Every weekday morning at 11:00 sharp, inside a white building with castle-like crenelated towers, a horn blasts. A cluster of men—and a few women—gathers around a horseshoe-shaped wooden rail beneath a large, green board inscribed with the names of companies.
"120," cries the reader under the board. No answer.
"120,' the reader cries again. "110," says a man on the right of the horseshoe. The reader leans over and chalks in the number on the board.
He is recording the "open-outcry" price negotiation for a share of stock, quoted in Moroccan dirhams. At the Casablanca Bourse des Valeurs—the stock exchange—business has been done this way since 1929. Trading is open for only two hours a day, and the pace is relaxed, even familial. Except for a few computer screens flickering below the board, the scene resembles the Paris stock exchange late in the last century.
It will not do so for long.
The government of Morocco, which privatized its national foreign-trade bank last year, is selling off all or parts of its stakes in 74 holding companies and some 400 subsidiaries. One-third of these sales are slated for public offer on the Bourse, which has grown from 46 listed companies as recently as 1992 to 65 companies in mid-1995, and from a total capitalization of 12 billion Moroccan dirhams ($1.5 billion) to 40 billion dirhams ($5 billion). Tax laws that offer incentives to listed companies are expected to stimulate further growth.
"The Casablanca bourse is only about one-fifth the size it should be," says Alfred H. Saulniers, an advisor to Morocco's Ministry of Economic Affairs and Privatization. Saulniers believes that only 10 to 15 percent of the country's investor demand is being met, because there is presently no other outlet for capital in Morocco's controlled-currency economy. Government issues—one of few places Moroccans have been able to invest their money—have routinely been oversubscribed. "There is a major unsatisfied demand for shares," Saulniers concludes.
On the other side of the Arab world, in a steel-and-glass office block in downtown Manama, Bahrain, the scene is dramatically different. Polished marble floors, burnished wood desks and the latest in global-market electronic technology make the Bahrain Stock Exchange, or BSE, one of the most advanced trading floors in the world. Here, a flurry of international traders and investors crowd what is also among the newest Arab stock markets, founded in 1989.
Unlike the Casablanca Bourse, which is designed to support Moroccan business and securities, the BSE is aiming at an international market. Foreign participation is not intended primarily to capitalize domestic companies but rather to secure Bahrain's role as a key world financial market. "The plan is not only to organize a local market, but to support Bahrain as a financial center in the region," says Fawzi Behzad, director of the BSE.
The BSE is also different from many other Arab exchanges because, until now, it has listed only stocks. No "government paper," such as treasury bonds, is traded here. However, says Behzad, that may change. "We are now developing a system to issue and trade bonds," he says, adding that the complex legal and procedural framework needed is nearing completion.
"One of our objectives is to diversify the range of investment instruments available."
This diversification will include listing non-Arab companies: In early 1992, the BSE invited Gulf, Arab and international firms to apply for listings.
The Casablanca Bourse and the BSE are designed to meet dramatically different economic needs. Morocco promotes internal development by allowing Moroccan companies to raise capital among mostly domestic investors, although foreign participation is increasingly welcomed. Bahrain is soliciting foreign investment that will be based in Bahrain but deployed worldwide. Yet both are part of a regional trend in which more than a dozen Arab stock exchanges are growing, nourished by investors and host governments seeking to meet economic and political needs that are as varied as the national economies in which the exchanges operate. In many of these countries, stock markets have become key elements in development plans, playing significant roles in privatization efforts as well as in tapping new sources of capital.
According to the Emerging Markets Database maintained by the International Financial Corporation, an affiliate of the World Bank, the 11 existing Arab markets—Morocco, Bahrain, Jordan, Kuwait, Lebanon, Oman, Saudi Arabia, Qatar, Tunisia and two in Egypt—have a combined market capitalization of $70 billion. Market experts believe that by the end of the decade two new exchanges will open, in Algeria and the United Arab Emirates; they, along with the expected growth of all the Arab exchanges, could push the aggregate capitalization above $120 billion. If neighboring non-Arab stock exchanges in Cyprus, Turkey and Iran are included, regional capitalization could reach $200 billion.
Throughout the region, impressive growth rates are catching the attention of would-be investors and fueling pressure for further change. According to International Finance Corporation figures, the Arab exchanges, like many other emerging markets, are expected to outperform their long-established counterparts in the US, Europe and Japan in the coming years. Worldwide, growth among 20 emerging markets has generally exceeded that of the nine largest developed markets. In Morocco and Tunisia, for example, stock market investors realized annual returns ranging between 20 and 30 percent in both 1993 and 1994—more than double the returns in better-known world markets.
Although today's world stock exchanges are usually organized along Western economic lines, some of the most common investment and banking products in use today originated in the Arab world. It was in Abbasid Baghdad of the eighth and ninth centuries that draft accounts—a variation of checking accounts—were first developed. A few centuries later, under the Cairo-based Mamluk caliphate, checking accounts appeared. From its trade with Egypt, Italy soon assimilated the device into the emerging economy of the Renaissance. Arab financiers of the Middle Ages also devised commodity futures contracts, still an important feature of Western finance as well as a popular investment tool used by Islamic banks.
In Casablanca, Tunis, Alexandria and Cairo, however, the forerunners of today's stock exchanges were set up only during the late 19th and early 20th centuries, under French and British colonial rule. Designed to meet European investment needs rather than local ones, those institutions to this day show signs of their colonial past: In Alexandria, trading chits are printed in English and French; in Casablanca, the language of the trading floor is French.
In the years after World War II, following these countries' independence from colonial rule, nationalist economic policies—sometimes complicated by Cold War politics—often weakened markets. But by the 1970's, governments throughout the region began to see markets—and stock exchanges—as significant tools of economic development. The world debt crisis of the 1980's forced a growing number of countries to turn to the market to stimulate private-sector investment and stanch outflows of much-needed local capital.
Stock exchanges throughout the Arab world today come in two basic forms. The first is typical of emerging markets, resembles the Casablanca Bourse and has counterparts in the other post-colonial countries of North Africa. The companies listed in this type of exchange are often predominantly "hard" industries: manufacturing concerns and utilities. Until recently, these markets have been dominated by relatively small circles of domestic investors who have concentrated their trading activity on limited offerings of government and public-company bonds.
The second type of exchange is typified by Manama's BSE and generally comprises the markets in the Arabian Gulf countries. Its structure is relatively new to the Arab world, and in many ways it has more in common with Singapore or Hong Kong than it does with the formerly colonial exchanges of the Maghrib, the western part of the Arab world. It is driven by a cash-rich economy in which domestic industry often plays a secondary—albeit growing—role in a market dominated by "soft" concerns such as banking and real estate.
Several of the emerging stock markets, particularly those in Morocco, Tunisia and Jordan, are gradually developing increasingly sophisticated investment rules that will permit the formation of the variety of "investment products" confmon in the West— mutual funds, for example—that may stimulate both small and large investors. There are also proposals in these markets to allow Arabs from the Gulf countries to participate.
Among the relative newcomers, but not fitting quite neatly into either the emerging-market model of the Maghrib or the global financial model of the Gulf, is Jordan's Amman Financial Market, or AFM. It is, however, presently the liveliest of all the Arab stock markets, and with good reason: An estimated one out of five adult Jordanians hold shares. This is not far shy of the rate in the United States, where one in three adults owns stock, or in the United Kingdom, where the rate is one in four. Trading volume has grown from $10 million in 1978, the AFM's first year of operation, to more than $2 billion in 1994. Total capitalization of the market now stands at $4.5 billion, and institutions and individuals each account for roughly half of the trading activity.
The AFM is also one of the most diverse markets in the Middle East. The 101 listed companies divide well among industry, real estate and finance. Public confidence in the market is buttressed by strict reporting requirements. Beginning this year, listed companies must provide accounts, prepared by external auditors, that conform to guidelines set by isosco, the international association of stock market regulators.
Because the extent of public participation is an indicator of public confidence, market authorities at the AFM take great care to ensure the stability of their market. Companies wishing to be listed must first be audited and tracked for one year by exchange officials. Then, for a full year following the company's initial public offering, shares are traded only on the AFM's parallel market, which offers a less stringent, over-the-counter style of listing. Only after a final review by Jordanian market authorities are the shares transferred to the AFM proper, and may then be bought and sold on its trading floor, housed in a gleaming-white, terraced tower.
Like all other Arab markets with the exception of Morocco, the AFM distinguishes three categories of investors: its own nationals, other Arabs, and nationals of non-Arab countries. Although regulations in Jordan prohibit foreign investors from holding more than 49 percent of a company, it is estimated that they actually hold only two percent of the shares traded on the AFM, and that non-Jordanian Arabs may hold another 15 percent.
One reason for this low level of non-Jordanian participation is the AFM's lack of mutual funds or other institutional investment vehicles. International investors often use such funds as confidence markers in markets where, because of their lack of familiarity with the local economy, they have difficulty keeping track of developments. But most regional experts believe the lure of increased international investment will lead the AFM to fill this gap in the near future.
Throughout the Middle East, international investment is now widely regarded as one key to national economic growth—yet historically, the Middle East has been "under-lent." In the early 1990's, The Wall Street Journal reports, when international capital flows to emerging markets exceeded $200 billion, only three percent was going to the Middle East, including the Gulf region. Especially in relatively volatile, high-growth markets, stability and investor confidence result from a careful balancing of the freedom to invest, on the one hand, and the control of speculation on the other.
Some markets, such as the AFM and Bahrain's BSE, prevent the short-term speculation that can lead to wild market imbalances by requiring investors to hold their shares for a minimum period of time. The BSE also limits share-price movements over time. In Morocco, although new investment laws do allow foreigners to purchase up to 100 percent of the shares of a given company, salaried employees of listed companies get a 20-percent discount from the market price when they buy their own company's shares—a clear and intentional advantage given to small domestic investors. Moreover, the government is retaining some percentage of ownership in certain companies to ensure that new owners do not mismanage them in some way.
There is another balancing act, too, as Arab exchanges seek to manage the direction of growth. Each exchange wants to expand, but equally, none wants to risk compromising its national or Arab identity. Memories of colonial domination are strong, particularly in North Africa and the Levant. By the standards of London or New York, the Arab markets are new, small, and relatively vulnerable to manipulation by outside investors, particularly large multinational corporations. It is against this background that many of today's investment restrictions were put in place. Still, many exchanges are increasingly willing—and are now sufficiently experienced—to begin to favor growth over protection.
One reason is that many observers in both government and the private sector believe that privatization—with the decentralization and diversification that it brings—may actually help national economies escape domination by well-entrenched local investor groups. "As long as we have control in the hands of family-owned banks, and fail to attract middle-class savings, the privatization program won't work," says Muhammad M'jid, a Casablanca businessman and member of the Moroccan Parliament. "Even small savers should have a right to profit. We have had a bad experience with stock markets in the past because they have been controlled and manipulated" by the wealthy.
In Bahrain, the BSE has opened to foreign investment in cautious stages. Initially, only foreigners resident in Bahrain for five years could buy shares. Then, in 1990, the BSE permitted outside investors to trade in shares of the Arab Banking Corporation, one of the largest financial institutions in the Gulf. Non-resident foreigners were then able to invest in four banking firms out of the total of 32 issues on the BSE. Investors from more than 26 countries now hold shares in one or more of those institutions.
In July, 1994, the BSE relaxed the regulations further. Now, foreigners resident in Bahrain may buy and sell shares in any of the 32 listed companies—but foreign holdings cannot exceed 24 percent of any one company's outstanding shares, and no single individual or foreign institution can hold more than one percent of the shares of any company.
Officials say even these restrictions are likely to be lifted further as the BSE completes its linkage with Oman's Muscat Securities Exchange, a move begun in 1993 and aimed at creating a combined market with 130 listed companies and a $7-billion capitalization.
One innovative way Middle Eastern markets can build a diverse international investor base is a relatively new form of mutual fund that specializes in one region of the world or in one specific country. These "country funds" are designed specifically to attract international capital. Their investments spread across a variety of long-established and newly privatized firms, domestic securities and government treasury bills in their region or country, but the funds themselves are traded on the London, New York and Tokyo stock exchanges.
Worldwide there are now more than 150 such funds, representing more than $30 billion in capital; two decades ago, they numbered only a handful. But as yet only a few operate on the periphery of the Arab world, in India, Pakistan and Turkey. Within the Arab world, leading stock exchanges have begun their development of mutual funds with several "closed-end" funds—a type that puts a ceiling on capitalization—which are expected to be offered in Bahrain, Egypt, Jordan, Morocco, Saudi Arabia and Tunisia within the next few years. Some markets are also looking carefully at India's practice of permitting currency convertibility for certain stock and bond portfolios; the goal is to encourage investment by expatriate nationals while still limiting participation by foreigners. All this, market planners believe, will stimulate private-sector, equity-driven development, particularly in those emerging markets with a history of government-led, centralized development.
The drive to increase the role of private capital is particularly powerful in Egypt. Here, a historic rivalry between Alexandria and Cairo has made it the only Arab country with more than one stock market. The Cairo Stock Exchange, founded in 1883, is the older of the two, which, until the early 1950's, were the largest in the Arab world. Economic reforms now being put in place seek to re-establish Cairo as a key financial center. As in Morocco, privatization is taking place in part by floating shares of formerly public companies on the stock market. But it is a significant challenge. As they do elsewhere, international investors are holding back somewhat as they wait for the regulatory safeguards and more sophisticated reporting and trading mechanisms that will ensure the stability they need.
Over the past two decades, the idea of a pan-Arab stock market has been discussed seriously at most regional economic summits. Such a union—usually envisioned as an expanded version of the Maghrib Union or the Gulf Cooperation Council—would have the advantage of drawing on a far larger body of investors than individual countries can muster.
With its offerings of a larger and more diverse list of companies, such a market might also form a "critical mass" for the Middle East in the world economy. Whereas American, Japanese and European exchanges number their listed companies in the thousands—the three major us exchanges combined list some 7000 companies—each of the Arab exchanges, except for Egypt, trades in fewer than 100 issues. The Kuwait Stock Exchange lists 54 stocks; the Casablanca Bourse trades 65. Saudi Arabia, which accounts for an estimated 50 percent of the region's total capital, has 78 companies listed on ESIS (Electronic Securities Information System), its dispersed electronic over-the-counter exchange.
One development that could spur the establishment of a regional or even pan-Arab exchange is the creation of a "stamp of approval" certification by some internationally respected financial entity. That approval, applied to certain stocks traded on national exchanges, would mark them as meeting international criteria, and would increase participation by investors abroad who lack local market knowledge.
An example of how this might be accomplished already exists. The Bahrain Development Bank (BDB) has helped finance the creation of 40 small- and medium-sized companies, and expects several of them to win listing on the BSE within the next three years. "Right now, we do not pressure them to get listed," says Roger J. Webster, the bank's CEO. "But in the future, this will be an element of our development policy. Listing such companies on the BSE will allow us to re-utilize our development capital faster." .
There have been several proposals to allow the bdb and the BSE to perform a similar role for companies in other Arab countries. One proposal is that companies could issue a special "BSE" class of shares, with a listing in Bahrain. That country's demanding listing requirements would provide a kind of quality rating in home markets.
Discussion of a smaller, Gulf-based regional exchange linking Kuwait, Saudi Arabia, Bahrain, Oman and the United Arab Emirates has been spurred recently by the link already planned between Bahrain's BSE and Oman. Such a Gulf-wide exchange could list 200 to 300 companies with an initial combined market capitalization of $60 to $70 billion; that would place it on par with the relatively developed exchanges of India and Mexico.
But like the BSE , the Gulf-based exchanges see themselves as potentially more than Arab markets: Officials from Kuwait to the United Arab Emirates have pointed out that they are favorably located between Europe and Japan to be a key link in the 24-hour global market. One goal of a Gulf regional market, officials say, would thus be to solicit trade from large transnational and multinational corporations that are seeking round-the-clock availability of market facilities.
Many regard the existing regulatory structures within the 14-year-old Gulf Cooperation Council, or GCC, as the best vehicle through which a regional exchange could be created (See Aramco World, July-August 1990). The six ccc members—Saudi Arabia, Bahrain, Kuwait, Qatar, Oman and the United Arab Emirates—have a combined population of 26 million people and a combined gross domestic product of $250 billion. All have relatively homogeneous populations, developed infrastructures and the internal resources to underwrite their own economic development plans. And all are aware of the economic incentives to strengthen their regional organization.
Member countries are moving to give the GCC additional powers of economic regulation. Cross-border investments, linked stock exchanges and tariff agreements can all be influenced by the prevailing regulatory environment. "The GCC is likely to play a real role as an economic arbiter," says Jean-François Seznec, a professor at Columbia University's Middle East Institute and an authority on banking in the Arab world. "The only way to develop successfully is to integrate economies regionally."
Individually, Bahrain and the uae have already relaxed government controls over foreign participation in their equities markets; Kuwait and Saudi Arabia are now exploring ways they might permit foreign investors to participate in theirs. "There is tremendous pressure for change," says Paul Scogna, a us Commerce Department trade analyst.
The GCC has already had some success in establishing an interbank market—useful for raising short-term government funds—that is linked to money centers in London, New York and elsewhere. But experts say that, while the communications facilities are there, the regulatory framework still needs work. "You need an SEC-type agency to ensure that investors will be satisfied and that transactions will be done in an open manner," says Seznec. "These exchanges need independent rating agencies which can give an impartial evaluation of companies and bond or share issues."
One us banker points out that the Gulf countries, with their substantial incomes and reserves, have all the ingredients to hand to build a successful regional financial market: "You just need agreement on the clearing and payments mechanism. All things are possible if the will is there."
"Arab investors are no different from any others," explains a Gulf-based banker. "They want a good return on their investment."
Josh Martin, a New-York-based journalist and consultant, specializes in Middle Eastern economics.