NAIROBI STOCK EXCHANGE

Nairobi Stock Exchange Presentation The Challenges Facing African Securities

Exchanges as They Upgrade their Information Technology in Order to Remain

Competitive

By: Mr. Chris MwebesaChief ExecutiveNairobi Stock Exchange (NSE)9th ASEA CONFERENCE

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Paradigm Shift in the Securities Exchange Business

Globalisation and the Information Economy and its effect on Africa

Globalisation can be narrowly described as theintegration of financial markets characterised by free flowof capital and other resources.

However a more expansive and eloquent definition must include the social, political,economic and cultural spheres of Globalisation.

Each of these spheres of Globalisation is supported by the application of electronic commerce, the so-called information economy.

Africa however is lagging behind in this transformation leading to the so called technological or digital divide.

Securities exchanges operating as a "club of

brokers" offer these services as monopoly operators serving largely under a mutual governance structure.

The members of the club enjoy rights of ownership, decision-making (one member, one vote), and trading. Value enhancement of the exchange is achieved by restricting access.

Securities exchanges are now increasingly changing their business model and restructuring themselves across the world due to the simultaneous convergence of a number of powerful developments.

Key change drivers include:

1. Advances in ICT

2. Convergence

3. Connectedness

4. Changing consumer trends

1. Advances in ICT:

Advances in ICT are causing the following:- Reducing information asymmetry thus

making markets more efficient; Providing easier access to markets and

products, both domestically and internationally;

Enabling more effective analysis and monitoring of risk;

Allowing more accurate pricing and redistribution of risk;

Blurring of traditional boundaries between banking, insurance and funds management

Balance-sheet intermediaries need the skills of the dealer

Market traders need big balance sheets to underwrite ever larger securities issues

bank relationships and reputation count

Underlying techniques for defining and managing risk also converge

2. Convergence

3. Connectedness

On-going globalisation of financial services facilitated

by roll-out of internet connectivity

Especially evident in growth of ECN’s and on-line share trading

ECN’s account for 30% of all trades in NASDAQ securities.

3. Connectedness

The proposed merger of the NYSE and Archipelago

gives NYSE a way into NASDAQ listed stocks, in which

Archipelago has a 25% market share, and the growth

business of derivatives trading

“supply side” and “demand side” scale economies are too powerful for information-intensive industries to resist digitisation

Global Alliances

HKSE

ASXSGX

EURONEXT(Paris,

Amsterdam, Brussels)

Nasdaq/Amex

TSE

NYSE

Tokyo

Mexico

Brazil

MOUs Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Tokyo

Source: ASX

4. Changing Consumer Trends

As populations age, people need access to higher rates of return on their savings, which only come with higher risk;

More diverse life cycle experiences including:greater job mobility,longer periods spent in training and

education,shifts in work – leisure preferences and,changes in family structures and

experiences.

4. Changing Consumer Trends

Better access to information and weakening of traditional supply relationships are raising consumer awareness of product and supplier value, thereby increasing competitiveness in markets;

Greater familiarity with the use of alternative technologies means that more households are pursuing lower cost and more convenient means of accessing financial services.

Greater presence of institutions as investors;

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The Challenges Facing African Stock Exchanges

Challenges

The Challenges Facing African Securities Exchanges

as they upgrade or even in some cases embrace Information Technology in order to remain competitive cannot be isolated from the

challenges that Africa as a continent faces as she attempts to

take advantage of the information revolution and

hence bridgethe infamous “technological divide.”

Challenges

The inequality in the information economy goes beyond a

division between the developed and developing world to

intra continent and further intra country divisions.

Specifically divisions arise from the possession of theknowledge, skills and abilities to contribute to the information economy.

In the information economy information and knowledge are the most important factors of

production

Challenges

1. The Development of Information and Communications Infrastructure

2. Human Resource Development and Employment Creation

3. Africa’s position in the Global Economy

4. National and Regional Legal and Regulatory Frameworks

5. Cost Implications

6. Change Management (Resistance to Change)

1. The Development of National Information and Communications

Infrastructure:

The African information and communicationsenvironment is characterized by:-

– Low telephone penetration rates;– Slow network growth;– Antiquated systems;– Sub-optimal reinvestment of profits;– High pricing of private facilities;– Poor inter-city telephone links;– Widely varying national infrastructures

1. The Development of National Information and Communications

Infrastructure: Access to information and communications

infrastructure is abysmal to say the least.

Achieving some form of “universal access” is critical to Africa in order to make the

information economy effective.

A wide variety of information infrastructure possibilities exist such as Multi-Purpose Info Centers(MPCICs),Global Mobile Personal Communications via Satellite(GMPCS) and local wireless solutions that could be considered by African Stock Exchanges to leap frog the technological divide.

2. Human Resources Development and Employment

Creation: Low levels of education and literacy are

crippling Africa’s ability to exploit the information economy. The limited use of universal languages (English) isoften cited as an additional constraining factor.

Large components of the population whose educational level and technical skills do not fit (and may never fit) the new techno-

economic paradigm of the information technology are

likely to rendered redundant.

2. Human Resources Development and Employment

Creation:

Educational requirements for the informationeconomy are increasing in complexity yet most national development programs on the continent continue to base their employment creation strategies on the perceived comparative advantage that comes from access to large pools of cheap unskilled labour.

3. Africa in Global Economy:

Real and perceived incidents of endemic macro-economic and political instability on the continent has worsened the competitive environment for the African private sector and Stock exchanges are no exception.

Attracting foreign investment which is one of the key benefits from automation is harder because of these perceptions.

The emergence of the global information economy heavily dependant on knowledge based products and services has further exposed Africa’s already tenuous primary production position in the global economy.

4. National and Regional Legal and Regulatory Frameworks:

Appropriate and effective regulation of new information economy systems enhances a country’s and by extension a stock exchange’s ability to attract investment both domestic and foreign.

Effective compliance is key.

Thorny issues such as intellectual property protection, privacy, security, data protection, electronic payments and currency, and wide ranging consumer protection issues remain to be addressed in national legislation and regional Strategies.

Further with no real national boundaries, the legal implications of

the internet and the World Wide Web are immense and are certain to affect electronic trading.

5. Cost Implications(Capital Outlays):

How to justify huge amounts of capital on technology spend given the small market

size, liquidity and depth, of national capital

markets, which individually are very small and

illiquid to effectively attract large pools of portfolio

flows;

Spend now or Later?

The costs of technology will continue to fall;

Technology has also made it possible to analyze and monitor risk more effectively and to disaggregate it on a broad scale;

To price it more accurately and to redistribute it more efficiently;

Innovations will increase the ease and security of electronic transactions;

Spend now or Later?

Technology has lowered barriers to entry;

Securities Exchanges that do not invest in information technology

infrastructure, do so at the own peril

6. Change Management:

Human nature is such that change is almost always resisted and hence must be managed effectively;

Teething problems usually blamed on the technology when in fact in most cases it is

other factors or events that impact implementation.

The Way forward for African Stock Exchanges

1. Proper planning and implementation. Address regulatory issues Address training needs Effective Solutions

2. Regional Co-operation and co-ordination. Continental and sub-regional

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THANK YOU

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