Print Article1.Introduction
At present, most African stock exchanges operate as mutual companies. Mutual funds were once the most important vehicles of investment. For instance, in the United States, ownership of stock, bond and money market mutual funds rose from 6 percent of the US households in 1980 to 37 percent in 1996 while the total assets held by mutual funds soared by 2,100 percent from $135 billion to $3.5 trillion at the end of 1996 (Alexander G. et al. 1998). The basic characteristics of a mutual company are that the company does not have shareholders and share capital. The mutual company is a company owned and managed by the members.
However, since recently due to globalization, competition and advances in technology of trading securities, stock exchanges have been involved in the process of demutualisation. Demutualisation is a process by which a mutual company changes to a company with shareholders and share capital. In other words, it is a process of change from a member-owned and managed to a for-profit, shareholder-owned corporation. During this process stock exchanges streamline governance issues relating to ownership and management, improve and expedite decision-making, and raise new capital. In sum, demutualization refers to the entire process of changing the legal structure of a stock exchange from a mutual association, with one-vote per member and usually consensus based decision-making to a company limited by shares, with one-vote per share and with majority decision-making (Onyuma, 2006).
Akpesey (2008) argues that mutually owned exchanges have served their purposes, and markets are increasingly recognising that a trading infrastructure, as well as modern corporate and governance structure, is essential to reducing transaction costs, attracting the funds of investors, and attracting new firms to raise their capital requirements. Accordingly, globally, stock exchanges have been involved in massive demutualisation exercises particularly since the beginning of the 21st century.
However, changes in the governance structure through demutualisation are not with out challenges. McDowall (2004) argues that while exchange demutualisation may unlock capital and bring attendant benefits in terms of responsiveness to customers, rewarding participants for usage and improved decision making, it does pose challenges in terms of governance, reconciliation and management of a wider range of interests and stakeholders. Thus demutualization is not in itself a long-term panacea. In some instances, the historical mutual structure was considered to be a better business model.
The article is organized as follows: Section 2 presents global trends in exchange demutualization; Section 3 reviews the African experience while section 4 concludes.
2. Global Trends in Exchange Demutualisation
Due to a growing competitive environment, globally stock exchanges are overhauling their corporate governance structures. This involved the demutualization of an increasing number of stock exchanges in EU, United States, Asia and Oceania. This process saw the decline in conventional mutually owned stock exchanges in favour of those non mutually owned and operated. According to Onyuma (2006), between 1999 and 2003, the number of exchanges organized as mutuals fell from 40 to 25 while the sum of those demutualized and publicly listed rose from 10 to 25 in the same period.
Although, the wave of demutualization started after 2000, some stock exchanges felt the need to demutualise earlier. In this regard, the Stockholm Stock Exchange is often cited as the pioneer in this area as it demutualised and restructured its corporate governance in 1993. Several other exchanges in Oceania (ASX), Canada (TSE), Europe (LSE), Asia Pacicifc (HKEs. SGX) and Africa (JSE) followed suit later (Onyuma, 2006).
In Europe. Deutsche Borse demutualised in February 2001 and led the way for the most recent wave of demutualization. It was followed later the same year by Euronext and the London Stock Exchange. Both the Chicago Mercantile Exchange (CME) and the Chicago Stock Exchange (CSX) have also demutualised, in 2002 and 2005 respectively (Delany, 2005).
Delany (2005) further states that there are three reasons advanced by exchanges for demutualisation. Firstly, the desire to be more commercially nimble and respond to market needs more quickly, unimpeded by member committees and their diverse interests. Secondly, demutualisation would give access to the capital markets for fund raising. Thirdly, being publicly quoted would also give exchanges and their management a clearer idea of what exactly they were worth. In addition to these, demutualization has increased competition between exchanges for market share, as investors demand a return on their investment.
However, demutualisation also brings potential problems. One of such problems is the divergence of interest between shareholders and members. What a shareholder wants and what a member wants are not the same thing. The loyalty of the new share holders in the national stock exchange is questionable. Empirical research evidence on the effects of the loyalty of shareholders on the stock return volatility is limited. However, the pressure to maximize return for demutualised funds investors may have contributed to the current global financial turmoil by encouraging business decisions with higher risks. However, further research is needed to provide supporting evidence.
3. Trends of Demutualisation in African Stock Exchanges
In Africa, the Johannesburg stock exchange (JSE) was the first to demutualise. It fully demutualised on July 1, 2005 while the Bond Exchange of South Africa (Besa) demutualised in 2007. Among the other bigger stock exchanges in Africa, the Nigerian Stock Exchanges (NSE) has established a committee to oversee the processes for possible demutualisation while among smaller exchanges, Nairobi Stock Exchange planned to complete demutualisation by the end of this year.
Other stock exchanges, such as Mauritius and the Bourse Régionale des Valeurs Mobilières (BRVM), are limited by shares and, in theory, demutualized. However, there is a significant overlap between licensed stockbrokers and shareholders (Onyuma, 2006).
The demutualization process can improve the competitiveness of African exchanges. Onyuma (2006) argues that the main motives of and expected benefit from demutualization include tapping new sources of capital through initial public offering (IPO) needed to modernize exchange trading systems. Such capital cannot be obtained through mutualized status. In fact, stockbrokers and governments cannot enable a commercial entity to raise such capital from shareholders, as do corporations. In the African context where the market size is limited this could be a serious challenge. Second, demutualization can enable exchanges to pursue business opportunities unconstrained by vested interest of members in the continent. The separation of ownership rights from trading rights will enable African exchanges to increase investor participation better than they currently do.
Moreover, demutualization would allow African exchanges to achieve better operational cost control, and to increase flexibility, efficiency and competitiveness through reviewing their commercial strategy. Such exchanges elsewhere have achieved consolidation in their domestic markets by merging the derivatives and cash segments or by including trading, clearing and settlement services under one roof to create economies of scale and scope (Onyuma, 2006).
Furthermore, demutualization is expected to reduce governance problems in mutualised exchanges by opening up trading rights, admitting new trading partners, and broadening ownership to allow the public to invest in exchanges. The absence of these in mutualised exchanges tends to breed poor governance structures. Because traders and brokers in mutualised exchanges enjoy monopoly power through exclusive rights and access to trading systems, their vested interests are protected. Demutualization induces better corporate governance systems because decision making is based on ownership structure and not on trades intermediation (Yartey, 2007).
However, challenges of demutualisation of African exchanges are still great. Among others, these include,. high costs associated with an exchange IPO, incomplete market liberalization, the need for exchange financial sustainability, conflict of interests, low liquidity, market size, underdeveloped infrastructure.
4. Conclusion
Mutual funds were once important vehicles for investment in stock, bonds and other securities. However, increased globalization, competitive pressure and technological advances in securities exchanges have forced stock exchanges world wide to overhaul their governance structures through demutualization.
The wave of demutualisation which began in early 2000s has engulfed stock exchanges in Europe, North America, Oceania and Asia pacific. The major stock exchange in Africa, JSE and Besa have also demutualised.
The basic arguments in favour of demutualisation are the ability to raise new capital, pursue business interests with out being constrained by the diverse interests of mutual fund members, increased flexibility, reduced operational costs, improved efficiency, and competitiveness and improved governance structure.
However, in the African context, the expected benefits from demutualisation can easily be offset by, among others, high costs associated with an exchange IPO, incomplete market liberalization, the need for exchange financial sustainability, conflict of interests, low liquidity, market size and underdeveloped infrastructure. Most African stocks are still infants. Therefore, demutualisation would be more useful after African stock markets have improved liquidity, fully liberalised the markets, strengthened cooperation and improve other infrastructure.
References
Akpesey, P. 2008. Publicly Owned Stock Exchanges - Prospects and Challenges: http://www.modernghana.com/news/169336/1/publicly-owned-stock-exchanges-prospects-and-chall.html (Retrieved on 16/09/2008)
Alexander G, Jones, J. and Nigro, P, 1998. Mutual Fund Shareholders: Characteristics, Investor Knowledge and Sources of information, Financial Services Review, Vol 7. Issue 4: 301-316.
Delany, G. 2005. Recent trends in the exchange landscape, (http://www.exchange-handbook.co.uk/index.cfm?section=articles&action=detail&id=54128 (Retrieved on 05/10/2008).
Yartey,C. 2007, African Stock Markets Join Global Boom.http://www.imf.org/external/pubs/ft/survey/so/2007/car1012a.htm, (Retrieved on 04/10/2008)
McDowall, B. 2004. IBC's 8th World Stock Exchange conference: Unity in diversity?
http://www.it-director.com/business/content.php?cid=7486, Retrieved on 05/10/2008)
Onyuma S. 2006. Demutualization of Stock Exchanges in Africa: Prospects and Problems, OSSREA Bulletin, VOL III, NO 3.
At present, most African stock exchanges operate as mutual companies. Mutual funds were once the most important vehicles of investment. For instance, in the United States, ownership of stock, bond and money market mutual funds rose from 6 percent of the US households in 1980 to 37 percent in 1996 while the total assets held by mutual funds soared by 2,100 percent from $135 billion to $3.5 trillion at the end of 1996 (Alexander G. et al. 1998). The basic characteristics of a mutual company are that the company does not have shareholders and share capital. The mutual company is a company owned and managed by the members.
However, since recently due to globalization, competition and advances in technology of trading securities, stock exchanges have been involved in the process of demutualisation. Demutualisation is a process by which a mutual company changes to a company with shareholders and share capital. In other words, it is a process of change from a member-owned and managed to a for-profit, shareholder-owned corporation. During this process stock exchanges streamline governance issues relating to ownership and management, improve and expedite decision-making, and raise new capital. In sum, demutualization refers to the entire process of changing the legal structure of a stock exchange from a mutual association, with one-vote per member and usually consensus based decision-making to a company limited by shares, with one-vote per share and with majority decision-making (Onyuma, 2006).
Akpesey (2008) argues that mutually owned exchanges have served their purposes, and markets are increasingly recognising that a trading infrastructure, as well as modern corporate and governance structure, is essential to reducing transaction costs, attracting the funds of investors, and attracting new firms to raise their capital requirements. Accordingly, globally, stock exchanges have been involved in massive demutualisation exercises particularly since the beginning of the 21st century.
However, changes in the governance structure through demutualisation are not with out challenges. McDowall (2004) argues that while exchange demutualisation may unlock capital and bring attendant benefits in terms of responsiveness to customers, rewarding participants for usage and improved decision making, it does pose challenges in terms of governance, reconciliation and management of a wider range of interests and stakeholders. Thus demutualization is not in itself a long-term panacea. In some instances, the historical mutual structure was considered to be a better business model.
The article is organized as follows: Section 2 presents global trends in exchange demutualization; Section 3 reviews the African experience while section 4 concludes.
2. Global Trends in Exchange Demutualisation
Due to a growing competitive environment, globally stock exchanges are overhauling their corporate governance structures. This involved the demutualization of an increasing number of stock exchanges in EU, United States, Asia and Oceania. This process saw the decline in conventional mutually owned stock exchanges in favour of those non mutually owned and operated. According to Onyuma (2006), between 1999 and 2003, the number of exchanges organized as mutuals fell from 40 to 25 while the sum of those demutualized and publicly listed rose from 10 to 25 in the same period.
Although, the wave of demutualization started after 2000, some stock exchanges felt the need to demutualise earlier. In this regard, the Stockholm Stock Exchange is often cited as the pioneer in this area as it demutualised and restructured its corporate governance in 1993. Several other exchanges in Oceania (ASX), Canada (TSE), Europe (LSE), Asia Pacicifc (HKEs. SGX) and Africa (JSE) followed suit later (Onyuma, 2006).
In Europe. Deutsche Borse demutualised in February 2001 and led the way for the most recent wave of demutualization. It was followed later the same year by Euronext and the London Stock Exchange. Both the Chicago Mercantile Exchange (CME) and the Chicago Stock Exchange (CSX) have also demutualised, in 2002 and 2005 respectively (Delany, 2005).
Delany (2005) further states that there are three reasons advanced by exchanges for demutualisation. Firstly, the desire to be more commercially nimble and respond to market needs more quickly, unimpeded by member committees and their diverse interests. Secondly, demutualisation would give access to the capital markets for fund raising. Thirdly, being publicly quoted would also give exchanges and their management a clearer idea of what exactly they were worth. In addition to these, demutualization has increased competition between exchanges for market share, as investors demand a return on their investment.
However, demutualisation also brings potential problems. One of such problems is the divergence of interest between shareholders and members. What a shareholder wants and what a member wants are not the same thing. The loyalty of the new share holders in the national stock exchange is questionable. Empirical research evidence on the effects of the loyalty of shareholders on the stock return volatility is limited. However, the pressure to maximize return for demutualised funds investors may have contributed to the current global financial turmoil by encouraging business decisions with higher risks. However, further research is needed to provide supporting evidence.
3. Trends of Demutualisation in African Stock Exchanges
In Africa, the Johannesburg stock exchange (JSE) was the first to demutualise. It fully demutualised on July 1, 2005 while the Bond Exchange of South Africa (Besa) demutualised in 2007. Among the other bigger stock exchanges in Africa, the Nigerian Stock Exchanges (NSE) has established a committee to oversee the processes for possible demutualisation while among smaller exchanges, Nairobi Stock Exchange planned to complete demutualisation by the end of this year.
Other stock exchanges, such as Mauritius and the Bourse Régionale des Valeurs Mobilières (BRVM), are limited by shares and, in theory, demutualized. However, there is a significant overlap between licensed stockbrokers and shareholders (Onyuma, 2006).
The demutualization process can improve the competitiveness of African exchanges. Onyuma (2006) argues that the main motives of and expected benefit from demutualization include tapping new sources of capital through initial public offering (IPO) needed to modernize exchange trading systems. Such capital cannot be obtained through mutualized status. In fact, stockbrokers and governments cannot enable a commercial entity to raise such capital from shareholders, as do corporations. In the African context where the market size is limited this could be a serious challenge. Second, demutualization can enable exchanges to pursue business opportunities unconstrained by vested interest of members in the continent. The separation of ownership rights from trading rights will enable African exchanges to increase investor participation better than they currently do.
Moreover, demutualization would allow African exchanges to achieve better operational cost control, and to increase flexibility, efficiency and competitiveness through reviewing their commercial strategy. Such exchanges elsewhere have achieved consolidation in their domestic markets by merging the derivatives and cash segments or by including trading, clearing and settlement services under one roof to create economies of scale and scope (Onyuma, 2006).
Furthermore, demutualization is expected to reduce governance problems in mutualised exchanges by opening up trading rights, admitting new trading partners, and broadening ownership to allow the public to invest in exchanges. The absence of these in mutualised exchanges tends to breed poor governance structures. Because traders and brokers in mutualised exchanges enjoy monopoly power through exclusive rights and access to trading systems, their vested interests are protected. Demutualization induces better corporate governance systems because decision making is based on ownership structure and not on trades intermediation (Yartey, 2007).
However, challenges of demutualisation of African exchanges are still great. Among others, these include,. high costs associated with an exchange IPO, incomplete market liberalization, the need for exchange financial sustainability, conflict of interests, low liquidity, market size, underdeveloped infrastructure.
4. Conclusion
Mutual funds were once important vehicles for investment in stock, bonds and other securities. However, increased globalization, competitive pressure and technological advances in securities exchanges have forced stock exchanges world wide to overhaul their governance structures through demutualization.
The wave of demutualisation which began in early 2000s has engulfed stock exchanges in Europe, North America, Oceania and Asia pacific. The major stock exchange in Africa, JSE and Besa have also demutualised.
The basic arguments in favour of demutualisation are the ability to raise new capital, pursue business interests with out being constrained by the diverse interests of mutual fund members, increased flexibility, reduced operational costs, improved efficiency, and competitiveness and improved governance structure.
However, in the African context, the expected benefits from demutualisation can easily be offset by, among others, high costs associated with an exchange IPO, incomplete market liberalization, the need for exchange financial sustainability, conflict of interests, low liquidity, market size and underdeveloped infrastructure. Most African stocks are still infants. Therefore, demutualisation would be more useful after African stock markets have improved liquidity, fully liberalised the markets, strengthened cooperation and improve other infrastructure.
References
Akpesey, P. 2008. Publicly Owned Stock Exchanges - Prospects and Challenges: http://www.modernghana.com/news/169336/1/publicly-owned-stock-exchanges-prospects-and-chall.html (Retrieved on 16/09/2008)
Alexander G, Jones, J. and Nigro, P, 1998. Mutual Fund Shareholders: Characteristics, Investor Knowledge and Sources of information, Financial Services Review, Vol 7. Issue 4: 301-316.
Delany, G. 2005. Recent trends in the exchange landscape, (http://www.exchange-handbook.co.uk/index.cfm?section=articles&action=detail&id=54128 (Retrieved on 05/10/2008).
Yartey,C. 2007, African Stock Markets Join Global Boom.http://www.imf.org/external/pubs/ft/survey/so/2007/car1012a.htm, (Retrieved on 04/10/2008)
McDowall, B. 2004. IBC's 8th World Stock Exchange conference: Unity in diversity?
http://www.it-director.com/business/content.php?cid=7486, Retrieved on 05/10/2008)
Onyuma S. 2006. Demutualization of Stock Exchanges in Africa: Prospects and Problems, OSSREA Bulletin, VOL III, NO 3.
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