JAMES VASHIRI ASSIGNMENT Project with footnotes.docx

UNIVERSITY OF ZIMBABWE

FACULTY OF COMMERCE

DEPARTMENT OF BUSINESS STUDIES

EVALUATION OF THE ROLES AND EFFECTIVENESS OF THE ZIMBABWE STOCK EXCHANGE (ZSE)

COMPILED BY:

JAMES VASHIRI

R101557A

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR BUSINESS STUDIES HONORS DEGREE IN MARKETING-HBBS 4

(MARKETING) BY THE UNIVERSITY OF ZIMBABWE

SUPERVISOR: MR. JD NHAVIRA

HARARE, ZIMBABWE

©2013

Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE)

Dedications

I would like to dedicate this research work to my beloved mother, Vinah Mubasa; brothers and sisters, Lovemore, David, Partson,

Gibson, Ever and Ester.

I appreciate your unconditional love and support.

Proverbs 1 V 7

God bless you.

Vashiri James R101557A Page ii


Acknowledgements

I would like extend my sincere gratitude and appreciation to the following people

for the contributions that they have made to make this research possible:

This study could not have been completed without the generous support and

contribution of many individuals and institutions. My respect and gratitude will

go to Mr. Mutungwazi, my supervisor for his guidance throughout this project. I

would like to appreciate the support, commitment, dedication, determination and

patience that he demonstrated being my supervisor during my research process. I

am also thankful to my lecturers, fellow students and colleagues for their support

and ideas. Above all, glory be to God to whom I owe everything.

Vashiri James R101557A Page iii


Abstract

This study sought to evaluate the effectiveness of Zimbabwe Stock Exchange in

accomplishing its roles in Capital Markets in Zimbabwe, specifically in

supporting small business enterprises raising capital. Roles and functions of stock

exchanges around the world were explored (literature review) to use as

benchmark in appraising our own bourse (ZSE).

The research attempted to answer the following question: Does the ZSE

adequately support small business enterprises raise capital.

The research was motivated by the fact that small to medium enterprises are

having difficulties in raising capital through the ZSE despite the fact they are

major driver to economic growth constituting % of Zimbabwe GDP.

In gathering the necessary information to complete the report both primary data

and secondary data were employed. Primary data was gathered by means of the

questionnaire and personal interviews. Secondary data was gathered from

textbooks, various websites and reports from previous research on the topic. Desk

research was useful in building important issues concerning the Zimbabwean

capital market (ZSE) and its effectiveness in performing functions of capital

markets. Field research was used in in-depth analysis of the problem from experts

of the financial market from various financial institutions.

Major findings were that the ZSE is not effective with some of the functions of

capital markets not even performed. Recommendations on findings included

relaxing some regulations that govern the ZSE especially the indigenization Act,

adopting codes on corporate governance best practice as part of listing

requirements and setting up a central depository system that enables electronic

trading.

Table of Contents

Vashiri James R101557A Page iv


Dedications........................................................................................................................ ii

Acknowledgements...........................................................................................................iii

Abstract............................................................................................................................. iv

List of Abbreviations and Acronyms................................................................................vii

CHAPTER I.....................................................................................................................13

1.0 INTRODUCTION...........................................................................................13

1.1 Introduction........................................................................................................13

1.2 Background of the study....................................................................................13

2.2 Definition of Stock Exchanges...........................................................................13

2.3 History of Stock Exchanges...............................................................................13

2.3.1 History of the Zimbabwe Stock Exchange......................................................14

1.3 Statement of the Problem...................................................................................15

1.4 Research objectives............................................................................................16

1.5 Research Questions............................................................................................17

1.6 Statement of Hypotheses....................................................................................17

1.7 Importance of the study......................................................................................17

1.8 Assumptions of the study...................................................................................19

1.9 Scope of the Study.............................................................................................19

1.10 Time budget.....................................................................................................20

1.11 Monetary Budget.............................................................................................20

1.12 Limitations.......................................................................................................20

1.13 Summary..........................................................................................................21

CHAPTER II...................................................................................................................21

2.0 LITERATURE REVIEW......................................................................................21

2.1 Introduction........................................................................................................22

2.2 ZSE functions....................................................................................................22

2.2.1Raising capital for businesses:.........................................................................22

2.2.2 Mobilizing saving for investment....................................................................22

2.2.3 Creating investment opportunity for small investors.......................................22

2.2.4 Government capital- raising for development projects....................................23

Vashiri James R101557A Page v


2.6.8.1 Remark 2......................................................................................................23

CHAPTER III..................................................................................................................24

3.0 RESEARCH METHODOLOGY...........................................................................24

3.1 Introduction........................................................................................................25

3.2.1 Rationale for Case Study Approach................................................................25

3.2.1 Design of Case Study......................................................................................26

3.3 Data Collection..................................................................................................26

3.3.1 Primary Data...................................................................................................26

3.3.1.2 Telephone interviews:......................................................................................27

3.3.2 Secondary Data...............................................................................................27

3.4 Sampling............................................................................................................28

3.4.3 Sample Size.....................................................................................................29

3.5 Data Analysis Plan.............................................................................................29

3.6 Summary............................................................................................................30

CHAPTER IV..................................................................................................................31

4.0 DATA PRESENTATION AND ANALYSIS OF RESULTS................................31

4.1 Introduction........................................................................................................31

4.2 Response Rate....................................................................................................31

4.4 Comparison of Sample Percentage with Expected.............................................32

4.5 Data Presentation...............................................................................................32

4.5.1.0 Questionnaire Response Review..................................................................32

4.5.4 Does the ZSE promote investment for small investors?..................................32

4.5.5 Does the ZSE promote growth for small to medium enterprises?...................33

Source: Raw Data....................................................................................................33

4.5.6 Is the Zimbabwean Capital Markets properly regulated?................................33

Source: Raw Data....................................................................................................34

4.5.7 How significant is the capital raising ability of the ZSE?................................34

4.5.8 What do you think should be done for the ZSE to be more effective in accomplishing its roles?...........................................................................................35

4.5.9 What recommendations do you expect this study to provide for the benefit of stock market development in Zimbabwe?................................................................35

Vashiri James R101557A Page vi


4.5.10 How effective is the ZSE in promoting economic growth and development?.................................................................................................................................35

4.5.11 Can companies rely on the ZSE for capital raising for project development?.................................................................................................................................36

4.5.12 Has there been any change for the better in terms of the effectiveness of the ZSE since the introduction of the multicurrency regime?........................................36

4.6 Interviews..........................................................................................................36

4.7 Discussion and Interpretation of Findings..........................................................37

4.8 Data Presentation and Analysis Summary..........................................................38

CHAPTER V...................................................................................................................39

5.0 CONCLUSIONS AND RECOMMENDATIONS.................................................39

5.1 Introduction........................................................................................................39

5.2 Summary of Findings.........................................................................................39

5.3.2 Comparison of Sample Percentage with Expected..........................................40

5.3.3 Does the ZSE promote investment for small investors?..................................40

5.3.4 Does the ZSE promote growth for small to medium enterprises?...................40

5.3.5 Is the Zimbabwean Capital Markets properly regulated?................................41

5.3.6 How significant is the capital raising ability of the ZSE?................................41

5.4 Recommendations..............................................................................................41

5.4.2 Stock Market Computerisation........................................................................42

5.4.3 Regulation.......................................................................................................42

5.4.6 Demutualization..............................................................................................42

5.5 Suggestions for Further Research.......................................................................42

5.6 Summary of Conclusions and Recommendations..............................................43

List of Abbreviations and Acronyms

ZSE Zimbabwe Stock Exchange

RBZ Reserve Bank of Zimbabwe

JSE Johannesburg Stock Exchange

LSE London Stock Exchange

Vashiri James R101557A Page vii


King Report South African code of best practice on Corporate

Governance

GDP Gross Domestic Product

CEO Chief Executive Officer

SEC Securities Exchange Commission of Zimbabwe

IPO Initial public Offering

IPO Where a company issues shares to the public for the

very first time.

SMEs Small to Medium Business Enterprises

Vashiri James R101557A Page viii

CHAPTER I

1.0 INTRODUCTION

1.1 Introduction

As the activities on the stock exchanges tend to be specialized and not understood

by common people, this chapter gives some basic definitions and review stock

exchange history, participants, operations and importance, A brief background of

the Zimbabwe Stock Exchange was explored in this chapter

The chapter also highlights objectives, research questions limitations and

delimitations, hypothesis to be tested and the assumptions adopted in carrying out

the study.

1.2 Background of the study

2.2 Definition of Stock Exchanges

A Stock Exchange is a market where stocks and shares are purchased and sold

and capital is raised for the purposes of industry and both local and central

government.1

2.3 History of Stock Exchanges2

Markets for the trading of stocks and shares or securities have existed for

centuries all over the world. One of the earliest known markets was established in

Paris, France around 1138.3 However, the modern form of the Stock Exchange

can be traced to about 200 years ago.4 .

1F. E. Armstrong 1957 The Book of The Stock Excliange, London: Pitman: p 17.

2 Wikipedia, the free encyclopedia

3 E. H. H. Edwards 1963 "The Role of the Stock Exchange", in RSE, Financial and Economic Symposium, Record of Proceedings, Salisbury: p 3

4 W. T. C. King 1954 The Stock Exchange, London: Allen & Unwin: p 15

Vashiri James R101557A Page 13

2.3.1 History of the Zimbabwe Stock Exchange

Trading of stocks and shares in Zimbabwe can be traced back from1891, when the

first stock-broking firm was opened.5The first Stock Exchanges were set up a few

years later in 1894 in Salisbury and Bulawayo. Later, two other exchanges

emerged in Gwelo (now Gweru) and Umtali (now Mutare) around 1898. These

exchanges were intended to meet the capital needs of the gold mining industry,

whose rapid expansion was fuelled by rumors of a 'Second Rand' in Southern

Rhodesia. As the hope of the Second Rand faded the mining companies withdrew,

the local stock markets collapsed. By 1902, all the local Exchanges had ceased to

operate. The Rhodesian Stock Exchange (RSE) was re-established in Bulawayo in

1946.6 By 1980, the ZSE was a highly specialized market, however as a result of

global recession; there was a dramatic fall of the industrial and mining indices on

the Exchange. However, between 1984 and 1990, the ZSE's performance

improved considerably. The industrial index shot up from 150 in 1984 to 2 732 in

1991, while the mining index jumped from 28 to 500 between 1984 and 1990.

This was due to the restored confidence among the investors that colonial

property rights would be upheld. To date, the history of the Stock Exchange in

Zimbabwe has received little scholarly attention although some economic

analyses exist. However, their focus has been, invariably, on illustrating the

highly speculative character of the gold mining industry in the country and not on

the Exchanges themselves. There is, thus, need for a scholarly study of the history

of the Zimbabwe Stock Exchange, which has played a very important part in the

recent history of Zimbabwe.

1.3 Statement of the Problem

5 The Rhodesinn HeniUi, 29 October 1892

6 George Karekwaivenani, A History of the Rhodesian Stock Exchange, p 2


Small business enterprises are having difficulties raising enough capital to finance

their operations. The most effective way to do so is by Initial Public Offerings yet

the ZSE requires specific levels of profitability and about three years of trading

history for a company to do so7. As much as this is meant to protect investors it is

compromising economic growth.

Zimbabwe is lagging behind on the disclosure of executive remuneration which is

a deficiency in corporate governance as witnessed by the United States of

America (USA) corporate scandals of 2000s and the Zimbabwean scandals of

2004 in the banking sector that saw not less than ten Banks placed under

curatorship and two under liquidation8. Board compositions of some listed

companies are not up to standards that good corporate governance practices

would want them to be. It is up to the ZSE to incorporate the practices in their

Listing Rules9

Indigenization laws of the ZSE is discouraging foreign investors. The Chief

Executive Officer (CEO) of the ZSE, Emmanuel Munyukwi believes that the

2010 financial year would have been a better year had it not been for the

indigenization regulations gazetted in March 2010. Munyukwi said:

“In April we raked in about US$5 million while months before that we were raking in more than US$20 million a month. Since the regulations were gazette, we have seen a negative impact on trade………..”“Last year our market was driven by foreigners, making up to about 45 -50% of the total turnover of about US$200 million on the ZSE,”10

7 Gilbert Muponda, 1 June 2008

8 Dr. Gono, Troubled Banking Institutions Handout, p 2

9 Willia Bonyongwe, August 2010

10 Zimbabwe Daily News, 29 December 2010


The indigenization laws as observed by Munyukwi clearly negatively impacts the

growth of the economy by dispiriting profitable trading at the ZSE.

Foreign investors improve the inflow of foreign exchange, which is often greatly

needed in developing countries to finance imports and other foreign payments11.

However, whilst foreign investors are important for emerging markets, the

currency crises of East Asia (1990s) brought doubt that such investment flows

generate benefits for developing countries12.

1.4 Research objectives

The primary objective of the study was to assess the effectiveness of the

Zimbabwe Capital market (ZSE) in accomplishing its roles. In line with the major

objective, the project also attempted to pursue the following subtopics:

Assessment of the ZSE’s performance in ensuring good corporate

governance among Zimbabwean companies;

Analyzing the extent to which the ZSE assist small enterprises grow;

Assessing the effectiveness of the ZSE in promoting economic growth

and development;

Establishing whether companies can rely on the ZSE as a source of

financing operations;

1.5 Research Questions

The major question the researcher attempted to answer was whether the capital

market is effective in accomplishing the roles that it is supposed to? The

following questions were also asked:

What is the best strategy in addressing the shortcomings that the

Zimbabwean capital market (ZSE) has as a way of raising capital among

other roles?

11 Jefferis, 1995; Doidge et al., 2004

12 Bhagwati, 2001; Gabriele et al., 2001


Has there been any change or improvement on the performance of the

Zimbabwean capital market in accomplishing its roles ever since the

introduction of the multi-currency regime in February 2009?

Is the capital market heavily regulated?

Does the capital market help firms to raise funds for new projects?

Does the capital market adequately support start-up firms?

1.6 Statement of Hypotheses

With respect to the research objective of determining whether the ZSE is effective

in accomplishing is roles, the hypotheses to be tested is as follows:

Ho: The Zimbabwe capital market (ZSE) is effective in accomplishing its roles.

H1: The Zimbabwe capital market is not efficient in performing its roles.

1.7 Importance of the study

The major significance of the research was to spell out the weaknesses and or

strengths of the Zimbabwe capital market and provide solutions thereto. The

research project shall enable companies to make an assessment of the method of

raising capital that they can use having evaluated the past, current and the

expected performance of the Zimbabwe Capital market, the Zimbabwe Stock

Exchange to be more precise. Small and medium enterprises will be able to resort

to some methods of raising finance for their demanding working capital needs and

also the ZSE if the recommendations of the study are adopted.

The project will enable the researcher to have a better understanding of the

Zimbabwe Capital market, ZSE. He will gain a thorough knowledge of how the

ZSE operates, its institutional weakness, current developments that are happening

to the capital market, the instruments traded through the capital market and be

able to identify gaps that need particular attention. Besides gaining knowledge

about the ZSE, the researcher also gain the necessary experience for research

projects in further studies.


The country shall also benefit from the research project. This is because the

research is aimed at ensuring that the ZSE is functionally effective. If the capital

markets becomes effective it leads to improved economic growth and

development and ultimately improved standards of living which is perceived to

lead to political stability.

The research results are also expected to improve the spirit of enterprise and

better corporate governance that will improve the status of the ZSE in the world

of investment. This will see an improvement in capital inflows which had dropped

drastically over the last decades because of political insecurity and indigenization

laws.

Good governance is also expected to reduce regulatory expense on the part of the

government. As noted by Magayisa, the corporate scandals of 2004 cost the

Reserve Bank of Zimbabwe a lot in trying to rescue the Troubled Banking

Institutions. The results of the research, if implemented are expected to result in

self regulatory markets that are both efficient and effective and possibly dilute the

monopoly status of the ZSE.

1.8 Assumptions of the study

All the Zimbabwe capital market trading is done through the Zimbabwe

Stock exchange (ZSE) and therefore the phrase capital market and ZSE

shall be used interchangeably;

The sample used is a true representative of the population;

All questionnaires will be responded to;

All interviews will be successful;

All the seventy seven listed companies on the ZSE use the capital market

as the sole method of raising capital;

Any company can be listed easily on the ZSE;

Companies across all industries can switch from one method of raising

capital to another.


1.9 Scope of the Study

In line with the research objectives, the scope of this study is restricted to the

following

areas:

Assessment of the ZSE’s performance in ensuring good corporate

governance among Zimbabwean companies;

Assessment of the extent to which the ZSE assist small enterprises grow;

Assessment of the effectiveness of the ZSE in promoting economic growth

and development;

Assessment of whether companies can rely on the ZSE as a source of

financing operations;

Assessment of the extent to which the ZSE facilitate raising of capital for

both the government and nongovernment corporate;

The research project will be confined to the roles and effectiveness of the

Zimbabwe capital market (ZSE) considering the currently listed companies. The

main focus of the research is on the effectiveness of the ZSE in accomplishing its

roles.

1.10 Time budget

Table 1: Time Budget

Chapter Allocated Time Due Date

Project proposal One week 13/12/2010

Chapter 1(Introduction) One month 21/01/2011

Chapter2(Literature review) Three weeks 15/02/2010

Chapter 3(Methodology) One month 14/03/2011

Chapter4(Research Findings) Two weeks 28/03/2011

Chapter 5(Conclusion ) One month 30/04/2011

1.11 Monetary Budget

The research will be carried out within the budget below:


Table 2: Monetary Budget

Item of Expenditure Cost (USD)

Tuition fees $315.00

Internet $20.00

Printing $30.00

Transport $40.00

Accommodation for field research $50.00

Total cost $455.00

1.12 Limitations

The major limitations that the researcher encountered in the course of the research

are as follows:

Financial constraints for field research

Limited time within which the research was carried out

During field research some people were not willing to dedicate their selves

to supporting the project

However, to overcome such limitations and problems the researcher made the best

use of the available financial resources and time. The researcher prepared a

financial and time budget to ensure that the quality of the research outcomes was

not affected by such constraints.

Challenges in field research were overcome by making prior arrangements and

appointments with the people with whom interviews were going to be held. The

researcher also took his time explaining the benefits and importance of the


research project to them. The researcher made it clear that the research is not to

his benefit only.

1.13 Summary

As the activities on the stock exchanges tend to be specialized and not understood by common people, this chapter gives some basic definitions and review stock exchange history, participants, operations and importance, so as to serve as the basis for understanding how the stock market can help promote investment and trade. A brief background of the Zimbabwe Stock Exchange was explored in this chapter.

CHAPTER II

2.0 LITERATURE REVIEW

2.1 Introduction

The chapter seeks to discuss theoretical and empirical literature concerning the

roles of stock exchange in relation to the ZSE. In line with the research questions

the chapter will explore the roles that Zimbabwe Stock Exchanges are expected to

perform. The ZSE’s performance would be compared with roles performed by

other stock exchanges around the world like the JSE.

2.2 ZSE functions13

The ZSE serves three critical functions:

mobilize and efficiently allocate resources for the country's economic

development

13 http://www.zse.co.zw/


provide a fair, efficient, transparent and secure price discovery

mechanism in a well regulated environment

build liquidity through innovation

2.2.1Raising capital for businesses:

The Stock Exchange provides companies with the facility to raise capital for

expansion through selling shares to the investing public.

The Stock Exchange therefore is an organized financial platform that deals in

transactions involving the buying and selling of financial securities.

2.2.2 Mobilizing saving for investment:14

When people draw their savings and invest in shares, it leads to a more rational

allocation of resources because funds, which could have been consumed, or kept

in idle deposits with banks, are mobilized and redirected to promote business

activity.

2.2.3 Creating investment opportunity for small investors:

As opposed to other businesses that require huge capital outlay, investing in

shares is open to both the large and small stock investors because a person buys

the number of shares they can afford. Therefore the Stock Exchange provides the

opportunity for small investors to own shares of the same companies as large

investors.

2.2.4 Government capital- raising for development projects:15

Governments at various levels may decide to borrow money in order to finance

infrastructure projects such as sewage and water treatment works or housing

estates by selling another category of securities known as bonds. These bonds can

14R. R. West and S. M. Tinic 1971 The Economics of the Stock Market, New York: Praeger: D

15 George Karekwaivenani,Department of Economic History, University of Zimbabwe, P 8


be raised through the Stock Exchange whereby members of the public buy them,

thus loaning money to the government.

2.6.8.1 Remark 2

The ZSE falls short of some of the functions that other stock exchanges around the

world do perform. Among the listing requirements of the ZSE should be the need

by companies to comply with international codes on corporate governance like

the King Report on corporate governance. The JSE adopted the King II guidelines

on corporate governance among its Listing requirements.

2.3 Performance Review of Zimbabwe Stock Exchange

Contrary to the noble purpose for which the ZSE was created, the ZSE has

literally galloped astray, in the process creating obscene paper wealth that is

causing havoc in the economy.16 By 2008 the Zimbabwe Stock Exchange had

become the most devastating vehicle of economic destruction, there was rogue

trading at the ZSE:

The ZSE allowed some stock brokers to falsely bid up share prices, when

in fact the same stock brokers had absolutely no money to pay for the

shares. The end result has been that some counters grew by as high as 2

million percent in a single day;

Where share prices were rising at the ridiculously bloated rates, what that

effectively meant was that someone could work up with no penny at the

bank, but end the day a multi-trillionnaire. The next morning, the false

wealth so created would show up as high demand for cash.

The Stock Exchange was deliberately indexing the entire stock market to

the spurious Old Mutual share prices. The whole economy was then being

priced via the Old Mutual rate whose share price movements had no

16 Press statement on the rampant fraudlent activities on the ZSE, Dr. G. Gono governor reserve bank of zimbabwe 20 november, 2008, pp 6-9


relationship with economic fundamentals, let alone actual corporate

performance of Old Mutual itself.

The Zimbabwe Stock Exchange had been operating with no strict rules

and regulations that prohibit rogue behavior. On numerous occasions,

company share prices rose astronomically with absolutely no actual

volumes trading;

Some stock brokers were buying shares cheap in the morning call overs

then drive up prices before off-loading the same shares on the same day at

inflated prices;

CHAPTER III

3.0 RESEARCH METHODOLOGY

3.1 Introduction

Research methodology refers to the systematic, focused and orderly collection of

data for the purposes of obtaining information in order to solve research

questions. Data collection and analysis procedures are central to the validity of the

research findings in so much that it determines the success (or failure) of the

study. This chapter outlines the research design adopted, the research population

and sample, data collection method and instruments and the data presentation and

analysis plan. The chapter also explains the rationale for and shows why a case

study research methodology was deemed appropriate for this study.

3.2 Research Design Adopted

A case study research methodology was deemed appropriate for this study. A case

study is a detailed and thorough investigation of a few cases. “It is an intensive

description and analysis of a phenomenon or social limit such as an individual, a

group, an institution or community”.


3.2.1 Rationale for Case Study Approach

A case study method can contain several case studies and could use multiple

sources of evidence17 including documents, interviews and observations. It also

allows for the utilization of both qualitative and quantitative approaches and is

thereby seen as being more advantageous. Moreover, since these study intents to

deal with a management and administration phenomenon, it became logical to

adopt a case study approach.

The other advantage of the method is that a case study approach is rich in details

and well defined. It therefore becomes immediately useful in gathering detail.

However, despite these advantages, case studies have received criticisms. Case

studies are often accused of lack of rigour. Too many times, the case study

investigator has been sloppy, and has allowed equivocal evidence or biased views

to influence the direction of the findings and conclusions.

3.2.1 Design of Case Study

Research design is the plan and structure of investigation so conceived as to

obtain answers to the research questions18. The researcher adopted a multiple-case

design because of the need to provide evidence in addressing the issue in

question. The research used a case study approach, which is exploratory, carried

out about the ZSE’s effectiveness in accomplishing its roles and functions.

Empirical data was obtained from different sources through sampling,

questionnaires, structured and unstructured interviews, and secondary data from

reports and recommendations derived from the various stock brokers, asset

management companies and the Zimbabwe Stock Exchange.

17 Yin, 1993, p3

18 Kerlinger, (1996) p 279


3.3 Data Collection

Data collection is a term used to describe a process of preparing and collecting

data, for example as part of a process improvement or similar project. The

purpose of data collection is to obtain information to keep on record, to make

decisions about important issues, to pass information on to others.

In this research the researcher collected data from both primary and secondary

sources. Primary data can be defined as data which can be collected directly from

target respondents whereas secondary data can be collected from publications of

various institutions such as textbooks and newspapers.

3.3.1 Primary Data

Primary data is observed or collected directly from first-hand experience. It can

be defined as data which is collected directly from target respondents. In this

research primary data was gathered through questionnaires, face-to-face

interviews and telephone interviews.

3.3.1.2 Telephone interviews:

Telephone interviews allowed the researcher to cover a wide geographical area

within a short period of time. Instant responds to the questions were given. The

use of telephone interviews enabled the researcher to conduct unstructured

interviews which is critical as it gives the respondent chance to express their

opinion without the bias that is always associated with personal and face to face

interviews.

Telephone interviews had advantages as follows:

The researcher could cover a wide geographical area within a short space

of time

The costs were less than those of conducting personal interviews

Gives instant responses as opposed to questionnaires


However, telephone interviews had the following drawbacks:

Time for detailed discussion was limited

More costly than questionnaires

3.3.2 Secondary Data

Secondary data is that which is already available prior to a study because it was

collected for some other purposes some other time, not for solving the current

problem. To gather the data, the researcher went through already existing records,

statistics and other publications. Other sources of secondary data included the

press, newsletters by investment companies and stock broking firms and the

Internet.

3.4 Sampling

Sampling is the way sample elements are to be selected from the entire population

to come up with ‘representative’ samples19. The need to sample arises when the

entire population cannot be surveyed because either of budget constraints,

practically impossible, or time constraints20..

There are two basic methods of sampling, namely21:

Probability or representative sampling

Non probability or judgmental sampling

Probability samples are so called because it is possible to express the

mathematical probability of sample characteristics being produced in all

population. Each element in the population of interest has an equal chance of

being part of the sample.

In non-probability sampling, the researcher uses his subjective judgment to come

up with sampling method that he feels will deliver results and enable him answer

19 Hill, et al., 2003

20Saunders et al. 2003

21 White ,2000 and Hill et al. 2003


the research question. This is particularly so where the data to be collected is

qualitative22.

Because of the qualitative nature of this research, non-probability sampling

techniques were used to select the sample.

The selection of the researcher’s target population was on the basis of knowledge,

flexibility, availability and convenience. The targeted population included credit

analysts, dealers, and other ZSE personnel.

3.4.3 Sample Size

Deciding on a sample size for a qualitative enquiry can be more difficult than for

a quantitative one because there are no rules to be followed23. It all depends on

what will be useful, what will have credibility and what can be done within

available time and resources. There is always a difficulty in striking a

compromise between the accuracy of the findings and the amount of time and

money available for collecting, checking and analyzing the data24.

To validate meaningfulness of insights generated from qualitative enquiry, have

more to do with the information richness of the case selected and the analytical

capabilities of the researcher than with sample size.

This research study had two populations or sampling frames. One population was

ZSE personnel. The other population was that of dealers and other employees of

stock broking firms and investment banks.

3.5 Data Analysis Plan

Due to the inherent noisy nature of raw data, questionnaire entries have to be

processed before being applied into any analytical models. Data processing

involves coding responses using numeric symbols, classifying respondents into

22 Patton ,1990

23 According to Mugo, 2005

24 Saunders et al ,1997


individual groups as well as adjusting for non-responses. To make a reasonable

conclusion about the topic, there is need to find systematic and justifiable ways to

analyze data and draw sound conclusions and recommendations. The data will be

analyzed by sorting it out into categories. Answers will be grouped by question in

order to draw numbers and percentages of the number of respondents whose

responses fall in a certain category.

3.6 Summary

In this chapter, the researcher identified the research methodology and outlined

the approaches used in carrying out the research, the sampling technique and the

data gathering instruments employed in making this research study a success. The

next chapter shall look at the data presentation and discussion or analysis.


CHAPTER IV

4.0 DATA PRESENTATION AND ANALYSIS OF RESULTS

4.1 Introduction

The chapter focuses on presentation techniques, discussion and interpretation of

research findings. It presents the data obtained through primary and secondary

means, the analysis and discussion of such data is in line with the research

objectives outlined in Chapter I. Specifically it presents results and analysis of

questionnaires, sampled data and results from the print media. The researcher

present and analyze the data collected from field research carried out in an

attempt to determine whether Zimbabwean Stock Exchange is effective in

accomplishing the roles that capital markets are expected to perform. The results

of the analysis are presented diagrammatically and expressed in percentages for

ease of assessment. The hypothesis, “Zimbabwean Capital Markets is effective in

accomplishing its roles” is tested. The research conclusions shall be based on such

analysis.

4.2 Response Rate

From the thirty five questionnaires distributed, nineteen were received back to

give a response rate of 54.30 % but three of the questionnaires received were

incompletely filled to such an extent that they were deemed spoiled thus reducing

the effective response rate to 45.70%. The response rate would have been higher

had respondents been given additional time to submit their responses but however

due to time constraints the 45.70 % response rate is accepted as being adequate


for this study. The response rate was also low due to the time and monetary

budget of the researcher.

4.4 Comparison of Sample Percentage with Expected

Seventy five percent of the respondents surveyed indicated that the ZSE is not

effective in accomplishing the roles of capital markets.

Figure 6: Comparison of sample percentage with expected

Yes (4)25%

No (12)75%

ZSE is effective in accomplishing its roles

Source: Raw Data

4.5 Data Presentation

The following analysis is based on questionnaires collected at the end of the

project. The questions asked are basically the same for all respondents.

4.5.1.0 Questionnaire Response Review

4.5.4 Does the ZSE promote investment for small investors?

About 100% of the respondents believed that the ZSE adequately promote

investment and growth of small investors arguing that shares can be transacted in

lots of 100 for all listed counters.


4.5.5 Does the ZSE promote growth for small to medium enterprises?

40% responded to this question agreed that the ZSE promote growth for small to

medium enterprises. However 60% of the respondents belied that the ZSE does

not adequately support small entrepreneurs to grow. The majority argued that the

requirements for small entrepreneurs to be able to list and issue shares through

initial public offerings (IPOs) were too much. For a company to be able to do that

it is required to have a trading history of about three years and showing some

levels of profitability. Some small entrepreneurs with brilliant ideas therefore fail

before they even launch their ideas because of lack of funding.

Figure 11: Does the ZSE promote Growth

ZSE Promotes Growth; 30%

ZSE does not Promote growth; 70%

Does the ZSE promote small entrepreneurs' growth?

Source: Raw Data

4.5.6 Is the Zimbabwean Capital Markets properly regulated?

50% of the respondents believed that the ZSE is heavily regulated especially

concerning foreign investors and selected sectors like the mining counters. They

believe that the introduction of SEC would, in the long term, enhence the ZSE’s

performance in relation to regulation. 45% of the respondents believed that the

ZSE is properly regulated. 5% were indifferent as to whether the regulation

currently prevailing affect the ZSE’s effectiveness.


Figure 12: Is the ZSE properly Regulated

45%

50%

5%

Is the ZSE properly regulated

Properly RegulatedHeavily RegulatedSomewhat properly

Source: Raw Data

4.5.7 How significant is the capital raising ability of the ZSE?

The majority of the respondents believed that the capital raising ability would be

very significant had it not been of the illiquid market. Capital flows from

international markets however seem to be affected more by regulation than

market liquidity. Currently the capital raising ability is not significant.

Figure 13: Significance of ZSE in raising Capital


Very Significant(28%)

Insignificant(72%)

Source: Raw Data

4.5.8 What do you think should be done for the ZSE to be more effective in accomplishing its roles?

Respondents believed that regulators should enforce stringent insider trading and

market manipulation regulations to improve on corporate governance. They also

believe that the demutualisation process should be hastened. Demutualisation is

the process of converting a non-profit, mutually owned organization to a for-

profit, investor-owned corporation. Although, demutualized exchanges will

continue to provide many if not most of the services, they will have different

governance structures in which outside shareholders are represented by boards of

directors. There are two main forces driving stock exchanges to demutualize: 1)

increased global competition and 2) advances in technology.

Some respondents also believed that the ZSE should incorporate codes on good

corporate governance practices like the King Report so as to improve corporate

governance.

4.5.9 What recommendations do you expect this study to provide for the

benefit of stock market development in Zimbabwe?

Respondents believed that the stock market should be computerised through a

Central Depository and do away with physical trading. Investors should be able to

trade on the local bourse without the need to be physically present at the ZSE.

Some respondents also believe that overregulation of the stock market should be

avoided. They belived that the should be a clear relationship between capital

markets and the Securities Commission of Zimbabwe.

4.5.10 How effective is the ZSE in promoting economic growth and

development?

Respondents believe that the ZSE can play a leading and prominent role in

marketing Zimbabwe as a suitable and promising investment destination by


attracting foreign and local investors who have an appetite for emerging market

growth prospects. There are several areas that the ZSE can deliberately promote

and encourage which will position Zimbabwe ahead of other countries on the

continent. The Financial sector is one such area due to the well developed

infrastructure and

highly experienced and educated professionals. The second area is the

information, communication and technology (ICT) sector which Africa is still

lagging behind. This presents an opportunity for Zimbabwe. Zimbabwe has

excellent infrastructure to build on a decent hub which can attract capital into the

country. This can be channeled through the ZSE.

4.5.11 Can companies rely on the ZSE for capital raising for project development?

The majority of respondents believe that companies cannot rely on the ZSE for

their capital needs due the liquidity constraints that the market is currently facing.

The current trading and settlement system is also too slow and poor. Therefore

companies should supplement their capital through retained earnings than relying

on the ZSE for their capital needs.

4.5.12 Has there been any change for the better in terms of the effectiveness of the ZSE since the introduction of the multicurrency regime?

Respondents noted that there was some remarkable improvement especially just

after the introduction of the multicurrency regime in February 2009. However

with the introduction of indigenization laws performance on the ZSE dampened

as it discouraged international investments because of the increased risk.

4.6 Interviews

Apart from questionnaires primary data was also collected through interviews. Of

the scheduled five interviews, three were successful making a response rate of

sixty percent.

The interview carried out at the ZSE proved that the major problem that the ZSE

is facing is liquidity challenges. The market condition is such that the ZSE cannot


effectively perform its roles. Regulatory constraints also affect the ZSE

negatively.

The ZSE would do better if it is demutualised. However the process of

demutualization is being delayed by the fact that there are some members

resisting.

4.7 Discussion and Interpretation of Findings

There was a general consensus by respondents that the ZSE plays a critical role in

the economy with many respondents arguing that, “the level of economic growth

and development would improve should the ZSE be reformed and take a lead in

marketing the economy as a better investment environment.” Further analysis

depicts that, the ZSE is not doing enough to make sure that there is adequate

support to potential SMEs and to ensure that there is quality corporate governance

in the market.

The Zimbabwe stock exchange needs to be reformed and restructured to be more

effective in assisting both investors and entrepreneurs reach their respective goals.

Initial Public Offering (IPO), also referred to simply as a "public offering," is

when a company issues common stock to the public for the first time. They are

often issued by smaller, younger companies seeking capital to expand, but can

also be done by large privately-owned companies looking to become publicly

traded. The Zimbabwe Stock Exchange (ZSE) is the primary institution involved

in this and sets the various rules, requirements, terms and conditions of conduct of

IPO’s.

The ZSE needs to be reformed to be able to make it more effective and responsive

to the needs of entrepreneurs especially small and medium scale businesses who

struggle to raise capital even though they may have all the other ingredients for

success. The ZSE needs to the reformed from an exclusive club into a more

inclusive institution that transforms upcoming, promising ideas, ventures and

projects from dreams into reality. If it can’t be reformed and restructured to meet

those goals then there is an urgent need to set up a rival exchange to do that.


The money paid by investors for the newly-issued shares goes directly to the

company (in contrast to a later trade of shares on the exchange, where the money

passes between investors). An IPO, therefore, allows a company to tap a wide

pool of stock market investors to provide it with large volumes of capital for

future growth. The company is never required to repay the capital, but instead the

new shareholders have a right to future profits distributed by the company and the

right to a capital distribution in case of dissolution.

Among the requirements of conducting an I.P.O in Zimbabwe is the need for the

company to be of a particular size and to have a trading record of a specified

period (minimum 3 years), and be showing certain level of profitability. These

requirements exist mainly to protect investors and also to make the ZSE’s life

easy and simple. The ZSE needs to actively encourage small to medium scale

businesses to pursue the possibility of IPOs as a way to raise capital for their

operations since the high level of inflation makes it almost impossible to keep

borrowing to keep pace with higher requirements of working capital.

4.8 Data Presentation and Analysis Summary

The response rate for the questionnaires distributed was 45.7%. The bulk of the

respondents were drawn from stock broking and asset management related

institutions due to their greater understating of the investment market in

Zimbabwe. From all the responses obtained from the field research, most were in

favor of implementation of proper regulatory framework that will ensure

transparency and reduce market manipulation. The study used both qualitative

and quantitative approaches to analyze the research findings. The primary data,

which was gathered through questionnaires and interviews was presented and

analyzed first, then secondary data, which was collected from related literature.

Tables, bar graphs and pie charts were used to present the findings. Logical

judgments were also used to come up with results as well as an analysis of

responses given by interviewees.


CHAPTER V

5.0 CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

The chapter focuses on the summary, conclusions and recommendations of the

case study. Conclusions were be made from the data obtained as compared to

what is expected as highlighted in the literature review. In trying to gather

empirical data a sample of 15 respondents were used being selected from financial

institutions.

5.2 Summary of Findings

The major research problems that motivated the researcher included the fact that

small business enterprises are having difficulties raising enough capital to finance

their operations; Zimbabwe is lagging behind due to indigenization laws

discouraging foreign investor participation on the ZSE and the participation of the

Zimbabwean Capital Markets to contributing economic Growth and

Development.

The findings of the research as outlined in the previous chapter proved that indeed

experts on capital markets are in agreement that the ZSE is not effective when it

comes to roles and functions of stock exchanges that if performed well would

eliminate the current problems outlined above.

5.3.0 Conclusions

The conclusions made emanated from the research findings as presented in

chapter IV, hence they are research based conclusions. They are summed up

answers to research questions and sub problems and are drawn directly from data

reported in the previous chapter. The conclusions section shall demonstrate


whether or not conclusions agree with the theory of previous researches. The

conclusions on the analysis are as follows:

5.3.2 Comparison of Sample Percentage with Expected

Seventy five percent of the respondents surveyed indicated that the ZSE is not

effective in accomplishing roles of Capital Markets in Zimbabwe.

The conclusion from the hypothesis testing is that “The Zimbabwe capital market

is not efficient in performing its roles”. (H1)

5.3.3 Does the ZSE promote investment for small investors?

About 100% of the respondents believed that the ZSE adequately promote

investment for small investors arguing that shares can be transacted in lots of 100

for all listed counters. The fact that shares are transacted in minimum lots of 100

shares means that even small investors that may want to participate on the market

can easily do so thereby contributing to economic growth and development

somehow.

The conclusion that can be drawn from the above observation is that the ZSE

adequately and effectively promotes investment to small investors.

5.3.4 Does the ZSE promote growth for small to medium enterprises?

The majority (60%) of the respondents argued that the requirements for small

entrepreneurs to be able to list and issue shares through initial public offerings

(IPOs) were too much. For a company to be able to do that it is required to have a

trading history of about three years and showing some levels of profitability.

Some small entrepreneurs with brilliant ideas therefore fail before they even

launch their ideas because of lack of funding.

The conclusion from the response frequency clearly demonstrate that the ZSE

does not adequately promote small to medium business enterprises because of the

heavy requirements for qualification for raise money through the ZSE.


5.3.5 Is the Zimbabwean Capital Markets properly regulated?

50% of the respondents believed that the ZSE is heavily regulated especially

concerning foreign investors and selected sectors like the mining counters. They

believe that the introduction of SEC would, in the long term, enhence the ZSE’s

performance in relation to regulation. 45% of the respondents believed that the

ZSE is properly regulated. 5% were indifferent as to whether the regulation

currently prevailing affect the ZSE’s effectiveness.

The distribution of the response shows that the ZSE is heavily regulated. 50%

respondents believed that the ZSE is heavily regulated, 45% believed it was

properly regulated and 5% were indifferent. In conclusion therefore the

implication is that the ZSE is heavily regulated.

5.3.6 How significant is the capital raising ability of the ZSE?

The research has found out the strength of capital raising by listed companies

depends on the performance of the company. If the company is doing well it

would attract more investors and thus more capital is raised and the reverse is

true. This means to say that the significance of the capital raising ability of stock

exchange is a function of the individual stocks on the stock exchange.

The result from respondents shows that the ZSE is effective with respect to local

investors because the ability of a share to pool demand is a function of the

performance of the individual company. However, concerning foreign investors,

the significance is more dependent on regulation than the performance of the

company.

Hence, it can be safely concluded that the ZSE’s capital raising ability is

significant on the local arena but in terms of pooling from international stock

markets it is not that significant.

5.4 Recommendations

In the light of the conclusions drawn by the study, the researcher clearly stated

recommendations on actions that should be taken to solve problems identified. In


addition, suggestions for future research on the study were made in the latter

section of the chapter.

5.4.2 Stock Market Computerisation

The stock market should be computerized through the central depository and do

away with physical trading. This is most likely to promote foreign participation

on the ZSE. Investors around the globe will be able to trade from their respective

locations.

5.4.3 Regulation

Overregulation of the ZSE should be avoided. There should be a clear relationship

between capital markets and the Securities Commission. Indigenization laws

clearly negatively impacts the growth of the economy by dispiriting profitable

trading at the ZSE. The ZSE should be moderately regulated in a way that does

not compromise the need for such regulation and at the same time in a way that

promotes trading and economic growth that will benefit the economy at large.

5.4.6 Demutualization

The process of demutualization should be hastened so as to improve on efficiency

and effectiveness of the Zimbabwe Stock Exchange. Demutualization enables the

ZSE to be run properly and converted from a club to a profit seeking organization

that should be listed also.

5.5 Suggestions for Further Research

Further research should be on evaluating the feasibility of establishing a rival

stock exchange in Zimbabwe. If efforts to reform the ZSE and possibly

demutualization fails, there is need to establish a rival stock exchange that will

dilute the monopoly status of the ZSE and improve the overall effectiveness of the

Zimbabwean Capital markets. Therefore further research on the topic of

effectiveness of Zimbabwean Capital markets should look into the feasibility of

the possibility of establishing a rival stock exchange.


5.6 Summary of Conclusions and Recommendations

The chapter looked at conclusions drawn from each research question and made

recommendations thereto. The major recommendations included the

establishment of the central depository system that enables electronic trading,

reducing the level of regulation of the ZSE. Hastening the demutualization

process was also among the recommendations. The chapter drew conclusions to

problems of the ZSE making particular reference to the objectives of the study as

spelt out in every chapter of the research. The last part of the chapter provided

suggestions for further research. It is the researcher’s belief that the current

research and available literature is inadequate to address the identified pitfalls of

the local market. This is especially because of the dynamic nature of capital

markets around the globe. New recommendations should be drawn more often so

as to incorporate any of the vast changing features of stock markets hence further

research on the topic is indispensable.


Documents

JAMES VASHIRI ASSIGNMENT Project with footnotes.docx