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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
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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.
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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.
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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 stockexchanges 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.
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Table of ContentsRelease Form ....................................................................... Error! Bookmark not defined.
The Approved Form............................................................. Error! Bookmark not defined.
Dedications ......................................................................................................................... ii
Acknowledgements............................................................................................................ iii
Abstract.............................................................................................................................. iv
List of Abbreviations and Acronyms .................................................................................. x
CHAPTER I ...................................................................................................................... 13
1.0 INTRODUCTION ............................................................................................ 13
1.1 Introduction......................................................................................................... 13
1.2 Background of the study ..................................................................................... 13
1.4 Research objectives............................................................................................. 18
1.5 Research Questions ............................................................................................. 18
1.6 Statement of Hypotheses..................................................................................... 19
1.7 Importance of the study ...................................................................................... 19
1.8 Assumptions of the study .................................................................................... 20
1.9 Scope of the Study .............................................................................................. 21
1.10 Time budget ...................................................................................................... 21
1.11 Monetary Budget .............................................................................................. 21
1.12 Limitations ........................................................................................................ 22
1.13 Summary ........................................................................................................... 23
CHAPTER II..................................................................................................................... 24
2.0 LITERATURE REVIEW ....................................................................................... 242.1 Introduction......................................................................................................... 24
2.2 Definition of Stock Exchanges ........................................................................... 25
2.3 History of Stock Exchanges ................................................................................ 26
2.3.1 History of the Zimbabwe Stock Exchange ...................................................... 27
2.4 Stock Market participants and trading ................................................................ 29
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2.5 ZSE functions...................................................................................................... 30
2.5.1 Remark 1 .......................................................................................................... 30
2.6 Importance of Stock Exchanges.......................................................................... 31
2.6.1Raising capital for businesses: .......................................................................... 31
2.6.2 Mobilizing saving for investment .................................................................... 32
2.6.3 Facilitating company growth ........................................................................... 32
2.6.4 Redistribution of wealth............................................................................ 33
2.6.5 Corporate governance ............................................................................... 33
2.6.6 Creating investment opportunity for small investors ....................................... 34
2.6.7Government capital- raising for development projects..................................... 34
2.6.8 Barometer of the economy ............................................................................... 35
2.6.8.1 Remark 2 ....................................................................................................... 35
2.7 Listing requirements of the ZSE ................................................................... 36
2.8 Trading and Settlement ................................................................................. 37
2.9 Performance and Size of the Market ................................................................... 37
2.9.1 Remark 3 .......................................................................................................... 39
2.9.2 Regulation of the Stock Exchange ................................................................... 42
2.9.3 Regulation of the ZSE...................................................................................... 43
2.9.4 Regulation affecting foreign investors............................................................. 43
2.10 Summary ........................................................................................................... 44
CHAPTER III ................................................................................................................... 45
3.0 RESEARCH METHODOLOGY............................................................................ 45
3.1 Introduction......................................................................................................... 45
3.2 Definition of Case Study ..................................................................................... 46
3.2.1 Design of Case Study ....................................................................................... 47
3.2.2 Rationale for Case Study Approach................................................................. 48
3.3 Data Collection ................................................................................................... 50
3.3.1 Primary Data .................................................................................................... 50
3.3.1.1 Questionnaires: ............................................................................................. 50
3.3.1.2 Telephone interviews: ....................................................................................... 52
3.3.1.3 Personal Interviews ....................................................................................... 53
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3.3.2 Secondary Data ................................................................................................ 54
3.3.3 Justification for the use of Secondary Data...................................................... 55
3.4 Sampling ............................................................................................................. 55
3.4.1 Population Identification.................................................................................. 57
3.4.2 Purposive Sampling ......................................................................................... 57
3.4.3 Sample Size...................................................................................................... 58
3.5 Data Analysis Plan .............................................................................................. 58
3.6 Summary ............................................................................................................. 59
CHAPTER IV ................................................................................................................... 60
4.0 DATA PRESENTATION AND ANALYSIS OF RESULTS ................................ 60
4.1 Introduction......................................................................................................... 60
4.2 Response Rate ..................................................................................................... 60
4.3 Typography of Respondents ............................................................................... 62
4.3.1 Respondent Field ............................................................................................. 62
4.3.2 Position of Employment .................................................................................. 63
4.4 Comparison of Sample Percentage with Expected ............................................. 63
4.5 Data Presentation ................................................................................................ 64
4.5.1.0 Questionnaire Response Review................................................................... 65
4.5.1.1 What class of companies does your company fall? ...................................... 65
4.5.1.2 How long have you been in your profession?............................................... 66
4.5.3 Corporate governance is now one of the key considerations by investors. Do
you agree? ................................................................................................................. 67
4.5.4 Does the ZSE promote investment for small investors? .................................. 68
4.5.5 Does the ZSE promote growth for small to medium enterprises? ................... 68
4.5.6 Is the Zimbabwean Capital Markets properly regulated? ................................ 69
4.5.7 How significant is the capital raising ability of the ZSE? ................................ 69
4.5.8 What do you think should be done for the ZSE to be more effective inaccomplishing its roles? ............................................................................................ 70
4.5.9 What recommendations do you expect this study to provide for the benefit of
stock market development in Zimbabwe? ................................................................ 71
4.5.10 How effective is the ZSE in promoting economic growth and development?
.................................................................................................................................. 71
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4.5.11 Can companies rely on the ZSE for capital raising for project development?
.................................................................................................................................. 71
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? ........................................ 72
4.6 Interviews............................................................................................................ 724.7 Discussion and Interpretation of Findings .......................................................... 72
4.8 Data Presentation and Analysis Summary .......................................................... 74
CHAPTER V .................................................................................................................... 74
5.0 CONCLUSIONS AND RECOMMENDATIONS ................................................. 74
5.1 Introduction......................................................................................................... 74
5.2 Summary of Findings.......................................................................................... 75
5.3.1 Does the ZSE promote Corporate Governance for listed companies?............. 77
5.3.2 Comparison of Sample Percentage with Expected .......................................... 78
5.3.3 Does the ZSE promote investment for small investors? .................................. 78
5.3.4 Does the ZSE promote growth for small to medium enterprises? ................... 78
5.3.5 Is the Zimbabwean Capital Markets properly regulated? ................................ 79
5.3.6 How significant is the capital raising ability of the ZSE? ................................ 79
5.3.8 Can companies rely on the ZSE for capital raising for project development?. 80
5.3.9 Has there been any change for the better in terms of the effectiveness of the
ZSE since the introduction of the multicurrency regime? ........................................ 815.4 Recommendations............................................................................................... 81
5.4.1 Corporate Governance ..................................................................................... 81
5.4.2 Stock Market Development and Economic Growth ........................................ 82
5.4.2.1 ZSE must play a leading role in Zimbabwe Economic recovery .................. 83
5.4.3 Regulation ........................................................................................................ 84
5.4.4 Can companies rely on the ZSE ....................................................................... 84
5.4.5 Capital Market Stability ................................................................................... 84
5.4.6 Demutualization ............................................................................................... 84
5.5 Suggestions for Further Research ....................................................................... 85
5.6 Summary of Conclusions and Recommendations............................................... 85
APPENDICES .................................................................................................................. 88
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List of Tables
Table 1: Time Budget.23
Table 2: Monetary Budget...23
Table 3: Questionnaire response rate...62
Table 4: Respondent Field...64
Table 5: Respondent By position of Employment65
Table 6: Summary of findings..78
List of Figures
Figure 1: Industrial Index and Daily volume ..40
Figure 2: Industrial Index and Value Traded...42
Figure 3: ZSE Index Movements.....43
Figure 4: Effective Response...63
Figure 5: Respondent field...64
Figure 6: Comparison of sample percentage with expected....66
Figure 7: Respondent Classification.67
Figure 8: Classification of Respondent by Position Held.67
Figure 9: Working Experience of Respondents....68
Figure 10: Does the ZSE promote Good Corporate Governance Practice....69
Figure 11: Does the ZSE promote Growth...70
Figure 12: Is the ZSE properly Regulated.....71
Figure 13: Significance of ZSE in raising Capital.71
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List of Abbreviations and Acronyms
ZSE Zimbabwe Stock Exchange
RBZ Reserve Bank of Zimbabwe
JSE Johannesburg Stock Exchange
LSE London Stock Exchange
Corporate Governance The ways suppliers of finance to corporations
assure themselves of getting a return on their
investment and how they make sure that managers
do not steal the capital or invest in bad projects.
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
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CHAPTER I
1.0 INTRODUCTION
1.1 Introduction
This chapter seeks to provide the background to the study focusing on the roles
and effectiveness of the Zimbabwe capital market, which basically revolves
around the Zimbabwe Stock Exchange, from 2008 to date. The chapter also
highlights objectives, the research questions limitations and delimitations of the
study and the hypothesis to be tested and the assumptions adopted in carrying out
the study, the limitations and delimitations of the study.
1.2 Background of the study
Under normal operating conditions the Zimbabwe Stock Exchange (ZSE) should
perform the following roles1:
Facilitates the raising of capital for businesses expansion through sellingshares to the investing public.
Mobilizing savings for investment- When people draw their savings andinvest 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. .
Creating investment opportunities for small investors- As opposed to otherbusinesses 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.
Facilitates Government in raising capital for development projects-Thegovernment may decide to borrow money in order to finance infrastructure
projects such as sewage and water treatment works by selling bonds.
1Sam Mensah,Ph.D
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These bonds can be raised through the ZSE whereby members of the
public buy them, thus loaning money to the government.
Barometer of the economy - At the ZSE, share prices rise and falldepending, largely, on market forces. Share prices tend to rise or remain
stable when companies and the economy in general show signs of stability
and growth. An economic recession, depression, or financial crisis could
eventually lead to a stock market crash. Therefore the movement of share
prices and in general of the stock indexes can be an indicator of the
general trend in the economy.
The ZSE failed to attract investors during the financial year 20102 and the
chairman of the management committee of the ZSE, Ndodana Mguquka has said:
Currently our capitalization is justabove US$3 billion and is falling,but if we attract big companies tolist, especially in the mining andbanking sectors, we can grow thesize of the market up to levels ofUS$10 billion.
3
Ndodana added the following:
As the new executive committee, we
are looking forward to reviving theZSE. At the moment there are a lot ofissues that need to be sorted out,particularly the quality of ourlistings. We need to improve thequality of our listings to attractforeign and local investment.
4
It has been suggested that some of the key reasons why investors avoid investing
in emerging markets are poor corporate governance and transparency5.Failure to
2Tom Minney, 26 July 2010,
3http://www.zse.co.zw/
4Zimbabwe Independent newspaper, (http://www.theindependent.co.zw/)
5 McKinsey and Company, 2001; Gibson, 200)
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attract foreign investors by the ZSE is therefore mainly attributable to poor
corporate governance practices. Following the corporate scandals of early 2000s
in America like the fall of Enron and World com, investors became conscious of
the need to consider good corporate governance practices in their investment
decisions6. Generally foreign investors have got an appetite for emerging market
growth prospects7.
However on 14 July 2010 the Finance Minister, Tendai Biti had given a summary
of the ZSEs woes in his 2010 Mid-Term Fiscal Policy Review 8 to Parliament.
He said that trading on the Zimbabwe Stock Exchange has largely been low,
mainly due to market illiquidity in the first half of the year and that foreign
participation has remained subdued with investments mainly confined to portfoliorestructurings. Corporate results have also failed to uplift the equity market as
most corporates were still undercapitalized and also suffering from subdued
demand. He said that on average take up of recapitalization rights issues had only
been 50%, and underwriters had taken the balance. According to the same Mid-
Term Fiscal policy review, the industrial index which started the year at 156.52
had dropped to 127.46 by June 2010, whilst the mining index fell from an opening
of 209.8 to 143.08. Similarly, market capitalization fell from US$3.97 billion in
January 2010 to US$3.19 billion by end of June 2010. The poor performance was
as a result of investors pulling out their investments reflecting depressed
investors sentiment over perceived financial risks, especially following the
gazette of the Indigenization Regulations on March 1.In particular, foreign
investors contribution to market turnover fell from between 40-50% to an
average 20% per month.
The performance of the ZSE remained subdued despite the fact that transaction
costs on the Zimbabwe Stock Exchange (ZSE) have been slashed by more than
6Musa Mangena, University of Bradford
7Gilbert Muponda, 2009
8www.zimtreasury.org
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half, to 3.21% (buying 1.73%, selling 1.48%) from 7.5% in December 2009 9. The
stockbroker had commented that generally this should encourage trading resulting
in better price discovery.
On 1 June 2008, Gilbert Muponda suggested that the ZSE be reformed and
restructured to be more effective in assisting both investors and entrepreneurs
reach their respective goals. He added that among the requirements of conducting
an Initial Public Offering (IPO) 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 ZSEs life easy and simple yet
IPOs are often issued by smaller, younger companies seeking capital to expand. Infact 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 as an
alternative to borrowing to keep pace with higher requirements of working
capital.
Zimbabwe is lagging behind on the disclosure of executive remuneration, which
is shrouded in secrecy10. This is a clear indication of the deficiencies in corporate
governance among Zimbabwean companies. The ZSE should incorporate
guidelines on corporate governance in their Listing Rules like the Johannesburg
Stock Exchange (JSE) that incorporated the King II guidelines11.
1.3 Statement of the Problem
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
9Imara Edwards Securities (http://www.imaracapital.com/
10Chris Muronzi, Zimbabwe Independent Business Editor, 13 August 2010
11Willia Bonyongwe, Chairperson of the Securities Commission of Zimbabwe (SEC)
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history for a company to do so12. 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 liquidation13. 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 Rules14
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$5million while months before that wewere raking in more than US$20
million a month. Since theregulations were gazette, we haveseen a negative impact ontrade..Last year our marketwas driven by foreigners, making upto about 45 -50% of the totalturnover of about US$200 million ontheZSE,
15
The indigenization laws as observed by Munyukwi clearly negatively impacts the
growth of the economy by dispiriting profitable trading at the ZSE.
12 Gilbert Muponda, 1 June 2008
13Dr. Gono, Troubled Banking Institutions Handout, p 2
14Willia Bonyongwe, August 2010
15Zimbabwe Daily News, 29 December 2010
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Foreign investors improve the inflow of foreign exchange, which is often greatly
needed in developing countries to finance imports and other foreign payments16.
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 countries17.
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 ZSEs performance in ensuring good corporategovernance 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 offinancing 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 theZimbabwean capital market (ZSE) has as a way of raising capital among
other roles?
16Jefferis, 1995; Doidge et al., 2004
17Bhagwati, 2001; Gabriele et al., 2001
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Has there been any change or improvement on the performance of theZimbabwean 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.
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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 ZimbabweStock 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.
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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 ZSEs 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 offinancing operations;
Assessment of the extent to which the ZSE facilitate raising of capital forboth 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 budgetTable 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:
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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
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research project to them. The researcher made it clear that the research is not to
his benefit only.
1.13 Summary
The chapter provided the background information on the role and effectiveness of
the ZSE. The roles that the ZSE should perform are also clearly spelt out in the
background section of the chapter. The problem statement is shown as resulting
from the fact that local companies are failing to utilize the capital market to raise
enough finance to cater for their operations. The problem also emanates from the
fact that foreign companies are not willing to invest at the ZSE due to
indigenization laws and poor corporate governance practices by local companies.
The background clearly showed that the poor performance of the ZSE is not
directly linked to transaction costs as witnessed by the subdued performance even
after transaction costs have been slashed in 2009. The primary objective of thestudy as explained in the chapter is to determine whether the ZSE is effectively
accomplishing its roles. The primary objective is broken down into sub objectives
with the aim of thoroughly accomplishing the major objective. The chapter
provided the purpose of the study, emphasizing on the fact that the time and
resources was worth it. The research questions included in the chapter helps
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coming up with the hypothesis tests and leading to pursuance of the objectives.
The hypothesis tested is, Zimbabwe Stock Exchange is effective in
accomplishing its roles. The major assumptions of the study are that all capital
markets trading is through the ZSE and therefore that the ZSE is the capital
market of Zimbabwe. The major limitations of the study are that of time and
monetary resources involved during the course of the research.
Having looked at the background, purpose, limitations and delimitations in
chapter I, chapter II focuses on the literature review of the study which aims at
identifying gaps in knowledge as well as weaknesses in previous studies and
providing possible solutions thereto.
Chapter III looks at the research methodology and why a particular approach was
chosen over the others.
Chapter IV focuses on presentation techniques, discussion and interpretation of
research findings and chapter V looks at recommendations and conclusion.
CHAPTER II
2.0 LITERATURE REVIEW
2.1 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, so as to serve as the
basis for understanding how the stock market can help promote investment and
trade. Besides, review of other studies is done in this chapter to give various
dimensions of stock exchanges in the economy. A brief background of the
Zimbabwe Stock Exchange and how it performed and the current performance is
also be explored in this chapter. The ZSE is the only stock exchange currently
operating in Zimbabwe. Historically, there was no statutory provision for the
operation of more than one stock exchange but only the ZSE which is in
operation. However with the formation SEC provision was given for the operation
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of more than one stock exchange in Zimbabwe. Since its formation, the ZSE went
through vast changes, including numerous changes in premises utilization, trading
systems, management and modification of rules, among other things. Attention is
given to changes that are believed to have impacted on the efficiency and
effectiveness of the ZSE, reduced costs of both trading and the running of the
exchange, and increased the exchanges efficiency in information dissemination.
The main focus is not on the chronology of changes but on the purpose of these
changes, or rather, their purported effect on market efficiency and effectiveness.
This study attempts to fill the gap in the literature by tracing the history and
operations of the Zimbabwe Stock Exchange (ZSE). It examines why and how the
ZSE was formed and documents its early history, as well as investigating the role
and impact of the local bourse in the economy. The study is divided into different
sections. The first section examines the origins of the ZSE and analyses the
internal organization of the Exchange, while the second gives an analysis of the
ZSE's operations and its influence on economic development between 2008 and
2011. Finally the conclusion assesses the ZSE's role and performance and
highlights some theoretical issues emerging from the study's findings.
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.18 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 1138.19 However, the modern form of the
Stock Exchange can be traced to about 200 years ago.20 By the twentieth century,
the Stock Exchange had become a common feature in many capitalist economies
and was widely considered an institution characteristic of a 'modern economy'.
18F. E. Armstrong 1957 The Book of The Stock Excliange, London: Pitman: p 17.
19 E. H. H. Edwards 1963 "The Role of the Stock Exchange", in RSE,Financial and EconomicSymposium, Record of Proceedings, Salisbury: p 3
20 W. T. C. King 1954 The Stock Exchange, London: Allen & Unwin: p 15
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The Stock Exchange is now recognized as an important component in the
financial structure of the capitalist system. While the Stock Exchange serves an
important function in the economy, it can also wreak havoc. Nowhere is this
clearer than in the case of the Wall Street Crash of 1929, which triggered a global
economic depression.21
2.3 History of Stock Exchanges22
In the 12th century France, the courratier de change was concerned with managing
and regulating the debts of agricultural communities on behalf of the banks.
Because they also traded with debts, they could be regarded the first brokers. In
early 13th century, Bruges commodity traders gathered inside the house of a man
called Van der Beurse and in 1309 they institutionalized this. But until then
informal meeting and become the Brugse Beurse. The idea quickly spread around
Flanders and neighboring countries and Beurzen and soon opened in Ghent
Amsterdam. In the middle of the 13th century, Venetian bankers began to trade in
government securities. In 1351, the Venetian government outlawed spreading
rumors intended to lower the price of government funds. Bankers in Pisa, Verona,
Genoa and Florence also began trading in government securities during the 14 th
century. This was only possible because these were independent city states which
were not ruled by a duke but a council of influential citizens. The Dutch later
started joint stock companies, which let shareholders invest in business ventures
and get a share of their profits or losses. In 1602, the Dutch East India Company
issued the first shares on the Amsterdam stock exchange. It was the first company
to issue stocks and bonds. The first stock exchange to trade continuously was the
Amsterdam Beurs, in the early 17th century. The Dutch pioneered short selling,
option trading, debt-equity swaps, merchant banking, unit trusts and other
speculative instruments, much as we know them. Now there are stock markets in
virtually every developed country and most developing countries, with the
21 J. Atack and P. Passell 1994A New Economic Vieir of American History fiom Colonial Timesto 1940,New York: VV. W. Norton: p 583
22 Wikipedia, the free encyclopedia
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worlds biggest markets in the United States of America, United Kingdom,
Germany and Japan.
2.3.1 History of the Zimbabwe Stock Exchange
Trading of stocks and shares in Zimbabwe goes back to 1891, when the first
stock-broking firm was opened.23The 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. During this period, the London and Johannesburg exchanges also saw
the listing of Rhodesian enterprises seeking to raise capital.24 On the whole, these
exchanges generated wild speculation in the country, which ended in financial
chaos as the hope of the Second Rand faded. The result was that, as mining
companies withdrew, the local stock markets collapsed. By 1902, all the local
Exchanges had ceased to operate. Between 1902 and 1945, public authorities and
companies in Southern Rhodesia relied on the London Stock Exchange (LSE) and
the Johannesburg Stock Exchange (JSE) for their capital needs. Due to a number
of reasons, the main one being the boom in manufacturing during World War II,the Rhodesian Stock Exchange (RSE) was set up in Bulawayo in 1946.25 By
1963, there were 98 listed companies, from only seven in 1946. Because of
economic sanctions during the Unilateral Declaration of Independence (UDI)
period, the ZSE was largely quiet. This was because the period was characterized
by the utilization of existing excess capacity as opposed to investment in capital
development. During the late 1970s, the hope of independence and the end of
sanctions led to a brief rise in share prices. By 1980, the ZSE was a highly
specialised market, which was likely to prove useful in the economy if a capitalist
23The Rhodesinn HeniUi, 29 October 1892
24 The Rhodesinn Herald, 1 June 1894
25 George Karekwaivenani, A History of the Rhodesian Stock Exchange, p 2
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oriented development strategy was adopted. After independence, however, the
independence government declared Socialism as its official ideology. This,
combined with a global recession, resulted in the dramatic fall of the industrial
and mining indices on the Exchange. By 1981, the market's total capitalisation
had fallen from Z$911 million to Z$52.5 million.1984 marked the Exchange's
lowest point since its birth. 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, van Onselen, Phimister and Bond have each made
passing references to the history of the local Exchanges during the
1890s26.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. Newlyn and Rowan have briefly discussed the emergence
of the ZSE. While their arguments on the anomaly of the emergence of a Stock
Exchange in a dependent economy are useful, their analysis focuses on the broad
monetary and financial systems in eight British African colonies between 1946
and 1951. As such, their treatment of the ZSE is necessarily limited. Sowelem's
work similarly concentrates on the monetary experience of the Federation of
Rhodesia and Nyasaland between 1952 and 1963 and only Sowelem touches on
the internal organisation of the ZSE and its performance. These analyses do not
trace the origins and development of the Stock Exchange in the country. Clarke
also briefly examines the ZSE's performance in the 1970s, but his study is not on
the Exchange itself. Rather, it only uses quoted companies as its sample for
investigating the degree of foreign control in the Rhodesian economy. 27 Finally,
Bonds' work comes closest to a critical study of the Stock Exchange but is limited
26ibid
27 D. G. Clarke 198(1Foreign Companies and Intel national Investment in Zimbabwe. GwelivMambo: p 116.
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to the period between 1980 and 1995 and concentrates on illustrating the role of
financial capital in the uneven development of Zimbabwe. 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.
2.4 Stock Market participants and trading28
Many years ago, worldwide, buyers and sellers were individual investors such as
wealthy businessmen, with long family histories to particular corporations. Over
time, markets have become more institutionalized with buyers and sellers largely
institutions e.g. pension funds, insurance companies, mutual funds, hedge funds,
investor groups and banks. The rise of institutional investor has brought with it
some improvements in stock market operations but not necessarily in the interest
of small investors or even youthful institutions, of which there are many. Now
participants in the stock market range from small individual stock investors to
large hedge fund traders, who can be based anywhere. Their orders usually end
with a professional at a stock exchange, who executes the order. Most stocks are
traded on exchanges e.g. ZSE, which are places where buyers and sellers meet
and decide on a price. Some exchanges are physical locations where transactions
are carried out on a trading floor, by a method known as open outcry. The other
type of exchange is a virtual kind e.g. NASDAQ, composed of a network of
computers where trades are made electronically via traders at computer terminals.
Actual trades are based on an auction market paradigm where a potential buyer
bids a specific price for a stock and a potential seller asks a specific price for a
stock. When the bid and ask price match, a sale takes place on a first come first
serve basis if there are multiple bidders and askers at a given price. The purpose
of a stock exchange is to facilitate the exchange of securities between buyers and
sellers, thus providing a marketplace (virtual or real). Really, a stock exchange is
nothing more than a super-sophisticated farmers market providing a meeting
place for buyers and sellers.
28Wikipedia, the free encyclopedia
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2.5 ZSE functions29
The ZSE serves three critical functions: mobilize and efficiently allocate
resources for the country's economic development
provide a fair, efficient, transparent and secure price discoverymechanism in a well regulated environment
build liquidity through innovation
The ZSE also provides a properly constituted and regulated environment that
ensures market integrity and fairness among stock market participants. Any off
market deals and any unethical criminal activities are dealt with within theframework of the rules and regulations governing stock market transactions in
Zimbabwe. Only stockbrokers and authorized dealers are allowed to transact in
shares on behalf of the public. Over The Counter Trading (OTC) is not allowed in
the market.OTC is a telephone and computer linked network of dealers who do
not physically meet. 30
2.5.1 Remark 1
Although there is much high credit risk in the OTC market the ZSE limits the
possibility of better trade and high volumes of trade in the economy. Trades in the
OTC markets are typically much larger than trades in the exchange traded
market. A key advantage of the OTC is that the terms of the contract do not have
to be those specified by the exchange, participants are free to negotiate any
attractive deal.31
29 http://www.zse.co.zw/
30Options, Futures, and other Derivatives, John C Hull, fourth Edition, P 17
31 ibid
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2.6 Importance of Stock Exchanges
Just as it is important that networks of transportation, electricity and
telecommunications function properly so it is essential that payments can be
transacted, capital can be saved and channeled to the most profitable projects and
that both households and firms get help in handling financial uncertainty and risk
as well as possibilities of spreading consumption over time. Financial markets
constitute an important part of the total infrastructure for every society that has
passed the stage of largely domestic economies. Stock market which is part of
financial markets, perform the following functions in an economy: 32
2.6.1Raising capital for businesses:
The Stock Exchange provides companies with the facility to raise capital for
expansion through selling shares to the investing public. Shares can be sold in
either of the two markets, primary or secondary. The Primary Market deals with
the trading of new securities. When a company issues securities for the first time
(i.e. IPO) , they are traded in the Primary Market through the help of issuing
houses , Dealing /Brokerage Firms, Investment Bankers and or Underwriters. The
acronym IPO stands for Initial Public Offering, which means the first time a
company is offering securities to the general public for subscription. The amount
of money raised in the Primary market goes directly to the Issuing Company/Firm
to finance its operations. Once the securities (shares) of a company are in the
hands of the general public, they can be traded in the Secondary Market to
enhance liquidity amongst holders of such financial securities. Thus, the
Secondary Market facilitates the buying and selling of securities that are already
in the hands of the general public (investors). The Stock Exchangetherefore is an
organized financial platform that deals in transactions involving the buying andselling of financial securities in the Secondary Market. In short, the Stock
32 Sam Mensah,Ph.D
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Exchange does the work of a Secondary Market by facilitating a formal trading
arrangement for financial securities.33
On 1 June 2008, Gilbert Muponda suggested that the ZSE be reformed and
restructured to be more effective in assisting both investors and entrepreneurs
reach their respective goals. He added that among the requirements of conducting
an Initial Public Offering (IPO) 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 ZSEs life easy and simple yet
IPOs are often issued by smaller, younger companies seeking capital to expand. In
fact the ZSE needs to actively encourage small to medium scale businesses topursue the possibility of IPOs as a way to raise capital for their operations as an
alternative to borrowing to keep pace with higher requirements of working
capital.
2.6.2 Mobilizing saving for investment:34
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 with benefits for several economic sectors such as agriculture,
commerce and industry, resulting in a stronger economic growth and higher
productivity levels and firms. 35
2.6.3 Facilitating company growth:
33 Dr. Mohamed Jalloh, Director general Sierra Leone Stock Exchange, The role of financial
markets in economic growth, p 7
34R. R. West and S. M. Tinic 1971 The Economics of the Stock Market,New York: Praeger: D
35 Dr G Gono, Press statement on the rampant fraudulent activities on the stock exchange, the
insurance and pension fund industries and the banking sector, p 6
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Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its market share, or
acquire other necessary business assets. A takeover bid or a merger agreement
through the stock market is one of the simplest and most common ways for a
company to grow by acquisition or fusion. Companies can merger and or takeover
another company in the same line of business ether vertically or horizontally for
different motives. Both takeovers and mergers are done by way of selling and or
buying shares through the stock exchange.
2.6.4 Redistribution of wealth:By giving a wide spectrum of people a chance to buy shares and therefore become
part owners of profitable enterprises, the stock market helps to reduce large
income inequalities. Although Stock exchanges do not exist to redistribute wealth,
both casual and professional stock investors, through dividends and stock price
increases that may result in capital gains, will share in the wealth of profitable
businesses.
2.6.5 Corporate governance: 36By having a wide and varied scope of owners, companies generally tend to
improve on their management standards and efficiency in order to satisfy the
demands of these shareholders and the more stringent rules for public
corporations imposed by public stock exchanges and the government.
Consequently, it is assumed that public companies (companies that are owned by
shareholders who are members of the general public and trade shares on public
exchanges) tend to have better management records than privately-held
companies (those companies where shares are not publicly traded, often owned by
the company founders and/or their families and heirs, or otherwise by a small
group of investors). However, some well-documented cases are known where it is
36 Hans Christiansen and Alissa Koldertsova, 2009
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alleged that there has been considerable slippage in corporate governance on the
part of some public companies (e.g. famous Enron Corporation, MCI Worldcom,
Pets.com, Sunbeam, Webvan, and Adelphia)
Zimbabwe is lagging behind on the disclosure of executive remuneration, which
is shrouded in secrecy37. This is a clear indication of the deficiencies in corporate
governance among Zimbabwean companies. According to the chairperson of the
Securities Commission of Zimbabwe (SEC) (Willia Bonyongwe) the ZSE should
incorporate guidelines on corporate governance in their Listing Rules like the
Johannesburg Stock Exchange (JSE) that incorporated the King II guidelines.
2.6.6 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.
2.6.7Government capital- raising for development projects:38
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
be raised through the Stock Exchange whereby members of the public buy them,
thus loaning money to the government. The issuance of such bonds can obviate
the need to directly tax the citizens in order to finance development, although by
securing such bonds with the full faith and credit of the government instead of
37 Chris Muronzi,Zimbabwe Independent Business Editor 13 August 2010
38 George Karekwaivenani,Department of Economic History, University of Zimbabwe, P 8
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with collateral, the result is that the government must tax the citizens or otherwise
raise additional funds to make any regular coupon payments and refund the
principal when the bonds mature.
2.6.8 Barometer of the economy:
At the stock exchange, share prices rise and fall depending, largely, on market
forces. Share prices tend to rise or remain stable when companies and the
economy in general show signs of stability and growth. An economic recession,
depression, or financial crisis could eventually lead to a stock market crash.
Therefore the movement of share prices and in general of the stock indexes can be
an indicator of the general trend in the economy.
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.
Contrary to the noble purpose for which the ZSE was created; which is that of
acting as a progressive vehicle for the mobilization of productive capital, the ZSE
has literally galloped astray, in the process creating obscene paper wealth that is
causing havoc in the economy.39 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, whenin fact the same stock brokers had absolutely no money to pay for the
39 Press statement on the rampant fraudlent activities on the ZSE, Dr. G. Gono governor reserve
bank of zimbabwe 20 november, 2008, pp 6-9
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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 thateffectively meant was that someone could work up with no penny at the
bank, but end the day a multitrillionnaire. 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 tothe spurious Old Mutual share prices. The whole economy was then being
priced via the Old Mutual rate whose share price movements had no
relationship with economic fundamentals, let alone actual corporate
performance of Old Mutual itself.
The Zimbabwe Stock Exchange had been operating with no strict rulesand 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 oversthen drive up prices before off-loading the same shares on the same day at
inflated prices;
The Stock Exchange did not rule a few aggressive Stock Brokers out oforder, when they stampeded specific counters up with the sole intention of
amassing false wealth.40
2.7 Listing requirements of the ZSE41It is an integral function of the ZSE to provide facilities for the listing of securities
(including securities issued by companies, domestic or foreign), to provide the
ZSEs users with an orderly market place for trading in such securities and to
regulate the market accordingly. The Listings Requirements apply to companies
seeking a listing for the first time, presently listed companies, all other securities
40 (ibid)
41(http://www.zse.co.zw/)
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that applicants may wish to list and those presently listed and, where applicable,
to directors (as defined in each relevant section) of applicant issuers. The Listings
Requirements contain the rules and procedures governing new applications, all
corporate actions and continuing obligations applicable to issuers and issuers of
specialist securities. They are furthermore aimed at ensuring that the business of
the ZSE is carried on with due regard to the public interest. Among the listing
Requirements should be provision of the need for companies to comply with
International codes on Corporate Governance like the Cadbury Report, King
Report and the combined code.
2.8 Trading and Settlement 42The ZSE uses a call over system on the floor of the exchange. The ZSE currently
conducts one call over session daily between 10.00 am and noon. Trading reports
are published and circulated to broking houses, the investing public and the press.
Trading on the Zimbabwe Stock Exchange is presently by open cry floor system
on a matched bargain basis. Shares are traded in minimum lots of 100.
2.9 Performance and Size of the Market
The month of March 2010 saw the release of financial results of a number oflisted companies. While there was growth in revenues across many companies,
most battled with costs which on the level of profits and many reported operating
losses. This, in addition to battered investor sentiment, pulled the stock market
down. The industrial index was down in April, bringing the year loss to -8.5% at
the end of April. Manufacturing and Financial companies posted the worst results
and have seen the worst declines as investors shun them. The last time the ZSE
hovered around these levels albeit for a short time was in May 2009 during an
exciting bull run on the way to the peak levels of November 2009. From one year
ago the market has experienced a lot of hype but has basically remained in one
42(http://www.zse.co.zw/)
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spot for investors. Volatility has increased on the market, with share prices
swinging as depicted in the chart below. 43
Figure 1: Industrial Index and Daily volume
Source: DATVEST April 2010 Newsletter
Market activity in February 2010 was dominated by the Statutory Instrument 21
of 2010 which compels businesses with assets worth at least $500,000 to cede
51% of their total shareholding to indigenous Zimbabweans within five years. The
43 DATVEST April 2010 Newsletter, p 3
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industrial index dropped 10.32% to close the month at 140.37 points while the
mining index weakened 16.6% to close at 175.08 points. Value traded was 32%
lower than January at $23.3m. The gazette of regulations with the requirement of
compliance plans to be submitted to the responsible ministry within 45 days from
the 1st March resulted in subdued investor appetite for the stock market. Volumes
were generally weak throughout the month. Given that foreign investors were
contributing significant levels in liquidity, the regulations have left many on the
line trying to assess the impact on businesses going forward. For foreign investors
the critical considerations was to make sure that the aggregate equity stakes are
below the limit in all businesses that they invest in. 44
2.9.1 Remark 3
Empowerment is a noble cause in its simplest form. Its primary motive is to
transform the lives of the previously disadvantaged by giving them the
opportunity to benefit from mainstream economic activity. Countries like South
Africa have similar schemes that have managed to keep international capital
flows at significant levels though questions have been asked if it has really
benefited South Africans! However each nations scheme differs in thresholdlevels, time frame and social investment credits among other factors. The ideal
situation is to ensure that its implementation results in a positive impact to the
economy and to the intended beneficiaries.
The Act and Regulations have been widely criticized since promulgation in
2007/08 and since the regulations have been gazetted. Suffice to say the Act &
Regulations are not investor friendly for either external or internal investment.
The legislation comes at a time when most companies are restructuring working
capital funding from the expensive short-term debt by requesting existing
shareholders to inject fresh capital in the form of rights issues. Tight liquidity
conditions, total bank deposits at $1.3 billion also limit the scope for any
44 DATVEST March 2010 Newsletter, P 2
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financing structures that other markets have managed to create for their cases.
Multinational Corporations have the financial wherewithal to invest in Zimbabwe
to stimulate growth; we are unable to do it ourselves. The question must be asked
as to how the Zimbabwe Stock Exchange could operate efficiently with these
regulations.
The figure below highlights market activity since the beginning of the year 2010
Figure 2: Industrial Index and Value Traded
Source: DATVEST March 2010 Newsletter
By the end of the year 2010, the ZSE market capitalization was at US$
3,884,485,459 up from US$ 3,829,925,096 by year end 2009. In September 2009
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the industrial index declined 7.7% to close the month at 137.06 points while the
mining index softened 13.37% to close the month at 192.8 points. Total value
traded for the month amounted to $39.8m down 20% from the previous months
$49.5m.
The graph below shows the ZSE Index Movements for August 2009:
Figure 3: ZSE Index Movements
Source: DATVEST March 2010 Newsletter
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2.9.2 Regulation of the Stock Exchange
For each of the markets there are rules relating to listing, trading, settlement, and
the general running and management of the exchange activities. It is generally
agreed that self-regulation is the best way to maintain standards that safeguard the
interests of investors; this explains why all the markets are self-regulated as is the
JSE. The existence of comprehensive rules, per se, does not guarantee
compliance, thus supervision and monitoring of the stock markets cannot be
overemphasised. The NSE has a compliance department that monitors the
disclosure of company information and ensures that market participants are aware
of the rules as they are embodied in the rulebook. The Capital Market Authority
of Egypt supervises the MCSD and inspects its activities to ensure the trading;
clearing and settlement are done in accordance with the rules and regulations of
the stock exchange. In addition to strict supervision each of the stock exchanges
has a guarantee fund. These funds were set up to reduce the risk of default by
members of the relevant stock exchange. If a member fails to settle upon delivery
of purchased securities, the exchange will make good the amount owing on the
account of the guarantee fund. All members of the stock exchange are covered by
the guarantee fund and they contribute to it. It is apparent that the ZSE is more
advanced than the other stock markets in respect of most of the issues considered
above, except in terms of regulation where all stock exchanges have similarly
strict regulation.
For a stock exchange to operate successfully, investors must have the confidence
that they can deal at genuine and fair prices, and that the market is not
manipulated to their disadvantage. A proper regulatory framework that is adhered
to by all market participants, and is enforced by the appropriate regulatory
authorities, brings about this confidence and integrity. Since its inception, theZSEs regulatory framework has been based on self-regulation. Legislation
relating to the ZSE, as embodied in the Zimbabwe Stock Exchanges Act (Chapter
24:18), seeks to protect the interests of the general public in buying and selling
shares without unduly infringing upon self-regulation. In the interest of self-
regulation the SEC proposed a Financial Services Institute which shall train ZSE
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participants.45 The ZSE executive has the authority and discretion to alter the
trading period, close, suspend or halt trading, or take any such steps necessary to
maintain an orderly market, notwithstanding any other provisions of the rules.
The rules also detail the security procedures, reporting procedures and resources
required by members to ensure the efficiency and integrity of the equities market
as well as the proper functioning of the ZSE trading system.
2.9.3 Regulation of the ZSE46
The Zimbabwe Stock Exchange (ZSE) is supervised by the Securities Exchange
Commission (SEC). SEC is a statutory body established in terms of the Securities
Act. Members of the ZSE are licensed by SEC, which also determines the level of
capitalization required for practicing members of the ZSE.
SEC has the power to intervene in the event that irregularities arise in the areas of
conduct of licensed members, financial difficulties, and rejection of applications
and/or termination of membership.
The Exchange supervises and monitors the trading process to ensure transparency
in the market and to prevent manipulation of the market. All trades for listed
securities by Members of the ZSE are declared to the ZSE. Any unethical or
criminal activities are dealt with within the framework of the rules and regulations
governing stock market transactions in Zimbabwe.
2.9.4 Regulation affecting foreign investors47
Foreign investors can participate on the bourse provided they bring in their capital
through normal banking channels. No prior exchange control approval is
45Securi ties Commission of Zimbabwe Proposed I nstitute : Di scussion Dr aft, 4/1/2010, P 5
46(http://www.zse.co.zw/)
47(http://www.zse.co.zw/)
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necessary for a foreign investor to participate on the Zimbabwe Stock Exchange.
Authorized dealers, acting on behalf of non-resident investors and FCDA holders,
receive funds for onward transmission to stock brokers for purchase of shares.
Shares purchased on behalf of the foreign investor are registered into either their
own names or the names of nominee companies. The share certificates, once
registered, are endorsed 'non-resident'. For dual quoted shares, a further
endorsement 'For Sale Within Zimbabwe Only' is required. The maximum foreign
investment is limited to 10% per single investor and 40% collectively. Should a
foreign investor exceed the 10% limit, the transfer secretary may not effect
registration and is obliged to report to the Zimbabwe Stock Exchange. The latter
may issue a directive to the investor to sell the excess shares within sixty days;
any losses incurred will be for the investor's account. The Zimbabwe Stock
Exchange is required to report the matter to the Reserve Bank. Withholding taxes
on dividends are deducted at source at the rate of 10%. Repatriation of income
and capital is free. This is subject to proof that payment for any purchases was
made with funds received through formal banking channels.
2.10 Summary
The chapter discussed theoretical and empirical literature concerning the roles of
stock exchange in relation to the Zimbabwe Stock Exchange. In line with the
research questions the chapter looked at the history of stock exchanges and the
roles that such exchanges are expected to perform. The ZSEs roles were
compared with roles performed by other stock exchanges around the world like
the JSE. The chapter also documented theoretical disagreement which exists
about the importance of stock exchanges for economic growth. Mayer (1988)
argues that even large stock markets are unimportant sources of corporate finance.
Stiglitz (1985, 1994) says stock market liquidity will not enhance incentives for
acquiring information about firms or exerting corporate governance. Moreover,
Devereux and Smith (1994) emphasize that greater risk sharing through
internationally integrated stock markets can actually reduce saving rates and slow
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economic growth. The analysis of Shleifer and Summers (1988) and Mork,
Shleifer and Vishny (1990) suggest that stock market development can hurt
economic growth by easing counterproductive corporate takeovers.
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
particular research methodology was deemed appropriate for this study.
Selections of research methodologies are also investigated. The topic of roles and
functions of capital markets can be approached from different angles, depending
on the nature of the problem under consideration. In this case, a case study
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approach was chosen because of its ability to use multiple sources of evidence48
including documents, interviews, observations and its flexibility. Case study
research seeks to obtain a holistic view of a specific phenomenon or a series of
events able to assist in the implementation of findings49. The ZSE could not have
found a better approach because of the need for informed decisions that would
assist with the implementation of proposed programmes and policies.
The researchers aim in this study was to establish the effectiveness of the ZSE in
accomplishing its roles and functions. In order to achieve this goal, thorough
investigation was required on the roles and functions of the ZSE, hence both
primary and secondary sources of data were used.
3.2 Definition of Case Study
A case study is a detailed and thorough investigation of a few cases 50. It is an
intensive description and analysis of a phenomenon or social limit such as an
individual, a group, an institution or community51. Case study method enables
the researcher to closely examine the data within a specific context. In most cases,
a case study method selects a very limited number of individuals as the subjects of
study. Case studies, in their true essence, explore and investigate contemporary
real-life phenomenon through detailed contextual analysis of a limited number of
events or conditions, and their relationships. Yin defines the case study research
method as an empirical inquiry that investigates a contemporary phenomenon
within its real-life context; when the boundaries between phenomenon and
context are not clearly evident; and in which multiple sources of evidence are
used. In some case studies, an in-depth examination of a single case or event is
used. The examination provides a systematic way of observing the events,
48 Yin, 1993
49Gummersson, 1991 p 76
50Bliss and Smith, (1999) p43
51Merrian and Simpson, (1984) p 95
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collecting data, analyzing information, and reporting the results over a long period
of time. There are mainly three categories of case studies, namely exploratory,
descriptive and explanatory case studies. Unlike quantitative analysis which
observes patterns in data at the macro level on the basis of the frequency of
occurrence of the phenomena being observed, case studies observe the data at the
micro level.
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 questions52. 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 ZSEs effectiveness in accomplishing its roles and functions.
Results obtained from a case study cannot be generalized over a wider area.
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. A research design is
a plan, structure and strategy of investigating conceived information so as toobtain answers to the research questions53. Therefore the validity, reliability and
usability of the methods and research instruments used in this design are
explained in this section.
The respondents were restricted to dealers, other stock broker personnel, credit
analysts and former credit analysts only since the study was limited to the roles
and functions of the ZSE. Due to shortage of time and financial resources the
researcher was not able to encompass larger samples of the total population so asto derive results from more subjects.
52Kerlinger, (1996) p 279
53Nadler ,(1994)
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3.2.2 Rationale for Case Study Approach
A case study method can contain several case studies and could