Challenging the Status Quo holds the key to real financial inclusion
South Africa’s financial services sector is regarded as one of the most sophisticated worldwide but it remains highly conservative and risk averse, an approach that must adapt to the growth needs of a developing economy characterised by massive income inequality. In a country with just four main commercial banks and a single dominant securities exchange, anyone seeking to generate and realise wealth is, to be frank, severely limited in their choice of options. This is true both for businesses needing to raise capital for expansion as well as individuals looking to improve their lives, particularly those from previously disadvantaged communities and women who have traditionally not enjoyed equitable access to financial opportunities.
These realities are compounded by the expensive, inflexible and often outdated, protective procedures and obfuscatory jargon inherent in the financial services and investment industries: an obvious consequence of a market that has traditionally been dominated by a single exchange. This is hardly ideal in a country that is not only desperate to promote greater financial inclusion for previously disadvantaged individuals, but that fundamentally must expand the proverbial pie if we’re to inclusively grow. It is hardly a secret that the severe income inequality that afflicts South Africa is not sustainable. As a country, we simply must find a way to promote greater financial inclusion and get more people participating in the formal economy.
While much of the focus on financial inclusion has centred on areas such as retail banking, money transfers, mobile transacting and even widening the tax base, comparatively little attention has been paid to the investment industry, at least at the level of new equity and debt issuance and the downstream suite of associated products.
For the ordinary South African, transparency and accessibility in the markets where equities and debt are bought and sold is essential. Mid-market companies with market capitalisations of between R100m and R8bn stand to be the prime beneficiaries of an expanded and more inclusive trading environment – not to mention the catalytic potential bubbling in exchange traded funds (ETFs), debt instruments, and real estate investment trusts (REITS). And it’s here that prospects to grow our economy may be developed to fruition.
On the eve of the digital revolution, the imperative that’s gone unchecked for far too long is the ability of average South Africans to identify opportunities to grow their wealth for their immediate benefit as well as those who depend on them. As it stands there are significant barriers to entry for would-be participants in the investment industry, not least of which are the complex and convoluted layers of jargon synonymous with the sector. If we can enable previously disadvantaged individuals to more easily access opportunities to create and grow wealth we can put them in a better position to share in our nation’s potential prosperity.
One tool that can be used to break down these barriers is to leverage the reach and financial knowledge of authorised retail, private client and institutional brokers, who are ideally positioned to play a powerful role in promoting greater understanding of the investment market, facilitating the inclusion of underserved groups in the industry.
A critical part of this barrier destruction, aimed at enabling a new generation of empowered South Africans to take advantage of economic opportunities, must be opening avenues for new issuers in the mid-market segment. Other potential investments include bankable start-ups as well as the equity portions of renewable energy projects, widening the range of investment choices beyond typical unit trusts. This will help to deepen liquidity while also serving the fundamental imperative of promoting greater financial inclusion.
There is also the opportunity to allow previously disadvantaged individuals and women to play a more meaningful role as shareholders in mid-market companies seeking new listing opportunities by giving them a greater say in setting the key listing requirements for each issuer. All of this forms part of a renewed emphasis on democratising the listing process by removing barriers for both investors wanting to participate in the wealth economy as well as issuers seeking to raise capital.
The importance of reducing the red tape and costs involved in seeking a listing cannot be underestimated – both for prospective issuers and any would-be investor. If we are able to increase the speed to market for companies raising acquisition or expansion capital we can promote more efficient allocation of that capital and speed up South Africa’s rate of economic growth.
The costs and complexities of listing a company and trading its shares must and can be addressed – through the removal of minimum fees when trading; real-time dissemination of relevant market information; real-time market surveillance; as well as improved liquidity, market trust and integrity for restricted share trading such as BEE schemes.
Increased competition in the exchange environment is critical to provide tangible consumer access to a more cost-effective equities trading platform and deepening capital markets for the benefit of both South Africa and the rest of the continent.
The democratisation of the trading environment is vitally important to create a more investment-friendly economy and ensure more efficient matching of capital seekers with capital providers. By promoting greater financial education and understanding amongst traditionally excluded groups, we can also widen the pool of people who are able to leverage the financial growth opportunities that this creates.
A more financially empowered citizenry is a crucial step towards challenging the severe income inequality that still exists in South Africa and achieving more equitable economic outcomes. In fact, our nation’s long-term stability depends on it.
Fay Mukaddam is the Chief Executive Officer of 4 Africa Exchange (“4AX”), South Africa’s second stock exchange with a full license to trade in both equity and debt. She is also a Chartered Director (SA) and an Advocate of the High Court of South Africa.