JAMES VASHIRI ASSIGNMENT Project.docx

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UNIVERSITY OF ZIMBABWE

FACULTY OF COMMERCE

DEPARTMENT OF BUSINESS STUDIES

EVALUATION OF THE ROLES AND EFFECTIVENESS OF THE

ZIMBABWE STOCK EXCHANGE (ZSE)

COMPILED BY:

JAMES VASHIRI

R101557A

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS

FOR BUSINESS STUDIES HONORS DEGREE IN MARKETING-HBBS 4

(MARKETING) BY THE UNIVERSITY OF ZIMBABWE

SUPERVISOR: MR. JD NHAVIRA

HARARE, ZIMBABWE

2013


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Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE)

Vashiri James R101557A Page i

Dedications

I would like to dedicate this research work to my beloved mother, Vinah

Mubasa; brothers and sisters, Lovemore, David, Partson, Gibson, Ever and

Ester.

I appreciate your unconditional love and support.

Proverbs 1 V 7

God bless you.


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Vashiri James R101557A Page ii

Acknowledgements

I would like extend my sincere gratitude and appreciation to the following people

for the contributions that they have made to make this research possible:

This study could not have been completed without the generous support and

contribution of many individuals and institutions. My respect and gratitude will

go to Mr. Mutungwazi, my supervisor for his guidance throughout this project. I

would like to appreciate the support, commitment, dedication, determination and

patience that he demonstrated being my supervisor during my research process. I

am also thankful to my lecturers, fellow students and colleagues for their support

and ideas. Above all, glory be to God to whom I owe everything.


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Vashiri James R101557A Page iv

Abstract

This study sought to evaluate the effectiveness of Zimbabwe Stock Exchange in

accomplishing its roles in Capital Markets in Zimbabwe, specifically in

supporting small business enterprises raising capital. Roles and functions of stockexchanges around the world were explored (literature review) to use as

benchmark in appraising our own bourse (ZSE).

The research attempted to answer the following question: Does the ZSE

adequately support small business enterprises raise capital.

The research was motivated by the fact that small to medium enterprises are

having difficulties in raising capital through the ZSE despite the fact they are

major driver to economic growth constituting % of Zimbabwe GDP.

In gathering the necessary information to complete the report both primary data

and secondary data were employed. Primary data was gathered by means of the

questionnaire and personal interviews. Secondary data was gathered from

textbooks, various websites and reports from previous research on the topic. Desk

research was useful in building important issues concerning the Zimbabwean

capital market (ZSE) and its effectiveness in performing functions of capital

markets. Field research was used in in-depth analysis of the problem from experts

of the financial market from various financial institutions.

Major findings were that the ZSE is not effective with some of the functions of

capital markets not even performed. Recommendations on findings included

relaxing some regulations that govern the ZSE especially the indigenization Act,

adopting codes on corporate governance best practice as part of listing

requirements and setting up a central depository system that enables electronic

trading.


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Vashiri James R101557A Page v

Table of ContentsRelease Form ....................................................................... Error! Bookmark not defined.

The Approved Form............................................................. Error! Bookmark not defined.

Dedications ......................................................................................................................... ii

Acknowledgements............................................................................................................ iii

Abstract.............................................................................................................................. iv

List of Abbreviations and Acronyms .................................................................................. x

CHAPTER I ...................................................................................................................... 13

1.0 INTRODUCTION ............................................................................................ 13

1.1 Introduction......................................................................................................... 13

1.2 Background of the study ..................................................................................... 13

1.4 Research objectives............................................................................................. 18

1.5 Research Questions ............................................................................................. 18

1.6 Statement of Hypotheses..................................................................................... 19

1.7 Importance of the study ...................................................................................... 19

1.8 Assumptions of the study .................................................................................... 20

1.9 Scope of the Study .............................................................................................. 21

1.10 Time budget ...................................................................................................... 21

1.11 Monetary Budget .............................................................................................. 21

1.12 Limitations ........................................................................................................ 22

1.13 Summary ........................................................................................................... 23

CHAPTER II..................................................................................................................... 24

2.0 LITERATURE REVIEW ....................................................................................... 242.1 Introduction......................................................................................................... 24

2.2 Definition of Stock Exchanges ........................................................................... 25

2.3 History of Stock Exchanges ................................................................................ 26

2.3.1 History of the Zimbabwe Stock Exchange ...................................................... 27

2.4 Stock Market participants and trading ................................................................ 29


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Vashiri James R101557A Page v

2.5 ZSE functions...................................................................................................... 30

2.5.1 Remark 1 .......................................................................................................... 30

2.6 Importance of Stock Exchanges.......................................................................... 31

2.6.1Raising capital for businesses: .......................................................................... 31

2.6.2 Mobilizing saving for investment .................................................................... 32

2.6.3 Facilitating company growth ........................................................................... 32

2.6.4 Redistribution of wealth............................................................................ 33

2.6.5 Corporate governance ............................................................................... 33

2.6.6 Creating investment opportunity for small investors ....................................... 34

2.6.7Government capital- raising for development projects..................................... 34

2.6.8 Barometer of the economy ............................................................................... 35

2.6.8.1 Remark 2 ....................................................................................................... 35

2.7 Listing requirements of the ZSE ................................................................... 36

2.8 Trading and Settlement ................................................................................. 37

2.9 Performance and Size of the Market ................................................................... 37

2.9.1 Remark 3 .......................................................................................................... 39

2.9.2 Regulation of the Stock Exchange ................................................................... 42

2.9.3 Regulation of the ZSE...................................................................................... 43

2.9.4 Regulation affecting foreign investors............................................................. 43

2.10 Summary ........................................................................................................... 44

CHAPTER III ................................................................................................................... 45

3.0 RESEARCH METHODOLOGY............................................................................ 45

3.1 Introduction......................................................................................................... 45

3.2 Definition of Case Study ..................................................................................... 46

3.2.1 Design of Case Study ....................................................................................... 47

3.2.2 Rationale for Case Study Approach................................................................. 48

3.3 Data Collection ................................................................................................... 50

3.3.1 Primary Data .................................................................................................... 50

3.3.1.1 Questionnaires: ............................................................................................. 50

3.3.1.2 Telephone interviews: ....................................................................................... 52

3.3.1.3 Personal Interviews ....................................................................................... 53


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Vashiri James R101557A Page vi

3.3.2 Secondary Data ................................................................................................ 54

3.3.3 Justification for the use of Secondary Data...................................................... 55

3.4 Sampling ............................................................................................................. 55

3.4.1 Population Identification.................................................................................. 57

3.4.2 Purposive Sampling ......................................................................................... 57

3.4.3 Sample Size...................................................................................................... 58

3.5 Data Analysis Plan .............................................................................................. 58

3.6 Summary ............................................................................................................. 59

CHAPTER IV ................................................................................................................... 60

4.0 DATA PRESENTATION AND ANALYSIS OF RESULTS ................................ 60

4.1 Introduction......................................................................................................... 60

4.2 Response Rate ..................................................................................................... 60

4.3 Typography of Respondents ............................................................................... 62

4.3.1 Respondent Field ............................................................................................. 62

4.3.2 Position of Employment .................................................................................. 63

4.4 Comparison of Sample Percentage with Expected ............................................. 63

4.5 Data Presentation ................................................................................................ 64

4.5.1.0 Questionnaire Response Review................................................................... 65

4.5.1.1 What class of companies does your company fall? ...................................... 65

4.5.1.2 How long have you been in your profession?............................................... 66

4.5.3 Corporate governance is now one of the key considerations by investors. Do

you agree? ................................................................................................................. 67

4.5.4 Does the ZSE promote investment for small investors? .................................. 68

4.5.5 Does the ZSE promote growth for small to medium enterprises? ................... 68

4.5.6 Is the Zimbabwean Capital Markets properly regulated? ................................ 69

4.5.7 How significant is the capital raising ability of the ZSE? ................................ 69

4.5.8 What do you think should be done for the ZSE to be more effective inaccomplishing its roles? ............................................................................................ 70

4.5.9 What recommendations do you expect this study to provide for the benefit of

stock market development in Zimbabwe? ................................................................ 71

4.5.10 How effective is the ZSE in promoting economic growth and development?

.................................................................................................................................. 71


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Vashiri James R101557A Page vii

4.5.11 Can companies rely on the ZSE for capital raising for project development?

.................................................................................................................................. 71

4.5.12 Has there been any change for the better in terms of the effectiveness of the

ZSE since the introduction of the multicurrency regime? ........................................ 72

4.6 Interviews............................................................................................................ 724.7 Discussion and Interpretation of Findings .......................................................... 72

4.8 Data Presentation and Analysis Summary .......................................................... 74

CHAPTER V .................................................................................................................... 74

5.0 CONCLUSIONS AND RECOMMENDATIONS ................................................. 74

5.1 Introduction......................................................................................................... 74

5.2 Summary of Findings.......................................................................................... 75

5.3.1 Does the ZSE promote Corporate Governance for listed companies?............. 77

5.3.2 Comparison of Sample Percentage with Expected .......................................... 78

5.3.3 Does the ZSE promote investment for small investors? .................................. 78

5.3.4 Does the ZSE promote growth for small to medium enterprises? ................... 78

5.3.5 Is the Zimbabwean Capital Markets properly regulated? ................................ 79

5.3.6 How significant is the capital raising ability of the ZSE? ................................ 79

5.3.8 Can companies rely on the ZSE for capital raising for project development?. 80

5.3.9 Has there been any change for the better in terms of the effectiveness of the

ZSE since the introduction of the multicurrency regime? ........................................ 815.4 Recommendations............................................................................................... 81

5.4.1 Corporate Governance ..................................................................................... 81

5.4.2 Stock Market Development and Economic Growth ........................................ 82

5.4.2.1 ZSE must play a leading role in Zimbabwe Economic recovery .................. 83

5.4.3 Regulation ........................................................................................................ 84

5.4.4 Can companies rely on the ZSE ....................................................................... 84

5.4.5 Capital Market Stability ................................................................................... 84

5.4.6 Demutualization ............................................................................................... 84

5.5 Suggestions for Further Research ....................................................................... 85

5.6 Summary of Conclusions and Recommendations............................................... 85

APPENDICES .................................................................................................................. 88


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Vashiri James R101557A Page ix

List of Tables

Table 1: Time Budget.23

Table 2: Monetary Budget...23

Table 3: Questionnaire response rate...62

Table 4: Respondent Field...64

Table 5: Respondent By position of Employment65

Table 6: Summary of findings..78

List of Figures

Figure 1: Industrial Index and Daily volume ..40

Figure 2: Industrial Index and Value Traded...42

Figure 3: ZSE Index Movements.....43

Figure 4: Effective Response...63

Figure 5: Respondent field...64

Figure 6: Comparison of sample percentage with expected....66

Figure 7: Respondent Classification.67

Figure 8: Classification of Respondent by Position Held.67

Figure 9: Working Experience of Respondents....68

Figure 10: Does the ZSE promote Good Corporate Governance Practice....69

Figure 11: Does the ZSE promote Growth...70

Figure 12: Is the ZSE properly Regulated.....71

Figure 13: Significance of ZSE in raising Capital.71


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Vashiri James R101557A Page x

List of Abbreviations and Acronyms

ZSE Zimbabwe Stock Exchange

RBZ Reserve Bank of Zimbabwe

JSE Johannesburg Stock Exchange

LSE London Stock Exchange

Corporate Governance The ways suppliers of finance to corporations

assure themselves of getting a return on their

investment and how they make sure that managers

do not steal the capital or invest in bad projects.

King Report South African code of best practice on Corporate

Governance

GDP Gross Domestic Product

CEO Chief Executive Officer

SEC Securities Exchange Commission of Zimbabwe

IPO Initial public Offering

IPO Where a company issues shares to the public for the

very first time.

SMEs Small to Medium Business Enterprises


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Vashiri James R101557A Page 13

CHAPTER I

1.0 INTRODUCTION

1.1 Introduction

This chapter seeks to provide the background to the study focusing on the roles

and effectiveness of the Zimbabwe capital market, which basically revolves

around the Zimbabwe Stock Exchange, from 2008 to date. The chapter also

highlights objectives, the research questions limitations and delimitations of the

study and the hypothesis to be tested and the assumptions adopted in carrying out

the study, the limitations and delimitations of the study.

1.2 Background of the study

Under normal operating conditions the Zimbabwe Stock Exchange (ZSE) should

perform the following roles1:

Facilitates the raising of capital for businesses expansion through sellingshares to the investing public.

Mobilizing savings for investment- When people draw their savings andinvest in shares, it leads to a more rational allocation of resources because

funds, which could have been consumed or kept in idle deposits with

banks, are mobilized and redirected to promote business activity. .

Creating investment opportunities for small investors- As opposed to otherbusinesses that require huge capital outlay, investing in shares is open to

both the large and small stock investors because a person buys the number

of shares they can afford.

Facilitates Government in raising capital for development projects-Thegovernment may decide to borrow money in order to finance infrastructure

projects such as sewage and water treatment works by selling bonds.

1Sam Mensah,Ph.D


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These bonds can be raised through the ZSE whereby members of the

public buy them, thus loaning money to the government.

Barometer of the economy - At the ZSE, share prices rise and falldepending, largely, on market forces. Share prices tend to rise or remain

stable when companies and the economy in general show signs of stability

and growth. An economic recession, depression, or financial crisis could

eventually lead to a stock market crash. Therefore the movement of share

prices and in general of the stock indexes can be an indicator of the

general trend in the economy.

The ZSE failed to attract investors during the financial year 20102 and the

chairman of the management committee of the ZSE, Ndodana Mguquka has said:

Currently our capitalization is justabove US$3 billion and is falling,but if we attract big companies tolist, especially in the mining andbanking sectors, we can grow thesize of the market up to levels ofUS$10 billion.

3

Ndodana added the following:

As the new executive committee, we

are looking forward to reviving theZSE. At the moment there are a lot ofissues that need to be sorted out,particularly the quality of ourlistings. We need to improve thequality of our listings to attractforeign and local investment.

4

It has been suggested that some of the key reasons why investors avoid investing

in emerging markets are poor corporate governance and transparency5.Failure to

2Tom Minney, 26 July 2010,

3http://www.zse.co.zw/

4Zimbabwe Independent newspaper, (http://www.theindependent.co.zw/)

5 McKinsey and Company, 2001; Gibson, 200)
http://www.zse.co.zw/http://www.zse.co.zw/http://www.theindependent.co.zw/http://www.theindependent.co.zw/http://www.zse.co.zw/


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attract foreign investors by the ZSE is therefore mainly attributable to poor

corporate governance practices. Following the corporate scandals of early 2000s

in America like the fall of Enron and World com, investors became conscious of

the need to consider good corporate governance practices in their investment

decisions6. Generally foreign investors have got an appetite for emerging market

growth prospects7.

However on 14 July 2010 the Finance Minister, Tendai Biti had given a summary

of the ZSEs woes in his 2010 Mid-Term Fiscal Policy Review 8 to Parliament.

He said that trading on the Zimbabwe Stock Exchange has largely been low,

mainly due to market illiquidity in the first half of the year and that foreign

participation has remained subdued with investments mainly confined to portfoliorestructurings. Corporate results have also failed to uplift the equity market as

most corporates were still undercapitalized and also suffering from subdued

demand. He said that on average take up of recapitalization rights issues had only

been 50%, and underwriters had taken the balance. According to the same Mid-

Term Fiscal policy review, the industrial index which started the year at 156.52

had dropped to 127.46 by June 2010, whilst the mining index fell from an opening

of 209.8 to 143.08. Similarly, market capitalization fell from US$3.97 billion in

January 2010 to US$3.19 billion by end of June 2010. The poor performance was

as a result of investors pulling out their investments reflecting depressed

investors sentiment over perceived financial risks, especially following the

gazette of the Indigenization Regulations on March 1.In particular, foreign

investors contribution to market turnover fell from between 40-50% to an

average 20% per month.

The performance of the ZSE remained subdued despite the fact that transaction

costs on the Zimbabwe Stock Exchange (ZSE) have been slashed by more than

6Musa Mangena, University of Bradford

7Gilbert Muponda, 2009

8www.zimtreasury.org
http://www.zimtreasury.org/downloads/738.pdfhttp://www.zimtreasury.org/downloads/738.pdfhttp://www.zimtreasury.org/downloads/738.pdf


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half, to 3.21% (buying 1.73%, selling 1.48%) from 7.5% in December 2009 9. The

stockbroker had commented that generally this should encourage trading resulting

in better price discovery.

On 1 June 2008, Gilbert Muponda suggested that the ZSE be reformed and

restructured to be more effective in assisting both investors and entrepreneurs

reach their respective goals. He added that among the requirements of conducting

an Initial Public Offering (IPO) in Zimbabwe is the need for the company to be of

a particular size and to have a trading record of a specified period (minimum 3

years), and be showing certain level of profitability. These requirements exist

mainly to protect investors and also to make the ZSEs life easy and simple yet

IPOs are often issued by smaller, younger companies seeking capital to expand. Infact the ZSE needs to actively encourage small to medium scale businesses to

pursue the possibility of IPOs as a way to raise capital for their operations as an

alternative to borrowing to keep pace with higher requirements of working

capital.

Zimbabwe is lagging behind on the disclosure of executive remuneration, which

is shrouded in secrecy10. This is a clear indication of the deficiencies in corporate

governance among Zimbabwean companies. The ZSE should incorporate

guidelines on corporate governance in their Listing Rules like the Johannesburg

Stock Exchange (JSE) that incorporated the King II guidelines11.

1.3 Statement of the Problem

Small business enterprises are having difficulties raising enough capital to finance

their operations. The most effective way to do so is by Initial Public Offerings yet

the ZSE requires specific levels of profitability and about three years of trading

9Imara Edwards Securities (http://www.imaracapital.com/

10Chris Muronzi, Zimbabwe Independent Business Editor, 13 August 2010

11Willia Bonyongwe, Chairperson of the Securities Commission of Zimbabwe (SEC)
http://www.imaracapital.com/http://www.imaracapital.com/http://www.imaracapital.com/


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history for a company to do so12. As much as this is meant to protect investors it is

compromising economic growth.

Zimbabwe is lagging behind on the disclosure of executive remuneration which is

a deficiency in corporate governance as witnessed by the United States of

America (USA) corporate scandals of 2000s and the Zimbabwean scandals of

2004 in the banking sector that saw not less than ten Banks placed under

curatorship and two under liquidation13. Board compositions of some listed

companies are not up to standards that good corporate governance practices

would want them to be. It is up to the ZSE to incorporate the practices in their

Listing Rules14

Indigenization laws of the ZSE is discouraging foreign investors. The Chief

Executive Officer (CEO) of the ZSE, Emmanuel Munyukwi believes that the

2010 financial year would have been a better year had it not been for the

indigenization regulations gazetted in March 2010. Munyukwi said:

In April we raked in about US$5million while months before that wewere raking in more than US$20

million a month. Since theregulations were gazette, we haveseen a negative impact ontrade..Last year our marketwas driven by foreigners, making upto about 45 -50% of the totalturnover of about US$200 million ontheZSE,

15

The indigenization laws as observed by Munyukwi clearly negatively impacts the

growth of the economy by dispiriting profitable trading at the ZSE.

12 Gilbert Muponda, 1 June 2008

13Dr. Gono, Troubled Banking Institutions Handout, p 2

14Willia Bonyongwe, August 2010

15Zimbabwe Daily News, 29 December 2010


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Foreign investors improve the inflow of foreign exchange, which is often greatly

needed in developing countries to finance imports and other foreign payments16.

However, whilst foreign investors are important for emerging markets, the

currency crises of East Asia (1990s) brought doubt that such investment flows

generate benefits for developing countries17.

1.4 Research objectives

The primary objective of the study was to assess the effectiveness of the

Zimbabwe Capital market (ZSE) in accomplishing its roles. In line with the major

objective, the project also attempted to pursue the following subtopics:

Assessment of the ZSEs performance in ensuring good corporategovernance among Zimbabwean companies;

Analyzing the extent to which the ZSE assist small enterprises grow; Assessing the effectiveness of the ZSE in promoting economic growth

and development;

Establishing whether companies can rely on the ZSE as a source offinancing operations;

1.5 Research Questions

The major question the researcher attempted to answer was whether the capital

market is effective in accomplishing the roles that it is supposed to? The

following questions were also asked:

What is the best strategy in addressing the shortcomings that theZimbabwean capital market (ZSE) has as a way of raising capital among

other roles?

16Jefferis, 1995; Doidge et al., 2004

17Bhagwati, 2001; Gabriele et al., 2001


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Has there been any change or improvement on the performance of theZimbabwean capital market in accomplishing its roles ever since the

introduction of the multi-currency regime in February 2009?

Is the capital market heavily regulated? Does the capital market help firms to raise funds for new projects? Does the capital market adequately support start-up firms?

1.6 Statement of Hypotheses

With respect to the research objective of determining whether the ZSE is effective

in accomplishing is roles, the hypotheses to be tested is as follows:

Ho:The Zimbabwe capital market (ZSE) is effective in accomplishing its roles.

H1: The Zimbabwe capital market is not efficient in performing its roles.

1.7 Importance of the study

The major significance of the research was to spell out the weaknesses and or

strengths of the Zimbabwe capital market and provide solutions thereto. The

research project shall enable companies to make an assessment of the method of

raising capital that they can use having evaluated the past, current and the

expected performance of the Zimbabwe Capital market, the Zimbabwe Stock

Exchange to be more precise. Small and medium enterprises will be able to resort

to some methods of raising finance for their demanding working capital needs and

also the ZSE if the recommendations of the study are adopted.

The project will enable the researcher to have a better understanding of the

Zimbabwe Capital market, ZSE. He will gain a thorough knowledge of how the

ZSE operates, its institutional weakness, current developments that are happening

to the capital market, the instruments traded through the capital market and be

able to identify gaps that need particular attention. Besides gaining knowledge

about the ZSE, the researcher also gain the necessary experience for research

projects in further studies.


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The country shall also benefit from the research project. This is because the

research is aimed at ensuring that the ZSE is functionally effective. If the capital

markets becomes effective it leads to improved economic growth and

development and ultimately improved standards of living which is perceived to

lead to political stability.

The research results are also expected to improve the spirit of enterprise and

better corporate governance that will improve the status of the ZSE in the world

of investment. This will see an improvement in capital inflows which had dropped

drastically over the last decades because of political insecurity and indigenization

laws.

Good governance is also expected to reduce regulatory expense on the part of the

government. As noted by Magayisa, the corporate scandals of 2004 cost the

Reserve Bank of Zimbabwe a lot in trying to rescue the Troubled Banking

Institutions. The results of the research, if implemented are expected to result in

self regulatory markets that are both efficient and effective and possibly dilute the

monopoly status of the ZSE.

1.8 Assumptions of the study

All the Zimbabwe capital market trading is done through the ZimbabweStock exchange (ZSE) and therefore the phrase capital market and ZSE

shall be used interchangeably;

The sample used is a true representative of the population; All questionnaires will be responded to; All interviews will be successful; All the seventy seven listed companies on the ZSE use the capital market

as the sole method of raising capital;

Any company can be listed easily on the ZSE; Companies across all industries can switch from one method of raising

capital to another.


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1.9 Scope of the Study

In line with the research objectives, the scope of this study is restricted to the

following

areas: Assessment of the ZSEs performance in ensuring good corporate

governance among Zimbabwean companies;

Assessment of the extent to which the ZSE assist small enterprises grow; Assessment of the effectiveness of the ZSE in promoting economic growth

and development;

Assessment of whether companies can rely on the ZSE as a source offinancing operations;

Assessment of the extent to which the ZSE facilitate raising of capital forboth the government and nongovernment corporate;

The research project will be confined to the roles and effectiveness of the

Zimbabwe capital market (ZSE) considering the currently listed companies. The

main focus of the research is on the effectiveness of the ZSE in accomplishing its

roles.

1.10 Time budgetTable 1: Time Budget

Chapter Allocated Time Due Date

Project proposal One week 13/12/2010

Chapter 1(Introduction) One month 21/01/2011

Chapter2(Literature review) Three weeks 15/02/2010

Chapter 3(Methodology) One month 14/03/2011

Chapter4(Research Findings) Two weeks 28/03/2011

Chapter 5(Conclusion ) One month 30/04/2011

1.11 Monetary Budget

The research will be carried out within the budget below:


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Table 2: Monetary Budget

Item of Expenditure Cost (USD)

Tuition fees $315.00

Internet $20.00

Printing $30.00

Transport $40.00

Accommodation for field research $50.00

Total cost $455.00

1.12 Limitations

The major limitations that the researcher encountered in the course of the research

are as follows:

Financial constraints for field research Limited time within which the research was carried out During field research some people were not willing to dedicate their selves

to supporting the project

However, to overcome such limitations and problems the researcher made the best

use of the available financial resources and time. The researcher prepared a

financial and time budget to ensure that the quality of the research outcomes was

not affected by such constraints.

Challenges in field research were overcome by making prior arrangements and

appointments with the people with whom interviews were going to be held. The

researcher also took his time explaining the benefits and importance of the


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research project to them. The researcher made it clear that the research is not to

his benefit only.

1.13 Summary

The chapter provided the background information on the role and effectiveness of

the ZSE. The roles that the ZSE should perform are also clearly spelt out in the

background section of the chapter. The problem statement is shown as resulting

from the fact that local companies are failing to utilize the capital market to raise

enough finance to cater for their operations. The problem also emanates from the

fact that foreign companies are not willing to invest at the ZSE due to

indigenization laws and poor corporate governance practices by local companies.

The background clearly showed that the poor performance of the ZSE is not

directly linked to transaction costs as witnessed by the subdued performance even

after transaction costs have been slashed in 2009. The primary objective of thestudy as explained in the chapter is to determine whether the ZSE is effectively

accomplishing its roles. The primary objective is broken down into sub objectives

with the aim of thoroughly accomplishing the major objective. The chapter

provided the purpose of the study, emphasizing on the fact that the time and

resources was worth it. The research questions included in the chapter helps


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coming up with the hypothesis tests and leading to pursuance of the objectives.

The hypothesis tested is, Zimbabwe Stock Exchange is effective in

accomplishing its roles. The major assumptions of the study are that all capital

markets trading is through the ZSE and therefore that the ZSE is the capital

market of Zimbabwe. The major limitations of the study are that of time and

monetary resources involved during the course of the research.

Having looked at the background, purpose, limitations and delimitations in

chapter I, chapter II focuses on the literature review of the study which aims at

identifying gaps in knowledge as well as weaknesses in previous studies and

providing possible solutions thereto.

Chapter III looks at the research methodology and why a particular approach was

chosen over the others.

Chapter IV focuses on presentation techniques, discussion and interpretation of

research findings and chapter V looks at recommendations and conclusion.

CHAPTER II

2.0 LITERATURE REVIEW

2.1 Introduction

As the activities on the stock exchanges tend to be specialized and not understood

by common people, this chapter gives some basic definitions and review stock

exchange history, participants, operations and importance, so as to serve as the

basis for understanding how the stock market can help promote investment and

trade. Besides, review of other studies is done in this chapter to give various

dimensions of stock exchanges in the economy. A brief background of the

Zimbabwe Stock Exchange and how it performed and the current performance is

also be explored in this chapter. The ZSE is the only stock exchange currently

operating in Zimbabwe. Historically, there was no statutory provision for the

operation of more than one stock exchange but only the ZSE which is in

operation. However with the formation SEC provision was given for the operation


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of more than one stock exchange in Zimbabwe. Since its formation, the ZSE went

through vast changes, including numerous changes in premises utilization, trading

systems, management and modification of rules, among other things. Attention is

given to changes that are believed to have impacted on the efficiency and

effectiveness of the ZSE, reduced costs of both trading and the running of the

exchange, and increased the exchanges efficiency in information dissemination.

The main focus is not on the chronology of changes but on the purpose of these

changes, or rather, their purported effect on market efficiency and effectiveness.

This study attempts to fill the gap in the literature by tracing the history and

operations of the Zimbabwe Stock Exchange (ZSE). It examines why and how the

ZSE was formed and documents its early history, as well as investigating the role

and impact of the local bourse in the economy. The study is divided into different

sections. The first section examines the origins of the ZSE and analyses the

internal organization of the Exchange, while the second gives an analysis of the

ZSE's operations and its influence on economic development between 2008 and

2011. Finally the conclusion assesses the ZSE's role and performance and

highlights some theoretical issues emerging from the study's findings.

2.2 Definition of Stock Exchanges

A Stock Exchange is a market where stocks and shares are purchased and sold

and capital is raised for the purposes of industry and both local and central

government.18 Markets for the trading of stocks and shares or securities have

existed for centuries all over the world. One of the earliest known markets was

established in Paris, France around 1138.19 However, the modern form of the

Stock Exchange can be traced to about 200 years ago.20 By the twentieth century,

the Stock Exchange had become a common feature in many capitalist economies

and was widely considered an institution characteristic of a 'modern economy'.

18F. E. Armstrong 1957 The Book of The Stock Excliange, London: Pitman: p 17.

19 E. H. H. Edwards 1963 "The Role of the Stock Exchange", in RSE,Financial and EconomicSymposium, Record of Proceedings, Salisbury: p 3

20 W. T. C. King 1954 The Stock Exchange, London: Allen & Unwin: p 15


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The Stock Exchange is now recognized as an important component in the

financial structure of the capitalist system. While the Stock Exchange serves an

important function in the economy, it can also wreak havoc. Nowhere is this

clearer than in the case of the Wall Street Crash of 1929, which triggered a global

economic depression.21

2.3 History of Stock Exchanges22

In the 12th century France, the courratier de change was concerned with managing

and regulating the debts of agricultural communities on behalf of the banks.

Because they also traded with debts, they could be regarded the first brokers. In

early 13th century, Bruges commodity traders gathered inside the house of a man

called Van der Beurse and in 1309 they institutionalized this. But until then

informal meeting and become the Brugse Beurse. The idea quickly spread around

Flanders and neighboring countries and Beurzen and soon opened in Ghent

Amsterdam. In the middle of the 13th century, Venetian bankers began to trade in

government securities. In 1351, the Venetian government outlawed spreading

rumors intended to lower the price of government funds. Bankers in Pisa, Verona,

Genoa and Florence also began trading in government securities during the 14 th

century. This was only possible because these were independent city states which

were not ruled by a duke but a council of influential citizens. The Dutch later

started joint stock companies, which let shareholders invest in business ventures

and get a share of their profits or losses. In 1602, the Dutch East India Company

issued the first shares on the Amsterdam stock exchange. It was the first company

to issue stocks and bonds. The first stock exchange to trade continuously was the

Amsterdam Beurs, in the early 17th century. The Dutch pioneered short selling,

option trading, debt-equity swaps, merchant banking, unit trusts and other

speculative instruments, much as we know them. Now there are stock markets in

virtually every developed country and most developing countries, with the

21 J. Atack and P. Passell 1994A New Economic Vieir of American History fiom Colonial Timesto 1940,New York: VV. W. Norton: p 583

22 Wikipedia, the free encyclopedia


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worlds biggest markets in the United States of America, United Kingdom,

Germany and Japan.

2.3.1 History of the Zimbabwe Stock Exchange

Trading of stocks and shares in Zimbabwe goes back to 1891, when the first

stock-broking firm was opened.23The first Stock Exchanges were set up a few

years later in 1894 in Salisbury and Bulawayo. Later, two other exchanges

emerged in Gwelo (now Gweru) and Umtali (now Mutare) around 1898. These

exchanges were intended to meet the capital needs of the gold mining industry,

whose rapid expansion was fuelled by rumors of a 'Second Rand' in Southern

Rhodesia. During this period, the London and Johannesburg exchanges also saw

the listing of Rhodesian enterprises seeking to raise capital.24 On the whole, these

exchanges generated wild speculation in the country, which ended in financial

chaos as the hope of the Second Rand faded. The result was that, as mining

companies withdrew, the local stock markets collapsed. By 1902, all the local

Exchanges had ceased to operate. Between 1902 and 1945, public authorities and

companies in Southern Rhodesia relied on the London Stock Exchange (LSE) and

the Johannesburg Stock Exchange (JSE) for their capital needs. Due to a number

of reasons, the main one being the boom in manufacturing during World War II,the Rhodesian Stock Exchange (RSE) was set up in Bulawayo in 1946.25 By

1963, there were 98 listed companies, from only seven in 1946. Because of

economic sanctions during the Unilateral Declaration of Independence (UDI)

period, the ZSE was largely quiet. This was because the period was characterized

by the utilization of existing excess capacity as opposed to investment in capital

development. During the late 1970s, the hope of independence and the end of

sanctions led to a brief rise in share prices. By 1980, the ZSE was a highly

specialised market, which was likely to prove useful in the economy if a capitalist

23The Rhodesinn HeniUi, 29 October 1892

24 The Rhodesinn Herald, 1 June 1894

25 George Karekwaivenani, A History of the Rhodesian Stock Exchange, p 2


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oriented development strategy was adopted. After independence, however, the

independence government declared Socialism as its official ideology. This,

combined with a global recession, resulted in the dramatic fall of the industrial

and mining indices on the Exchange. By 1981, the market's total capitalisation

had fallen from Z$911 million to Z$52.5 million.1984 marked the Exchange's

lowest point since its birth. However, between 1984 and 1990, the ZSE's

performance improved considerably. The industrial index shot up from 150 in

1984 to 2 732 in 1991, while the mining index jumped from 28 to 500 between

1984 and 1990. This was due to the restored confidence among the investors that

colonial property rights would be upheld. To date, the history of the Stock

Exchange in Zimbabwe has received little scholarly attention although some

economic analyses exist, van Onselen, Phimister and Bond have each made

passing references to the history of the local Exchanges during the

1890s26.However, their focus has been, invariably, on illustrating the highly

speculative character of the gold mining industry in the country and not on the

Exchanges themselves. Newlyn and Rowan have briefly discussed the emergence

of the ZSE. While their arguments on the anomaly of the emergence of a Stock

Exchange in a dependent economy are useful, their analysis focuses on the broad

monetary and financial systems in eight British African colonies between 1946

and 1951. As such, their treatment of the ZSE is necessarily limited. Sowelem's

work similarly concentrates on the monetary experience of the Federation of

Rhodesia and Nyasaland between 1952 and 1963 and only Sowelem touches on

the internal organisation of the ZSE and its performance. These analyses do not

trace the origins and development of the Stock Exchange in the country. Clarke

also briefly examines the ZSE's performance in the 1970s, but his study is not on

the Exchange itself. Rather, it only uses quoted companies as its sample for

investigating the degree of foreign control in the Rhodesian economy. 27 Finally,

Bonds' work comes closest to a critical study of the Stock Exchange but is limited

26ibid

27 D. G. Clarke 198(1Foreign Companies and Intel national Investment in Zimbabwe. GwelivMambo: p 116.


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to the period between 1980 and 1995 and concentrates on illustrating the role of

financial capital in the uneven development of Zimbabwe. There is, thus, need for

a scholarly study of the history of the Zimbabwe Stock Exchange, which has

played a very important part in the recent history of Zimbabwe.

2.4 Stock Market participants and trading28

Many years ago, worldwide, buyers and sellers were individual investors such as

wealthy businessmen, with long family histories to particular corporations. Over

time, markets have become more institutionalized with buyers and sellers largely

institutions e.g. pension funds, insurance companies, mutual funds, hedge funds,

investor groups and banks. The rise of institutional investor has brought with it

some improvements in stock market operations but not necessarily in the interest

of small investors or even youthful institutions, of which there are many. Now

participants in the stock market range from small individual stock investors to

large hedge fund traders, who can be based anywhere. Their orders usually end

with a professional at a stock exchange, who executes the order. Most stocks are

traded on exchanges e.g. ZSE, which are places where buyers and sellers meet

and decide on a price. Some exchanges are physical locations where transactions

are carried out on a trading floor, by a method known as open outcry. The other

type of exchange is a virtual kind e.g. NASDAQ, composed of a network of

computers where trades are made electronically via traders at computer terminals.

Actual trades are based on an auction market paradigm where a potential buyer

bids a specific price for a stock and a potential seller asks a specific price for a

stock. When the bid and ask price match, a sale takes place on a first come first

serve basis if there are multiple bidders and askers at a given price. The purpose

of a stock exchange is to facilitate the exchange of securities between buyers and

sellers, thus providing a marketplace (virtual or real). Really, a stock exchange is

nothing more than a super-sophisticated farmers market providing a meeting

place for buyers and sellers.

28Wikipedia, the free encyclopedia


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2.5 ZSE functions29

The ZSE serves three critical functions: mobilize and efficiently allocate

resources for the country's economic development

provide a fair, efficient, transparent and secure price discoverymechanism in a well regulated environment

build liquidity through innovation

The ZSE also provides a properly constituted and regulated environment that

ensures market integrity and fairness among stock market participants. Any off

market deals and any unethical criminal activities are dealt with within theframework of the rules and regulations governing stock market transactions in

Zimbabwe. Only stockbrokers and authorized dealers are allowed to transact in

shares on behalf of the public. Over The Counter Trading (OTC) is not allowed in

the market.OTC is a telephone and computer linked network of dealers who do

not physically meet. 30

2.5.1 Remark 1

Although there is much high credit risk in the OTC market the ZSE limits the

possibility of better trade and high volumes of trade in the economy. Trades in the

OTC markets are typically much larger than trades in the exchange traded

market. A key advantage of the OTC is that the terms of the contract do not have

to be those specified by the exchange, participants are free to negotiate any

attractive deal.31

29 http://www.zse.co.zw/

30Options, Futures, and other Derivatives, John C Hull, fourth Edition, P 17

31 ibid
http://www.zse.co.zw/http://www.zse.co.zw/


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2.6 Importance of Stock Exchanges

Just as it is important that networks of transportation, electricity and

telecommunications function properly so it is essential that payments can be

transacted, capital can be saved and channeled to the most profitable projects and

that both households and firms get help in handling financial uncertainty and risk

as well as possibilities of spreading consumption over time. Financial markets

constitute an important part of the total infrastructure for every society that has

passed the stage of largely domestic economies. Stock market which is part of

financial markets, perform the following functions in an economy: 32

2.6.1Raising capital for businesses:

The Stock Exchange provides companies with the facility to raise capital for

expansion through selling shares to the investing public. Shares can be sold in

either of the two markets, primary or secondary. The Primary Market deals with

the trading of new securities. When a company issues securities for the first time

(i.e. IPO) , they are traded in the Primary Market through the help of issuing

houses , Dealing /Brokerage Firms, Investment Bankers and or Underwriters. The

acronym IPO stands for Initial Public Offering, which means the first time a

company is offering securities to the general public for subscription. The amount

of money raised in the Primary market goes directly to the Issuing Company/Firm

to finance its operations. Once the securities (shares) of a company are in the

hands of the general public, they can be traded in the Secondary Market to

enhance liquidity amongst holders of such financial securities. Thus, the

Secondary Market facilitates the buying and selling of securities that are already

in the hands of the general public (investors). The Stock Exchangetherefore is an

organized financial platform that deals in transactions involving the buying andselling of financial securities in the Secondary Market. In short, the Stock

32 Sam Mensah,Ph.D


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Exchange does the work of a Secondary Market by facilitating a formal trading

arrangement for financial securities.33

On 1 June 2008, Gilbert Muponda suggested that the ZSE be reformed and

restructured to be more effective in assisting both investors and entrepreneurs

reach their respective goals. He added that among the requirements of conducting

an Initial Public Offering (IPO) in Zimbabwe is the need for the company to be of

a particular size and to have a trading record of a specified period (minimum 3

years), and be showing certain level of profitability. These requirements exist

mainly to protect investors and also to make the ZSEs life easy and simple yet

IPOs are often issued by smaller, younger companies seeking capital to expand. In

fact the ZSE needs to actively encourage small to medium scale businesses topursue the possibility of IPOs as a way to raise capital for their operations as an

alternative to borrowing to keep pace with higher requirements of working

capital.

2.6.2 Mobilizing saving for investment:34

When people draw their savings and invest in shares, it leads to a more rational

allocation of resources because funds, which could have been consumed,

or kept in idle deposits with banks, are mobilized and redirected to promote

business activity with benefits for several economic sectors such as agriculture,

commerce and industry, resulting in a stronger economic growth and higher

productivity levels and firms. 35

2.6.3 Facilitating company growth:

33 Dr. Mohamed Jalloh, Director general Sierra Leone Stock Exchange, The role of financial

markets in economic growth, p 7

34R. R. West and S. M. Tinic 1971 The Economics of the Stock Market,New York: Praeger: D

35 Dr G Gono, Press statement on the rampant fraudulent activities on the stock exchange, the

insurance and pension fund industries and the banking sector, p 6


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Companies view acquisitions as an opportunity to expand product lines, increase

distribution channels, hedge against volatility, increase its market share, or

acquire other necessary business assets. A takeover bid or a merger agreement

through the stock market is one of the simplest and most common ways for a

company to grow by acquisition or fusion. Companies can merger and or takeover

another company in the same line of business ether vertically or horizontally for

different motives. Both takeovers and mergers are done by way of selling and or

buying shares through the stock exchange.

2.6.4 Redistribution of wealth:By giving a wide spectrum of people a chance to buy shares and therefore become

part owners of profitable enterprises, the stock market helps to reduce large

income inequalities. Although Stock exchanges do not exist to redistribute wealth,

both casual and professional stock investors, through dividends and stock price

increases that may result in capital gains, will share in the wealth of profitable

businesses.

2.6.5 Corporate governance: 36By having a wide and varied scope of owners, companies generally tend to

improve on their management standards and efficiency in order to satisfy the

demands of these shareholders and the more stringent rules for public

corporations imposed by public stock exchanges and the government.

Consequently, it is assumed that public companies (companies that are owned by

shareholders who are members of the general public and trade shares on public

exchanges) tend to have better management records than privately-held

companies (those companies where shares are not publicly traded, often owned by

the company founders and/or their families and heirs, or otherwise by a small

group of investors). However, some well-documented cases are known where it is

36 Hans Christiansen and Alissa Koldertsova, 2009


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alleged that there has been considerable slippage in corporate governance on the

part of some public companies (e.g. famous Enron Corporation, MCI Worldcom,

Pets.com, Sunbeam, Webvan, and Adelphia)

Zimbabwe is lagging behind on the disclosure of executive remuneration, which

is shrouded in secrecy37. This is a clear indication of the deficiencies in corporate

governance among Zimbabwean companies. According to the chairperson of the

Securities Commission of Zimbabwe (SEC) (Willia Bonyongwe) the ZSE should

incorporate guidelines on corporate governance in their Listing Rules like the

Johannesburg Stock Exchange (JSE) that incorporated the King II guidelines.

2.6.6 Creating investment opportunity for small investors:

As opposed to other businesses that require huge capital outlay, investing in

shares is open to both the large and small stock investors because a person buys

the number of shares they can afford. Therefore the Stock Exchange provides the

opportunity for small investors to own shares of the same companies as large

investors.

2.6.7Government capital- raising for development projects:38

Governments at various levels may decide to borrow money in order to finance

infrastructure projects such as sewage and water treatment works or housing

estates by selling another category of securities known as bonds. These bonds can

be raised through the Stock Exchange whereby members of the public buy them,

thus loaning money to the government. The issuance of such bonds can obviate

the need to directly tax the citizens in order to finance development, although by

securing such bonds with the full faith and credit of the government instead of

37 Chris Muronzi,Zimbabwe Independent Business Editor 13 August 2010

38 George Karekwaivenani,Department of Economic History, University of Zimbabwe, P 8


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with collateral, the result is that the government must tax the citizens or otherwise

raise additional funds to make any regular coupon payments and refund the

principal when the bonds mature.

2.6.8 Barometer of the economy:

At the stock exchange, share prices rise and fall depending, largely, on market

forces. Share prices tend to rise or remain stable when companies and the

economy in general show signs of stability and growth. An economic recession,

depression, or financial crisis could eventually lead to a stock market crash.

Therefore the movement of share prices and in general of the stock indexes can be

an indicator of the general trend in the economy.

2.6.8.1 Remark 2

The ZSE falls short of some of the functions that other stock exchanges around the

world do perform.Among the listing requirements of the ZSE should be the need

by companies to comply with international codes on corporate governance like

the King Report on corporate governance. The JSE adopted the King II guidelines

on corporate governance among its Listing requirements.

Contrary to the noble purpose for which the ZSE was created; which is that of

acting as a progressive vehicle for the mobilization of productive capital, the ZSE

has literally galloped astray, in the process creating obscene paper wealth that is

causing havoc in the economy.39 By 2008 the Zimbabwe Stock Exchange had

become the most devastating vehicle of economic destruction, there was rogue

trading at the ZSE:

The ZSE allowed some stock brokers to falsely bid up share prices, whenin fact the same stock brokers had absolutely no money to pay for the

39 Press statement on the rampant fraudlent activities on the ZSE, Dr. G. Gono governor reserve

bank of zimbabwe 20 november, 2008, pp 6-9


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shares. The end result has been that some counters grew by as high as 2

million percent in a single day;

Where share prices were rising at the ridiculously bloated rates, what thateffectively meant was that someone could work up with no penny at the

bank, but end the day a multitrillionnaire. The next morning, the false

wealth so created would show up as high demand for cash.

The Stock Exchange was deliberately indexing the entire stock market tothe spurious Old Mutual share prices. The whole economy was then being

priced via the Old Mutual rate whose share price movements had no

relationship with economic fundamentals, let alone actual corporate

performance of Old Mutual itself.

The Zimbabwe Stock Exchange had been operating with no strict rulesand regulations that prohibit rogue behavior. On numerous occasions,

company share prices rose astronomically with absolutely no actual

volumes trading;

Some stock brokers were buying shares cheap in the morning call oversthen drive up prices before off-loading the same shares on the same day at

inflated prices;

The Stock Exchange did not rule a few aggressive Stock Brokers out oforder, when they stampeded specific counters up with the sole intention of

amassing false wealth.40

2.7 Listing requirements of the ZSE41It is an integral function of the ZSE to provide facilities for the listing of securities

(including securities issued by companies, domestic or foreign), to provide the

ZSEs users with an orderly market place for trading in such securities and to

regulate the market accordingly. The Listings Requirements apply to companies

seeking a listing for the first time, presently listed companies, all other securities

40 (ibid)

41(http://www.zse.co.zw/)


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that applicants may wish to list and those presently listed and, where applicable,

to directors (as defined in each relevant section) of applicant issuers. The Listings

Requirements contain the rules and procedures governing new applications, all

corporate actions and continuing obligations applicable to issuers and issuers of

specialist securities. They are furthermore aimed at ensuring that the business of

the ZSE is carried on with due regard to the public interest. Among the listing

Requirements should be provision of the need for companies to comply with

International codes on Corporate Governance like the Cadbury Report, King

Report and the combined code.

2.8 Trading and Settlement 42The ZSE uses a call over system on the floor of the exchange. The ZSE currently

conducts one call over session daily between 10.00 am and noon. Trading reports

are published and circulated to broking houses, the investing public and the press.

Trading on the Zimbabwe Stock Exchange is presently by open cry floor system

on a matched bargain basis. Shares are traded in minimum lots of 100.

2.9 Performance and Size of the Market

The month of March 2010 saw the release of financial results of a number oflisted companies. While there was growth in revenues across many companies,

most battled with costs which on the level of profits and many reported operating

losses. This, in addition to battered investor sentiment, pulled the stock market

down. The industrial index was down in April, bringing the year loss to -8.5% at

the end of April. Manufacturing and Financial companies posted the worst results

and have seen the worst declines as investors shun them. The last time the ZSE

hovered around these levels albeit for a short time was in May 2009 during an

exciting bull run on the way to the peak levels of November 2009. From one year

ago the market has experienced a lot of hype but has basically remained in one



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spot for investors. Volatility has increased on the market, with share prices

swinging as depicted in the chart below. 43

Figure 1: Industrial Index and Daily volume

Source: DATVEST April 2010 Newsletter

Market activity in February 2010 was dominated by the Statutory Instrument 21

of 2010 which compels businesses with assets worth at least $500,000 to cede

51% of their total shareholding to indigenous Zimbabweans within five years. The

43 DATVEST April 2010 Newsletter, p 3


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industrial index dropped 10.32% to close the month at 140.37 points while the

mining index weakened 16.6% to close at 175.08 points. Value traded was 32%

lower than January at $23.3m. The gazette of regulations with the requirement of

compliance plans to be submitted to the responsible ministry within 45 days from

the 1st March resulted in subdued investor appetite for the stock market. Volumes

were generally weak throughout the month. Given that foreign investors were

contributing significant levels in liquidity, the regulations have left many on the

line trying to assess the impact on businesses going forward. For foreign investors

the critical considerations was to make sure that the aggregate equity stakes are

below the limit in all businesses that they invest in. 44

2.9.1 Remark 3

Empowerment is a noble cause in its simplest form. Its primary motive is to

transform the lives of the previously disadvantaged by giving them the

opportunity to benefit from mainstream economic activity. Countries like South

Africa have similar schemes that have managed to keep international capital

flows at significant levels though questions have been asked if it has really

benefited South Africans! However each nations scheme differs in thresholdlevels, time frame and social investment credits among other factors. The ideal

situation is to ensure that its implementation results in a positive impact to the

economy and to the intended beneficiaries.

The Act and Regulations have been widely criticized since promulgation in

2007/08 and since the regulations have been gazetted. Suffice to say the Act &

Regulations are not investor friendly for either external or internal investment.

The legislation comes at a time when most companies are restructuring working

capital funding from the expensive short-term debt by requesting existing

shareholders to inject fresh capital in the form of rights issues. Tight liquidity

conditions, total bank deposits at $1.3 billion also limit the scope for any

44 DATVEST March 2010 Newsletter, P 2


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financing structures that other markets have managed to create for their cases.

Multinational Corporations have the financial wherewithal to invest in Zimbabwe

to stimulate growth; we are unable to do it ourselves. The question must be asked

as to how the Zimbabwe Stock Exchange could operate efficiently with these

regulations.

The figure below highlights market activity since the beginning of the year 2010

Figure 2: Industrial Index and Value Traded

Source: DATVEST March 2010 Newsletter

By the end of the year 2010, the ZSE market capitalization was at US$

3,884,485,459 up from US$ 3,829,925,096 by year end 2009. In September 2009


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the industrial index declined 7.7% to close the month at 137.06 points while the

mining index softened 13.37% to close the month at 192.8 points. Total value

traded for the month amounted to $39.8m down 20% from the previous months

$49.5m.

The graph below shows the ZSE Index Movements for August 2009:

Figure 3: ZSE Index Movements

Source: DATVEST March 2010 Newsletter


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2.9.2 Regulation of the Stock Exchange

For each of the markets there are rules relating to listing, trading, settlement, and

the general running and management of the exchange activities. It is generally

agreed that self-regulation is the best way to maintain standards that safeguard the

interests of investors; this explains why all the markets are self-regulated as is the

JSE. The existence of comprehensive rules, per se, does not guarantee

compliance, thus supervision and monitoring of the stock markets cannot be

overemphasised. The NSE has a compliance department that monitors the

disclosure of company information and ensures that market participants are aware

of the rules as they are embodied in the rulebook. The Capital Market Authority

of Egypt supervises the MCSD and inspects its activities to ensure the trading;

clearing and settlement are done in accordance with the rules and regulations of

the stock exchange. In addition to strict supervision each of the stock exchanges

has a guarantee fund. These funds were set up to reduce the risk of default by

members of the relevant stock exchange. If a member fails to settle upon delivery

of purchased securities, the exchange will make good the amount owing on the

account of the guarantee fund. All members of the stock exchange are covered by

the guarantee fund and they contribute to it. It is apparent that the ZSE is more

advanced than the other stock markets in respect of most of the issues considered

above, except in terms of regulation where all stock exchanges have similarly

strict regulation.

For a stock exchange to operate successfully, investors must have the confidence

that they can deal at genuine and fair prices, and that the market is not

manipulated to their disadvantage. A proper regulatory framework that is adhered

to by all market participants, and is enforced by the appropriate regulatory

authorities, brings about this confidence and integrity. Since its inception, theZSEs regulatory framework has been based on self-regulation. Legislation

relating to the ZSE, as embodied in the Zimbabwe Stock Exchanges Act (Chapter

24:18), seeks to protect the interests of the general public in buying and selling

shares without unduly infringing upon self-regulation. In the interest of self-

regulation the SEC proposed a Financial Services Institute which shall train ZSE


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participants.45 The ZSE executive has the authority and discretion to alter the

trading period, close, suspend or halt trading, or take any such steps necessary to

maintain an orderly market, notwithstanding any other provisions of the rules.

The rules also detail the security procedures, reporting procedures and resources

required by members to ensure the efficiency and integrity of the equities market

as well as the proper functioning of the ZSE trading system.

2.9.3 Regulation of the ZSE46

The Zimbabwe Stock Exchange (ZSE) is supervised by the Securities Exchange

Commission (SEC). SEC is a statutory body established in terms of the Securities

Act. Members of the ZSE are licensed by SEC, which also determines the level of

capitalization required for practicing members of the ZSE.

SEC has the power to intervene in the event that irregularities arise in the areas of

conduct of licensed members, financial difficulties, and rejection of applications

and/or termination of membership.

The Exchange supervises and monitors the trading process to ensure transparency

in the market and to prevent manipulation of the market. All trades for listed

securities by Members of the ZSE are declared to the ZSE. Any unethical or

criminal activities are dealt with within the framework of the rules and regulations

governing stock market transactions in Zimbabwe.

2.9.4 Regulation affecting foreign investors47

Foreign investors can participate on the bourse provided they bring in their capital

through normal banking channels. No prior exchange control approval is

45Securi ties Commission of Zimbabwe Proposed I nstitute : Di scussion Dr aft, 4/1/2010, P 5


http://www.zse.co.zw/http://www.zse.co.zw/http://www.zse.co.zw/http://www.zse.co.zw/


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necessary for a foreign investor to participate on the Zimbabwe Stock Exchange.

Authorized dealers, acting on behalf of non-resident investors and FCDA holders,

receive funds for onward transmission to stock brokers for purchase of shares.

Shares purchased on behalf of the foreign investor are registered into either their

own names or the names of nominee companies. The share certificates, once

registered, are endorsed 'non-resident'. For dual quoted shares, a further

endorsement 'For Sale Within Zimbabwe Only' is required. The maximum foreign

investment is limited to 10% per single investor and 40% collectively. Should a

foreign investor exceed the 10% limit, the transfer secretary may not effect

registration and is obliged to report to the Zimbabwe Stock Exchange. The latter

may issue a directive to the investor to sell the excess shares within sixty days;

any losses incurred will be for the investor's account. The Zimbabwe Stock

Exchange is required to report the matter to the Reserve Bank. Withholding taxes

on dividends are deducted at source at the rate of 10%. Repatriation of income

and capital is free. This is subject to proof that payment for any purchases was

made with funds received through formal banking channels.

2.10 Summary

The chapter discussed theoretical and empirical literature concerning the roles of

stock exchange in relation to the Zimbabwe Stock Exchange. In line with the

research questions the chapter looked at the history of stock exchanges and the

roles that such exchanges are expected to perform. The ZSEs roles were

compared with roles performed by other stock exchanges around the world like

the JSE. The chapter also documented theoretical disagreement which exists

about the importance of stock exchanges for economic growth. Mayer (1988)

argues that even large stock markets are unimportant sources of corporate finance.

Stiglitz (1985, 1994) says stock market liquidity will not enhance incentives for

acquiring information about firms or exerting corporate governance. Moreover,

Devereux and Smith (1994) emphasize that greater risk sharing through

internationally integrated stock markets can actually reduce saving rates and slow


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economic growth. The analysis of Shleifer and Summers (1988) and Mork,

Shleifer and Vishny (1990) suggest that stock market development can hurt

economic growth by easing counterproductive corporate takeovers.

CHAPTER III

3.0 RESEARCH METHODOLOGY

3.1 Introduction

Research methodology refers to the systematic, focused and orderly collection of

data for the purposes of obtaining information in order to solve research

questions. Data collection and analysis procedures are central to the validity of the

research findings in so much that it determines the success (or failure) of the

study. This chapter outlines the research design adopted, the research population

and sample, data collection method and instruments and the data presentation and

analysis plan. The chapter also explains the rationale for and shows why a

particular research methodology was deemed appropriate for this study.

Selections of research methodologies are also investigated. The topic of roles and

functions of capital markets can be approached from different angles, depending

on the nature of the problem under consideration. In this case, a case study


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approach was chosen because of its ability to use multiple sources of evidence48

including documents, interviews, observations and its flexibility. Case study

research seeks to obtain a holistic view of a specific phenomenon or a series of

events able to assist in the implementation of findings49. The ZSE could not have

found a better approach because of the need for informed decisions that would

assist with the implementation of proposed programmes and policies.

The researchers aim in this study was to establish the effectiveness of the ZSE in

accomplishing its roles and functions. In order to achieve this goal, thorough

investigation was required on the roles and functions of the ZSE, hence both

primary and secondary sources of data were used.

3.2 Definition of Case Study

A case study is a detailed and thorough investigation of a few cases 50. It is an

intensive description and analysis of a phenomenon or social limit such as an

individual, a group, an institution or community51. Case study method enables

the researcher to closely examine the data within a specific context. In most cases,

a case study method selects a very limited number of individuals as the subjects of

study. Case studies, in their true essence, explore and investigate contemporary

real-life phenomenon through detailed contextual analysis of a limited number of

events or conditions, and their relationships. Yin defines the case study research

method as an empirical inquiry that investigates a contemporary phenomenon

within its real-life context; when the boundaries between phenomenon and

context are not clearly evident; and in which multiple sources of evidence are

used. In some case studies, an in-depth examination of a single case or event is

used. The examination provides a systematic way of observing the events,

48 Yin, 1993

49Gummersson, 1991 p 76

50Bliss and Smith, (1999) p43

51Merrian and Simpson, (1984) p 95


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collecting data, analyzing information, and reporting the results over a long period

of time. There are mainly three categories of case studies, namely exploratory,

descriptive and explanatory case studies. Unlike quantitative analysis which

observes patterns in data at the macro level on the basis of the frequency of

occurrence of the phenomena being observed, case studies observe the data at the

micro level.

3.2.1 Design of Case Study

Research design is the plan and structure of investigation so conceived as to

obtain answers to the research questions52. The researcher adopted a multiple-case

design because of the need to provide evidence in addressing the issue in

question. The research used a case study approach, which is exploratory, carried

out about the ZSEs effectiveness in accomplishing its roles and functions.

Results obtained from a case study cannot be generalized over a wider area.

Empirical data was obtained from different sources through sampling,

questionnaires, structured and unstructured interviews, and secondary data from

reports and recommendations derived from the various stock brokers, asset

management companies and the Zimbabwe Stock Exchange. A research design is

a plan, structure and strategy of investigating conceived information so as toobtain answers to the research questions53. Therefore the validity, reliability and

usability of the methods and research instruments used in this design are

explained in this section.

The respondents were restricted to dealers, other stock broker personnel, credit

analysts and former credit analysts only since the study was limited to the roles

and functions of the ZSE. Due to shortage of time and financial resources the

researcher was not able to encompass larger samples of the total population so asto derive results from more subjects.

52Kerlinger, (1996) p 279

53Nadler ,(1994)


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3.2.2 Rationale for Case Study Approach

A case study method can contain several case studies and could

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