/ 10 January 2020

Democratising financial participation

The JSE is working on SME & sustainable development initiatives.
The JSE is working on SME & sustainable development initiatives.



In my first month in office, at an Exco strategy meeting offsite, I was approached by a hotel restaurant server, called Lazarus. Lazarus heard we were from the JSE and wanted to know how he could invest his cash in the stock exchange. Today, Lazarus can download an app on his smartphone, verify his identity and begin to save on the exchange in small increments. It’s a simple and relatively inexpensive process.

Unfortunately, Lazarus is the exception to the rule as South Africans are not known for their savings. In fact, South Africans save on average -0.1% of their income or, put more plainly, we spend more than we save. This is not surprising when we consider our country has among the highest inequality and youth unemployment rates in the world.

The point is that the socioeconomic impact of finance cannot be underestimated and we would be hard pressed to deny that the financial infrastructure of a society is inextricably linked to the real economy.

Many academics, such as Thomas Piketty and Tony Atkinson, have argued that finance is a material source of inequality. Access to finance can, however, be used as a force for good when applied responsibly.

Access to finance can enfranchise people, capacitate the development of business, and generate income and, in so doing, contribute towards addressing inequality and grow the economy.

As an economist, I’m curious about the connection between financial markets and the real economy. And, given my role at the exchange, I’m passionate about the role the JSE and the finance sector more broadly can play in building a more inclusive and sustainable South Africa.

Well-functioning stock exchanges can play a critical role in supporting the growth and development of an economy. Exchanges do this by enabling entrepreneurs and companies to raise capital to grow and expand. The capital raised is funded by savings from domestic and international investors, who expect a return on their investment through the growth in the value of the company and/or through dividends paid to shareholders.

As the company grows, it employs more people, who are able to both consume more and invest or save more. These savings, together with the investment returns received by existing investors, are then available for future investment, allowing the virtuous cycle to continue. In a nutshell, we connect lenders and borrowers to grow the economy.

The JSE is synonymous with the growth of the South African economy. Founded in 1887, the exchange enabled the exploration and development of the newly discovered gold fields.

As the South African economy has diversified away from gold, the composition of the JSE has changed to reflect the economy. Over time, the JSE has become home to South Africa’s — and even the world’s — best-known companies, supporting their expansion locally, as well as further afield.

At time of writing, the JSE is among the top 20 largest exchanges in the world, with a market capitalisation (the total value of all companies listed on the exchange) of more than R17-trillion.

Exchanges act as a barometer of the economic health of the country and the companies listed on the market. The market capitalisation to GDP ratio of more than 300% demonstrates that the exchange not only supports the local economy, but provides a platform for South African companies in their international expansion.

The scale of the JSE’s market is a very good base on which to build. But although where we have come from is instructive, and where we are today is relevant, what truly matters is where we are going.

For the JSE, future success means ensuring we remain relevant to the real economy; that we are cognisant of the environment in which we are operating; and are contributing meaningfully to sustainable and inclusive economic growth and development.

One of the ways in which we plan to achieve this future vision is by focusing on people such as Lazarus — the retail investor. We acknowledge our country’s limited disposable cash, access to formal markets and low levels of financial literacy, but it is imperative for the JSE and the market to enable more South Africans to access investment opportunities.

In support of financial literacy, the JSE runs the annual JSE Investment Challenge. This event aims to make the stock market accessible to all learners between grades 8 and 12 and university students. Teams are given an imaginary sum of R1 000  000 to invest in JSE-listed instruments. The performance of their investment portfolios is tracked and measured against other teams taking part in the challenge. The initiative creates a risk-free learning environment that opens up the world of investing to learners. Each year the Investment Challenge attracts more than 20 000 participants culminating in a prize-giving event at the JSE.

Literacy is, however, only one piece of the puzzle. We also need to develop affordable, easily accessible products that meet different investment needs. Technology has an important role to play here, by both reducing the costs of accessing investment opportunities (as we’ve already seen through the advent of online trading solutions) and by enabling the creation of different types of investment products, such as exchange-traded funds or fractional shares.

Technology also enables us to promote greater awareness and understanding of markets and investment opportunities. Technology is a powerful democratising force, because it unlocks access for the mass market to invest their savings.

On the journey towards democratising market access, the JSE will also aim to learn from other emerging market exchanges. Thailand, for example, has an extensive retail investor base who account for nearly 60% of the value traded on the exchange. In support of retail investors, the exchange has invested significantly in expanding market access through both digital and physical means. The exchange is also committed to improving financial literacy and has a dedicated education initiative to support this.

Another area of future focus for the JSE is supporting small and medium enterprises. According to the International Finance Corporation, the small and medium enterprises (SME) sector employs 50% to 60% of South Africa’s workforce and contributes 34% of South Africa’s gross domestic product.

The JSE’s Alt-X market was established in 2003 with the specific objective of enhancing SME access to capital. Since its inception, companies listed on the market have raised nearly R65-billion. Over that same period, 30% of companies listed on Alt-X have graduated to the JSE’s main board, making it — by this measure — one of the most successful SME boards in the world.

We believe, however, there is more that can be done. Our strategy may take the form of a new board or the creation of dedicated instruments. Our strategy will almost certainly involve working with partners.

Again, there are lessons to be learnt from others. For example, the Casablanca Stock Exchange partnered with the London Stock Exchange in 2016 to launch the Elite SMME (small, medium and micro enterprises) Programme in Morocco, with 84 companies admitted. Companies that are accepted to participate are able to access training and support and a network of investors and advisers, as well as other Elite companies around the world.

We will aim to apply innovative thinking similar to the Casablanca case study in South Africa. We will also continue to work with our fellow African exchanges on this topic. The JSE currently leads the African Securities Exchange Association (Asea) dedicated SME working group, focused on improving the efficacy of SME markets in Africa. This work provides valuable insights into the challenges facing SMEs.

We believe this focus on SMEs will not only contribute positively to the broader economic environment but will create new opportunities for the JSE. Nonetheless, we also recognise that we need to expand the range of products available for investment on the JSE. Building on the JSE’s legacy of leadership in the area of sustainability (the JSE was the first exchange to launch a sustainability index), we will continue to offer new products and services that cater for the growing demand for more sustainable investment options.

The JSE launched a dedicated green bond segment at the end of 2017 (the first of its kind in Africa), and is now exploring introducing products such as blue bonds (funding marine and ocean-based projects) and social bonds.

Our work in this area is not limited to South Africa. In 2019 I was invited to co-chair the United Nation’s Global Investors for Sustainable Development Alliance initiative. This initiative is made up of 30 chief executives of major financial institutions and corporations from all the regions of the world, with the aim of using our convening power and influence to promote sustainable development.

Although the emphasis is on mobilising finance, sustainable investment is also about reorienting our financial system away from short-term profit maximisation to delivering value over the long term; to promoting sustainable social development rather than inequality and exclusion; and sustainable environmental development rather than ongoing environmental degradation. These are universally relevant themes with particular resonance in South Africa.

Finally, to ensure the JSE is able to deliver on these aforementioned (and other) objectives, we have to (re)build trust in the market. The willingness of investors to invest is founded on trust and confidence in our markets. We have already implemented changes to our equity listings requirements and are in the process of revisiting our debt listings requirements, with revised requirements for state-owned enterprises and an enhanced focus on governance.

The JSE is committed to South Africa and to collaborating with public- and private-sector partners to ensure South Africa delivers on its potential. This means ensuring we are the destination of choice for local and international investment, and the listing venue of choice for South African firms and companies operating in Africa.

Economic growth that is not inclusive can never be sustainable. We recognise this and have put the democratisation of finance at the heart of our strategy. By delivering innovative, affordable and accessible products and services that are responsive to the needs of the local economy, and contribute to inclusive and sustainable economic growth, we hope that our next hundred years are as good as our last.