East African Community Plot for joint commodity Trading Platform

Wednesday, 6th April, 2011

UGANDA, Kenya, Tanzania, Rwanda and Burundi need a unified currency and commodity exchange to offer local platforms for investors worldwide eyeing East Africa’s wealth.

Soft commodities like coffee, cotton and tea may also be traded in the same single platform.

Analysts said the new exchange aims at bringing in farmers, producers, processors, traders, wholesalers, retailers, buyers, sellers, and transporters in the financial system.

This will broaden and deepen the EAC stock markets “in a manner that will attract serious participation from global funds focused on the African continent.”

“For the regional commodity producers, it is a platform for true discovery of their commodities and they will be able to ‘make’ a price for their produce rather than ‘take’ a price,” Joseph Bosco, the Global Board of Trade, managing director, said.

“Commodity derivatives for the region allow the local producers to plan their finances according to their expected production.”

Although agriculture is critical to economic growth in the EAC region, farmers have remained the poorest and the reason is that sensitivity of agriculture production towards season vagaries and fragmented trading and marketing structure.

Farmers get on a fraction of true value of the produce while large part is pocketed by middlemen and traders.

Bosco explained that commodities derivatives provide investors an opportunity to trade global commodities and ability to diversify their portfolio.

He said the currency derivatives would offer currency risk mitigation capability for foreign capital interested to access local equities.

“Useful tool for EAC exchanges to cross list companies on mutual basis and strongly support the proposition for foreign equity players focused on emerging Africa,” Bosco said.

“It is a platform for regional importers, exporters, goods and service providers to safeguard against volatile currency fluctuations.”

New regional capital market laws needed

But to achieve the multi-asset exchange, there needs a law as part of the measures to expand a common capital market.

“We first need to come up with a regional legal framework, which should be given priority because capital markets pay a significant role in establishing a single market,” Robert Mathu, the East African Securities Regulatory Authority (EASRA), noted.

“This calls for harmonisation of regional regulatory framework and creating a common trading platform.”

Regional integration of exchanges diversify risks in a wider market, more efficient and competitive market, lower costs, higher returns and increased cross-border capital flows, Mathew said.

This would attract more investors to agriculture and provide incentives to large scale farmers because of guaranteed ready market and prices.

Uganda, Kenya and Tanzania have established warehouse receipt systems and commodities exchanges to enable farmers receive loans and assure the quality of their produce. But inefficiencies, ineffectiveness, quality and transparency issues continue to dog the operationalisation.

“We are not taking over the work of warehouse receipt system but we want a proper, transparent and efficient commodities exchange,” Japheth Katto, the Capital Markets Authority of Uganda head, said.

“The way the receipt system is done now shows that there is no price discovery and farmers are left out.”

He said that the commodities exchange will have a trading platform that will organise dealers and sellers and ensure efficient and effective settlement and clearance procedures are in place.

Dr Fratern Mboya, the Capital markets and Securities Authority of Tanzania head, said that farmers have benefited little.

“East Africa is endowed with a lot of agriculture commodity and most of our people depend on agriculture. Warehouse receipt system has not really benefited the farmer and there is a need for effective and efficient marketing system,” he noted.

$16m boost to support EAC common Agenda

To move forward, the World Bank has agreed to give $16m to fund the EAC financial sector development and regionalisation project.

It has six components including financial inclusion and strengthening market participants, harmonisation of financial laws and regulations and mutual recognition of supervisory agencies.

Other components are integration of financial market infrastructure, development of a regional bond market and capacity building.

The project to be implemented in two phases over a nine year period will support EAC efforts towards building a single financial services market for the region.

The agenda includes harmonisation of regional regulatory framework, creation of a common trading platform, seamless clearing and settlement infrastructure, presence of sophisticated capital market participants and capital market education and investor awareness.

Alloys Mutabingwa, the EAC deputy secretary general for infrastructure and planning, said investing in financial infrastructure services will link the region to the global market.

“When we have got the required financial infrastructure, then the regional capital market integration process starts,” he said.“We need to ct together to build a strong financial service sector.

Mutabingwa said EAC must work on towards the integration plan as access to global market products is essential to deepen the markets and build critical mass required for foreign capital inflows.

Twaha Kaawaase, the chairman Capital Markets Authority Uganda, said the recent crisis underscores the need for nations to work together in tackling the challenges that financial markets face.

“Regulatory arbitrage, unscrupulous market players, financial sector infrastructure integration, enforcement or laws, investor protection, dissimilarities in our markets, new and sophisticated products, limited regulatory capacities and the different levels of development are some of the challenges,” he observed.

By Ibrahim Kasita: The New Vision Newspaper