African countries are taking their capital markets to the next level by launching more sophisticated financial products


Derivatives, ETFs and real-estate investment funds are terms that will hopefully become more commonly used by Africa’s investors. That’s if plans are realised by several bourses on the continent – outside the JSE – to introduce more advanced financial products to their markets.

It’s not an easy process, though. Hurdles include regulation, the substantial investment in technology for trading platforms and clearing systems and a lack of liquidity. But the effort may be worth it because the role these products play in improving the efficiency of financial markets has knock-on benefits for economic growth and development.

According to the African Development Bank’s (AfDB) Guidebook on African Commodity and Derivatives Exchanges, derivatives and commodity exchange markets can ‘help deliver an improved market transparency, financing of commodity chain and financial market participants, hedging and risk management, and provide the financial resources for private-sector participation in Africa’s infrastructure development’. Secondary effects include job creation.

Even though the guide focuses on commodities exchanges, the argument can also be extended to other financial products.

A capacity-building seminar held by the JSE found that one inhibiting factor in getting firms to list on exchanges is a lack of liquidity. The event, titled Building African Financial Markets 2014, was held in September last year and drew participants from across the continent. Some suggested that exchanges need to find other ways to boost liquidity and deepen their capital markets besides initial public offerings. An alternative would be the listing of ETFs and developing derivatives markets.

Other points covered at the seminar included the importance of an institutionally strong ecosystem in Africa, fundamental in attracting the vast sums of money that are already waiting to be invested.

Aigboje Aig-Imoukhuede, president of the Council of the Nigerian Stock Exchange, told the seminar that Africa’s exchanges are still ‘grossly under-utilised. Among the 23 nations that make up the African Securities Exchanges Association, we have a combined total of just over 1 600 listed companies – a paltry sum when compared to the total number of successful companies operating on the continent’.

African exchanges (excluding SA’s) have only recently started exploring the introduction of more sophisticated financial instruments to deepen their capital markets. Besides SA, Morocco, Egypt and Tunisia, most other countries on the continent do not have derivatives markets, according to the AfDB. The few that do exist are just getting started and are mostly focused on foreign-exchange derivatives contracts.

Africa has a number of commodities exchanges, with varying degrees of sophistication. In fact, it had one of the first in the world – in Alexandria, Egypt, over 150 years ago.

The most successful African commodity bourse is the JSE’s Commodity Derivatives (formerly known as Safex), with the country’s main staple, white maize, as its flagship contract.

In recent years, the Ethiopian Commodity Exchange has built a reasonable volume, while a handful of countries have begun to introduce index-tracking ETFs.

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According to Nerina Visser, independent ETF strategist/advisor and a director of, ETFs can be a good start to help create a derivatives market. Furthermore, they ‘can also increase overall liquidity on the local market and generate a new source of revenue for the exchange’.

An example is Absa’s NewGold, the first ETF to list in Botswana. It ‘helped to develop the financial market industry and it improved interaction with clients’, says Visser.

In June last year, the Nigerian Stock Exchange completed a derivatives feasibility study to assess the market’s readiness for such products.

Its CEO, Oscar Onyema, told Reuters that plans were under way to host the trading of derivatives such as futures and options in interest rates, currencies and equity indexes by 2016. He said the bourse had conducted surveys that indicated an ‘encouraging’ demand for derivatives.

The Nigerian Stock Exchange already offers ETFs, listing three in 2014. The Vetiva Griffin 30 ETF and the Stanbic IBTC ETF 30 both track the performance of firms that form the NSE 30 Index, while the Lotus Halal Equity ETF tracks the performance of the NSE Lotus Islamic Index.

In East Africa, the Nairobi Securities Exchange is making strides towards creating a derivatives  market. The Kenyan exchange regulator, the Capital Markets Authority, granted the bourse a provisional licence in December to establish and operate a derivatives exchange, which will be modelled on the JSE’s derivatives market.

Nairobi Securities Exchange chairman Eddy Njoroge says: ‘Derivatives are among the most affordable and convenient means [by which] companies can cushion themselves against interest rates fluctuations, exchange rate volatility and commodity prices. Derivatives also boost liquidity in the underlying assets.’

The establishment of a derivatives market is in line with Kenya’s 2030 vision, which is to deepen its capital markets and make Nairobi the financial services hub of East Africa, he says.

According to the former acting CEO of the exchange, Andrew Wachira, the plan is to establish a ‘globally competitive’ derivatives exchange to enable spot and futures trading of multi-asset classes including equities, currency and interest rate products as well as varied forms of agricultural commodities contracts.

The Kenyan bourse also plans to trade real-estate investment trusts – securities sold on exchanges that invest in property and receive special tax treatment – in a bid to quadruple its market capitalisation. Ghana and Nigeria also offer real-estate investment trusts. Nigeria has sub-Saharan Africa’s second biggest exchange, after SA. Kenya’s exchange is the third largest in the region.

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‘ETFs can increase overall liquidity on the local market and generate a new source of revenue for the exchange’


The Bond & Derivatives Exchange (Badex) launched in Zambia last year. It has ambitious plans to trade a wide range of products including corporate bonds, municipal bonds, currency futures and options, interest-rate derivatives (including swaps), equity derivatives and commodity derivatives. Last year, Badex launched its first product, the kwacha/dollar currency futures contract.

A number of African countries have announced plans to develop derivatives markets. For example, ALT Xchange, a wholly owned subsidiary of the Mauritius-based ALTX Africa Group, plans to operate a securities and derivatives market, starting in Uganda. It will then expand to the East African region, before developing a pan-African footprint.

‘We see opportunities in derivatives because of the volatility in interest and exchange rates in the market,’ CEO Joseph Kitamirike told Bloomberg.

ALTX Africa Group’s equity partner, the GMEX Group, says the former is planning to ‘establish a network of fully interconnected exchanges in Africa enabled by common exchange trading, clearing and settlement technology’.

ALTX Africa, meanwhile, says that it has made applications for five other unnamed countries. These are currently pending approval. The Ugandan exchange, however, could be up and running by May, states the group. ALTX is also working with major banks to develop an ETF business in major commodity and equity offerings.

The Seychelles bourse, Trop-X, launched a derivatives exchange in 2014 and offers over 100 listed derivatives on underlying assets including currencies, equity indices and equity securities.

According to the African Securities Exchanges Association 2014 yearbook, over the past two years, the Stock Exchange of Mauritius has been moving away from an equity-based exchange to one offering multiple products that are in line with its international strategy.

The exchange wants to offer a variety of products, including African-focused ETFs and specialised debt instruments. It does not mention any intention to develop a derivatives market – for now.

Implementing the various initiatives has been slow as countries struggle to put the necessary regulatory framework in place so that the exchange can offer more sophisticated products.

The AfDB states that ‘common challenges’ include the role of government, with some states being too involved while others oppose a bourse operating in their country while the technology is located outside their borders. The cost of the required technology can also be prohibitive.

The lack of a regulatory framework to create and operate commodities exchanges or futures markets, or for the trade in derivatives instruments, can also hamper the adoption of more sophisticated financial instruments, the bank states.

The JSE is keen to help the rest of Africa develop more sophisticated offerings. The stock exchange plans to do this by partnering with other African bourses via a dual-issuance model, particularly when offering instruments such as ETFs.

By Gene Michelson
Image: Fredrik Broden/