Establishing a Stock Exchange in Liberia: challenges and Opportunities

Establishing a Stock Exchange in Liberia: challenges and Opportunities

Emmanuel Kaydor writes.

Introduction

Liberia has come a long way in opting to be self-sufficient and to boost its economic status. This dream can be seen in the economic agenda under the leadership of former President Ellen Johnson Sirleaf and the current ‘pro-poor government’. After the 2005 election, the Liberian government drew out the vision 2030, which clearly states the development plan for the country. One of the key components of the vision 2030 is to embark on economic growth and development. That will lead the country to a middle-income level. However, much has not being achieved in economic growth and development because of the lack of proper mechanisms and other major driving forces to stimulate economic growth and development.

Furthermore, in 2015, the Liberian economy was initially estimated to grow at 0.9 percent, but due to the declining prices of major export commodities, this figure was downgraded to 0.3 percent. This decline in real GDP growth can be attributed mainly to the stagnant growth in the extractive sector.  However, the government continues to put in place robust effort in assuring that resources are utilized in ways that boost the economy. To achieve this dream, the GDP for 2017 was estimated to be 2.3 billion (international monitoring fund (IMF) world economic outlook 2017)

The Liberian government needs to put in place proper mechanism to boost the economy. One way to get this done is to introduce the stock exchange market in Liberia to improve investment. The creation of stock exchange market will help open the investment corridor for both local and foreign investors and will immensely help to boost the development agenda of the country. The government needs to develop policy to bring together credible financial institutions and establish measures that will serve as vehicles in support of the stock exchange.  The writer’s key interest is to discuss the challenges and opportunities in creating a stock exchange in Liberia.

The Historicity of Stock Market

The stock market started as far back as the Industrial revolution that began in Europe. Those that were involved in trading were either individual owners of assets or partnerships. The first modern shareholding enterprise is recognized as the proposal by Sebastian Cabot, the British explorer, to set up and enterprise to find a North-East trade route to China and the Orient. Many of the pioneer merchants of the industrial age wanted to start big businesses, which no single individual could accomplish alone. As a result the old age merchants pull their savings and started their businesses as partners and co-owners. The contribution of each partner to the enterprise was to be represented by a unit of ownership. This ownership is what we call share. This ownership style in the partnership gives birth to joint stock companies.

Trading in share informally began on the streets of London. As the volume of share increased, the need for an organized market place for exchange of the share arose. As a result, the traders began meeting at a coffeehouse, which they used as market place. In 1773, the traders eventually took over the coffeehouse as exchange-the name to stock exchange-and the first stock exchange, the London Stock exchange, was founded (Valdez, 2003). This was followed by financial institutions and intermediaries and other instruments like bonds.

In 1792, a group of New York, merchants met to discuss how to establish and take control of security business. The merchants, a group of 24 men, founded what is now known as the New York Stock exchange (Valdez, 2003). The exchange opened up shop in the Wall Street and facilitates billions of dollars’ worth of trade each day.

The stock market has developed and improved over the centuries. There are different stock exchanges in the world through which securities can be bought or sold. The most popular exchanges include the New York stock Exchange, the NASDAQ (national Association of security Dealers Automated Quotation), the American Stock Exchange, the London Stock Exchange and the Hong Kong Stock Exchange.

What is a stock exchange?

Given the evolution of the stock market, scholars have stock exchange as an organized market for the trading of stock, bonds and other securities. Stock exchange provides a mechanism though which companies can raise capital for expansion by swelling and issuing securities.  In the word of Avadhani (2002), stock exchange means ‘anybody or individuals whether incorporated or not, constituted for assisting, regulating or controlling the business of buying, selling or dealing in securities; it is an association of brokers to self-regulate and protect the interest of its members’.

The importance of Stock Exchange

The importance of stock exchange cannot be over emphasized. However, it is the world’s most reliable market. The economy of the world relies on stock exchange to facilitate trade in the stock of companies by connecting people who seek money with those who can provide it. The primary objective of stock exchange is to raise funds for investment in long term assets to the investing public. Besides its primary purpose, stock exchange plays a key role in mobilizing saving for investment, redistribution of wealth, creating investment opportunities for small investors, raising government capital for development projects, control of company management, and serves a barometer of the Economy.

How companies get selected to be listed on the stock market?

To be listed on an established stock exchange market, a company must meet some criteria set be by the stock exchange regulating body. The stock exchange selects companies whose securities are to be traded by preparing an official list which contains their names for the exchange purpose. The listing may vary from country to country. However, the general requirement relates to the size of the company, earning records, number of years in the business, number of share outstanding and their market value. To get enlisted, companies have to meet all requirements in order to have their share publically traded on the market.  For example, to be enlisted on the New York Exchange, a company must have issued at least a million shares of stock with $100 million and must have earned more than $10 million over the past three years.

There are many reasons why a company must seek stock market listing. Some of the reasons include but not limited to access to wider pool of finance, improved marketability of share, transfer of capital to other users, enhancement of the company’s image and the facilitation of growth by acquisition.

Dose stock market contribute to economic growth?

As stated earlier, the economy of the world relies on stock exchange to facilitate trade in the stock of companies by connecting people who seek money with those who can provide it. For an economy to grow, money needs to shift from less to more productive activities. The stock market is the vehicle that enables companies to raise money in huge amount. According to (Nsabimana, 2005) the price of shares and other assets is an important part of the dynamics of economic growth. In support of this argument, we can agree that stock exchange encourages investments by enabling unused money and savings to become productive by bringing borrowers and lenders of money together at a low cost.

In his 2005 publication, Nsabimana addressed other advantages of the stock exchange. It enables investors to diversify across a variety of assets to reduce risk; encouraging investor’s confidence through transparent trading and information disclosure; promoting proper financial functioning of intermediaries to complement existing banks; monitoring the performance of managers thus improving corporate governance; and promoting international negotiation across borders among other things.

What are the opportunities associated with stock exchange?

Stock exchange comes with several opportunities that drive the economy. Stock exchange will encourage investor by enabling unused money and savings to become productive by bringing borrower and lenders of money together at a low cost. It will provide easy access to long term financing and allow the government as well as industries to raise long-term capital to finance new projects. If established, the Liberian stock exchange will attract investors who wish to invest in new stock exchange.  Stock exchange will encourage foreign direct investment, well organized market, huge capital mobilization, well-developed banking sector, market monitoring, and will enhance better education about market conditions through security analysis.

What are the challenges associated with stock exchange?

Just as there are opportunities associated with stock market, there are also huge challenges that come alone with stock exchange.  The challenges include but not limited to low domestic saving, complicated tax regime, absence of financial intermediaries, lack of adequate accounting and auditing systems, risk to family owned companies and lack of information.

Low saving rate is a major challenge that threatens the survival of stock exchange. A low domestic saving rate can be attributed to low income. However, the citizens must be encouraged to increase domestic saving if stock exchange must be established. Government must also ensure that the tax system is not that complex. Complexity in tax on income, property and value added will lead to an unsuccessful underdeveloped stock exchange.

In the same vine, the lack of financial intermediaries such as merchant banks, financial advisory service and development banks. which are important to stock exchange, will hinder the proper functioning of the stock exchange. Government needs to ensure that these financial institutions are available and will function to provide the necessary means of accessing funds.

The structure of Family owned companies may impose an obstacle to the creation of stock exchange in Liberia. Liberia has many businesses that are family owned and which might have large amount of resources to issue share, but who’s manager my fear losing control by opening their business to the public ownership.

The lack of information is also a major challenge for proper function of stock market. in Liberia, most people do not know about negotiated instruments. It therefore requires a robust effort to inform citizens and business institutions about the idea behind the stock exchange in order to trigger full participation.

To function properly, stock exchange needs to be supported by well-developed infrastructure in the banking system. A poor system is an obstacle for stock exchange. Government and financial institutions must ensure that the banking system in Liberia is revamped and upgraded to accommodate stock exchange.

Capacity building within the financial institutions is a major challenge in Liberia. Financial institutions must ensure a total reform in the financial sector through the support of external service providers of technical support in some areas like monetary policy design and implementation.

Conclusion

Establishing stock exchange in Liberia will have considerable benefits. The government and the business community alike need to focus their attention in this area in order to help boost the economy.

Why it is true that there are more challenges associated with the stock market, it provides better solution to enhance economic growth and development. Study shows that the world economy relies on stock exchange to facilitate trade in the stock of companies by connecting people who seek money with those who can provide it. For an economy to grow, money needs to shift from less to more productive activities in a well-structured market system. In this way, the economic development agenda of the country can be achieved.

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