Ground-breaker

Japheth Katto is proud of how far Uganda’s capital markets have come since the Capital Markets Authority Act was introduced in 1996. He tells Colette Steckel about the role he has played in driving Uganda’s economic development

Japheth Katto, the charismatic chief executive of the Uganda Capital Markets Authority (CMA), vigorously shakes his head when asked whether he considers himself a pioneer in nurturing Uganda’s emerging capital markets. He is far too modest to acknowledge such an accolade. But he does concede that he has played his own small part in, what he calls, “demystifying this concept of owning shares” in a country that, a decade ago, didn’t have a stock exchange.

He points to the widening gulf between the investment decisions of an older generation that valued property and a younger generation that has an altogether different take on how to invest their future earnings. “Our parents have always known that the safest way to invest in Uganda was to own a house, land, a few cows, things you can see and touch. But, today, we’re seeing a younger generation that is more aware of investment trends. They watch CNN and BBC, they have some idea about trading shares, and they’re asking questions. Today’s youth are more likely to welcome and embrace the capital markets in Uganda because they are without fixed ideas about how to invest.”

Seizing this new-found interest in capital markets, Katto and his team of 18 at the CMA, with the support of the British Council, GTZ/Sida FSD Programme, and local and corporate sponsors, have been introducing a successful public education programme that includes an annual secondary schools challenge. Last year’s challenge, which saw 35 schools participate in the competition, is pitched at advanced level pupils who are eager to learn about finance and, more importantly, are likely to become Uganda’s future investors and private sector practitioners. “We at the Capital Markets Authority firmly believe, like any parent, that the youth are our future,” explains Katto. “We need to offer these youngsters a strong foundation and the tools to be better savers and investors in comparison to ourselves.”

The success of the programme, which is being rolled out to schools upcountry, led to the launch, in March this year, of the first ever Capital Markets University Challenge. Students from eight universities were invited to submit an essay on a capital markets related topic, with the best candidates selected to present a case study on how a retiree with a large family of six children and two wives might invest his pension of UShs.55m. Prizes for the winner included a three-day study tour of the Financial Services Board of South Africa, the Johannesburg Stock Exchange and several other South African industry players, a cash sum to invest on the Uganda Securities Exchange, and an internship at one of Uganda’s licensed fund managers and at CMA. The event itself garnered plenty of press interest as well as praise from parents, lecturers and the general public. “When a concept is new, there is bound to be scepticism and mistrust. The capital markets in Uganda didn’t exist until 1996 when the Capital Markets Authority Act was introduced, so the whole issue of confidence building is crucial to the economic development of the country,” says Katto.

To date, eight companies (with a market capitalisation of UShs.4,145bn as at May 2006) are listed on the Uganda Securities Exchange, which was approved in 1997 by the CMA as the country’s only stock exchange. Five of the companies are local listings, most of which arose through the Ugandan Government’s privatisation initiative begun in the 1990s. Katto points out that the initiative green-lighted Uganda’s capital markets and generated intense interest among investors. Indeed, shares in the privatised companies, which included British American Tobacco and Uganda Clays, were oversubscribed. But the real challenge, according to Katto, is convincing the myriad family-owned companies to list.

Through the Government’s drive to provide the necessary legal policies and physical infrastructure for private investment to develop in Uganda, family-owned businesses are flourishing but Katto notes a reluctance for owners to raise capital through the capital markets. “A lot of work is being done to convince the private sector that there is an opportunity in Uganda to raise capital, but the trade-off is providing information about a company’s performance and that’s not easy, particularly when you have a large predominance of family-owned companies which would rather keep that information to themselves. We’re urging them that transparency and good accounting practice aren’t harmful to business.”

A more positive development are the recent cross-listings of three companies on the Uganda Securities Exchange, the latest - the Kenyan-based Jubilee Holdings - in February 2006. The cross-listings are the result of progress made under the East African Community (comprising Kenya, Tanzania and Uganda) towards regional integration and economic co-operation. Katto stresses that the partnerships between Uganda and its neighbours have not only assisted in the growth of Uganda’s capital markets but also in regulating the industry. “We’ve received a lot of support from around the world. We’ve sent our people to training programmes in the UK and US, and have looked to our counterparts in South Africa and Malaysia for guidance on procedures. Within the region, we sought advice from the Nairobi Stock Exchange, which was established in 1954, and were assisted a great deal by Kenya’s Capital Markets Authority and the Commonwealth Secretariat in developing the regulatory framework for the capital markets.”

Now that the regulatory framework is in place, Katto wants to upgrade Uganda’s laws so that they are in compliance with the International Organization of Securities Commissions (IOSCO) standards. Working with IOSCO (where he has served as vice chairman of IOSCO Africa/Middle East Regional Committee since 2002) and the World Bank-funded First Initiative, Uganda, along with Kenya and Tanzania, are undergoing a fundamental compliance review of their laws. Explains Katto: “Uganda is a fully liberalised economy. We want to attract foreign investment to our country, which means raising our standards to international levels. By undergoing the review, we can spot our weaknesses and see what we need to do to improve our standards. And if we can’t comply, we need to disclose. I passionately believe that you have to benchmark yourself against international standards.”

Katto says that his deep interest and understanding of international standards and compliance stem from his ACCA studies, which he undertook in the UK, and his 15-year career in regulation and compliance at the UK’s Department of Trade and Industry (DTI) and the Financial Services Authority (FSA). He moved to the UK in 1980 after a short stint working in the audit department of the former East African Community (EAC) (which ceased in 1977 and was resurrected in 1999) in Kenya. He was singled out by the EAC while studying a Bachelor of Commerce degree in Uganda, but chose to stay in Kenya when the EAC collapsed rather than return to Uganda, which, at that time, was in the throes of civil war and economic catastrophe under the tumultuous reign of Idi Amin. Katto returned to Uganda after the fall of Amin and his subsequent employer, the national post and communications corporation, sponsored his ACCA study in the UK. Funding was withdrawn shortly after Katto’s arrival in London, but, by then, because of continued instability at home, he was fixed on staying in the UK and developing his career once he qualified in 1981. Katto’s nine-year tenure with the DTI coincided with Britain’s recession, while his move to the FSA (formerly the Investment Management Regulatory Organisation, IMRO) in 1990 came at the time of deregulation of the financial markets - the “big bang” - which revolutionised the financial services industry in the UK. Both the DTI and the FSA gave Katto exposure to the workings of the investigations, compliance and enforcement divisions of the financial services industry, which has put him in good stead for his role as chief executive at the CMA. “I look at it like this: all that knowledge and experience in the UK was really preparation for my role at the Capital Markets Authority,” says Katto.

Encouraged by his peers in Uganda, as well as the UK, Katto applied for the post of CEO and returned to his home country in 1998. “I was happy with my role at the FSA but here was an opportunity to contribute in a very small way to the establishment of Uganda’s capital markets, which, at that time, was a totally new aspect of economic development in the country.”

New ground

From the beginnings of a small office (thanks to the Bank of Uganda) and a staff of two (a secretary and office assistant), the CMA has grown in size and stature. “We’re working in a dynamic and innovative environment, where everything we do is breaking new ground in Uganda,” enthuses Katto. Key projects the CMA is working on are professional standards for investment advisers and brokers (of which there are currently 20 licensed firms in the country) and pensions reform. The latter, notes Katto, is essential for the growth of long-term funding, which in turn will strengthen the capital markets. His words are echoed by Simon Rutega, CEO of the Uganda Securities Exchange (USE), who was quoted in a press report in June that, with prudent pension reform, Uganda can depend upon the USE for most of its domestic capital requirements.

Still, the securing of long-term finance is proving problematic. Katto laments the deficiency but counters that, in June this year, the Standard Chartered Bank of Uganda listed a 10-year bond to raise UShs.23bn on the USE Fixed Income Securities Market Segment - the third company to issue long-term bonds. The news heralds the beginnings of a move away from cash in favour of financial instruments, which, if it continues, will bode well for capital markets.

Reflecting on a decade of the Capital Markets Act in Uganda, Katto notes that there have been “great strides” in the development of the country’s and East African region’s capital markets. But he acknowledges that there is a lot of work ahead. He reels off a list of things he wants to “get straight”, like dispensing with paper share certificates and introducing electronic trading, but he is justifiably proud of just how far Uganda’s capital markets have come, considering their humble beginnings. “Put it this way: the Uganda Securities Exchange is never going to be the LSE or the NYSE, but the point is that it will contribute to Uganda’s economic development. We need to create opportunities for wealth creation, for companies to grow, raise money and employ people, and for they in turn to earn salaries, save and be better off. If Uganda and East Africa can generate its own domestic long-term savings, then that will reduce our dependence on foreign donors. Capital markets can make a significant contribution to that end-game.”