UNIVERSITY OF ZIMBABWE FACULTY OF COMMERCE DEPARTMENT OF BUSINESS STUDIES

EVALUATION OF THE ROLES AND EFFECTIVENESS OF THE ZIMBABWE STOCK EXCHANGE (ZSE)

COMPILED BY: JAMES VASHIRI R101557A

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR BUSINESS STUDIES HONORS DEGREE IN MARKETING-HBBS 4 (MARKETING) BY THE UNIVERSITY OF ZIMBABWE

SUPERVISOR: MR. JD NHAVIRA

HARARE, ZIMBABWE

2013

Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE)

Dedications I would like to dedicate this research work to my beloved mother, Vinah Mubasa; brothers and sisters, Lovemore, David, Partson, Gibson, Ever and Ester. I appreciate your unconditional love and support. Proverbs 1 V 7 God bless you.

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Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE)

Acknowledgements I would like extend my sincere gratitude and appreciation to the following people for the contributions that they have made to make this research possible: This study could not have been completed without the generous support and contribution of many individuals and institutions. My respect and gratitude will go to Mr. Mutungwazi, my supervisor for his guidance throughout this project. I would like to appreciate the support, commitment, dedication, determination and patience that he demonstrated being my supervisor during my research process. I am also thankful to my lecturers, fellow students and colleagues for their support and ideas. Above all, glory be to God to whom I owe everything.

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Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE)

Abstract This study sought to evaluate the effectiveness of Zimbabwe Stock Exchange in accomplishing its roles in Capital Markets in Zimbabwe, specifically in supporting small business enterprises raising capital. Roles and functions of stock exchanges around the world were explored (literature review) to use as benchmark in appraising our own bourse (ZSE). The research attempted to answer the following question: Does the ZSE adequately support small business enterprises raise capital. The research was motivated by the fact that small to medium enterprises are having difficulties in raising capital through the ZSE despite the fact they are major driver to economic growth constituting % of Zimbabwe GDP. In gathering the necessary information to complete the report both primary data and secondary data were employed. Primary data was gathered by means of the questionnaire and personal interviews. Secondary data was gathered from textbooks, various websites and reports from previous research on the topic. Desk research was useful in building important issues concerning the Zimbabwean capital market (ZSE) and its effectiveness in performing functions of capital markets. Field research was used in in-depth analysis of the problem from experts of the financial market from various financial institutions. Major findings were that the ZSE is not effective with some of the functions of capital markets not even performed. Recommendations on findings included relaxing some regulations that govern the ZSE especially the indigenization Act, adopting codes on corporate governance best practice as part of listing requirements and setting up a central depository system that enables electronic trading.

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Table of Contents
Dedications ......................................................................................................................... ii Acknowledgements ............................................................................................................ iii Abstract .............................................................................................................................. iv List of Abbreviations and Acronyms ................................................................................ vii CHAPTER I ...................................................................................................................... 13 1.0 INTRODUCTION ............................................................................................ 13

1.1 Introduction ......................................................................................................... 13 1.2 Background of the study ..................................................................................... 13 2.2 Definition of Stock Exchanges ........................................................................... 13 2.3 History of Stock Exchanges ................................................................................ 13 2.3.1 History of the Zimbabwe Stock Exchange ...................................................... 14 1.3 Statement of the Problem .................................................................................... 15 1.4 Research objectives ............................................................................................. 16 1.5 Research Questions ............................................................................................. 17 1.6 Statement of Hypotheses..................................................................................... 17 1.7 Importance of the study ...................................................................................... 17 1.8 Assumptions of the study .................................................................................... 18 1.9 Scope of the Study .............................................................................................. 19 1.10 Time budget ...................................................................................................... 19 1.11 Monetary Budget .............................................................................................. 20 1.12 Limitations ........................................................................................................ 20 1.13 Summary ........................................................................................................... 21 CHAPTER II..................................................................................................................... 21 2.0 LITERATURE REVIEW ....................................................................................... 21 2.1 Introduction ......................................................................................................... 21 2.2 ZSE functions...................................................................................................... 22 2.2.1Raising capital for businesses: .......................................................................... 22

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Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE) 2.2.2 Mobilizing saving for investment .................................................................... 22 2.2.3 Creating investment opportunity for small investors ....................................... 22 2.2.4 Government capital- raising for development projects .................................... 22 2.6.8.1 Remark 2 ....................................................................................................... 23 CHAPTER III ................................................................................................................... 24 3.0 RESEARCH METHODOLOGY ............................................................................ 24 3.1 Introduction ......................................................................................................... 24 3.2.1 Rationale for Case Study Approach ................................................................. 25 3.2.1 Design of Case Study ....................................................................................... 25 3.3 Data Collection ................................................................................................... 26 3.3.1 Primary Data .................................................................................................... 26 3.3.1.2 Telephone interviews: ....................................................................................... 26 3.3.2 Secondary Data ................................................................................................ 27 3.4 Sampling ............................................................................................................. 27 3.4.3 Sample Size...................................................................................................... 28 3.5 Data Analysis Plan .............................................................................................. 29 3.6 Summary ............................................................................................................. 29 CHAPTER IV ................................................................................................................... 30 4.0 DATA PRESENTATION AND ANALYSIS OF RESULTS ................................ 30 4.1 Introduction ......................................................................................................... 30 4.2 Response Rate ..................................................................................................... 31 4.4 Comparison of Sample Percentage with Expected ............................................. 31 4.5 Data Presentation ................................................................................................ 32 4.5.1.0 Questionnaire Response Review................................................................... 32 4.5.4 Does the ZSE promote investment for small investors? .................................. 32 4.5.5 Does the ZSE promote growth for small to medium enterprises? ................... 32 Source: Raw Data ..................................................................................................... 33 4.5.6 Is the Zimbabwean Capital Markets properly regulated? ................................ 33 Source: Raw Data ..................................................................................................... 34 4.5.7 How significant is the capital raising ability of the ZSE? ................................ 34

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Evaluation of the roles and effectiveness of the Zimbabwe Stock Exchange (ZSE) 4.5.8 What do you think should be done for the ZSE to be more effective in accomplishing its roles? ............................................................................................ 35 4.5.9 What recommendations do you expect this study to provide for the benefit of stock market development in Zimbabwe? ................................................................ 35 4.5.10 How effective is the ZSE in promoting economic growth and development? .................................................................................................................................. 35 4.5.11 Can companies rely on the ZSE for capital raising for project development? .................................................................................................................................. 36 4.5.12 Has there been any change for the better in terms of the effectiveness of the ZSE since the introduction of the multicurrency regime? ........................................ 36 4.6 Interviews............................................................................................................ 36 4.7 Discussion and Interpretation of Findings .......................................................... 37 4.8 Data Presentation and Analysis Summary .......................................................... 38 CHAPTER V .................................................................................................................... 39 5.0 CONCLUSIONS AND RECOMMENDATIONS ................................................. 39 5.1 Introduction ......................................................................................................... 39 5.2 Summary of Findings .......................................................................................... 39 5.3.2 Comparison of Sample Percentage with Expected .......................................... 40 5.3.3 Does the ZSE promote investment for small investors? .................................. 40 5.3.4 Does the ZSE promote growth for small to medium enterprises? ................... 40 5.3.5 Is the Zimbabwean Capital Markets properly regulated? ................................ 41 5.3.6 How significant is the capital raising ability of the ZSE? ................................ 41 5.4 Recommendations ............................................................................................... 41 5.4.2 Stock Market Computerisation ........................................................................ 42 5.4.3 Regulation ........................................................................................................ 42 5.4.6 Demutualization ............................................................................................... 42 5.5 Suggestions for Further Research ....................................................................... 42 5.6 Summary of Conclusions and Recommendations............................................... 43

List of Abbreviations and Acronyms ZSE Zimbabwe Stock Exchange

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RBZ JSE LSE King Report

Reserve Bank of Zimbabwe Johannesburg Stock Exchange London Stock Exchange South African code of best practice on Corporate Governance

GDP CEO SEC IPO IPO

Gross Domestic Product Chief Executive Officer Securities Exchange Commission of Zimbabwe Initial public Offering Where a company issues shares to the public for the very first time.

SMEs

Small to Medium Business Enterprises

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CHAPTER I 1.0 INTRODUCTION

1.1 Introduction As the activities on the stock exchanges tend to be specialized and not understood by common people, this chapter gives some basic definitions and review stock exchange history, participants, operations and importance, A brief background of the Zimbabwe Stock Exchange was explored in this chapter The chapter also highlights objectives, research questions limitations and delimitations, hypothesis to be tested and the assumptions adopted in carrying out the study. 1.2 Background of the study 2.2 Definition of Stock Exchanges A Stock Exchange is a market where stocks and shares are purchased and sold and capital is raised for the purposes of industry and both local and central government.1 2.3 History of Stock Exchanges2 Markets for the trading of stocks and shares or securities have existed for centuries all over the world. One of the earliest known markets was established in Paris, France around 1138.3 However, the modern form of the Stock Exchange can be traced to about 200 years ago.4 .
1 2 3

F. E. Armstrong 1957 The Book of The Stock Excliange, London: Pitman: p 17. Wikipedia, the free encyclopedia

E. H. H. Edwards 1963 "The Role of the Stock Exchange", in RSE, Financial and Economic Symposium, Record of Proceedings, Salisbury: p 3
4

W. T. C. King 1954 The Stock Exchange, London: Allen & Unwin: p 15

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2.3.1 History of the Zimbabwe Stock Exchange Trading of stocks and shares in Zimbabwe can be traced back from1891, when the first stock-broking firm was opened.5The first Stock Exchanges were set up a few years later in 1894 in Salisbury and Bulawayo. Later, two other exchanges emerged in Gwelo (now Gweru) and Umtali (now Mutare) around 1898. These exchanges were intended to meet the capital needs of the gold mining industry, whose rapid expansion was fuelled by rumors of a 'Second Rand' in Southern Rhodesia. As the hope of the Second Rand faded the mining companies withdrew, the local stock markets collapsed. By 1902, all the local Exchanges had ceased to operate. The Rhodesian Stock Exchange (RSE) was re-established in Bulawayo in 1946.6 By 1980, the ZSE was a highly specialized market, however as a result of global recession; there was a dramatic fall of the industrial and mining indices on the Exchange. However, between 1984 and 1990, the ZSE's performance improved considerably. The industrial index shot up from 150 in 1984 to 2 732 in 1991, while the mining index jumped from 28 to 500 between 1984 and 1990. This was due to the restored confidence among the investors that colonial property rights would be upheld. To date, the history of the Stock Exchange in Zimbabwe has received little scholarly attention although some economic analyses exist. However, their focus has been, invariably, on illustrating the highly speculative character of the gold mining industry in the country and not on the Exchanges themselves. There is, thus, need for a scholarly study of the history of the Zimbabwe Stock Exchange, which has played a very important part in the recent history of Zimbabwe.

5 6

The Rhodesinn HeniUi, 29 October 1892 George Karekwaivenani, A History of the Rhodesian Stock Exchange, p 2

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1.3 Statement of the Problem Small business enterprises are having difficulties raising enough capital to finance their operations. The most effective way to do so is by Initial Public Offerings yet the ZSE requires specific levels of profitability and about three years of trading history for a company to do so7. As much as this is meant to protect investors it is compromising economic growth. Zimbabwe is lagging behind on the disclosure of executive remuneration which is a deficiency in corporate governance as witnessed by the United States of America (USA) corporate scandals of 2000s and the Zimbabwean scandals of 2004 in the banking sector that saw not less than ten Banks placed under curatorship and two under liquidation8. Board compositions of some listed companies are not up to standards that good corporate governance practices would want them to be. It is up to the ZSE to incorporate the practices in their Listing Rules9 Indigenization laws of the ZSE is discouraging foreign investors. The Chief Executive Officer (CEO) of the ZSE, Emmanuel Munyukwi believes that the 2010 financial year would have been a better year had it not been for the indigenization regulations gazetted in March 2010. Munyukwi said: In April we raked in about US$5 million while months before that we were raking in more than US$20 million a month. Since the regulations were gazette, we have seen a negative impact on trade..Last year our market
7 8

Gilbert Muponda, 1 June 2008 Dr. Gono, Troubled Banking Institutions Handout, p 2 Willia Bonyongwe, August 2010

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was driven by foreigners, making up to about 45 -50% of the total turnover of about US$200 million on the ZSE,10 The indigenization laws as observed by Munyukwi clearly negatively impacts the growth of the economy by dispiriting profitable trading at the ZSE. Foreign investors improve the inflow of foreign exchange, which is often greatly needed in developing countries to finance imports and other foreign payments11. However, whilst foreign investors are important for emerging markets, the currency crises of East Asia (1990s) brought doubt that such investment flows generate benefits for developing countries12. 1.4 Research objectives The primary objective of the study was to assess the effectiveness of the Zimbabwe Capital market (ZSE) in accomplishing its roles. In line with the major objective, the project also attempted to pursue the following subtopics: Assessment of the ZSEs performance in ensuring good corporate governance among Zimbabwean companies; Analyzing the extent to which the ZSE assist small enterprises grow; Assessing the effectiveness of the ZSE in promoting economic growth and development; Establishing whether companies can rely on the ZSE as a source of financing operations;

10 11

Zimbabwe Daily News, 29 December 2010 Jefferis, 1995; Doidge et al., 2004 Bhagwati, 2001; Gabriele et al., 2001

12

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1.5 Research Questions The major question the researcher attempted to answer was whether the capital market is effective in accomplishing the roles that it is supposed to? The following questions were also asked: What is the best strategy in addressing the shortcomings that the Zimbabwean capital market (ZSE) has as a way of raising capital among other roles? Has there been any change or improvement on the performance of the Zimbabwean capital market in accomplishing its roles ever since the introduction of the multi-currency regime in February 2009? Is the capital market heavily regulated? Does the capital market help firms to raise funds for new projects? Does the capital market adequately support start-up firms? 1.6 Statement of Hypotheses With respect to the research objective of determining whether the ZSE is effective in accomplishing is roles, the hypotheses to be tested is as follows: Ho: The Zimbabwe capital market (ZSE) is effective in accomplishing its roles. H1: The Zimbabwe capital market is not efficient in performing its roles. 1.7 Importance of the study The major significance of the research was to spell out the weaknesses and or strengths of the Zimbabwe capital market and provide solutions thereto. The research project shall enable companies to make an assessment of the method of raising capital that they can use having evaluated the past, current and the expected performance of the Zimbabwe Capital market, the Zimbabwe Stock Exchange to be more precise. Small and medium enterprises will be able to resort to some methods of raising finance for their demanding working capital needs and also the ZSE if the recommendations of the study are adopted.

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The project will enable the researcher to have a better understanding of the Zimbabwe Capital market, ZSE. He will gain a thorough knowledge of how the ZSE operates, its institutional weakness, current developments that are happening to the capital market, the instruments traded through the capital market and be able to identify gaps that need particular attention. Besides gaining knowledge about the ZSE, the researcher also gain the necessary experience for research projects in further studies. The country shall also benefit from the research project. This is because the research is aimed at ensuring that the ZSE is functionally effective. If the capital markets becomes effective it leads to improved economic growth and development and ultimately improved standards of living which is perceived to lead to political stability. The research results are also expected to improve the spirit of enterprise and better corporate governance that will improve the status of the ZSE in the world of investment. This will see an improvement in capital inflows which had dropped drastically over the last decades because of political insecurity and indigenization laws. Good governance is also expected to reduce regulatory expense on the part of the government. As noted by Magayisa, the corporate scandals of 2004 cost the Reserve Bank of Zimbabwe a lot in trying to rescue the Troubled Banking Institutions. The results of the research, if implemented are expected to result in self regulatory markets that are both efficient and effective and possibly dilute the monopoly status of the ZSE. 1.8 Assumptions of the study All the Zimbabwe capital market trading is done through the Zimbabwe Stock exchange (ZSE) and therefore the phrase capital market and ZSE shall be used interchangeably; The sample used is a true representative of the population; All questionnaires will be responded to;
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 All interviews will be successful; All the seventy seven listed companies on the ZSE use the capital market as the sole method of raising capital; Any company can be listed easily on the ZSE; Companies across all industries can switch from one method of raising capital to another. 1.9 Scope of the Study In line with the research objectives, the scope of this study is restricted to the following areas: Assessment of the ZSEs performance in ensuring good corporate governance among Zimbabwean companies; Assessment of the extent to which the ZSE assist small enterprises grow; Assessment of the effectiveness of the ZSE in promoting economic growth and development; Assessment of whether companies can rely on the ZSE as a source of financing operations; Assessment of the extent to which the ZSE facilitate raising of capital for both the government and nongovernment corporate; The research project will be confined to the roles and effectiveness of the Zimbabwe capital market (ZSE) considering the currently listed companies. The main focus of the research is on the effectiveness of the ZSE in accomplishing its roles. 1.10 Time budget Table 1: Time Budget Chapter Project proposal Chapter 1(Introduction) Chapter2(Literature review)
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Allocated Time One week One month Three weeks

Due Date 13/12/2010 21/01/2011 15/02/2010

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Chapter 3(Methodology) Chapter4(Research Findings) Chapter 5(Conclusion ) 1.11 Monetary Budget

One month Two weeks One month

14/03/2011 28/03/2011 30/04/2011

The research will be carried out within the budget below: Table 2: Monetary Budget Item of Expenditure Tuition fees Internet Printing Transport Accommodation for field research Total cost Cost (USD) $315.00 $20.00 $30.00 $40.00 $50.00 $455.00

1.12 Limitations The major limitations that the researcher encountered in the course of the research are as follows: Financial constraints for field research Limited time within which the research was carried out During field research some people were not willing to dedicate their selves to supporting the project However, to overcome such limitations and problems the researcher made the best use of the available financial resources and time. The researcher prepared a
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financial and time budget to ensure that the quality of the research outcomes was not affected by such constraints. Challenges in field research were overcome by making prior arrangements and appointments with the people with whom interviews were going to be held. The researcher also took his time explaining the benefits and importance of the research project to them. The researcher made it clear that the research is not to his benefit only.

1.13 Summary As the activities on the stock exchanges tend to be specialized and not understood by common people, this chapter gives some basic definitions and review stock exchange history, participants, operations and importance, so as to serve as the basis for understanding how the stock market can help promote investment and trade. A brief background of the Zimbabwe Stock Exchange was explored in this chapter.

CHAPTER II 2.0 LITERATURE REVIEW

2.1 Introduction The chapter seeks to discuss theoretical and empirical literature concerning the roles of stock exchange in relation to the ZSE. In line with the research questions the chapter will explore the roles that Zimbabwe Stock Exchanges are expected to perform. The ZSEs performance would be compared with roles performed by other stock exchanges around the world like the JSE.

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2.2 ZSE functions13 The ZSE serves three critical functions: mobilize and efficiently allocate resources for the country's economic development

provide a fair, efficient, transparent and secure price discovery mechanism in a well regulated environment

build liquidity through innovation

2.2.1Raising capital for businesses: The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. The Stock Exchange therefore is an organized financial platform that deals in transactions involving the buying and selling of financial securities. 2.2.2 Mobilizing saving for investment:14 When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity. 2.2.3 Creating investment opportunity for small investors: As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. 2.2.4 Government capital- raising for development projects:15

13 14

http://www.zse.co.zw/ R. R. West and S. M. Tinic 1971 The Economics of the Stock Market, New York: Praeger: D

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Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. 2.6.8.1 Remark 2 The ZSE falls short of some of the functions that other stock exchanges around the world do perform. Among the listing requirements of the ZSE should be the need by companies to comply with international codes on corporate governance like the King Report on corporate governance. The JSE adopted the King II guidelines on corporate governance among its Listing requirements.

2.3 Performance Review of Zimbabwe Stock Exchange Contrary to the noble purpose for which the ZSE was created, the ZSE has literally galloped astray, in the process creating obscene paper wealth that is causing havoc in the economy.16 By 2008 the Zimbabwe Stock Exchange had become the most devastating vehicle of economic destruction, there was rogue trading at the ZSE: The ZSE allowed some stock brokers to falsely bid up share prices, when in fact the same stock brokers had absolutely no money to pay for the shares. The end result has been that some counters grew by as high as 2 million percent in a single day;

15

George Karekwaivenani,Department of Economic History, University of Zimbabwe, P 8

16

Press statement on the rampant fraudlent activities on the ZSE, Dr. G. Gono governor reserve bank of zimbabwe 20 november, 2008, pp 6-9

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 Where share prices were rising at the ridiculously bloated rates, what that effectively meant was that someone could work up with no penny at the bank, but end the day a multi-trillionnaire. The next morning, the false wealth so created would show up as high demand for cash. The Stock Exchange was deliberately indexing the entire stock market to the spurious Old Mutual share prices. The whole economy was then being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itself. The Zimbabwe Stock Exchange had been operating with no strict rules and regulations that prohibit rogue behavior. On numerous occasions, company share prices rose astronomically with absolutely no actual volumes trading; Some stock brokers were buying shares cheap in the morning call overs then drive up prices before off-loading the same shares on the same day at inflated prices;

CHAPTER III 3.0 RESEARCH METHODOLOGY

3.1 Introduction Research methodology refers to the systematic, focused and orderly collection of data for the purposes of obtaining information in order to solve research questions. Data collection and analysis procedures are central to the validity of the research findings in so much that it determines the success (or failure) of the study. This chapter outlines the research design adopted, the research population and sample, data collection method and instruments and the data presentation and analysis plan. The chapter also explains the rationale for and shows why a case study research methodology was deemed appropriate for this study.
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3.2 Research Design Adopted A case study research methodology was deemed appropriate for this study. A case study is a detailed and thorough investigation of a few cases. It is an intensive description and analysis of a phenomenon or social limit such as an individual, a group, an institution or community. 3.2.1 Rationale for Case Study Approach A case study method can contain several case studies and could use multiple sources of evidence17 including documents, interviews and observations. It also allows for the utilization of both qualitative and quantitative approaches and is thereby seen as being more advantageous. Moreover, since these study intents to deal with a management and administration phenomenon, it became logical to adopt a case study approach. The other advantage of the method is that a case study approach is rich in details and well defined. It therefore becomes immediately useful in gathering detail.

However, despite these advantages, case studies have received criticisms. Case studies are often accused of lack of rigour. Too many times, the case study investigator has been sloppy, and has allowed equivocal evidence or biased views to influence the direction of the findings and conclusions. 3.2.1 Design of Case Study Research design is the plan and structure of investigation so conceived as to obtain answers to the research questions18. The researcher adopted a multiple-case design because of the need to provide evidence in addressing the issue in

17 18

Yin, 1993, p3 Kerlinger, (1996) p 279

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question. The research used a case study approach, which is exploratory, carried out about the ZSEs effectiveness in accomplishing its roles and functions. Empirical data was obtained from different sources through sampling, questionnaires, structured and unstructured interviews, and secondary data from reports and recommendations derived from the various stock brokers, asset management companies and the Zimbabwe Stock Exchange. 3.3 Data Collection Data collection is a term used to describe a process of preparing and collecting data, for example as part of a process improvement or similar project. The purpose of data collection is to obtain information to keep on record, to make decisions about important issues, to pass information on to others. In this research the researcher collected data from both primary and secondary sources. Primary data can be defined as data which can be collected directly from target respondents whereas secondary data can be collected from publications of various institutions such as textbooks and newspapers. 3.3.1 Primary Data Primary data is observed or collected directly from first-hand experience. It can be defined as data which is collected directly from target respondents. In this research primary data was gathered through questionnaires, face-to-face interviews and telephone interviews.

3.3.1.2 Telephone interviews: Telephone interviews allowed the researcher to cover a wide geographical area within a short period of time. Instant responds to the questions were given. The use of telephone interviews enabled the researcher to conduct unstructured interviews which is critical as it gives the respondent chance to express their
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opinion without the bias that is always associated with personal and face to face interviews. Telephone interviews had advantages as follows: The researcher could cover a wide geographical area within a short space of time The costs were less than those of conducting personal interviews Gives instant responses as opposed to questionnaires However, telephone interviews had the following drawbacks: Time for detailed discussion was limited
More costly than questionnaires

3.3.2 Secondary Data Secondary data is that which is already available prior to a study because it was collected for some other purposes some other time, not for solving the current problem. To gather the data, the researcher went through already existing records, statistics and other publications. Other sources of secondary data included the press, newsletters by investment companies and stock broking firms and the Internet. 3.4 Sampling Sampling is the way sample elements are to be selected from the entire population to come up with representative samples19. The need to sample arises when the entire population cannot be surveyed because either of budget constraints, practically impossible, or time constraints20.. There are two basic methods of sampling, namely21: Probability or representative sampling Non probability or judgmental sampling
19 20 21

Hill, et al., 2003

Saunders et al. 2003 White ,2000 and Hill et al. 2003

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Probability samples are so called because it is possible to express the mathematical probability of sample characteristics being produced in all population. Each element in the population of interest has an equal chance of being part of the sample. In non-probability sampling, the researcher uses his subjective judgment to come up with sampling method that he feels will deliver results and enable him answer the research question. This is particularly so where the data to be collected is qualitative22. Because of the qualitative nature of this research, non-probability sampling techniques were used to select the sample. The selection of the researchers target population was on the basis of knowledge, flexibility, availability and convenience. The targeted population included credit analysts, dealers, and other ZSE personnel. 3.4.3 Sample Size Deciding on a sample size for a qualitative enquiry can be more difficult than for a quantitative one because there are no rules to be followed 23. It all depends on what will be useful, what will have credibility and what can be done within available time and resources. There is always a difficulty in striking a compromise between the accuracy of the findings and the amount of time and money available for collecting, checking and analyzing the data24.

To validate meaningfulness of insights generated from qualitative enquiry, have more to do with the information richness of the case selected and the analytical capabilities of the researcher than with sample size.

22 23

Patton ,1990 According to Mugo, 2005 Saunders et al ,1997

24

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This research study had two populations or sampling frames. One population was ZSE personnel. The other population was that of dealers and other employees of stock broking firms and investment banks. 3.5 Data Analysis Plan Due to the inherent noisy nature of raw data, questionnaire entries have to be processed before being applied into any analytical models. Data processing involves coding responses using numeric symbols, classifying respondents into individual groups as well as adjusting for non-responses. To make a reasonable conclusion about the topic, there is need to find systematic and justifiable ways to analyze data and draw sound conclusions and recommendations. The data will be analyzed by sorting it out into categories. Answers will be grouped by question in order to draw numbers and percentages of the number of respondents whose responses fall in a certain category. 3.6 Summary In this chapter, the researcher identified the research methodology and outlined the approaches used in carrying out the research, the sampling technique and the data gathering instruments employed in making this research study a success. The next chapter shall look at the data presentation and discussion or analysis.

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CHAPTER IV 4.0 DATA PRESENTATION AND ANALYSIS OF RESULTS

4.1 Introduction The chapter focuses on presentation techniques, discussion and interpretation of research findings. It presents the data obtained through primary and secondary means, the analysis and discussion of such data is in line with the research objectives outlined in Chapter I. Specifically it presents results and analysis of questionnaires, sampled data and results from the print media. The researcher present and analyze the data collected from field research carried out in an attempt to determine whether Zimbabwean Stock Exchange is effective in accomplishing the roles that capital markets are expected to perform. The results of the analysis are presented diagrammatically and expressed in percentages for ease of assessment. The hypothesis, Zimbabwean Capital Markets is effective in accomplishing its roles is tested. The research conclusions shall be based on such analysis.

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4.2 Response Rate From the thirty five questionnaires distributed, nineteen were received back to give a response rate of 54.30 % but three of the questionnaires received were incompletely filled to such an extent that they were deemed spoiled thus reducing the effective response rate to 45.70%. The response rate would have been higher had respondents been given additional time to submit their responses but however due to time constraints the 45.70 % response rate is accepted as being adequate for this study. The response rate was also low due to the time and monetary budget of the researcher. 4.4 Comparison of Sample Percentage with Expected Seventy five percent of the respondents surveyed indicated that the ZSE is not effective in accomplishing the roles of capital markets. Figure 6: Comparison of sample percentage with expected ZSE is effective in accomplishing its roles

Yes (4) 25%

No (12) 75%

Source: Raw Data

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4.5 Data Presentation The following analysis is based on questionnaires collected at the end of the project. The questions asked are basically the same for all respondents. 4.5.1.0 Questionnaire Response Review 4.5.4 Does the ZSE promote investment for small investors? About 100% of the respondents believed that the ZSE adequately promote investment and growth of small investors arguing that shares can be transacted in lots of 100 for all listed counters. 4.5.5 Does the ZSE promote growth for small to medium enterprises? 40% responded to this question agreed that the ZSE promote growth for small to medium enterprises. However 60% of the respondents belied that the ZSE does not adequately support small entrepreneurs to grow. The majority argued that the requirements for small entrepreneurs to be able to list and issue shares through initial public offerings (IPOs) were too much. For a company to be able to do that it is required to have a trading history of about three years and showing some levels of profitability. Some small entrepreneurs with brilliant ideas therefore fail before they even launch their ideas because of lack of funding. Figure 11: Does the ZSE promote Growth

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Does the ZSE promote small entrepreneurs' growth?

ZSE Promotes Growth, 30% ZSE does not Promote growth, 70%

Source: Raw Data 4.5.6 Is the Zimbabwean Capital Markets properly regulated? 50% of the respondents believed that the ZSE is heavily regulated especially concerning foreign investors and selected sectors like the mining counters. They believe that the introduction of SEC would, in the long term, enhence the ZSEs performance in relation to regulation. 45% of the respondents believed that the ZSE is properly regulated. 5% were indifferent as to whether the regulation currently prevailing affect the ZSEs effectiveness. Figure 12: Is the ZSE properly Regulated

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Is the ZSE properly regulated

5%

45% 50%

Properly Regulated Heavily Regulated Somewhat properly

Source: Raw Data 4.5.7 How significant is the capital raising ability of the ZSE? The majority of the respondents believed that the capital raising ability would be very significant had it not been of the illiquid market. Capital flows from international markets however seem to be affected more by regulation than market liquidity. Currently the capital raising ability is not significant. Figure 13: Significance of ZSE in raising Capital

Very Significant(28%)

Insignificant(72%)

Source: Raw Data

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4.5.8 What do you think should be done for the ZSE to be more effective in accomplishing its roles? Respondents believed that regulators should enforce stringent insider trading and market manipulation regulations to improve on corporate governance. They also believe that the demutualisation process should be hastened. Demutualisation is the process of converting a non-profit, mutually owned organization to a forprofit, investor-owned corporation. Although, demutualized exchanges will continue to provide many if not most of the services, they will have different governance structures in which outside shareholders are represented by boards of directors. There are two main forces driving stock exchanges to demutualize: 1) increased global competition and 2) advances in technology. Some respondents also believed that the ZSE should incorporate codes on good corporate governance practices like the King Report so as to improve corporate governance. 4.5.9 What recommendations do you expect this study to provide for the benefit of stock market development in Zimbabwe? Respondents believed that the stock market should be computerised through a Central Depository and do away with physical trading. Investors should be able to trade on the local bourse without the need to be physically present at the ZSE. Some respondents also believe that overregulation of the stock market should be avoided. They belived that the should be a clear relationship between capital markets and the Securities Commission of Zimbabwe. 4.5.10 How effective is the ZSE in promoting economic growth and development? Respondents believe that the ZSE can play a leading and prominent role in marketing Zimbabwe as a suitable and promising investment destination by attracting foreign and local investors who have an appetite for emerging market

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growth prospects. There are several areas that the ZSE can deliberately promote and encourage which will position Zimbabwe ahead of other countries on the continent. The Financial sector is one such area due to the well developed infrastructure and highly experienced and educated professionals. The second area is the information, communication and technology (ICT) sector which Africa is still lagging behind. This presents an opportunity for Zimbabwe. Zimbabwe has excellent infrastructure to build on a decent hub which can attract capital into the country. This can be channeled through the ZSE. 4.5.11 Can companies rely on the ZSE for capital raising for project development? The majority of respondents believe that companies cannot rely on the ZSE for their capital needs due the liquidity constraints that the market is currently facing. The current trading and settlement system is also too slow and poor. Therefore companies should supplement their capital through retained earnings than relying on the ZSE for their capital needs. 4.5.12 Has there been any change for the better in terms of the effectiveness of the ZSE since the introduction of the multicurrency regime? Respondents noted that there was some remarkable improvement especially just after the introduction of the multicurrency regime in February 2009. However with the introduction of indigenization laws performance on the ZSE dampened as it discouraged international investments because of the increased risk. 4.6 Interviews Apart from questionnaires primary data was also collected through interviews. Of the scheduled five interviews, three were successful making a response rate of sixty percent. The interview carried out at the ZSE proved that the major problem that the ZSE is facing is liquidity challenges. The market condition is such that the ZSE cannot

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effectively perform its roles. Regulatory constraints also affect the ZSE negatively. The ZSE would do better if it is demutualised. However the process of demutualization is being delayed by the fact that there are some members resisting. 4.7 Discussion and Interpretation of Findings There was a general consensus by respondents that the ZSE plays a critical role in the economy with many respondents arguing that, the level of economic growth and development would improve should the ZSE be reformed and take a lead in marketing the economy as a better investment environment. Further analysis depicts that, the ZSE is not doing enough to make sure that there is adequate support to potential SMEs and to ensure that there is quality corporate governance in the market. The Zimbabwe stock exchange needs to be reformed and restructured to be more effective in assisting both investors and entrepreneurs reach their respective goals. Initial Public Offering (IPO), also referred to simply as a "public offering," is when a company issues common stock to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. The Zimbabwe Stock Exchange (ZSE) is the primary institution involved in this and sets the various rules, requirements, terms and conditions of conduct of IPOs. The ZSE needs to be reformed to be able to make it more effective and responsive to the needs of entrepreneurs especially small and medium scale businesses who struggle to raise capital even though they may have all the other ingredients for success. The ZSE needs to the reformed from an exclusive club into a more inclusive institution that transforms upcoming, promising ideas, ventures and projects from dreams into reality. If it cant be reformed and restructured to meet those goals then there is an urgent need to set up a rival exchange to do that.
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The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of dissolution. Among the requirements of conducting an I.P.O in Zimbabwe is the need for the company to be of a particular size and to have a trading record of a specified period (minimum 3 years), and be showing certain level of profitability. These requirements exist mainly to protect investors and also to make the ZSEs life easy and simple. The ZSE needs to actively encourage small to medium scale businesses to pursue the possibility of IPOs as a way to raise capital for their operations since the high level of inflation makes it almost impossible to keep borrowing to keep pace with higher requirements of working capital. 4.8 Data Presentation and Analysis Summary The response rate for the questionnaires distributed was 45.7%. The bulk of the respondents were drawn from stock broking and asset management related institutions due to their greater understating of the investment market in Zimbabwe. From all the responses obtained from the field research, most were in favor of implementation of proper regulatory framework that will ensure transparency and reduce market manipulation. The study used both qualitative and quantitative approaches to analyze the research findings. The primary data, which was gathered through questionnaires and interviews was presented and analyzed first, then secondary data, which was collected from related literature. Tables, bar graphs and pie charts were used to present the findings. Logical judgments were also used to come up with results as well as an analysis of responses given by interviewees.

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CHAPTER V 5.0 CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction The chapter focuses on the summary, conclusions and recommendations of the case study. Conclusions were be made from the data obtained as compared to what is expected as highlighted in the literature review. In trying to gather empirical data a sample of 15 respondents were used being selected from financial institutions. 5.2 Summary of Findings The major research problems that motivated the researcher included the fact that small business enterprises are having difficulties raising enough capital to finance their operations; Zimbabwe is lagging behind due to indigenization laws discouraging foreign investor participation on the ZSE and the participation of the Zimbabwean Development. Capital Markets to contributing economic Growth and

The findings of the research as outlined in the previous chapter proved that indeed experts on capital markets are in agreement that the ZSE is not effective when it comes to roles and functions of stock exchanges that if performed well would eliminate the current problems outlined above.

5.3.0 Conclusions The conclusions made emanated from the research findings as presented in chapter IV, hence they are research based conclusions. They are summed up answers to research questions and sub problems and are drawn directly from data reported in the previous chapter. The conclusions section shall demonstrate

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whether or not conclusions agree with the theory of previous researches. The conclusions on the analysis are as follows: 5.3.2 Comparison of Sample Percentage with Expected Seventy five percent of the respondents surveyed indicated that the ZSE is not effective in accomplishing roles of Capital Markets in Zimbabwe. The conclusion from the hypothesis testing is that The Zimbabwe capital market is not efficient in performing its roles. (H1) 5.3.3 Does the ZSE promote investment for small investors? About 100% of the respondents believed that the ZSE adequately promote investment for small investors arguing that shares can be transacted in lots of 100 for all listed counters. The fact that shares are transacted in minimum lots of 100 shares means that even small investors that may want to participate on the market can easily do so thereby contributing to economic growth and development somehow. The conclusion that can be drawn from the above observation is that the ZSE adequately and effectively promotes investment to small investors. 5.3.4 Does the ZSE promote growth for small to medium enterprises? The majority (60%) of the respondents argued that the requirements for small entrepreneurs to be able to list and issue shares through initial public offerings (IPOs) were too much. For a company to be able to do that it is required to have a trading history of about three years and showing some levels of profitability. Some small entrepreneurs with brilliant ideas therefore fail before they even launch their ideas because of lack of funding. The conclusion from the response frequency clearly demonstrate that the ZSE does not adequately promote small to medium business enterprises because of the heavy requirements for qualification for raise money through the ZSE.

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5.3.5 Is the Zimbabwean Capital Markets properly regulated? 50% of the respondents believed that the ZSE is heavily regulated especially concerning foreign investors and selected sectors like the mining counters. They believe that the introduction of SEC would, in the long term, enhence the ZSEs performance in relation to regulation. 45% of the respondents believed that the ZSE is properly regulated. 5% were indifferent as to whether the regulation currently prevailing affect the ZSEs effectiveness. The distribution of the response shows that the ZSE is heavily regulated. 50% respondents believed that the ZSE is heavily regulated, 45% believed it was properly regulated and 5% were indifferent. In conclusion therefore the implication is that the ZSE is heavily regulated. 5.3.6 How significant is the capital raising ability of the ZSE? The research has found out the strength of capital raising by listed companies depends on the performance of the company. If the company is doing well it would attract more investors and thus more capital is raised and the reverse is true. This means to say that the significance of the capital raising ability of stock exchange is a function of the individual stocks on the stock exchange. The result from respondents shows that the ZSE is effective with respect to local investors because the ability of a share to pool demand is a function of the performance of the individual company. However, concerning foreign investors, the significance is more dependent on regulation than the performance of the company. Hence, it can be safely concluded that the ZSEs capital raising ability is significant on the local arena but in terms of pooling from international stock markets it is not that significant. 5.4 Recommendations In the light of the conclusions drawn by the study, the researcher clearly stated recommendations on actions that should be taken to solve problems identified. In
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addition, suggestions for future research on the study were made in the latter section of the chapter. 5.4.2 Stock Market Computerisation The stock market should be computerized through the central depository and do away with physical trading. This is most likely to promote foreign participation on the ZSE. Investors around the globe will be able to trade from their respective locations. 5.4.3 Regulation Overregulation of the ZSE should be avoided. There should be a clear relationship between capital markets and the Securities Commission. Indigenization laws clearly negatively impacts the growth of the economy by dispiriting profitable trading at the ZSE. The ZSE should be moderately regulated in a way that does not compromise the need for such regulation and at the same time in a way that promotes trading and economic growth that will benefit the economy at large. 5.4.6 Demutualization The process of demutualization should be hastened so as to improve on efficiency and effectiveness of the Zimbabwe Stock Exchange. Demutualization enables the ZSE to be run properly and converted from a club to a profit seeking organization that should be listed also. 5.5 Suggestions for Further Research Further research should be on evaluating the feasibility of establishing a rival stock exchange in Zimbabwe. If efforts to reform the ZSE and possibly demutualization fails, there is need to establish a rival stock exchange that will dilute the monopoly status of the ZSE and improve the overall effectiveness of the Zimbabwean Capital markets. Therefore further research on the topic of effectiveness of Zimbabwean Capital markets should look into the feasibility of the possibility of establishing a rival stock exchange.
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5.6 Summary of Conclusions and Recommendations The chapter looked at conclusions drawn from each research question and made recommendations thereto. The major recommendations included the

establishment of the central depository system that enables electronic trading, reducing the level of regulation of the ZSE. Hastening the demutualization process was also among the recommendations. The chapter drew conclusions to problems of the ZSE making particular reference to the objectives of the study as spelt out in every chapter of the research. The last part of the chapter provided suggestions for further research. It is the researchers belief that the current research and available literature is inadequate to address the identified pitfalls of the local market. This is especially because of the dynamic nature of capital markets around the globe. New recommendations should be drawn more often so as to incorporate any of the vast changing features of stock markets hence further research on the topic is indispensable.

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