanon Mwenda fmwenda@nse.co.ke French Translation Emma Wenani wenani.emma@gmail.com The Exchange Committee Members Pierre Celestin ( Chairman, CEO - RSE) Peter Mwangi ( Member, CEO - NSE) Donald Ouma ( Member - NSE) Jonathan Bushara ( Member - USE) Joseph Kitamirike ( Member - USE) Emanuel Nyalali ( Member - DSE)

Contributors Evelyne Ogutu Dr Issac Rutenberg Kinoti Gatobu Abrah Hadgu Sammy K. Waweru David Mugwe Moses Munene Maryanne Muchui Waithera Mwai

Chairman’s Note

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egional integration has been a key focal point for the East African Exchanges with initiatives such as regional standards for the Broker Back Office system (BBO), The Smart Order Routing system (SOR) to enable trading across all EAC exchanges and a regional inter-depository transfer mechanism being discussed. Regional integration of the EA capital markets will reduce the costs and complications of cross border trading, enhance the movement of securities across the region and improve the liquidity of cross listed securities. The emergence of an equity culture across Eastern Africa is making cross border investment more common. Several public listed companies have taken advantage of this phenomenon to cross list. KCB Group and Nation Media Group are cross listed on the Dar-es-Salaam Stock Exchange, Rwanda Stock Exchange and the Uganda Securities Exchange. East African Breweries, Jubilee Holdings and Kenya Airways, are cross listed on the Dar-es-Salaam Stock Exchange and the Uganda Securities Exchange. Centum Investment Company and Equity Bank are both cross listed on the Uganda Securities Exchange and have expressed interest in cross listing on the Rwanda Stock Exchange. All these firms have a primary listing on the Nairobi Securities Exchange. On December 14 2012, Umeme Ltd., which began trading on the Uganda Securities Exchange on November 30 2012, became the first East African company following the incorporation of the East African Securities Exchanges Association (EASEA) to have a secondary listing on the Nairobi Securities Exchange. The trading of cross listed securities particularly in the secondary

All rights reserved. Reproduction in whole or in part without written permission of the editor is strictly prohibited. The greatest care has been taken in compiling this magazine publication. However, no responsibility can be accepted by the publishers or compilers for accuracy of the information presented.

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Design Kichimbi Brand Solution kichimbibrand@gmail.com Photography Shutterstock, Image Library Advertising Sales info@nse.co.ke Waithera Mwai wmwai@nse.co.ke TEL: 254 (020) 2831000

Distributed in Uganda, Tanzania, Kenya and Rwanda.

The Exchange Magazine is owned by Nairobi Securities Exchange, Uganda Securities Exchange, Rwanda Stock Exchange and Dar es Salaam Stock Exchange.


Chairman’s Note markets has been marred with challenges. To make it easier to trade cross listed securities, EASEA has adopted the Kenya Broker Back Office System as the minimum standard for the region. Discussions to implement procedures for a regional interdepository transfer mechanism are advanced.

Heightened Market Liquidity High trading volumes are important to an exchange because of the increased liquidity associated with them. Liquidity is the ability to buy or sell an asset quickly and at a price similar to the prices of previous transactions, assuming no new information is available. When buyers and sellers are few in number and arrive sporadically at the market, they may not find each other immediately, and significant price fluctuations can ensue. Boosting liquidity facilitates market transactions and attracts more investors. Accordingly, this encourages new equity investment.

Reduced Market Fragmentation Parallel trading of the same security on different national exchanges contributes to fragmentation of the financial markets. Because most stocks have not been trading simultaneously on the EAC exchanges, market fragmentation is not a major concern at present. With the increasing integration of the EAC markets, however, more companies are likely to seek multiple trading venues for their shares, and fragmentation could become a more pressing issue if the status quo remains on the technology front.

Consolidation Vs Multiple Exchanges Environment There is a school of thought suggesting a regional EAC exchange though several forces are working against it rather advocating for maintaining domestic exchanges that can talk to each other through an SOR. These include the desire for product differentiation, the existence of cross-country legal and regulatory differences, demutualization, high information costs, home-country bias, and the widespread fragmentation of the EAC’s clearing and settlement systems. How can technology help?

Fragmentation of Clearing and Settlement Systems The current state of the EAC’s fragmented clearing and settlement systems stand in the way of regionalization. After a trade has been executed, clearing takes place—that is, the buyer and seller confirm the terms of the trade, and the clearing agency calculates the counterparties’ obligations. Settlement entails the actual transfer of funds and asset ownership between buyer and seller. Unlike trade execution, which occurs at exchanges, clearing and settlement can be completed at agencies that are either independent or controlled by an exchange. In Tanzania and Uganda, the clearing and settlement systems are run by the Dar-es-Salaam Stock Exchange and the Uganda Securities Exchange respectively. In Kenya, the Central Depository and Settlement Corporation (CDSC) Kenya, an associate company of the Nairobi

Securities Exchange runs the clearing and settlement system for the Kenya capital markets. In Rwanda, clearing and settlement is a function of the National Bank of Rwanda. Clearing and settlement is sharply divided along national lines. Such fragmentation—which often brings with it redundant clearing and settlement processes— can result in significantly higher transaction costs. Consequently, EAC stock exchanges may fail to achieve greater integration unless clearing and settlement systems also integrate. The proposed interdepository procedures will make it much easier to transfer securities between national depositories and allow investors to choose which exchange to trade their securities. Another model might be a pan-EAC central counterparty—similar to the Depository Trust and Clearing Corporation in the United States. A central counterparty takes the other side of every matched deal after trading is completed: buyers purchase securities from and make payments to the central counterparty (rather than their market counterparties), while sellers do the opposite. This model also working in the European financial industry is being looked at EASEA level but the jury is still out.

A Comparison with U.S. Consolidations In the early twentieth century, there were dozens of regional exchanges in the United States—outside the New York Stock Exchange (NYSE), the American Stock Exchange, and the National Association of Securities Dealers—that mainly traded the stocks of local companies. However, the industry structure began to change with the introduction of new communications technologies. The emergence of cross-country telephone service after 1915, the coast-to-coast availability of NYSE stock tickers after the mid-1920s, and the development of the open-end teletype after 1935 eliminated geographical barriers, allowing the NYSE to capture a large portion of the regional exchanges’ trading volumes (Arnold et al. 1999). New regulations put forth in the wake of the 1929 stock market crash were another major factor affecting industry structure. In 1936, the U.S. Congress granted exchanges “unlisted trading privileges” permitting an exchange to trade any security that was approved for listing on another exchange (Securities and Exchange Commission 1944). Unlisted trading privileges facilitated the trading of a single stock on multiple exchanges. Thanks largely to these technological and regulatory changes, the percentage of “regionalonly” stocks traded on regional exchanges declined from 63.7 percent in 1929 to 18.3 percent in 1949 (Arnold et al. 1999). Moreover, the dramatic increase in the number of stocks that traded simultaneously on multiple exchanges led to intense competition for order flows: investors could decide where to place buy and sell orders by comparing the cost, speed, and quality of execution in different venues.

investors, and the exchanges themselves enjoyed higher values for their membership seats. However, because the technological and regulatory changes did not take place overnight, consolidation still proved to be an extremely gradual process. The more than 100 regional exchanges in operation in the late nineteenth century were reduced to 18 by 1940, 14 by 1950, 11 by 1960, 9 by 1970, and 7 by 1980 (Arnold et al. 1999). However, differences between the U.S. and the East African experience could suggest a somewhat faster consolidation in East Africa; if the region chooses to do so. For instance, while the consolidation of the U.S. exchanges had to await the development of new communications technologies, East African regionalization does not face similar technological impediments. Indeed, the obstacles to consolidation in East Africa are more narrowly regulatory and financial. Since financial and regulatory restructuring can occur faster than technological innovation, one might expect consolidation to happen a bit more swiftly in East Africa than it did in the United States. The Broker Back Office, The Smart Order Routing system, the Inter Depository Transfer Mechanism, all support access to markets by enabling an investor to input orders more efficiently through their mobile phone and very soon through the internet. Going forward, EAC governments can play an important role in the transformation of the countries’ stock exchanges. For example, they could facilitate the regionalization process by encouraging regulatory standardization across stock markets and allowing more liberalized trading of stocks on multiple venues. The ensuing benefits would likely be passed on to investors and companies in the form of improved financial services, decreased transaction expenses, and reduced costs of obtaining capital. East Africa can leapfrog in the capital market integration efforts as technology is improving at a lightning speed and changing the way we think and operate along the way in a region full of opportunities and an ever growing demand from investors and issuers for an fully integrated and efficient market. Whether consolidation is the way to go as it has been over decades with our counterparts’ outre mer or if multiple exchanges environment end up being the norm for us as a region, we must be mindful of the ultimate objective: To serve the best interest of our investors. The ball is in our court as leaders of our markets but most importantly, it can only work if it is a collective effort by everyone across the board.

PIERRE CELESTIN RWABUKUMBA CHAIRMAN EAST AFRICAN SECURITIES EXCHANGES ASSOCIATION (EASEA)

This competition sparked several mergers among the regional exchanges, a development that brought additional advantages to the financial sector. For instance, the combined exchanges traded stocks at lower bid-ask spreads, benefiting

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MEMBERS Nairobi Securities Exchange Member Firms Francis Drummond and Co. Ltd Hughes Building, 2nd floor, P.O. Box 45465, 00100 Nairobi. Tel: 318690/318689 Fax: 2223061 E-mail: info@drummond.co.ke Web: www.drummond.co.ke Kingdom Securities Ltd Co-operative Bank House,5th Floor, P.O. Box 48231 00100 Nairobi Tel: 3276000 Fax: 3276156 info@kingdomsecurities.co.ke NIC Securities Limited Ground Floor, NIC House, Masaba Road P.O. Box 63046 – 00200, Nairobi Tel:2888 444 / 0711 041 444 Fax: 2888 544 E-mail: info@nic-capital.com Suntra Investment Bank Ltd Nation Centre, 7th floor, P. O. Box 74016-00200 Nairobi Tel: 2870000/247530/2223330/2211846 0724- 257024, 0733-222216 Fax: 2224327 E-mail: info@suntra.co.ke Web:www.suntra.co.ke Discount Securities Ltd. (Under Statutory management) NHIF Building P.O. Box 42489-00100 Nairobi Tel: 2219552/38, 2773000 Fax: 2230987 E-mail: discount@dsl.co.ke Web: www.dsl.co.ke Genghis Capital Ltd. Prudential Building, 5th Floor P.O. Box 1670-00100 Nairobi Tel: 2337535/36, 8008561, 2373984/968/969 Fax: 246334 E-mail: info@gencap.co.ke

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Dyer & Blair Investment Bank Ltd Pension Towers, 10th floor, P.O. Box 45396 - 00100 Nairobi Tel: 3240000/2227803/4/5 Fax: 2218633 E-mail: shares@dyerandblair.com Web: www.dyerandblair.com

CFC Stanbic Financial Services CFC Stanbic Centre, P.O. Box 47198 – 00100 Nairobi Tel: 3638900 Fax: 3752950 E-mail: csfs@stanbic.com Web: www.csfs.co.ke

Old Mutual Securities Ltd. IPS Building, 6th Floor P.O BOX 50338 - 00200 Nairobi Tel: 2241379/2241408 Fax: 2241392 E-mail: info@reliablesecurities.co.ke www.oldmutual.co.ke

ABC Capital Ltd IPS Building, 5th Floor P.O. Box 34137- 00100 Nairobi Tel: 2246036/2245971 Fax: 2245971 E-mail: headoffice@abccapital.co.ke

A I B Capital Ltd. Finance House, 9th Floor. P. O. Box 11019-00100 Nairobi Tel: 2210178/2212989 Fax: 2210500 E-mail: info@afrikainvestmentbank.com Web: www.afrikainvestmentbank.com

Faida Investment Bank Ltd. Crawford Business park, Ground Floor, State House Road P. O. Box 45236-00100 Tel: +254-20-7606026-35 Fax: 2243814 Email: info@fib.co.ke Web: www.fib.co.ke

African Alliance Kenya Investment Bank 1st Floor, Trans-national Plaza P.O. Box 27639 - 00506 Nairobi Tel: 2762000/2762557/0733333140 Fax: 2731162 E-mail: securities@africanalliance.co.ke Web: www.africanalliance.com

Kestrel Capital (EA) Limited ICEA Building, 5th floor, P.O Box 40005-00100 Nairobi Tel: 251758/2251893,2251815,2250082 Fax: 2243264 E-mail: info@kestrelcapital.com Web: www.kestrelcapital.com

ApexAfrica Capital Ltd Rehani House, 4th floor P.O. Box 43676 - 00100 Tel: 242170/2220517 Fax: 2215554 E-mail: invest@apexafrica.com Website: www.www.apexafrica.com

Renaissance Capital (Kenya) Ltd Purshottam Place, 6th floor, Westland , Chiromo Road P.O. Box 40560-00100 Nairobi Tel: 3682000/3754422 Fax: 3632339 E-mail:infokenya@vencap.com Web: rencap.com

Standard Investment Bank Ltd ICEA Building, 16th floor P.O. Box 13714- 00800 Nairobi Tel: 2228963/2228967/2228969 Fax: 240297 E-mail: inf o@sib.co.ke Ngenye Kariuki & Co. Ltd. (Under Statutory Management) Corner House, 8th floor, P.O. Box 12185-00400 Nairobi Tel: 224333/2220052/2220141 Fax: 2217199/241825 E-mail: ngenyekari@wananchi.com Web: www.ngenyestockbrokers.co.ke

Sterling Capital Ltd Barclays Plaza, 5th floor, P.O. Box 45080- 00100 Nairobi Tel: 2244077/244077/316414 0723153219/0734219146 Fax: 2218261 E-mail:info@sterling16.com Web : www.sterlingstocks.com


Uganda Securities Exchange Baroda Capital Markets (U) Ltd. P.O. Box: 7197 Kampala Tel: +256-414 233680/3 Fax: +256-414 258263 Email: bob10@calva.com UAP Financial Services 1st Floor, Communication House P. O. Box 1610, Kampala Tel: +256 414 332 743, 312 332 743 E-mail: financialservices@uap.co.ug E-mail: info@uap.co.ug Crane Financial Services (U) Ltd. Plot 20/38 Kampala Road P.O. Box: 22572 Kampala Tel: +256-414 341414/ 345345 Fax: +256-414 231578 Equity Stock Brokers (U) Ltd. Orient Plaza Plot 6/6A Kampala Road P.O. Box: 3072 Kampala Tel: +256-414 236012/3/4/5 Fax: +256-414 348039 Email: equity@orient-bank.com Contact Person: Mr. Edward Ruyonga MBEA Brokerage Services (U) Ltd. Lumumba Avenue, Nakasero Fax: 256-414-342045 P.O. Box: 24613 Kampala Tel: +256-312-260011 / +256414 341448/231960 Email: info@mbea.net Website: www.mbea.net Contact Person: Mr. Andrew Owiny Dyer & Blair (Uganda) Ltd Rwenzori House Ground Floor P.O. Box: 36620 Tel: +256-414-233050 Fax: +256 -414 231813 Email: shares@dyerandblair.com African Aliance (Uganda) Ltd Workers’ House, 6th Floor Plot 1 Pilkington Road Tel: +256 414 235 577 Fax: +256- 414 235575 E-mail: securities@africanalliance.co.ug Contact Person: Mr. Kenneth Kitariko Renaissance Capital Ltd ReNaissance Capital Limited, Unit 3, Plot 15 Kitante Close Lower Kololo P.O.Box 893 Kampala, Uganda Tel: +256 312 264 775/6 +256 414 340 018/9 Fax : +256 414 340 016 E-mail: keithk@renaissance.co.ug

MEMBERS Dar-Es-salaam Stock Exchange CORE securities Ltd Ground Floor, Twiga House Samora Avenue, DSM Tel: +255 22 212 3103 Fax: +255 22 218 2521 info@coresecurities.co.tz Orbit Securities Co. Ltd 3rd Floor, Twiga house Samora Avenue, DSM Tel: +255 22 211 1758 Fax: +255 22 211 3067 orbit@orbit.co.tz Rasilimali Ltd Former TACOSHILI Offices Sokoine Drive, DSM Tel: +255 22 211 1708 Fax: +255 22 212 2883 rasilimali@africaonline.co.tz Solomon Stock Brokers Ltd Ground Floor, PPF House Samora Avenue/ Morogoro Road, DSM Tel: +255 22 211 2874 Fax: +255 22 213 1969 solomon@simbanet.net Tanzania Securities Ltd 7th Floor, IPS Building Samora Avenue/ Azikiwe Str, DSM Tel: +255 22 211 2807 Fax: +255 22 211 2809 tsl@muchs.ac.tz Vertex International Securities Ltd Annex Building – Zambia High Commission Sokoine Drive / Ohio Street, DSM Tel: +255 22 211 0392 Fax: +255 22 211 0387 vertex@intafrica.com

CMAC MEMBERS FAIDA Securities Rwanda Ltd Rue de I’Akagera Tel:+254722522724 E mail:bob@faidastocks.com P.O Box 6679 KIGALI African Alliance Rwanda Ltd 6th Floor,Centenary House P.O Box 6368, KIGALI. Office: +250 785 694 490 securitiesrw@africanalliance.com Continental Discount House 5th Floor Ecobank building Patrick@cdhrwanda.com Tel:+250-570785 P.O. Box 6237 KIGALI DALLAS Securities Brokerage Mrs. Immy Kamarade E-Mail :Immy1968@yahoo.com Tel:+250 08-302113 P.O. Box 1028, KIGALI MBEA Brokerage Services Rwanda S.A & MBEA Financial Services Sarl i_mutebi@mbea.net.com +0783 0203745 P.O Box 92, KIGALI Avenue de la paix Dyer and Blair Simon Kalenzi +250 08-308080 Chadel Building, Avenue des milles collines, P.O Box 5292, KIGALI Tel: +250570390

Crested Stocks and Securities Limited 6th Floor Impala House Plot 13-15, Kimathi Avenue P.O. Box 31736, Kampala, Uganda Tel: +256 41 4 230900 Fax: +256 41 4 230612 Email: info@crestedsecurities.com Website: www.crestedsecurities.com Contact Person Mr. Robert Baldwin

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t Movement

The Nairobi Securities Exchange Macroeconomic Outlook – 2013

Kenya seems to be on a moderate economic recovery. In the third quarter of 2012, the GPD expanded 4.7 percent year-on-year and 2.2 percent quarter-on-quarters, from 4 percent and 1.1 percent in the previous year. Moreover, inflation rate slowed to 4.11 percent in March of 2013 from a high of 18.31 percent in January 2012. According to World Bank, Kenya’s 2013 GDP is expected to hover around 5 percent driven by rapidly expanding consumer sector and the discovery of sizable oil and gas deposits.

MARKET PERFORMANCE The NSE 20 Share Index (NASI) reported a 17.42 percent rise closing at 4,861 points at the end of 2013Qtr1 from 4,140 points at the start of January 2013. The FTSE NSE Kenya 15 and the FTSE NSE Kenya 25 indices launched on November 8 2011 increased 21.78 percent to 154 points and 22.25 percent to 158 points respectively. In comparison to 2012Qtr 1, total equity turnover increased by 155.83 percent to Kshs 34 billion in 2013Qtr1. Foreign trading activity averagely represented 50.13 percent of the total traded equity turnover in 2013 Qtr1.

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.”

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INITIATIVES Membership of the World Federation of Exchanges (WFE) The Nairobi Securities Exchange is interested in becoming a full member of the World Federation of Exchanges. The NSE which is currently an Associate member of the WFE, has formally written to the WFE to confirm our intention to pursue full membership. In 2013, the NSE will participate in the evaluation process for full membership to the WFE. The NSE believes that participating in the evaluation process provides an opportunity to audit operational systems, regulatory framework and corporate governance framework of the Exchange and benchmark with international best practice.

THE GROWTH ENTERPRISE MARKET SEGMENT (GEMS): On June 14 2012, the Minister for Finance gazetted the amendments to the Capital Markets (Securities) (Public Offers, Listings and Disclosures), operationalising the Growth Enterprise Market Segment (GEMS) Listing Requirements. The Capital Markets Authority approved the Nairobi Securities Exchange (Nominated Advisors) Rules, 2012 on September 6, 2012. On December 10 2012, the Board of Directors of the Exchange approved the registration of the first four (4) firms as Nominated Advisors and their Authorized Representatives to GEMS. An additional four (4) firms as Nominated Advisors and their Authorized Representatives to GEMS were registered on January 21 2013. The NOMADS will assist companies to list on GEMS and to comply with good corporate governance practices. We also believe that GEMS provides an opportunity for firms participating in Kenya’s natural resources and mining sector to raise capital and also comply with the thirty five percent (35%) local equity component under Legal Notice No. 118.

THE IMMINENT INTRODUCTION OF REAL ESTATE INVESTMENT TRUSTS (REITS):

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.”

Following the exposure of the Capital Markets (Real Estate Investment Trusts) (Collective Investment Scheme) Regulations, 2012 by the CMA, the NSE is working on the introduction of REITS as an alternative investment which will provide Kenyan investors with an opportunity to invest in the Real Estate sector without requiring large sums of money.

NEAR TERM PRIORITIES In 2013 there are a number of key products which the NSE would like to implement with the Capital Markets Authority and the Central Depository and Settlement Corporation. These are: 1. 2. 3.

The establishment of a Real Estate Investment Trust Market and trading platform; The establishment of Exchange Traded Funds Products; and The establishment of a Futures and Commodities Exchange.

The Exchange views these initiatives as being crucial to the development of the Kenyan Capital Markets and meeting the objectives of Vision 2030, to transform Kenya into a middle income country.

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Tanzania

Economic Review Population Trend

The 2012 Population and Housing Census results show that, Tanzania has a population of 44,928,923 of which 43,625,354 are in Tanzania Mainland and 1,303,569 are in Zanzibar. The population growth rate has declined from 3.3% in 1967 to 2.7% in 2012. Dar es Salaam with a population of 4.36 million accounts for 10% of the total Tanzania Mainland population, whereas Mjini Magharibi with a population of 0.59 million accounts for 46% of the total Zanzibar population. Tanzania is still sparsely populated with population density of 51 persons per square kilometre with variation across regions. Dar es Salaam and Mjini Magharibi are densely populated regions with population densities of 3,133 and 2,581 persons per square kilometre respectively. The average household size in Tanzania has remained almost constant between 2002 and 2012. Average household size was 4.9 persons per household in 2002 and 4.8 in 2012. Source: National Bureau of Statistics

Gross Domestic Product (GDP) Growth Tanzanian economy continues to show resilience against the background of weak global growth by achieving a GDP growth of 6.9% in 2012 compared to 6.4% in 2011 which was realised from goods and services worth TZS 44.7 Trillion (US$ 27.95 billion) produced during the period. Source: Planning Commission

Inflation Trend

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.�

The Annual Headline Inflation Rate for the month of March, 2013 has decreased to 9.8% from 10.4% recorded in February, 2013. The decrease of Annual Headline Inflation Rate for the month of March, 2013 explains that, the speed of price increase for commodities in March, 2013 has decreased compared to the speed recorded in February, 2013. However, the overall index went up to 140.93 in March, 2013 from 128.39 recorded in March, 2012. Food and Non-alcoholic beverages Inflation Rate has slightly decreased to 11.1% in March 2013 from 12.0% recorded in February, 2013.

Movement of National Consumer PriceIndices (NCPI) and Inflation Rates from March,2012 - March 2013 (September2010 + 100)

Source: National Bureau of Statistics

Exchange Rate The Shilling depreciated against the US dollar to a weighted average rate of TZS 1,590.52 per USD in March 2013 from TZS 1,571.62 per USD in December 2012. On annual basis, the Shilling lost value against USD by 1.03% from TZS 1574.30 per USD in March 2012. Source: Bank of Tanzania

MARKET OPERATIONS A. Equities Market Capitalization & Indices Market Capitalization grew by 2.41% from TZS 13,197.34 billion as of 31st December 2012 to TZS 13,515.84 billion as of 31st March 2013. All Share Index gained (+2.41%) from 1,485.63 points by the end of December 2012 to 1,521.48 points as of 31st March 2013. Growth in DSE All Share Index was caused by appreciation of domestic share prices as following:

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TCC (37.14%), NMB (16.07%), SWISSPORT (10.47%), TATEPA (10%), CRDB (8.33%) and TBL (2%).

Regional

nt Analysis | Market Moveme

Source: Bank of Tanzania Base year/Value for All Share Index :15 Dec 2006 =1,000

Tanzania Share Index increased by 10.60% from 1,430 basis points as at the end of December 2012 to 1,582.07 basis points as at the end of March 2013. This is also linked to the appreciation of domestic share prices.

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.� Banking & Investment Index increased by 14.72% to 1,342.95 basis points at the end of March, 2013 compared to 1,170.63 basis points by the end of the previous quarter. The increase was supported by increase of share prices of NMB (16.07%) and CRDB (8.33%). DCB share prices declined (-3.23%) during the quarter.

Industrial & Allied Index increased by 9.16% moving from 1,728.86 points on 31st December, 2012 to 1,881.74 points as of 31st March, 2013. During the quarter; TCC, SWISSPORT, TATEPA, TBL, and TWIGA share prices appreciated by 37.14%, 10.47%, 10%, 2% and 0.77% respectively. TOL, SIMBA and PAL remained the same.

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Turnover Trend During the quarter, the turnover and volume of shares traded declined by 31.63% and 3.38% respectively. On the other hand, the number of deals increased by 24.24%. NMB, TBL, CRDB and TWIGA counters contributed most of the trades during the quarter, accounting for 30.60%, 28.80%, 19.90%, and 16.70% of the quarterly turnover respectively.

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.� Base year/Value for Industrial & Allied Index: 01 Jan 2011 = 1,000

During the quarter under review: TCC, SWISSPORT and NMB ranked first, second and third respectively, in terms of price appreciation.

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Foreign Investors’ Participation During the quarter under review, foreign investors’ participation in secondary trading dropped significantly. The percentage of turnover contributed by foreign investors stood at 24.17% compared to 44.85% recorded in the previous quarter.

Details

Jan – Mar 2013 Oct – Dec 2012

Turnover (TZS Million)

10,423.94

15,264.51

% Buying Local Investors

75.83

55.15

% Buying Foreign Investors

24.17

44.85

Corporate Announcements 1. SWISSPORT announced final dividend of TZS 2,948 million equal to TZS 81.89 per share this will make total dividend for year 2012 be TZS 5.378 million or TZS 149.39 per share. This shows a 5% decline in dividend income when compared with TZS 5,671 million or TZS 157.52 per share dividend declared in year 2011. 2. Twiga cement announced a total dividend of TZS 33.29 billion equal to TZS 185 per share for year 2012. This shows a 2.8% growth in dividend income when compared with a TZS 180 dividend per share declared in year 2011. 3. TCC announced a total gross dividend of TZS 75 billion equal to TZS 750 per share. This shows a 20% increase in dividend income when compared with TZS 600 billion or TZS 600 dividend per share declared in year 2011. 4. TBL announced an interim dividend of TZS 150 per share for the year 2012/13. In year 2011/12 TBL declared a total dividend of TZS 200 per share.

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.”

New Listing During the quarter under review DCB Commercial Bank listed 35 million additional ordinary shares as a result of bonus shares and rights issue.

B.Bonds

Secondary Market During the quarter ending March 2013, Government bonds worth TZS 41.68 billion were traded at the secondary market. This shows a decline 65.22% when compared to the preceding quarter of October to December of 2012 where Government bonds with a value of TZS 119.83 billion were traded. On year to year basis, Government bonds with a value of 63.79 billion were traded in the first quarter of year 2012 compared to TZS 41.68 billion value of bonds traded during the first quarter of year 2013.

Yield Curve on Secondary Bond Market During the quarter of January to March 2013, Weighted Average Yield to Maturity (YTM) for 5-Year and 10-Year bonds declined when compared to the preceding quarter. The 2-Year and 7-Year bonds slightly gained over their preceding quarters’ averages. YTM for the 10-Year bonds recorded the highest decline of 8.19%. The 5-Year bonds’ YTM declined by 3.7%. Ten year bond yield declined from 15.55% to 14.28%, Seven year bonds improved from 15.25% to 15.29 (+0.04%), Five year bonds declined from 14.94% to 14.38%, and, the two year bonds gained (+0.08%) from 14.21% to 14.30%. As shown below, except for 7-Year bonds (with 15.25%), during the Jan – Mar 2013 quarter, yields for longer and short term maturities had the same yield (average of 14.32%).

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Term Preference on Fixed Income Instruments During the quarter, subscription levels for short term investment opportunities were below the amounts offered while levels for long term investments surpassed amounts offered. Investors far more preferred short term investments (130% subscription levels) than long term investments (93%) during the quarter. However, the combined subscription levels for short and long term investments were higher (112%) than the preceding quarter (106%).

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.” New Listing During the quarter under review DSE listed Government bonds worth TZS 264.09 billion which is equivalent to 124% of the estimated TZS 212 billion value of bonds to be listed.

Market Developments Demutualization Study

During the period under review, the Consultant for demutualization study submitted a draft report with recommendations. The report was discussed by DSE stakeholders. It is expected that the Demutualization Study will be concluded in the second quarter of the year 2013.

Review DSE’s Blue Print During the quarter, DSE continued with the exercise of reviewing its Blue Print Rules with the objective of amending old rules, filling in the gaps and preparing completely new rules for new products and services. Such a comprehensive review is being done by a Consultant in collaboration with the DSE management. The Consultant submitted to the DSE draft Rules. The draft Rules were discussed, and have been placed in the DSE website seeking for public comments before being tabled to stakeholders for discussion and consensus. It is expected the new Rules will be in place ready for use in the second quarter of the year 2013.

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DSE New and Revised Fees One of the objectives of the DSE 5 years Strategic Plan is to make the DSE financially self-sustained by increasing its sources of incomes. Under this objective, DSE planned to increase the number of services and products and change the rates of fees for services provided in the market. The change of fee structure aimed at enabling the market to meet increasing operational costs in the course of discharging its duties. During the quarter ended March 2013, the Capital Market and Securities Authority approved DSE’s new fee structure.

Public Education Financial illiteracy is still a hindrance to development of capital markets in Tanzania and therefore it is one of the challenges that the Exchange is facing. Thus, one of the activities of the DSE is to educate the public and create public awareness on the importance of the DSE in the economy in respect of mobilization of resources for investments and business expansion. During the quarter under review, DSE attended a total of 125 students, 45 from the Institute of Finance Management and 80 from Highridge Training Institute who visited the Exchange to learn/research on securities market operations.

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.�

As one of initiatives on public education, DSE will conduct country wide seminars about the establishment of a secondary market for small and medium size companies known as Enterprise Growth Market segment. These seminars will be done concurrently with radio and television programs. The project is sponsored by a non-governmental organization known as Financial Sector Deepening Trust (FSDT).

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Uganda

ECONOMIC & FINANCIAL DEVELOPMENTS Inflation – Domestic and Global Developments

According to Bank of Uganda’s monetary policy report, global inflation, remained rather subdued, and could face some upward pressures going forward due to the movement in energy prices. Energy prices rose since December 2012 buoyed by geopolitical risks, relative weakness of the U.S dollar, stronger economic recovery in China, avoidance of the US fiscal cliff and increased investor appetite in the financial markets. The Economist Intelligence Unit forecasts that the future price of energy commodities remains uncertain going forward. Factors that might influence oil prices going forward include: the uncertainty surrounding US fiscal policy, lack of complete resolve of the euro debt crisis, geopolitical tensions and expected recovery of the global economy during 2013, marked by high demand from China

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.”

Bank of Uganda reported that annual headline inflation decreased to 3.4 per cent in February, from 4.9 per cent in January. The inflationary slowdown was largely driven by food crop prices, which fell to negative 6.2 per cent in February, on an annual basis, from 3.0 per cent in January coupled with favourable base year effects. The country enjoyed good weather and this resulted in improved general food supply, which led to decelerated prices across a wider range of food crops. Similarly, annual energy, fuel and utilities (EFU) inflation declined to negative 3.3 per cent in February, from negative 2.1 per cent in January. The disinflation experienced in the EFU prices over the period was due to a fall in prices of water, electricity and propane gas. Despite falling inflationary outturns in food crop and EFU prices, annual core inflation marginally decreased in February to 5.5 per cent from 5.6 per cent in January. The level of core inflation in February, led to price increases in health, education and other manufactured foods and transport.

Interest and Lending Rates The report highlighted that whilst the cost of borrowing continued to fall, Uganda’s lending rates remained consistently high compared to the global economy and the East African region. The weighted average cost of shilling denominated loans stood at 24.2 per cent in January 2013, 0.6 percentage points lower than the previous month. Commercial banks attribute the lower cost of shilling denominated loans to monetary policy easing; BOU gradually reduced the central bank rate by 8 percentage points from 20 per cent in July 2012 to 12 per cent in December 2012. The banks have attributed the expensive Shilling denominated loans to costs arising from previously high Shilling-denominated time deposit rates which have been falling much faster than the lending rates over the last year. The fall in lending rates, according to the report is likely to recover credited demand, hence boosting investment and consequently enhancing economic activity.

Foreign Exchange Rates – Shilling steady In February the Shilling recorded its first monthly appreciation against the US dollar in 9 months, and this was largely attributed to domestic factors given that the US dollar typically appreciated against most currencies over the month and reinforced by the observation that other regional currencies typically depreciated over the month under review. Domestic factors that largely contributed to the appreciation in February 2013 included notable dollar inflows mainly from coffee export proceeds, remittances and offshore investments. Below is a graph depicting the trend.

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MARKET PERFORMANCE EQUITIES Secondary market performance in the Q1 showed a slight improvement in activity, with turnover registering Ushs 19.4bn from Ushs 18.3bn recorded in the previous quarter – representing a daily average of approx. Ushs 335m. Number of shares traded was up 37.2 per cent at 239.5 million shares compared to 174 million shares traded in 2012-Q4. While the total number of deals recorded were 1,097 down from 1,381 of the previous quarter.

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.”

Quarterly turnover performance per counter The UMEME stock continued to dominate turnover activity, with the counter scooping 77 per cent of the total turnover. Stanbic Bank Uganda Ltd in second position closed at 15.1 per cent while Bank of Baroda Uganda, DFCU Group, British American Tobacco Uganda and Uganda Clays Limited accounted for 4.6 per cent, 2.3 per cent, 0.5 per cent and 0.3 per cent respectively. The result of the counters had minimal turnover recordings. UMEME was listed on the USE in November 2012, and as a result has drawn interest from both retail and institutional investors who gained advantage from the 36 per cent price appreciation and the dividend price of Ushs 15 per share. The counter is currently trading at Ushs 375 per share. Volume traded per counter Stanbic Bank Uganda Ltd remained the most active counter with the highest record of volume traded and this is mainly attributed to the fact that investors exercised their rights to the bonus issues. The counter accounted for 67.6 per cent of the volume, followed by UMEME with 28.7 per cent and Bank of Baroda Uganda at 2 per cent. Uganda Clays Limited, National Insurance Corporation and DFCU Group posted 0.9 per cent, 0.5 per cent and 0.3 per cent respectively, while British American Tobacco Uganda and New Vision Limited posted marginal positions.

Key Equity Market Indicators – Annual Comparisons (Year on Year: 12 months) Market Indicator USE All Share Index USE Local Index Market P/E Ratio Market Capitalization (Ushs. bn) Total No. of issued/Listed shares (Billion)

Apr 11 - Mar 12

Apr 12 – Mar 13

993.80

1531

% Change 54

195.1

227.6

16.7

11.63

16.90

45.3

12,117

19,974

64.8

62.5

65.7

138.9

488.8

251.9

24.9

42.4

70.3

No. of Deals

4,221

4,199

-0.5

Trading Days

248

237

Ushs/USD rate

2522

2612

Volume Traded (Ushs. mn) Turnover ( Ushs. bn)

3.6

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February

March

Total

Volume Traded

66,882,225

91,365,020

16,319,162

174,566,407

Turnover (Ushs)

13,945,003,650

4,234,181,850

1,256,246,670

19,435,432,170

No. of Deals

514

498

369

1,381

Trading Days

21

18

19

58

664,047,793

235,232,325

66,118,246

Daily Avg.Turnover (Ushs) Daily Avg. no. of trades

24

28

19

Market Capitalization (Ushs. bn)

17,548.7

17,993.1

19,973.6

USE All Share Index

1349.31

1379.2

1531

LCI

222.5

227.2

227.6

Ushs/USD rate

2522

2612

3.6

Source USE Product Markets Department

USE Index Performance The All share index (ALSI) cast an upward trend as equity prices across most of the listed stocks continued to appreciate. The month of January saw the index rise to 1378.13 from 1203.42 of the preceding month. In mid February, the ALSI was sustained at 1409.89 before dropping to 1379.20 at the end of the Month. The Index gained in the last month of the quarter to close at a high of 1531.04. Due to a stable price movement on the local companies, the Local Company Index (LCI) maintained a stable outlook with January posting 222.5, February 227.2 and March closing the quarter at 227.6.

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.”

Source: USE Trading Dept

FIXED INCOME Treasury Bonds Secondary Market Activity: Trading on the government bond secondary market for the year 2012 recorded a turnover of Ushs 373,645,100,000 up from Ushs 105,350,900,000 that was recorded in the pervious year. Corporate Bond Secondary Market Activity: - 2011- 2012 Activity was recorded on the Corporate Bond Segment with HFB, SBU, EADB, AfDB and PTA bonds recording a total volume of Ushs. 98.1million. Refer to breakdown below.

Volume Traded (Ushs Million) Turnover (Ushs.bn) No. of Deals Trading Days Daily Avg.Turnover (Ushs)

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JAN –DEC 2011

JAN – DEC 2012

% CHANGE

709.4

98.1

- 86.2

73.3

9.9

- 86.5

12

3

5

3

14.7

3.3

- 77.6


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Source: Bank of Uganda

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.”

Market Developments January – March 2013 1.UMEME Limited Listed – 30th November 2012. 2. Bank of Baroda Bonus Issue – Bank of Baroda Uganda approved the issuance of a second bonus to the ratio 1.5:1. 3. EASEA Conference held in Fort Portal, Uganda – February 2013 4. Government Bond Listing – The 3yr and 5yr Government Bonds were listed on the fixed income segment, bringing the total listings to thirty eight. 5. Public Awareness Campaigns – Targeting University and Tertiary Institutions in and around Kampala. A total of five institutions were reached. 6. Corporate Actions • Bank of Baroda Uganda announced a final dividend of Ushs 2 per share on the increased paid-up share capital of Ushs 25bn. The company book closure and dividend payment dates are scheduled of 21st June 2013. • Stanbic Bank Uganda announced a final dividend of Ushs 1.37 per share. The company book closure and the annual general meeting will be on 20th May 2013, and the dividend if approved will be paid on or about 1st July 2013. • UMEME Limited announced a final dividend of Ushs 15 per share to all its shareholders at the close of business on 24th May 2013.

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ment

ECONOMIC INDICATORS

Jan 2013

GDP Annual Headline inflation Underlying inflation Key Repo rate Interbank Rate Overall Deposit rate Prime lending rate Treasury Bills Rate – WARE Repo rate J Exchange rate(USD)

Feb 2013

March 2013

8%( for all of 2012) 4.8 0.2 7.5 10.398 10.32 17.020 12.309 7.364 633

5.7 1.9 7.5 11.109 11.30 17.090 12.552 7.435 632

7.5 10.026 12.142 76.995 635

MARKET PERFORMANCE Primary Market Activity There was no new issuance in bond and equity market for the period under review. Secondary Market Activity Bond Market The bond secondary market remained unchanged.

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.”

Equity trading activities The equity market continued an upward trend in share prices and recorded a sharp increase in the volumes traded over during the first quarter of 2013. The market recorded a Total turnover of Rwf 13.6 billion from 35.7 million shares in 576 deals compared to the same period the previous year where the market recorded a total turnover of Rwf 1.3 billion from 7.6 million shares in 327. This is an increase of 946%, 370% and 76% in turnover, volumes and number of transactions, respectively over the same period. The most active counters were those of Bank of Kigali and Bralirwa. Market performance for the period of January – March 2013.

Volumes Traded Turnover (Rwf) Daily AVG. Turn

Jan-2013 4,152,700 1,492,085,900 71,338,186

Feb-2013 19,923,200 3,792,330,500 199,596,342

Mar-2013 11,754,000 8,344,166, 700 417,208,335

Total 35,719,200 13,628,583,100 270,934,528

Market performance: Turnover first Quarter 2012 and first Quarter 2013.

MARKET DEVELOPMENT RSE is working on different projects including the development of the bond market, SME funding through Capital Market, and RSE has just launched its first index in December 2012. (See the index performance chart below).

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ment

RSE RWANDA SHARE INDEX(RSI)

DATE

01-Jan-13

31-Mar-13

RSI

161.48

182.48

POINTS

0.0

21.00

0.0%

13.00%

DATE

01-Jan-13

31-Mar-13

ALSI

111.67

128.76

%CHANGE

RSE ALL SHARE INDEX

POINTS %CHANGE

0.0

17.09

0.00%

15.30%

“How the EAC markets and their economies are doing, the quarterly trends on each market and their likely impact on other markets.”

2013 I Issue 2 21


FAST-TRACKING REGIONAL INTEGRATION THROUGH VIRTUAL MARKETING

Information and Communications for Development 2012: Maximizing Mobile

By Evelyne Ogutu

According to a World Bank and infoDev recent study three quarters of world population now has access to a mobile phone pointing to major development opportunities offered by mobile communications. With over 6 billion mobile subscriptions in use worldwide, up from fewer than 1 billion in 2000, around threequarters of the world’s inhabitants now have access to a mobile phone. 22

2013 I Issue 2


using them to improve service delivery and citizen feedback mechanisms. “With nearly five billion mobile phone subscriptions in developing countries, mobile communications offer major opportunities to advance human and economic development – from providing basic access to health information to making cash payments, spurring job creation, and stimulating citizen involvement in democratic processes,” said World Bank Vice President for Sustainable Development Rachel Kyte. “The challenge now is to enable people, businesses, and governments in developing countries to develop their own locallyrelevant mobile applications so they can take full advantage of these opportunities.” This new report, the third in the World Bank’s series on Information and Communication Technologies (ICTs) for Development, analyzes the growth and evolution of mobile telephony, and the rise of data-based services, including apps, delivered to handheld devices. The report explores the consequences for development of the emerging “app economy”, especially in agriculture, health, financial services and government, and how it is changing approaches to entrepreneurship and employment.

T

he mobile communications story is moving to a new level, which is not so much about the phone but how it is used, says a new report released last year by World Bank and infoDev. The report dubbed “Information and Communications for Development 2012: Maximizing Mobile”, more than 30 billion mobile applications, or “apps,”

were downloaded in 2011 – software that extends the capabilities of phones, for instance to become mobile wallets, navigational aids or price comparison tools. In developing countries, citizens are increasingly using mobile phones to create new livelihoods and enhance their lifestyles, while governments are

“The mobile revolution is right at the start of its growth curve: mobile devices are becoming cheaper and more powerful while networks are doubling in bandwidth roughly every 18 months and expanding into rural areas,” said Tim Kelly, Lead ICT Policy Specialist at the World Bankand one of the authors of the report. The report emphasizes the role of governments in enabling mobile application development. It also highlights how mobile innovation labs – shared spaces for training developers and incubating startups – can help bring new apps to market. For instance, infoDev, in collaboration with the Government of Finland and Nokia, has established five regional mobile innovation labs (mLabs) in Armenia, Kenya, Pakistan, South Africa, and Vietnam. infoDev is also using mobile social networking to bring grassroots entrepreneurs together with other stakeholders in mobile hubs (mHubs). “Most businesses based around mobile app technology are at an early stage of development, but may hold enormous employment and economic potential, similar to that of the software industry in the 1980s and 1990s. Supporting the networking and incubation of entrepreneurs is essential to ensure that such potential is tapped,” said Valerie D’Costa, Program Manager of infoDev.

2013 I Issue 2 23


CAPITAL MARKET THEORIES IN PRACTISE

Relationship between dividends, earnings, share prices, assets and liabilities among the companies listed on the Nairobi Securities Exchange Earnings

Share Prices Liabilities

Assets Dividends

By: Abrah Hadgu

Over the past half a century, no consensus has been reached on the dividend behavior despite numerous studies having been carried out by various researchers in and outside Kenya. Even in the 21st century, the issue of dividend behavior has been receiving growing interest among both academic and industry researchers. 24

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A study was conducted in the Kenyan context to investigate the relationship between dividends and earnings, share prices, assets (current & non-current) and liabilities (current & non-current) of 35 out of 57 companies listed on the Nairobi Securities Exchange (NSE). In addition, the study examined joint influence of earnings, assets & liabilities on dividends both in the short and long terms. The study found that the level of earnings determined dividend payout levels to a limited extent while assets and liabilities had little influence. Dividend and share price were strongly correlated both in the short and long terms. The study showed that

besides share price, managers also consider the level of assets and liabilities jointly with earnings to determine dividends. Under such circumstances, investors are required to exercise extra caution before reacting to declared dividends and need to find out the reasons behind dividend payouts, particularly when companies cut/ omit dividends. This is primarily because the fact that not all dividend cuts are attributed to poor financial performance as the dividend signaling theory suggests. The study found little support to the dividend signaling theory which argues that dividend cuts are caused by poor past and projected financial performances.


Share Price nt e r r Cu ssets A

Ear n

ing

s

DIVIDENDS Non-C u Assetrsrent

Currenites Liabilit

Non-Current Liabilities

in generalizing the sample results to these sectors. The secondary data did not include share prices, dividends and earnings of eight companies that split their shares between 2004 and 2008 and this might have a limited effect in the established relationships between these variables and might have a limited impact in generalizing the sample results to the population. The telecommunication and technology sector did not satisfy the selection criteria and consequently its data was not included in the secondary data. As a result, the outcome of the sample might not represent this sector. The insurance and investment sectors only represented 25% of their respective sectors and the sample results might not fully represent these sectors. The implication is that the sample results might have a limited impact in generalizing to the entire population.

Recommendations Figure 1. Relationship between dividends and earnings, share prices,assets and liabilities involved in correlation analysis.

Conclusions

between dividends and earnings, investors were observed to sensitively react to declared amount of dividends. This was witnessed by the strong relationship between dividends and share prices in both the short and long terms.

Corporate managers consider current level of earnings in determining dividends but only to a limited extent. This implies that investors cannot use current dividends as a proxy to gauge the present level of earnings. Particularly, investors Managers consider the were very sensitively past level of earnings reacting to dividend in determining current The secondary data did not cuts/omissions in dividends although include share prices, dividends relative to previous to a limited extent. and earnings of eight levels of dividends. This implies that companies that split their shares Dividend cuts/ investors cannot between 2004 and 2008 and omissions were not use past earnings to predict future level of this might have a limited effect entirely attributing past poor financial dividends since the in the established relationships to performance and relationship between between these variables and pessimistic future past earnings and might have a limited impact financial outcomes current dividends was but to other numerous not strong. Conversely, in generalizing the sample factors. Financial investors cannot use results to the population. performance was past dividends as a just one factor proxy to predict future among others considered by managers earnings since the relationship between in determining dividend levels. Therefore, past dividend and current earnings was the dividend signaling theory got only also fairly weak Corporate managers do limited support in the Kenyan context. not consider current level of assets (current & non-current) and liabilities (current & non-current) in determining dividends. Limitations However, companies do consider the level of The assets and liabilities of the banking non-current liabilities, attractive investment and insurance sectors were not included opportunities that would require heavy in the secondary data since the sectors’ cash outlays jointly with current level of data was not separately recorded from earnings to determine the level of dividends. their respective clienteles. The exclusion Despite the fairly weak relationship of the data might have a negative impact

Since dividends had reflected limited relationship with earnings, investors are required to be cautious before using declared dividends to gauge present and future financial performances. Particularly, investors are not required to react negatively to dividend cuts/omissions since not all dividend reductions are attributed to poor financial performance as the dividend signaling theory suggests. Similarly, investors should not use share prices to gauge present and future financial performances since share prices are influenced by several factors including dividend levels which in turn are not strongly correlated with earnings. Therefore, investors are required to make extra effort to examine the financial statements to arrive at a more informed view of the company’s prospects. The annual financial statements might not particularly and explicitly disclose the primary causes for dividend reduction/omission and to bridge the information asymmetry, investors are required to seek for additional information by approaching company managers before executing investment decisions.

Beneficiaries of the Study The outcome of the study will benefit shareholders, potential investors, brokerage firms, fund managers, institutional investors, financial institutions, the NSE, the Capital Market Authority, Government Agents, financial analysts, learning institutions and future researchers. The results of this study will particularly benefit the retail investors who might not have the capacity to analyze the financial statements published by the listed companies at the NSE.

2013 I Issue 2 25


WHO OWNS THE SYSTEM

Who Owns the System?

By Dr. Isaac Rutenberg

Intellectual Property Technology brings efficiency, but technology also introduces a host of new and interesting issues. Such issues include intellectual property rights, data ownership, liability, security, and authentication, a few of which are discussed below. 26

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The Automated Trading System (ATS) provides computerized trading of securities, and was sourced from Millennium Information Technologies (MIT), a Sri Lankan company. The newlyintroduced Broker Back Office (BBO) allows electronic linkage of brokers, and was sourced from Chella Software, an Indian company. Both systems are computer programs and are therefore subject to the forms of intellectual property rights that apply to software. The least complicated aspect of intellectual property (IP) applied to computer software is copyright. Indeed, both the ATS and BBO are protected by copyright, such that it would be an infringement for any person or business to make an unauthorized copy of the software. For example, the NSE cannot make a copy of the software and then cancel its contracts with MIT or Chella Software. The copyright protection is limited, however, because a third company could independently develop software that performs the same functions as the ATS or BBO, without fear of copyright infringement.


The patent law in Kenya forbids patents on business methods, but does not exclude (per se) computer software. Thus, like most countries, the Kenyan patent law can be used to protect certain aspects of software In the case of ATS and BBO, this author was not able to find any patents specifically covering such software. A large number of patents exist, particularly in the United States and Europe, covering various aspects of electronic trading and brokerage systems. Some of these patents are over 20 years old and are therefore expired, meaning that the technology described in the patents can be used without fear of infringement. It is quite possible that there exist patents in the United States or Europe that cover one or more aspects of the ATS or BBO. If this is the case, MIT or Chella may still use such software in East Africa without fear of infringement because the American and European patents are not valid in East Africa. This is unlike copyrights, which are locally granted but are valid in any Berne Convention member country. MIT and Chella are able to control the use of their software by the NSE or other licensees through contractual agreements. The contract states that NSE as a licensee is authorized to use the copyright-protected software, provided that the conditions of the contract are satisfied (e.g., payment to the copyright owner). In America or Europe, MIT and Chella would also have to guarantee that their software does not infringe any third party patents, and indemnify the licensee against law suits filed by third parties for patent infringement. A search of patent databases would be required for MIT or Chella to be sure that their software does not infringe any patents, and that their software is therefore suitable for licensing to companies. Even a thorough search may not catch every potential problem patent, however, since patent applications remain secret for a period of time after they are filed (typically 18 months).

The copyrights for ATS and BBO are held in Sri Lanka and India, respectively. However, since Sri Lanka, India, and Kenya are members of the Berne Convention dealing with copyright, the Sri Lankan and Indian copyrights are enforceable in Kenya. Interestingly, Uganda, Burundi, and Tanzania are not members of the Berne Convention and therefore are not required (under Berne) to extend copyright protection to such programs. A more complex issue is that of patent protection. As computer software, the ATS and BBO would be eligible for patent protection in certain countries, including potentially Kenya.

In summary, MIT and Chella have sufficient copyright protection to enable licensing of their software to securities exchanges in various countries (including Kenya, Uganda, South Africa, and Singapore). Without patent protection, however, there is no IP barrier to independent development by an East African company of a competing system.

Data Ownership As trading speed and simplicity increases, trading volume also tends to increase. Thus, with electronic trading and brokerage, there is an ever-increasing amount of data that is processed and stored by the NSE and other regional exchanges. Such data is

intellectual property with potential value, and it is IP that is covered by various rights. For example, data gathered by the NSE includes data about individual transactions, such as buyer identity, seller identity, the type and number of securities being traded, the price per share, and the time of the bargain. The Exchange also gathers historical data such as share price over time, and trading volume over time. The Exchange “owns” the data inasmuch as it may decide how to make such data available. In many countries including Kenya, databases can be protected by copyright or, in the case of Europe, a specific database right. A database of historical data from the NSE may qualify for copyright protection, depending on the threshold used to determine copyright eligibility. As applied to databases, there are two standards that may be applied to determine whether copyright or database protection exists. The first is a “sweat of the brow” standard, which affords protection to any database that required substantial effort on the part of the author. Such effort is typically effort in gathering and/or processing of the data. The second is a “creativity” standard, which affords protection to a database that required significant creativity in preparation. Such creativity is typically in selecting and arranging the data. If copyright or database protection is available, then the author can control the use of such data even after it has been sold. For data that is distributed to the public, such as via a website, the NSE loses a great deal of control over the data. It would be difficult or impossible to stop a person or company from gathering live-feed data from the website, processing or formatting such data, and selling the result as a service.

Data ownership has been the subject of litigation in various countries, most recently in South Africa for a database of medical service providers. As the East African region harmonizes securities trading, the data produced by the exchanges will become more valuable. Without a doubt, the increased value of the data will tend to make it a subject for ownership and usage disputes.

2013 I Issue 2 27


TECHNOLOGY AND PUBLIC RELATIONS

Wikis

Website

Videos

Twitter

Internet forums

al i c o S ia d e M

Rating Weblogs

Microblogging Facebook

Podcasts

Recent developments in technology have made communication more timely and efficient. Public Relations practitioners have particularly benefited from new age media as dissemination of information- press releases, newsletters, video clips etc is just a click away. By: Waithera Mwai

U

se of company websites and corporate social media accounts has allowed both large and small organizations to have a global reach and increase their brand presence. PR practitioners can effectively build relationships between an organization and its key publics.

The technological advancements have also improved two way communication. Unlike in the past the consumer of a service or product now has a ‘voice’. Use of social media has put organizations in a very vulnerable position as they have to combat their critics in an open platform. A case in point is Kenya Power which is the primary distributor of electricity in Kenya. Kenya Power has a website, active social media pages on twitter, Facebook, flickr and YouTube. A look into their twitter page ‘@KenyaPower’ reads like a corporate horror story. Dissatisfied customers spew their complaints onto the social media platform and the organization responds in kind with explanations and or apologies. On the flipside new media allows organizations garner feedback from their existing and potential customers, which gives the organization essential intelligence on the perception their publics hold about their organization, product or service and as Leonardo Da Vinci rightly noted, “All our knowledge is the offspring of our perceptions”. 28

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Technology has expanded the scope of both internal and external communications beyond that of traditional media. Communications is steadily The use of social media platforms calls moving from a monologue for organizations to take proactive type to a more dialogue or steps at combating potential negative conversational base and the publicity. There is a clear need for audiences associated with each comprehensive communication form are also diverse in nature. This calls for the design of new strategies, in order to steer conversations media strategic communication to the benefit of the organization. efforts separate and distinct from those conducted through traditional media. This in no way media. The ability of a negative news story, implies that strategic communication in article or even comment to spin out of the traditional media sphere is diminished, control in a matter of hours to an infinite only that it cannot be used on its own but audience is valid. The use of social media used in synergy to must be conceptually platforms calls for organizations to take recognized as entirely separate from new proactive steps at combating potential media strategic communication efforts. With negative publicity. There is a clear need the correct strategy, new media can help for comprehensive communication both small and large organizations boost strategies, in order to steer conversations brand awareness, improve customer relations, to the benefit of the organization. Van gather market intelligence and boost sales. der Merwe, Pitt & Abratt, 2005 wrote- The terrain of public relations practice is also Successful use of new media will improve shifting with new media bringing about the empowerment of your consumer, substantial increases in stakeholder strength the engagement between you and your through facilitating communication consumer and the relationship between within stakeholder groups and between you and your consumer. Ensure you are different stakeholder groups. Therefore, it is always providing something compelling imperative that public relations practitioners to your audience, be relevant and embrace the full potential of new media interesting. When an organization joins if they are to overcome such a threat. social media participation is mandatory. One of the biggest PR challenges posed by technology is the explosion of social


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2013 I Issue 2

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