ROLE OF THE CAPITAL MARKET IN LONG TERM

DEVELOPMENT FINANCING

Presented by

John Robson Kamanga

Chief Executive Officer – Malawi Stock Exchange.
22 November 2018
CONTENTS
1. Defining Capital Markets
2. Functions of the Stock Exchange as a player in the
Capital Market
3. What is Development Finance?
4. Areas that development finance seeks to finance
5. The Capital Market as a source of development finance
6. Why the Capital Market?
7. Achievements of the Malawi Stock Exchange
8. What other capital markets have done
9. Opportunities for Capital Markets
10. Challenges of the Capital Market
11. Solutions
1. DEFINING CAPITAL MARKETS

The Capital Market is a part of the financial system concerned with

channeling wealth from savers/investors to institutions (public or
private) that can put it to long term productive use.

Primary market
• Where capital is raised
• Where new issue of capital market instruments is done

Secondary market
• Where investor’s trade in previously issued securities
• Where trading of securities is done
2. FUNCTIONS OF THE STOCK EXCHANGE AS
A PLAYER IN THE CAPITAL MARKET
 Providing a link between financial raisers and financial
suppliers (investors)
 Providing market place for buyers and sellers of investment
assets
 Supervising trading activities
 Supervising the conduct of member firms
 Providing information services such as share price information
 Providing announcements made by listed companies
3. WHAT IS DEVELOPMENT FINANCE?

• Development finance involves public and private investment

in physical development, redevelopment and/or business
and industry aimed at supporting, encouraging and
influencing expansion.

• Development finance aims to establish proactive approaches

that leverage public and private resources to solve the needs
of business, industry, developers and investors.
4. AREAS THAT DEVELOPMENT FINANCE
SEEKS TO FINANCE
• Government projects e.g. roads, utilities, airports, schools etc
• Established industry e.g industrial parks, manufacturing,
commercial retail centers etc
• Development & redevelopment - projects that require major
public resource commitments to catalyze new private sector
development
• Small businesses and micro-enterprises
• Entrepreneurs - not ready for traditional financing and need a
unique approach to help them find the working capital needed to
expand and grow.
 5. THE CAPITAL MARKET AS A SOURCE OF
DEVELOPMENT FINANCE
EQUITY DEBT

Main Board Government

bonds

Alternative Capital Corporate

Market bonds

The MSE has platforms to cater for various capital needs to provide
inclusive access to capital for businesses.
6. WHY THE CAPITAL MARKET ?

1. Large pool of resources

2. Low cost financing
3. Long term financing
4. May offer funding for riskier activities that would traditionally
not be served by the banking sector
5. Offers locally denominated funding that is free from exchange
rate risk
6. Wealth distribution through investor participation
7. Value creation
6.1 LARGE POOL OF FUNDS

A. Initial Public Offers

Company Shares Amount (MK) Sub. Date of
Offered Times listing
TNM 1,290,450,000 2,580,900,000.00 3.1 3 Nov 2008
MPICO 384,922,944 855,076,624.00 5.3 12 Nov 2007
BRITAM 77,500,000 178,250,000.00 2.9 29 Sep 2008
NBM 31,500,000 126,000,000.00 3.4 21 Aug 2000
STANDARD 24,000,000 78,000,000.00 1.7 29 Jun 1998
SUNBIRD 39,237,400 72,589,190.00 0.7 8 Dec 2002
ILLOVO 28,000,000 63,000,000.00 2.2 10 Nov 1997
NICO 15,000,000 29,410,000.00 1.4 11 Nov 1996
NBS 93,333,000 242,665,800.00 25 June 2007
LARGE POOL OF FUNDS CONTINUED…

B. Rights issues
Company Offer Type Shares Offered Amount (MK)
NBS Rights Issue 2,182,930,017 11,800,000,000.00
MPICO Rights Issue 1,149,023,730 9,000,000,000.00
PCL Rights Issue 10,021,318 2,094,455,462.00
ILLOVO Rights Issue 39,635,800 188,270,050.00
LARGE POOL OF FUNDS CONTINUED…

C. Bonds (Government & Private)

Issuer Amount (MK) Coupon rate Maturity date
Government 3bn 11% 22 Feb 2021
Government 5bn 10% 25 Jan 2020
Government 20bn 11% 31 Aug 2019
Government 106.9bn 15% 30 Jun 2017
Government 0.8bn 10% 30 Dec 2016
Government 1.6bn 9.5% 30 Dec 2015
NFB – MK14bn K4bn 17.37% 28 Jun 2021
 6.2 EFFICIENT WAY OF RAISING CAPITAL

 Low cost of raising funds

Company Listing Cost Bank lending
Ratio (%) Rates
NICO (1996) 15.33 38.00
ILLOVO (1997) 14.01 25.00
STANDARD (1998) 5.38 35.00
PCL (1998) 19.68 35.00
NBM (2000) 9.68 55.00
SUNBIRD (2002) 18.97 50.00
FMB (2006) 6.24 27.00
MPICO (2016) 2.75 34.00
NBS (2017) 6.00 34.00
NFB Medium term notes (2018) 2.60 24.78
6.3 WEALTH DISTRIBUTION

Company Shareholders Before Listing S/Holders

STANDARD 4 1,733
NBM 4 4,595
NICO 3 1,878
NITL 538 1,318
ILLOVO 3 2,151
PCL 2 1,489
SUNBIRD 3 661
FMBCH 4 1,710
TNM 4 14,958
NBS 3 6,201
MPICO 2 4,983
BHL 259
 6.4 VALUE CREATION

 Market price depicts investors perception of a company.

Company Year of Listing Listing Price 13-Nov-18 Growth (Times)
NICO (adjusted
for share split) 11-Nov-96 0.20 50.97 255
ILLOVO 10-Nov-97 2.25 200.00 89
BHL (adjusted
for Share split) 25-Mar-97 0.17 13.00 77
STANDARD 29-Jun-98 3.25 670.00 206
PCL 9-Sep-98 14.89 1,150.00 77
NBM 21-Aug-00 4.00 332.00 83
SUNBIRD 21-Aug-02 1.85 145.00 78
NITL 21-Mar-05 2.65 86.00 32
NBS 25-Jun-07 2.60 10.01 4
MPICO 12-Nov-07 2.25 13.20 6
TNM 3-Nov-08 2.00 24.50 12
FMBCH 18-Sep-17 45.01 82.10 2
7. ACHIEVEMENTS OF THE MALAWI STOCK
EXCHANGE
 Helped companies rebrand to achieve expansion beyond our
borders – FMBCH acquisition of Barclays Bank Zimbabwe

 Helped a bank meet its capital adequacy requirement – NBS

Bank MK11.8 bn rights issue.

 Helped a company restructure its balance sheet - MPICO MK9bn

rights issue.

 Helped a bank increase capital for growth of its operations – NFB

14bn Medium Term Note Program.
ACHIEVEMENTS CONTINUED…
 Created a pool of investors to stock market investments -
>40,000 shareholders.

 Key member on financial inclusion of Malawians through

Financial Literacy program.

 Created a platform for Small and Medium Enterprises.

 Provided platform to Government for trading of its instruments

8. WHAT OTHER CAPITAL MARKETS HAVE DONE
 Kenya Electricity Generating Company (KenGen) listed through a
government sale of 30% stake to the public in 2006. Over
USD295 million was realized.

• In 2016, KenGen raised about US$260mn through a rights issue

with the aim of injecting new equity into the Company, thereby
creating additional debt headroom needed to access future loans
to facilitate KenGen’s expansion having successfully finalized the
Geothermal baseload in 2014 with a JICA Loan Funding.
WHAT OTHER CAPITAL MARKETS HAVE DONE
CONTINUED…
KenGen Geothermal baseload
WHAT OTHER CAPITAL MARKETS HAVE DONE
CONTINUED…
NIGERIA
Issuer Amount (N) Project description
Niger State 6bn Rehabilitation & construction of roads
Government
Edo State 1bn Development of a housing estate
Delta State 5bn Market, healthcare, water and education
Imo State 18.5bn Rehabilitation of water schemes & road
construction
Kwara State 17bn Education, commercial agriculture project,
water distribution project etc
Lagos State 50bn Refinancing loans on ongoing infrastructural
project
9. OPPORTUNITIES FOR CAPITAL MARKETS

1. Growth in Pension Fund Assets

2. Growing middle income class
3. Frontier markets with untapped natural resources looking for
financial resources.
4. Increase in institutions of higher learning providing investor
education
5. Government demand for debt for implementation of infrastructure
projects
6. Growth in demand for funds in the real estate sector
7. Growing interest in PPP
8. High commercial bank lending rates
10. CHALLENGES OF THE CAPITAL MARKET
 Limited supply of products to satisfy potential demand on both
primary and secondary markets.
 Low usage of capital markets for capital mobilization by potential
issuers.
 Inadequate expertise for structuring of complex capital market
products which leads to shortage of well prepared projects.
 High transactional costs.
 Multiple taxation in form of surtax, dividend tax, withholding tax
which erode attractiveness of the capital market.
 Balancing and consistency of macroeconomic variables
11. SOLUTIONS
 Implement sound macroeconomic and policy frameworks.
 Government to take a leading role through MOF to have
parastatals issue and list Bonds to fund development projects and
also list commercial parastatals.
 Integration of the capital market to the financial system.
 Improve legal and regulatory framework.
 Development of securities instruments to align the risk-return
appetite of institutional investors.
 Intensify financial literacy programs.
 Introduction of credit rating entities to facilitate the Bond market.
THANK YOU!