The Sunday Mail
Operators of exchanges in Zimbabwe are working on ways to improve retail participation on capital markets, which for years has been dominated by institutional investors. The Financial Securities Exchange Limited (FINSEC) recently announced plans to introduce derivatives on the market as a way of increasing products on the capital markets and boost retail participation. Our business reporter Enacy Mapakame (EM) had a chat with FINSEC general manager Garikayi Munema (GM) on the new product and below are excerpts of the conversation.
EM: What are derivatives and how do they work?
GM: Derivatives are financial instruments whose value is actually derived from an underlying security or asset. This could be a commodity, currency or some shares. So when you talk of a derivative you talk of an instrument that is created, but it derives its value from another asset.
An example is maybe I could create a financial asset that is listed and traded on a security’s exchange, but that asset derives its value from a commodity like gold or oil.
EM: What are the common types of derivatives?
GM: Most markets have futures and options and this is what we are looking at for Zimbabwe. Being something new that we are introducing into the market, obviously we don’t want to start by bringing in too much complexity, so we want to start simple, get people to understand and appreciate.
EM: You said derivatives derive value from other assets. Which particular assets are you considering?
GM: We want to start with equities that is securities listed on the Zimbabwe Stock exchange (ZSE). But later on we may introduce equities listed outside the country, so you can have an instrument that is listed in Zimbabwe but tracking the performance of shares listed in Johannesburg or in London. That’s what derivatives are all about. It can even extend to agricultural commodities like wheat, mhunga or sorghum as long as that underlying commodity is something that’s tangible and has value.
EM: What are the timelines?
GM: We intend to start off by market capacitation through training, working with the Harare Institute of Technology (HIT). The idea here is to combine the theory that is taught in the classroom and practice you find on capital markets. We are targeting students so they can now take the theory into practice. We also have capital markets participants that is brokers, fund managers, investment analysts, these are the people that will be doing the actual trading. Investors are key, they need to know about the new products on the market. As an exchange, we will provide the system and platform and people will actually do the practical trading. But before they do that we want HIT lecturers to come in and provide the theoretical lessons to people. We have tried to break down the training into some modules, starting with the introduction then how derivatives are issued, traded as well as how to get value out of such an investment because you obviously want to trade for a profit.
EM: How conducive is the prevailing economic environment for the introduction of new products such as derivatives?
GM: I think this is the time to actually bring in all the good ideas that we have for two reasons. One, the legal or the regulatory framework in this country is very supportive of innovation so we need to take advantage of that for new ideas and new products.
Secondly, I personally believe that the environment is actually right, all indications are pointing to an economy that is stabilising. Inflation is going down, the currency has stabilised for quite some time and generally the economic prospects are pointing in the right direction.
So this is the time to bring in new products and make sure Zimbabwean capital markets do not remain behind.
EM: So who exactly is the target market for derivatives, can the ordinary citizen trade or this is for institutional investors?
GM: Everyone. We appreciate that derivatives can be complex, which is why we are bringing the training so people really understand what derivatives are and the risks involved.
Everything will be fully automated to enhance transparency and convenience so that before trading you know all the necessary information such as prices or volumes.
EM: And what are the major risks with derivatives?
GM: The major risk is limited understanding of the mechanics of how the derivatives trading happens, for instance, the valuation or when to buy or sell. Like any other securities there are risks involved and we want anyone who participates in derivatives training to have at least some basic understanding, which is the purpose of the training that we want to do.
EM: Given the Zimbabwe setup where financial inclusion in capital market is around 1 percent, do you think a new product of this nature will attract much attention from the market or it will be the same 1 percent participating?
GM: People know about capital markets but their participation is limited and we have tried to address that firstly by bringing in CTrade. Statistics show there has been a lot of retail and first time traders on the equities market using CTrade. Now riding on that euphoria created by CTrade, let’s bring in more innovative products. Recently there was introduction of ETFs. The technology is there, the regulatory support is there, what is left is for us operators of exchanges to bring in new products.
EM: Where do you see opportunities in terms of capital markets in Zimbabwe?
GM: I think the opportunities really emanate from the growth in technology and new innovations. Technology helps to bring in new products, it boosts product uptake because of the convenience, you can trade from the comfort of you home or office and that is what people want. Also, technology brings in information. As long as both investors and new products are coming, then the market will grow.
