Khartoum Stock Exchange; Who should oversee its operations?

By Professor Ali Abdalla Ali,
-Sudan University of Science and Technology

June 25, 2007 — Week before last, the Minister of Finance and National Economy (MFNE), Mr. Zubeir M. Hassan, withdrew the regulatory powers over Khartoum Stock Exchange (KSE) delegated by him to the Central Bank of Sudan (CBS) in January 2006.Such regulatory powers were passed to the CBS on the request of the CBS and on the basis of the recommendations of a joint IMF/World Bank. No reasons were given for such withdrawal .KSE has been overseen by a board headed by the Minister of MFNE and the deputy is the governor of the CBS, in addition to other members. This board was supervising the operation of KSE for the last 12 years and very successfully. During the tenure of this board KSE by cross listing Sudan Telecommunication Co. (Sudatel) in the Gulf markets was able to attract a considerable size of Arab investment into Sudatel as well as the banking sector. These regulatory powers were given to the CBS and taken away from it without any visible reasons.
However before proceeding to analyse the nature of these changes, it will be of both academic and practical interest to provide a background to the establishment of KSE which is now one of the most important and visible financial institution in Sudan and also an important emerging market in the Arab and African regions.
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Thinking about establishing a Securities Market in Sudan started as early as 1962 during the regime of late General Abboud. A good number of studies were undertaken and were initially started by the MFNE at that time in consultation with the Bank of Sudan and the cooperation of the International Finance Corporation (IFC) which is an arm of the World Bank. The idea did not get through and it was abandoned. In 1976 during the regime of Nimeiri an act to establish a Securities Market was prepared and was handed over to the Peoples’ Assembly which passed such an act to the Attorney General’s Chamber.. Ironically enough this Act remained in the offices of the Attorney General’s Chamber and was only passed in 1982!! Obviously the act could have come to the surface during Nimeiri’s time because from its very inception Nimeiri started with nationalization of the banking and trading system in 1970 and the adopted socialist planning. A decision which left its mark on the course of Sudan’s economy for many years to come. In such a situation the idea of a Securities Market which is a capitalist instrument would not have found its way to application. Therefore, the Act to establish a Securities Market was only passed in 1982. Even then and with the prevalence a heavily loaded public sector culture the idea of a Securities Market would not have found its way to the surface. Between 1962 when the idea was first conceived and 1982 when the Act for a Securities Market was conceived nothing came through because of the unstable economic policies during the period and the continuous changes in governments alternating between military and civilian rule. From then on and until 1992, no attention was given to the idea of establishing a Securities Market because the whole environment was preoccupied with the problems of governance and political stability which is a precondition for any meaningful development.

However, when the present government came in 1989, it paved the way for the liberalization of the economy which was started in 22nd. February 1992.Before that subsidies were cancelled on a number of goods and services, exchange controls were waived and in February 1992 a full scale liberalization was adopted embracing a sizeable devaluation. Among such objectives was to pave the way for the establishment of a Securities Market and, therefore, encourage investors from inside and outside to invest in financial assets. Therefore, in August 1992 and on the basis of the 1982 Act, a capital market was established and was headed by the writer as a National Consultant.

The idea was to establish a Sudan Capital Market which will consist of three markets i.e. Securities Market, Foreign Exchange Market and a Commodity Market. The Securities Market was intended to take care of the Public Companies operating in Sudan. The Exchange Market was intended to rationalize the utilization of the scarce foreign exchange resources and the Commodity Market was intended to improve on the quality of Sudanese exports which suffered a visible decline in quality and quantity in recent years. These three markets were to be supervised by a Sudan Capital Market (SCM).In order to be sure of the idea an expert from Comesa was invited to Khartoum. The expert was Nigerian and has a very good vision of the African experience in establishing capital markets. He produced a very fair report which supported the idea of three markets and the establishment of a SCM.

However “the winds blow to the distaste of sailing vessels” The idea of establishing a Foreign Exchange Market was not very much liked by businessmen who were dealing in exchange of currencies without having proper licenses i.e. dealing in the black market. They thought that such a market will reduce their chances and they might go out of business. Going out of such a very lucrative business meant a lot to them and they fought back in many subtle ways and a decree was announced canceling the Foreign Exchange Market. As for the Commodity Market it was hoped that the institution responsible for the marketing of Cotton will the first one to be considered in the Commodity Market. However considerable resistance was shown because it was thought that Cotton is the most organized market internationally and need not to be organized internally in any form. As for other products it was thought impossible to be put within the frame of a Commodity Market without securing the organization of the whole production chain. Therefore, the Commodity Market was abandoned and the only market that remained was the Securities Market .As a result there was no need to maintain the idea of SCM. SCM was nullified and a Board was formed to oversee the operation of a Securities Market which was then named Khartoum Stock Exchange (KSE). The 1982 Act was taken into consideration. When it was found that the 1982 Act was not adequate, a new Act was passed in 1994 by the National Assembly and KSE started its operation in 1995 with 34 public companies which had grown into 52 listed companies by 2007.

KHARTOUM STOCK EXCHANGE:

KSE started its operations in 1995 with 34 companies which had satisfied the requirements of listing in KSE. This figure has now gone up to 52 listed public companies out of no less than 285 public companies registered in Sudan. Most of the remaining public companies are in a very unsatisfactory state, most of them not holding annual meetings for years which also indicates that no proper financial returns were prepared and audited.

The listed companies had played a very important role in enhancing awareness about the virtues and advantages of investing in financial assets (vis-à-vis investment in real assets which has its own special problems) specially after listing Sudatel and after it was privatized. The high performance of Sudatel and the high returns had encouraged investors to invest in the companies listed in KSE .This had even gone beyond Sudan’s borders to the Gulf countries. In this section (1) certain data will be give which will show the developments which had taken place in KSE since 1995, (2) the relations that were established between KSE and other emerging markets in the Arab and African regions and (3) the controversy as to who shall be charged with the responsibility of overseeing the operations of KSE in the coming years specially in the context of the Comprehensive Peace Agreement (CPA).

1. THE DATA:

KSE was able to produce very reliable annual reports which embody all the necessary data about the performance of KSE since its inception in 1995.The following are the developments:

* The number of listed companies that satisfied the listing requirement had gone up from 34 public companies to 52 companies by end of December 2006 and to 53 companies in 2007.Out of this listed number there are 18 banks, 8 Insurance companies, 8 commercial companies, 2 in the industrial sector and two companies in the agricultural sector and 13 other companies with various activities. In addition to that a good number of mutual funds and Government Investment Certificates are also traded in KSE.

So it can be seen that the majority of companies operate in the services sector mainly banks. During 2005 a number of Gulf investors entered in the banking sector i.e. Al Salam Bank, Sudan and Emirates Bank, as well as Arab participation in Bank of Khartoum (60 % Dubai Islamic Bank) and also in El Nilein Industrial Development Bank (60%) with an approximate capital of more than 350 million US Dollars which is more than the capital of the rest of the Sudanese Banks. All this influx from the Arab countries was primarily due to the performance of Sudatael after it was cross listed in two Arab emerging markets. The success of Sudatel had given an unusual drive to investors to come to Sudan in this financial sector. As for the eight insurance companies, there is virtually no trading in these companies because of the problem of difference in Islamic and non-Islamic conception about Insurance.

* The total value of new issues in the Primary Market in 1995 was US $65.16 million. This had gone up to US $2065 million in 2006 reflecting a very high level of activities in the area of issue of new companies or acquiring additional shares. As for the Secondary Market in addition to the listed companies there were hardly any mutual funds or Government Investment Certificates (GICs). By 2006 the number of Mutual Funds listed in KSE were 16 Funds and .GICs were 33 in 2006.Therefore funds and GICs became new financial instruments which came into being starting from the year 2001.Since then the instruments were traded in KSE consisted of Shares, Mutual Funds and GICs .The trading in shares on 28.5.07 amounted only to 4% of total trading while Certificates accounted to 96% on the same day. In 1995 when KSE commenced operations all trading was in shares.

* As for the total capitalization i.e. the market value of the traded shares, it was US $ 44.25 million in 1995 for a total of 34 listed companies. In 2007 the market value for a number of 51 listed companies amounted to US $ 4656 million .This is a phenomenal growth would not have been known had it not been for the establishment of KSE. Moreover it shows the overall growth in the economy which had led to this high value of the listed companies. For example the entry of Arab money in the banking sector in 2005 and the raising of the capital of Sudatel to more than US $ 775 by 2006, had a very visible impact on the size of invested capital and its market value. This awareness about investment opportunities as mentioned before was caused by the cross listing of Sudatel in Arab emerging markets namely UAE, in addition, to investments by Kuwaiti, Saudi and Lebanese investors.

2. RELATIONS WITH OTHER EMERGING MARKETS:

KSE was able to establish a number of relationships with emerging markets in both the Arab and African countries with markets. The first relation was with Common Market for Eastern and Southern Africa (COMESA) which was requested to send an expert to provide second thoughts on the vision entertained by the Sudanese experts on the establishment of a Capital Market as mentioned earlier. Another relation was with Amman Market in Jordan from where an expert was contracted to help in the improvement of the laws governing the market at that time. Since then KSE was operating on its own and was able to build a good and fair level of expertise by undertaking intensive and extensive training for the local staff in various Arab and other markets. Out of the 12 years of the existence of KSE 10 years were wholly run by a Sudanese Board of Directors headed by the Minister of Finance and National Economy with Central Bank of Sudan Governor as deputy .

KSE’s other relation was with Egypt’s Cairo and Alexandria Stock Exchanges as well as Amman Stock Exchange in Jordan. KSE was able to establish a good working relationship with Bahrain, Kuwait and UAE emerging markets. More important is the entry of KSE in the data centre about emerging markets in the Arab Monetary Fund (AMF). KSE followed closely the system of indexing applied by the AMF in order to be in line with other Arab emerging markets. This has enabled KSE to be known to other emerging markets.

3. WHO SHOULD OVERSEE THE OPERATIONS OF KSE?

During the 12 years of the life of KSE it has been proved that the creation of KSE was a worthwhile exercise and that it should have been in existence for many decades had it not been for high degree of instability of governance and the economic policies since independence. However, better late than never. KSE was able to carry with its board all these years and achieved the success that has been referred to above. However and in the context of the joint program of the IMF and the World Bank — the Financial Sector Assessment Program (FSAP) — which had suggested in its 2005 report recommendations as to the regulation of KSE and that such regulatory responsibility was to be delegated by the Board of KSE to the Bank of Sudan. According to that the Minister of In Finance who is also the Chairman of KSE wrote a letter (4.1.2006) indicating that according to the FSAP report by the IMF and the World Bank joint mission and the discussions with the Governor of CBOS, that he had delegated the CBOS the responsibility of becoming a Regulator of KSE and that the governor of CBOS was to coordinate the matter with the Minister of State in the MFNE. In June 2007 the same Minister of FNE issued a letter addressed to the Governor, CBOS, indicating that he has withdrawn the contents of his previous letter of January 4th. 2006, therefore nullifying CBOS as a regulator of KSE. No reasons were given. However it was decided by the Minister of FNE that the Board of KSE were to convene and discuss the kind of body that shall oversee the operation of KSE, whether be it the CBOS, or the Board or a Securities and Exchange Commission (SEC) such as that of Amman, Saudi Arabia or Egypt . At the same time there were news that the National Assembly is contemplating the formation of a Committee to look into the issue. So it can be seen that the success achieved by KSE is becoming a source of a tug of war among the various financial institutions in the country towards the control of this important institution.

Now where does the CPA come in here? It is not yet known who will get the control over KSE in the coming future, but as far as one is concerned the present Board headed by the Minister of Finance is the legitimate institution that is overseeing the operation of this important yet very sensitive institution since 1995 and since it was entrusted with national and foreign savings to the value of US $ 4656 million worth of shares in 52 public companies in 2006.Therefore, and since there was no mention of a capital market in the CPA and if the situation is to be corrected then it will be worthwhile considering the establishment of a Securities and Exchange Commission (SEC) under which other securities markets could be established in both Khartoum and Juba as well as other regions .The legal form of a public company could be taken as a formula which could activate the various regions and economies by using people’s savings in the form of shares and bonds and other financial instruments. My own personal feelings is that for the authorities in Khartoum to carry on with the present arrangements of a Board headed by the Minister of Finance until such time full political stability is achieved in all parts of the Sudan .This is extremely important because if a Securities and Exchange Commission is established now before achieving full stability in the whole of Sudan ,other parties in the South and West as well as the East might not accept to come under such an arrangement .Therefore it will be logical to leave this matter until political stability is achieved and the issue to be discussed later among concerned parties. The presence of such a financial institution is of great importance for the whole economy and therefore it had to be handled with patience and care.

*The writer is Professor of Economics, School of Business Studies, Sudan University of Science and Technology. He can be reached at [email protected].