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Innovative securities market leads the way for regional economic integration

Updated: 12 August 2014

Economic development in Africa requires long-term investment in key sectors such as infrastructure, housing and microfinance. However, such development requires a lot of money, for a long period of time. This is why Sida has co-financed a programme to improve the bond markets in Africa, which can support long-term investments in a number of countries and regions.

The Efficient Securities Markets Institutional Development (ESMID) Programme, is a joint initiative between Sida, World Bank and the International Finance Corporation (IFC). The purpose of ESMID is to help finance important sectors like infrastructure, housing, Small and Medium Enterprises (SMEs) and micro-finance by developing well-functioning securities markets in Africa while trying to address “market failures” .

Investments in these sectors require long-term financing – sometimes up to 20 years. The governments and banks in Africa alone are not able to meet this demand. That is why well-functioning bond markets are a more sustainable complimentary avenue to raise the necessary funds. The set-up means that a corporation can issue a bond – a loan – to whoever wants to buy them. The investors, who buy the bonds, are basically lending money with an interest to the corporations and projects.

Bond markets are a good way to mobilize private funds and channel them to productive sectors in need of long term local currency finance. For a bond market to function well, the process of approving new bonds needs to be fast and cost effective. The bonds have to be  structured well while the legislation and trading and back office platforms should be supportive. ESMID has been working to develop well functioning bond markets in Africa for the past five years, and the results are tangible according to Alison Harwood, Manager Capital Markets and Corporate Governance, IFC/World Bank.

"Before a bond is issued to the public, it has to be approved by a regulator and this process has previously taken a lot of time. ESMID has worked with the regulators to make that process faster, and more reliable," she says.

The work has paid off: the time taken to approve bond issues has reduced from an average of 270 days in East Africa to 60 days in Tanzania and 45 days in Kenya. Over the last five years, a total of USD 950 million has been raised through the corporate bond markets in East Africa to finance a variety of projects and companies through the direct and indirect support of the program and that of other stakeholders.

ESMID also played a key role in NIC Capital (an investment bank in Kenya) receiving approval* from the Capital Markets Authority (CMA) for the Athi River Mining Equity Linked Note**.

"Being the first structured product in the Kenyan market, it meant that there was no precedence and this led to delays in receiving approval mainly due to the fact the CMA was being cautious in approving the issue. However, ESMID was our go between, advocating certain enhancements from our side and at the same time articulating to the CMA the simplicity of the offer structure and the importance ofapproving it in order to deepen the debt capital market," says Irungu Nyakera, MD at NIC Capital.

Providing companies and government with access to finance is not only good for the economic growth of the country, but for people on all levels, adds Evans Osano, Head of ESMID in Africa at IFC/World Bank.

"For example, a woman in rural Rwanda would profit from better roads being built, and perhaps investment in water facilities. A developed business sector means more jobs for her and her children, or she might borrow money to set up her own business from a micro finance institution," he says.

The ESMID strategy includes the East Africa region and Nigeria in West Africa, and aims at developing well-functioning bond markets and integrated markets in Tanzania, Kenya, Rwanda and Uganda. A regional capital market provides more opportunities for investors as well as more options to finance projects.

The creation of Securities Industry Training Institute for East Africa is part of the programme’s regional approach. The institute provides training on capital markets for regulators and other market participants, in the four countries involved.

While the ESMID programme has seen many good results, there is still a lot of work to be done. Further training is important, as well as hands-on transaction support for companies wanting to issue bonds.

"We believe that people learn more by seeing and doing. When you get to learn about the advantages, and see others invest, you become more encouraged to do the same things yourself," says Evans Osano.


* The Capital Markets Authority regulates capital markets in Kenya

 **An Equity-Linked Note (ELN) is a debt instrument, usually a bond, whose return to investors is determined by the performance of the issuers' equity, a basket of equity securities or an equity index.


Facts about ESMID Programme

The Efficient Securities Markets Institutional Development programme (ESMID), is a joint initiative between Sida, World Bank and the International Finance Corporation (IFC). The programme in Africa covers the East Africa region including Tanzania, Kenya, Rwanda and Uganda, as well as Nigeria in West Africa.

Sida provided USD 5.5 million to support the pilot programme that began in 2007 and ends in 2012. After the pilot phase, ESMID is to be integrated as a component of the EAC regional integration programme, with the possibility to scale up the initiative, e.g. across the entire three part cooperation in Africa: EAC, COMESA and SADC. Demand for ESMID’s support continues to increase with requests for assistance being received from other regions in Africa and beyond.

The international interest for regional economic integration and bond markets has exploded since the launch of the ESMID pilot in 2006. The regional East African Co-operation community EAC has together with the World Bank initiated a large programme in the region, based on the work of the ESMID programme, and other donors around the world have also been inspired. 

Achievements in East Africa through ESMID’s support:

• Supportive regulatory changes have been implemented in the recipient countries to make it easier to issue and trade bonds.

• Active support to transactions has helped secure regulatory approvals for the first equity-linked and microfinance bond issues in Kenya and Tanzania respectively.

• Supported the development of a regionalization strategy and roadmap for the East African capital markets, and initiated a unique project for integrating clearing and settlement infrastructure across the region.

• Supported the establishment of a regional self-sustaining Securities Industry Training Institute (SITI) that has trained over 1,800 market participants about capital markets.

• Developed framework for the issuance of regional bonds in East Africa.

• Facilitated significant reduction in the number of days taken to approve bond issues from an average of 270 days in East Africa to 60 and 45 days respectively, in Tanzania and Kenya.  

• Provided support to the Nigeria National Pension Commission (PENCOM) to develop new investment guidelines that will allow greater diversification of pension fund portfolios and facilitate increased investments in non-government bonds by pension funds. 

• Provided support to the Securities and Exchange Commission in Nigeria to implement new rules to make it easier to issue bonds with significant reductions in regulatory costs.


Page owner: Department for Africa

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