Stock Exchange: Reformation for growth

THE regulatory and tax frameworks governing the Dar es Salaam Stock Exchange (DSE) form the backbone of Tanzania’s capital market infrastructure.

At the core of this system lies the Capital Markets and Securities Act (CMSA), which establishes the Capital Markets and Securities Authority (CMSA) as the principal regulator.

This Act provides a legal framework for licensing, enforcement, and investor protection, ensuring a transparent and secure investment environment.

According to Mr Beatus Mlingi, a Research Analytics Manager from Vertex International Securities, the CMSA has been instrumental in fostering trust and stability, as reflected in the DSE’s growth in local market capitalisation, which reached 16.834tri/- (6.3 billion US dollars) by mid2024.

However, the Act’s stringent compliance requirements present significant challenges, particularly for small and medium-sized enterprises (SMEs), which often face high costs and administrative burdens.

This dynamic underscore the need for a more inclusive approach to encourage broader participation.

Dr Hildebrand Shayo, an economist-cum-investment banker said on top of that SMEs, especially newly established ones, often need more credit history and financial information, which lenders require to assess their creditworthiness and risk profile.

“Many formal financial institutions, such as commercial banks, impose strict collateral requirements that are difficult for SMEs to meet, particularly those in the informal sector or with limited assets,” Dr Shayo said.

Regulatory frameworks

Building on the CMSA, an official from Dar es Salaam Stock Exchange highlighted that the DSE Rules of 2022 provide a robust operational framework.

These rules define listing requirements, trading procedures, and disclosure obligations, fostering transparency and standardisation among market participants. By mandating high corporate governance standards, they enhance investor confidence and ensure market integrity.

Despite their strengths, analysis reveals that the rigidity of these rules often poses significant challenges for smaller businesses.

The ntricate and time-intensive listing procedures, for example, deter many potential entrants, thereby restricting the market’s diversity and dynamism.

Addressing these barriers through streamlined procedures and tailored support for SMEs could significantly expand the exchange’s reach. Foreign investment is another critical aspect of the DSE, regulated by Tanzania’s foreign investor policies.

These policies balance the need to attract foreign capital with protecting national interests, particularly in strategic sectors. Currently, foreign investors account for a substantial portion of the DSE’s market capitalisation, contributing to liquidity and market depth.

However, restrictions on foreign ownership in certain industries may deter large-scale investments, reducing the market’s competitiveness compared to regional exchanges with more liberal policies.

Revisiting these restrictions, while maintaining safeguards for key sectors, could unlock greater capital inflows and stimulate economic growth.

Tax policies

Complementing the regulatory framework, Tanzania’s tax policies provide incentives to encourage participation in the DSE. The corporate tax incentive, which reduces the tax rate to 25 per cent for newly listed companies for three years, is a notable example. This provision has been effective in encouraging companies to list, driving a 15 per cent annual increase in operational capacity for beneficiaries. However, its short duration limits its potential for longterm impact.

Similarly, the withholding tax on dividends for listed companies is reduced to 5.0 per cent, compared to 10 per cent for unlisted entities. This policy enhances the attractiveness of listed firms, driving higher liquidity and participation.

Yet, the disparity in tax treatment creates competitive imbalances, potentially disincentivising unlisted companies from pursuing public listings.

Furthermore, the reduced tax rate results in foregone government revenue, presenting a challenge to balancing market growth with fiscal sustainability.

The capital gains tax exemption on listed securities is another pivotal incentive, encouraging investment and trading activity on the DSE. By exempting listed securities from the 10 per cent capital gains tax applicable to unlisted securities, this policy drives market liquidity and attracts long-term investors.

However, it may also encourage speculative trading, increasing market volatility.

Additionally, the higher tax burden on unlisted securities creates equity concerns, potentially deterring investment in other segments of the market. Lastly, the stamp duty exemption on transactions involving listed securities reduces trading costs, making the DSE more accessible to retail investors.

This exemption has been a significant factor in the recent 20 per cent growth in retail investor participation, improving liquidity and market activity.

However, the policy’s narrow application results in lost revenue and competitive disadvantages for unlisted securities.

Tax-based recommendations

Tax policy reforms are fundamental to fostering inclusivity and competitiveness in Tanzania’s capital markets.

Currently, corporate tax incentives for newly listed companies offer a reduced rate of 25 per cent for three years, which has encouraged some growth but lacks the longevity needed to sustain impact.

Singapore’s success with tax reforms provides an exemplary model: newly listed firms enjoy tax exemptions for up to five years, alongside financial grants covering up to 70 per cent of listing costs.

These policies contributed to a 40 per cent increase in new listings over a decade, creating a vibrant and diversified market.

By extending Tanzania’s corporate tax incentive to five years and introducing subsidies for SMEs covering 50 per cent of listing costs, the DSE could attract 15 additional listings annually, potentially increasing market capitalisation by 2.0tri/- (800 million US dollars) by 2030.

Such reforms would not only reduce entry barriers for smaller firms but also enhance the exchange’s diversity and depth. Mr Mlingi said high transaction costs, including brokerage fees, disproportionately impact retail investors, making trading less accessible.

“Reducing these costs or offering tax incentives for retail investors, akin to tax-free accounts or deductions in other markets, could expand participation, increase trading volumes, and foster a robust investment culture,” Mr Mlingi said.

According to a tax consultant from one of Tanzania’s top four audit firms, revising withholding tax policies could significantly boost market participation.

Currently, listed companies benefit from a 5.0 per cent withholding tax on dividends, compared to 10 per cent for unlisted entities, creating a disparity that may discourage unlisted firms from formalising.

Drawing from the Nairobi Securities Exchange (NSE) model, which uses tiered withholding taxes to reward unlisted companies meeting compliance and reinvestment benchmarks with reduced rates, Tanzania could implement similar reforms.

Such a move could encourage 20 per cent of eligible unlisted firms to formalise or list on the DSE within five years, potentially increasing annual trading volumes by 500bn/- (200 million US dollars) by 2030.

Equally, extending reduced withholding tax rates to shareholder returns, such as bond interest and share buybacks, would align Tanzania’s tax framework with international standards and attract a more diverse investor base.

The capital gains tax exemption for listed securities has successfully spurred trading activity in the DSE but creates a disparity with the 10 per cent tax applied to unlisted securities.

This imbalance discourages investment in private markets, particularly SMEs. South Africa’s balanced approach offers valuable insights: listed securities are taxed at a minimal 3.0 per cent, reducing speculative trading while maintaining investor confidence.

Tanzania could adopt a similar system, generating 1.0tri/- (400 million US dollars) annually in dditional revenue while fostering long-term investments.

A senior tax advisor, who claimed anonymity, said introducing a tiered capital gains tax system or providing exemptions for reinvested gains could drive higher trading volumes and improve market liquidity.

“Additionally, establishing tax-free accounts, similar to the UK’s Individual Savings Accounts (ISAs), would encourage longterm participation in the stock market, helping retail investors build wealth while bolstering market stability,” she said, “When paired with incentives for holding securities over extended periods, as demonstrated by India’s long-term capital gains exemptions, these reforms could reduce speculative trading, stabilize the market, and strengthen overall resilience,” she added.

Complementing these reforms, adjustments to stamp duty policies could address inequities and fiscal constraints. Currently, listed securities enjoy exemptions, but unlisted securities face stamp duty requirements, disadvantaging smaller issuers like SMEs.

Nigeria’s dual approach, which imposes a nominal 0.1 per cent duty on listed securities and provides partial exemptions for unlisted securities in strategic sectors, has increased participation while recovering lost revenue.

Regulation-based recommendations

A financial market specialist commented that regulatory reforms are essential for fostering market participation.

Establishing an SME-focused board within the DSE, modeled after India’s Bombay Stock Exchange (BSE) SME platform, could greatly enhance access for smaller firms.

Since its launch in 2012, the BSE SME platform has enabled over 400 SMEs to raise a combined 4.6 billion US dollars, driving growth and visibility.

“Tanzania could achieve similar success by targeting at least 50 SME listings by 2030.

Tailored listing requirements, capacitybuilding initiatives, and subsidies for listing costs would reduce entry barriers, while active engagement from institutional investors would ensure liquidity, potentially boosting daily trading volumes by 20 per cent within the next five years,” the market specialist said.

Governance and compliance improvements are also necessary for enhancing investor confidence.

Singapore’s Monetary Authority provides an effective example through its use of real-time digital compliance monitoring and automated enforcement systems. Introducing similar tools in Tanzania would streamline oversight, improving compliance rates among listed companies to 95 per cent within three years.

Additionally, governance training programmes for SMEs and listed firms could raise the number of companies meeting listing standards, fostering a 20 per cent rise in SME participation by 2030.

Such measures would enhance transparency and trust, vital for attracting long-term institutional investors.

Development-oriented recommendations

Tanzania’s capital markets must align with national development goals to maximise their impact.

Relaxing foreign ownership restrictions in non-strategic sectors, as demonstrated by Kenya’s Nairobi Securities Exchange (NSE), can attract substantial foreign investment.

Kenya’s foreign investors now account for 51 per cent of trading activity, contributing 1.1billion US dollars annually.

By revising ownership caps in Tanzania, foreign investor participation could rise from the current 40 per cent to 55 per cent by 2030, bringing an estimated 500 million US dollars in additional annual inflows.

Clear regulatory guidelines and guarantees against policy reversals would further bolster investor confidence, ensuring a stable and transparent environment.

“Innovative financial instruments like exchange-traded funds (ETFs) have the potential to drive diversification and growth in Tanzania’s financial markets,” a capital markets analyst stated.

The US provides a compelling example, with ETFs evolving into a 6 trillion US dollars market, accounting for 30 per cent of market activity.

Tanzania could replicate this success by introducing ETFs focused on regional indices or key sectors such as agriculture and renewable energy, aiming for these instruments to contribute 10 per cent of DSE trading activity by 2030.

He said coupling ETFs with financial literacy programmes, similar to Rwanda’s outreach efforts, could boost retail investor participation by 50 per cent within five years, enhancing market accessibility and engagement.

Technological integration recommendations

Technological advancements have immense transformative potential for Tanzania’s capital markets.

Research highlights how India’s Zerodha revolutionized stock market access through its low-cost, technology-driven platform.

By offering zero brokerage on equity delivery and a flat 20 rupees fee for intraday trades, Zerodha attracted over 6.3 million active clients, accounting for 18.33 per cent of India’s investors in 2022.

This innovative approach not only democratised trading but also significantly boosted retail participation, setting a benchmark for leveraging technology to enhance market inclusivity and accessibility.

Tanzania can replicate this by enhancing “Soko la Hisa Kiganjani” with mobile money integration to improve accessibility, especially in rural areas.

This could double retail participation to 40 per cent of market activity by 2030, driving inclusivity, market growth, and fintech-aligned modernisation in the DSE.

Orbit Securities Portfolio Manager and Head of Research and Investments, Ammi Mwamunyi told the ‘Daily News’ that technological innovations are at the heart of DSE’s strategy for growth.

“Hisa Kiganjani has democratised market access, enabling retail investors to participate more actively in the equity markets. Integration with payment systems like M-PESA, Visa, and Mastercard has further enhanced accessibility, making investing seamless for both domestic users and the diaspora,” he said.

Automation of regulatory processes can further enhance efficiency and attract international investors. South Africa’s Johannesburg Stock Exchange (JSE) employs automated compliance tools to minimise fraud and streamline oversight.

Projections indicate that implementing similar systems in Tanzania could reduce compliance delays by 50 per cent and increase foreign investor activity from 40 per cent to 55 per cent by 2030.

Such advancements would elevate the DSE), positioning it as a technologically advanced and globally competitive market.

Afterword

By integrating tax reforms, regulatory enhancements, development-oriented strategies, and technological advancements, Tanzania can transform the DSE into a dynamic and inclusive financial hub.

Lessons from global success stories, such as India’s SME platform, Singapore’s tax policies, Kenya’s foreign investment strategies, and South Africa’s technological innovations, provide a clear roadmap for actionable reforms.

These measures, tailored to Tanzania’s unique context, will foster market growth, attract diverse investments, and align with national development goals.

Together, they will establish the DSE as a regional leader in capital markets, driving long-term economic prosperity and sustainable development.Top of Form