INVESTING IN THE ZAMBIAN CAPITAL MARKETS
What is investing and how does it relate to financial growth?
Chifwanakeni (2005) recalls an old idiom that identified the two most powerful forces in the world as gravity and the time value of money. The latter of the two being one pivotal component of the unfolding article. Before a discussion of investment and capital markets ensues, indeed greater impetus must be given to what are arguably the two most fundamental concepts of investing in capital markets, scarcity and time value of money.
Scarcity, the problem that needs are unlimited, whereas resources are limited in supply is described by Ison and Wall (2007) as the central problem of economics in that due to scarcity, choices must be made as to how resources must be allocated. These choices often lead to trade as humans create mechanisms to transfer resources from surplus units to deficit units. One such mechanism is the use of markets - places where buyers and sellers meet in order to match demand and supply of scarce resources.
On the other hand, Time Value of Money (TVM), the notion that K1 is worth more today than K1 is worth in the future, is the pillar of finance and investment decisions. Because money can generate interest, it is worthwhile to invest money that would otherwise be idle in order to capitalise on time’s effect on money (finance) and counteract with inflation. This too involves resource allocation decisions.
Money is the prime medium of trade and it is needed by governments, organisations and businesses for usage in productive avenues. However, it is a scarce resource and hence there exists a financial market to bring entities with surplus units to supply the deficit units through trading tools known as financial instruments (investment products). This market interaction is known as investing or financing depending on which side of the coin you’re on.
Investment therefore, is a commitment of funds made in the expectation of some positive rate of return (Fischer et. Al., 1994). In analysing the terminology “expectation”, note that this word alludes to two things, one that it refers to a point in the future and two that it is not a guarantee, meaning there is a possibility that the actual return might differ from the expected return, and that is what is referred to as risk. Risk is therefore the price mechanism of investments that warrants the return.
Through investing, the investor is exposed to financial growth which can be defined as the ability to generate diversified, expanding and sustainable income sources for a worthwhile period. This is because an investor carries out three important activities that lead to achieving financial growth
Firstly, an investor saves money. An investor postpones current consumption in order to accumulate capital. Secondly, an investor plans for the future. This involves budgeting and economic forecasting in order to determine a comfortable and ideal path., considering the risk and return of different business ventures for generating income. Finally, an investor commits their savings to an ideal productive avenue that is expected to grow savings of the investor and generate income paying distributions, which can further be invested, thus achieving financial growth. When carried out prudently, investing may be the key to unlocking financial freedom.
What are the advantages and dis-advantages of investing?
Like anything else, investing has its advantages and disadvantages and these are listed as follows;
Advantages:
· Investing offers protection against inflation
· Investing provides a greater return than bank deposits
· Investing builds up capital for future use
· Investor Guide (2018) highlights that A prudent investor can have their money work for them to earn more money. This gives them the benefit of enjoying a higher standard of living for roughly the same amount of work.
· Investing can lead to capital gains, a situation where the initial investment or the periodic income generated by the initial investment gains value due to prevailing market conditions.
· Investing creates employment and value addition to the economy, leading to economic growth.
· Investing diversifies an individual or institutions earning streams, minimizes risk and leads to financial growth.
· The investment market is regulated to safeguard investors interests.
· Investing teaches investors on how to handle risk and how to read market trends
Disadvantages:
· There is a risk that the actual returns may vary from the expected returns
· Accumulated earnings may not be readily available to collect. This depends on the liquidity of the secondary market and the policies of the responsible party.
· Information asymmetries exist, leading to investors relying solely on the integrity of the responsible party.
· Brokerage fees and intermediary costs are passed on to the investor
· Investing limits cashflow for current expenditures
· Business risk may lead to loss of investment.
· Fraud risk, investors risk being exposed to fraudulent practices and being cheated out of their investment.
What are the different investment opportunities available in the capital market of Zambia?
The period of investment can be less than a year, in which case it is classified under the money market, or it can be a time period of over a year long, being classified as a capital market investment. This discussion shall focus on the capital market.
The capital market is the sector of the financial market where long-term financial instruments issued by corporations and governments trade. These financial instruments consist of equity securities and debt (bond) securities. The key participants are buyers, sellers and financial intermediaries.
According to the Securities Exchange Commission (2018), the securities market in Zambia currently consist of 34 equity securities (23 of which are listed] and 11 debt securities, aside from the government issued bonds.
Debt Instruments
Thakor (2015) postulates that a bond is a debt security that represents a fixed-income claim on the cash flows and assets of a company. A bond usually pays a fixed rate of interest (known as a coupon) semi-annually and at maturity (end of borrowing period), returns the capital amount that was initially invested.
The private debt market, which consists of corporate bonds and notes issued under a medium-term notes (MTN) programme, is described by Ministry of Finance (2017) as underdeveloped, stating that there is almost no secondary market trading. However, issuance is more frequent than for the equity market. Secondary trading of government bonds is limited, consists mostly of bilateral trades between banks.
Financial growth for debt holders may not be as explosive as it is for equity holders, but it is definitely less risky. Investors who need a steady flow of income to sustain them are better off investing in bonds. Bonds also make a good alternative to traditional banking and can therefore be a good way to grow finances.
Equity instruments
Equity securities represent an ownership claim to the assets and income of a company (Treasury Today, 2006). An investor therefore buys shares of a company. There are two types of shares, namely common and preferred shares.
Dar?kuvien? (2010) remarks that common (ordinary) shares represent partial ownership of the company and provide their holders claims to future streams of income, paid out of company profits and commonly referred to as dividends.
Preferred stocks are much like common shares, except that they typically pay a fixed dividend and have preference over the payments to common shareholders. Thus, Levy and Post (2005) suggest preferred stock is a ‘hybrid security’ that has some of the properties of bonds and some properties of stocks.
Although equally held back by the secondary markets that are still in their infancy stage, Equity Instruments do have promising long term financial growth prospects, of course depending on the company, the industry and the economy. The value of equity instruments is dependant on these factors and hence investors are exposed to high risk and high return probabilities.
Financial growth is seen in the form of capital gains and dividend payments. Ministry of Finance (2017) points out erosion in value on some stocks. An investor therefore must take calculated decisions in what stocks to invest in.
What are the factors to consider when investing?
Having discussed the main investment products in the financial market, a potential investor must equip themselves with factors to consider before choosing to invest and IOSCO (2017) highlights some of them as follows;
Verifies that an investment professional is licensed:
As an investor, it is important to deal with an investment advisor or firm that is licensed by the Securities and Exchange Commission.
Conducts research on a product before investing:
This enables you to assess the level of risk associated with the investment and also ensure that the expected profit was the most favourable.
Understands that risk exists in all investments:
All investments attract a level of risk. It is therefore smart for an investor to understand the types and levels of risks associated with the investment and to be able to set realistic investment goals by assessing their investment environment.
Recognizes the importance of diversification:
It is important as an investor to have a wide variety of investments within your investment portfolio as this usually reduces your investment risk exposure and on average yields higher returns.
Lastly, assess your financial stability:
A prudent investor must determine their risk appetite and their ability to remain financially stable during the tenure and outcome of their investment.
What investment options interest me the most?
Common Shares are the financial instrument that are by far the most interesting to me. This is for several reasons. As a potential investor, it takes an intrinsic eye to identify companies that are expected to return superior value through capital gains, this involves observing policy directions of the company, business ethics, industry performance and the performance of the economy in general. The public perception of high level executives also has an impact on the value of common shares.
Employee Stock Ownership Programs add to my interest. Common Stock is sometimes offered to employees on special employee participation programs to boost the capital markets as well as to reward employees and cement their congruence to the success of the company.
It can be said that common stock is the ultimate high risk high return security, giving stockholders voting rights to determine the direction of the company, considering their ownership stake, rights offers are made to maintain shares of ownership. Furthermore, the potential for significant capital gains (sometimes even 3 to 5 times worth the original investment) do exist. Stock prices interestingly enough tend to react noticeably to information that affects the company almost immediately.
Common stock is available to all kinds of investors whether individual, institutional or government.
My Recommendation of a new product that would be most appropriate within the Zambian Context: The Sukuk – Islamic Bonds
Sukuk are financial instruments similar to bonds and also shares that are compliant with Islamic law. (Zolfaghari, 2017) It is the equivalent of a conventional bond and is made up of certificates of equal value that represent undivided shares in ownership of an underlying asset. By adopting the Sukuk in the Zambian capital market, we open our capital markets to the Muslim community of investors. In favour, Gondwe (2013) argues that; the Muslim Community constitutes an estimated 12% (roughly about 1.8 million) of Zambia’s population and additionally the community constitutes high value businessmen who control a very significant share of the Zambian economy in various sectors. Their exclusion from the financial sector therefore, has significant impact on the Bank of Zambia efforts on financial inclusion.”
Nammari (2017) outlines that the sukuk works as follows; the issuer issues Islamic bonds and collects proceeds from the bond investors and uses the proceeds to acquire the Islamic assets on behalf of the investors. The issuer then declares a trust over the proceeds and assets. The asset generates return for the investors. The sukuk holders (investors) are entitled to receive their share of profits generated by the asset and the proceeds of disposal of the asset at the end of the term.
The Sukuk is not exclusive to Muslims but rather any individual or institution is enabled to partake in the issuing and selling of the Islamic Bonds.
The benefit to investors is as follows; unlike conventional bonds, the sukuk entitles the holder to ownership of the underlying asset, with a buyback option thereby making it a more secure. Issuers of Sukuk stand to benefit as follows; they will be exposed to a larger pool of investors, thereby exposing themselves to more competitive priced offers. They are alleviated from the obligation of paying interest, which relaxes their liabilities and cashflows, instead.
The sukuk is highly suited for project financing and the International Monetary Fund (2015) points out that the Sukuk can readily be structured for infrastructure financing. They resemble Public-Private Partnership (PPP) financing whereby investors finance the assets, own them—leading to true securitization— and then transfer them back to the government at maturity.
In 2014, Bank of Zambia issued Islamic Finance Guidelines, demonstrating that necessary regulation was being looked at to pave way for Islamic finance. With such prospects, there is little doubt that over the next 10 years, the sukuk would contribute significantly to economic and financial growth in Zambia.
References
· Chifwanakeni, P. (2005). Corporate Finance Management. Zambia Institute of Chartered Accountants, Lusaka.
· Dar?kuvien?, V. (2010) Financial Markets. Leonardo da Vinci programme project, Latvya, Vytautas Magnus University
· Fischer et. Al. (1994) Security Analysis and Portfolio Management, 5th ed, New Delhi: Prentice-Hall.
· Gondwe, M. (2013). Islamic commerce and finance. Lusaka, Bank of Zambia.
· International Monetary Fund (2015) Islamic Finance: Opportunities, Challenges and Policy Options. [Online]. Available https://www.imf.org/external/pubs/ft/sdn/2015/sdn1505.pdf [Accessed on 19th February 2018].
· Investor Guide. (2018) The advantages of investments. [Online]. Available from- https://www.investorguide.com/article/10275/the-advantages-of-investments/ [Accessed on 20th February 2018].
· IOSCO (2017). A smart investor through Captial Markets. World Investor Week.
· Ison, S. & Wall, S. (2007) Economics. 4th Ed, England: Prentice-Hall
· Levy and Post (2005 Investments. 1st ed, England: Prentice-Hall
· Nammari, D. (2017). An introduction to Islamic Capital Markets. [Online]. Available https://redmoneyevents.com/main/framework/assets/2017/presentations/oman/03-DocumentsIFN_IntroductiontoIslamicCapitalMarkets.pdf [Accessed on 18th February 2018].
· Securities Exchange Commission (2018). Registered Securities. [Online]. Available from https://www.seczambia.org.zm/registration/registered-securities/ [Accessed on 14th February 2018].
· Thakor, A. (2015). International Financial Markets: A diverse system is the key to commerce. St. Louis: Washington University.
· Treasury Today, (2006). Capital Market Instruments. [Online]. Available https://treasurytoday.com/2006/10/capital-market-instruments [Accessed on 18th February 2018].
· ZAMBIA, ECONOMIC MANAGEMENT DEPARTMENT (2017) National Finance Sector Development Policy. Ministry of Finance [Online]. Available https://zambiamf.opendataforafrica.org [Accessed on 18th February 2018].
· Zolfaghari, P. (2017) An introduction to Islamic Securities (Sukuk) Uppsala Faculty of Law, Iran, University of Iran.
Energy & Risk Management
6 年I look forward to your Volume 2.