Malawi Stock Exchange (MSE) has said it is making notable strides towards the establishment of a derivatives market— a financial market for a security with a price dependant on one or more underlying assets.
Out of the 25 stock exchanges in Africa, only three have derivatives markets.
MSE chief executive officer John Kamanga told Business News that Malawi has potential for such a market.
Currently, apart from the stock market, the country has a thriving commodities market—one of the components of the derivatives market.
Malawi, which is an agro-based economy established the commodities market, currently run by Auction Holdings Commodities Exchange (AHCX) and African Commodities Exchange (ACX), as a step in setting up the derivatives market.
Kamanga said Malawi has what it takes to set up the market, highlighting that derivatives market is a good risk management tool.
He described it as an alternative avenue for investment which provides room for an investor to diversify investment risks into the financial market.
“Taking into account the availability of pension funds in the country, which are in excess of $60 million [about K4 billion], this calls for other products to be introduced in the financial market because our 14- counter stock market itself is unable to absorb those savings,” he said.
Kamanga said with the enactment of the Pension Act, the probability is high that the savings are growing, which means all those funds are looking for areas of investment; hence, the derivatives market would be among the savings avenues to channel the money.
But in a separate interview, one of prominent brokers on the local market said our market needs to develop the basics first before going into advanced products.
“We need to expand the number of companies listed on the MSE. We need to get more financial products trading on the MSE such as bonds etc.
“Once we do that, we can then move to other complex financial products…14 counters is too small an exchange. We need to make it deeper,” he said.
Kamanga was, however, upbeat, saying there is need for a legal and regulatory framework to help supervisory authorities to manage the market.
He said Malawi needs a sound infrastructure development comprising back-end to settlement and clearing and front-end to look at the trading of the transactions on the market.
He said the derivatives market can survive in the country on the back of a deep and robust financial market that comes with educational awareness so as to broaden knowledge of the public in terms of benefits of investment, technical aspects and a solid retail investing public.
Derivatives are financial instruments that derive their value from their underlying assets or instruments such as bonds, equities, commodities, currencies, interest rates, or stock indices.
They are often bought or sold in an effort to manage risks or fluctuations in the value of the underlying asset or instrument, but they also serve as investments in their own right. Futures, options and swaps are the most common forms of derivatives.
Most African countries have no derivative markets, with the exception of South Africa and the North African economies of Morocco, Egypt and Tunisia.n