It goes without saying that savings are an important way to grow economies and boost individual self-actualization goals. Despite various instruments and policies put in place to boost the investment culture in Africa, such as social security funds or private pension plans, there remains significant room for improvement to keep up with other regions. A key investment instrument that has yet to be explored on the continent is securities trading for retail. Apart from the Johannesburg Stock Exchange, institutional investors make up more than 80% of the volume, leaving the retail market with huge potential to become a top asset class for a growing middle class and other income groups.
According to a recent World Bank report, most African countries’ savings rates are relatively low, around 17% of gross domestic product (GDP). Kenya, for example, ranks lower than many of its peers, with around 9-11% of GDP over the last five years. In Nigeria, another key market in West Africa, savings accounted for about 17-21% of the nation’s GDP over the same period. The focus for many African economists and policymakers is therefore on how to tap into the growing stock markets to promote a vibrant savings culture in the continent, while also availing funds for many companies to accelerate economic growth.
As the popularity and penetration of mobile communication technology continues to grow, it presents a very viable entry point to improve retail investors’ participation in trading equities. In terms of accessibility, Global System for Mobile Communications (GSMA) estimates that the average annual growth rate in smartphone connections in sub-Saharan Africa has been 28% since 2015, and smartphones now account for almost half of total connections, making a strong case for Mobile App retail trading. Thus, creating a conducive environment by leveraging new technologies and an already existing strong mobile and internet penetration in the continent will fast-track many benefits from the stock market that have perhaps just been lucid dreams in the past.
Simply put, equity and bond markets are a liquid way for individual investors to put aside some money and diversify their investments beyond traditional asset classes such as land, cars, or other “get rich quick” schemes.
Implementing new technologies should be done without losing sight of the main goal: encouraging a savings and investment culture to develop across all income groups. Having a vibrant retail investor base is important for this to be achieved effectively. Recently we have seen retail investors set the tone and direction of markets, a good example comes from the United States, where stocks like Gamestop and AMC saw large numbers of retail investors communicating in Reddit forums and other sites driving massive market activity. This vibrancy is advantageous in the long run, as companies will improve their corporate governance, reputation, sustainability, and shared value frameworks, thereby creating stronger and profitable multigenerational companies. Furthermore, mass retail trade will give companies the stimulus to see the capital markets as viable and ripe areas to raise financing, allowing them to grow and diversify their incomes, ultimately growing the economy.
Another reason retail investors should be encouraged is that they are more likely to day trade and take various positions during the day, helping with overall market liquidity. A liquid market promotes more business as more products and services are introduced. These include derivatives, structured products, futures, REITS, indexes, and margin trading, among others. These products are the future of the Nairobi Securities Exchange as it continues to build a deep financial market.
Retail investors’ participation also increases interest in smaller companies, boosting overall activity in the capital market and encouraging both local and foreign SMEs to consider listing to be financed when the time is right for them.
EFG Hermes, the leading financial services corporation in Frontier Emerging Markets (FEM), with operations from West to East Africa, has provided a solution for retail investors, allowing them to trade on the go availing much-needed new capital to listed companies. We just launched our One App in Kenya, to give retail investors convenient and direct access to the stock market using new mobile technology. We hope this will disrupt the market, encouraging young people who previously shied away from the stock market due to lack of access and difficulty opening accounts. Such efficiencies will boost Kenya’s saving culture while offering people an opportunity to diversify their investment portfolio, creating new sources of income. This is in addition to creating a footprint for other African bourses, with less developed retail trading platforms to follow.
Participating in the retail market will also boost financial literacy by spreading knowledge of the basic principles of money management, including how to set budgets and manage cash flow. This includes creating personal savings plans to support short, medium, and long-term self-actualization goals like saving for a home, school, or retirement plans.
The time is right for African markets to increase retail access through leveraging technologies such as mobile apps for institutional investors, bolstered by growing smartphone and internet penetration. This will create much-needed change in the savings culture that is supported by a simplified onboarding process and hassle-free access. This is how the savings culture journey begins for the future African investors.
Kilonzo is the Director – Frontier Equity Sales & Head of Equities Kenya at EFG Hermes