By Alissa Amico and Maged Shawky
The Egyptian Exchange (EGX) is the oldest exchange market in the Middle East and North Africa region and one with a fascinating history of development, having gone through nationalisation in the 1950s and having been revitalised only in the early 1990s. The passage of the Capital Markets Law in 1992 and the introduction of the Asset Management Programme in 1994, which facilitated disposal of government stakes, was key to the revitalisation of the exchange. While the number of listed companies peaked at 1,100 in 2001 with market capitalisation of $24bn, the market remained illiquid and lacked transparency.
Eventually, in order to bring liquidity and improve market quality, over 800 companies were delisted by 2005 for failing to meet regulatory requirements. In an effort to bring further transparency to the market, the Egyptian regulator introduced a voluntary corporate governance code for listed companies in 2005 and some of its recommendations were eventually transcribed in the listing requirements of the EGX. Over the years, enforcement activity has grown and in 2014, the exchange started to publish all violations on its website and through the trading terminals.
Yet, substantially improving governance practices in listed companies remains a challenge due to the low levels of participation of institutional investors in the capital market. While only 15% of market capitalisation remains in the hands of retail investors, they account for close to 80% of trading, similarly to other MENA markets. Furthermore, institutional investors, both domestic and foreign, remain rather passive unlike in developed markets where, especially following the financial crisis, the expectations and stewardship responsibilities placed on institutional investors have been growing – for example the Stewardship Code in the UK.
The lack of engagement by domestic investors can be explained by the type of institutional capital present in equity markets, notably state-owned pension funds and insurance companies, which continue to hold sizeable stakes in the market, having “inherited” them following the nationalisation programme. Their investment decisions are delegated to investment committees composed of the executive management and board members whose investment approach is usually characterised by conservatism and scepticism of capital markets. In addition, limits for capital market investment by pension funds and insurance companies are below international standards.
On the other hand, foreign investors’ passivity can be explained by a number of factors, including their relatively small stakes in listed companies – most as part of an Emerging Market Index investing, leading to a lack of incentives for them to engage. In addition, recent years have seen an outflow of foreign capital and reduced activity by foreigner investors due to political instability, as well as hurdles in profit repatriation and foreign currency scarcity. As a result, foreign institutional investment dropped to 36% of the total market capitalisation.
In a forthcoming report on exploring the participation of institutional investors in the Egyptian capital market, we put forth recommendations on encouraging institutional investors and especially sovereign investors, such as pension funds and insurance companies to act in their stewardship capacity. Doing so would yield positive results both for the state as their ultimate owner, for the general public which is the beneficiary of their services, as well as for improving the quality of the governance of listed companies.
We propose obliging certain categories of institutional investors to develop voting policies and vote their shares. This was already implemented in some countries such as Chile, specifically for the pension funds, with positive results. In addition, we propose that the Egyptian Capital Market Association (ECMA) and the Egyptian Investment Management Association (EIMA) be used as a platform to introduce self-regulatory standards for institutional investors.
Maged Shawky Sourial is the CEO of Beltone Financial Holding since 2012 and Chairman of Beltone Exchange Traded Fund Company. He holds a Masters Degree in Financial Economics from Queen Mary University of London, United Kingdom.
Alissa Amico is responsible for overseeing OECD’s work on financial markets and corporate governance in the Middle East and North Africa. She is a member of the French Institute of Directors’ International Commission and was recognised by Columbia Law School as the Rising Star of Corporate Governance in 2014