Part 1 Continuation– The Economic Moat For The Rich And Powerful

It was the 35th President of the USA, President John Fitzgerald Kennedy, aka JFK, who once said,

‘‘CONFORMITY, IS THE JAILER OF FREEDOM AND THE ENEMY OF GROWTH.’’

To conform is; ‘‘…to follow prevailing standards or customs’’. Regulation, by nature, is, ”The act of forcing someone or something to strictly adhere to the prevailing standards and customs”. So according to the transitive principle of logic, one can say;

‘’REGULATION, IS THE JAILER OF FREEDOM AND THE ENEMY OF GROWTH’’

I must preface this by saying, just like sports matches need refereeing, there is a need for some regulation in markets and economies. However, the level of regulation reaches a point of diminishing return very quickly, especially in infant economies such as Zambia. This is because the primary goal of infant economies is growth, and regulation is just there to ensure there is no long term damaging toxicity to growth, but is not there to impede it. Some of the regulators have understood the context of the market and learnt to draw a line early, but many of the regulators on the market have been guilty of massive overreach, doing more harm than good, and no one has been guiltier of said overreach, than the Securities and Exchange Commission of Zambia.

The commission seems to be on some rogue mission to take down as many local capital markets businesses as possible, in the name of some Foreign and Big Business only agenda for the capital markets.

The commission has, of late, become the judge, jury and executioner of the market. Through a series of hostile actions, it seems to carry the sentiment that the Zambian people are not worthy enough to fruitfully and gainfully participate in their own market. At this point, the commission seems determined to exterminate every local entrepreneur from the capital markets. Regulation has moved from a tool of protection and administration to a WEAPON OF EXCLUSION.

Dynamism, competition and innovation, in general, best serve free markets. However, the commission has decided to circumvent the free market and make itself God, by selecting market winners and losers. Like most Zambian regulators, it tends to come down on the side of the Big and Foreign players. The average Zambian regulator cannot seem to stand the idea of honest business success by locals with no political ties.

The commission, like most regulators, have spent their existence infringing on the Economic freedoms of the citizens of Zambia using the following tools;

1. Entry Requirements that are out of the Reach of most Zambian Entrepreneurs.
2. Operational rules and Practices designed to bankrupt the small and often local players.
3. Anti-Local Private sector and Pro-foreign career bureaucrat staff who evidently despise local entrepreneurs.
4. It’s support for Monopolies and Oligopolies in the market at the expense of the market and the nation at large.
5. Continuous expansion of its own rules and powers at the expense of the dynamism of the market.

Is this even really in the name of INVESTOR PROTECTION anymore, or is it now just in the name of POWER and EGOS?

In this series of articles, I will tackle the tools of disenfranchisement that the Commission, like its fellow enemies of Growth, engage in.

Firstly, we are going to look at how the commission has now become an Economic Moat for the Big and Foreign. As a castle moat may protect a kingdom, it primarily protects the interests of the KING. The commission is now protecting the interests of the industry Kings above the interests of the people. The Zambian people are almost viewed and treated as peasants, not worthy of being in the market.

The purpose of an economic moat is to protect the profits and Power or Dominance of a big business.

Economic moats fall into 3 categories, and these are;

1. OPERATIONAL COMPLEXITY.
2. HIGH CUSTOMER SWITCHING COSTS.
3. BRAND LOYALTY or BRAND EQUITY.

These economic moat factors can act as a barrier to competition. The commission has become an OPERATIONAL COMPLEXITY MOAT for the established players, making it difficult for new entrants to even get in the market in the first place.

In 2017 the commission shut down a youth-based Fin-tech start-up called LCB Moguls. All for the crime of daring to innovate in the property space. Instead of choosing unemployment, political noise making, cadreism or activism, the founders of LCB Moguls simply wanted to make property purchase and ownership better with an electronic cloud-based platform that would serve the local property owners and brokers. In the Commission’s usual jealous reaction they decided that privately writing to, and helping, a young innovator was not in order. The commission, therefore, decided to crush the company with a public stop order and caution. In addition, the commission slapped the company with a series of requirements they knew were out of its reach by demanding it converts to a Collective Investment Scheme.

Here are the Collective Investment Scheme Requirements usually requested by the Commission:

• You need to get a Dealer’s License from SEC which requires the following

1. 20,000 kwacha paid upfront for the FIRM
2. Capital Markets Association of Zambia annual membership, which costs 8,000 kwacha.
3. You must own or rent an office space that still needs to be approved by the commission.
4. 3 full-time employees or partners who will act as dealers representatives and must also fulfil the following criteria:
   1. They must all have completed the Investment and Securities course or at least have a relevant degree in the field of Economics or Financial Markets.
   2. They must all be a member of The Capital Markets Association which has an annual cost of 2,000 kwacha for each of them.
   3. One of them must act as your INTERNAL COMPLIANCE OFFICER for purpose of Financial Intelligence Act adherence.
   4. They must all have a Securities and Exchange Commission Dealers Representative Practicing License, which has a cost of 4,000 Kwacha for each of them.
5. You Must have a 3-year business plan with 3 years financial projections
6. You must have an Anti-Money Laundering Policy which is subject to SEC Approval
7. You must have at least 2 independent Directors who have passed police clearance.
8. You must have a minimum of 50,000 kwacha of cash in the bank at all times.
9. You must already have a credible audit firm which can cost you anywhere upwards of 20,000 kwacha per year.
   

• You Also Need a collective Investment Scheme License which requires the following

1. 100,000 kwacha for SEC application of the scheme
2. A trust Deed for the fund put together by a credible LAW FIRM
3. A tentative agreement with a Trustee and Custodian Bank
4. An automated fund management system which will cost you anywhere north of USD25,000 per year and a setup fee of USD10,000.
5. Marketing material that will probably cost you 5,000 to 10,000 kwacha for graphic design work.

You need, at least, 90 days of cash on hand, above the 50,000 kwacha needed in your bank account, to take you through the application process, which is a statutory period of 90 days and goes through 3 bureaucratic tiers of tedious government meetings.

When totalled you are looking at a 250,000 to 1,000,000 kwacha process. How can one reasonably expect a group of 20-year-old innovators to have that capital? This was all a method to systematically exclude and destroy their dreams as part of the commission’s agenda. It appears the commission is more comfortable with unemployed youth than the idea of actually serving the people of Zambia.

The commission claims to have 2 arguments to protect the extent to which it conducts such stringent entry requirements:

1. It’s mandate of Investor Protection
2. It claims to be inexpensive against other jurisdictions.

Let’s unpack these arguments offered by the commission.

Let’s start with the second argument of it being inexpensive against other jurisdictions. On face value, this is correct but does not take into consideration the context of the average Zambian entrepreneur. This is a chronic mistake made by many regulators in Zambia and is the reason why 60% to 80% of the Zambian private sector is controlled by 250 foreign-owned companies. The entry standards are inexpensive for the average foreign investor, but in the case of local start-ups, such requirements are excessive.

According to various surveys, the average local entrepreneur’s starting capital ranges from $250 to $20,000. One can conclude that 1 million Kwacha, or USD50,000, in starting costs is excessive to the average entrepreneur. These entry-level requirements are more exclusionary than precautionary. This leaves the markets only available for foreign companies and Big businesses who can access credit of such a nature. So the question is, who do they serve? THE PEOPLE OF ZAMBIA? or the GLOBAL ECONOMY?

Now let’s address the argument of local Investor protection. Intense competition and low switching costs are the best way to empower the local investor. These rigid entry standards block competition and become detrimental to the local investor. The commission is actually putting the power in the hands of the RICH and POWERFUL incumbent businesses. In the name of Investor protection, the commission is the one reason why local investors get sloppy service and no innovation. Innovation in many industries comes from cash strapped new entrants trying to grow. This is the reason why Zambia does not have Mobile Banking innovations or Exchange Traded Funds, which would improve local uptake. This is also one of the main reasons why the nation has struggled to channel local household savings to government securities like bonds and treasuries.

The capital markets are now sitting with virtual monopolies and powerful Oligopolies:

1. Over 60% of Assets in fund management are managed by African Life Financial Services.
2. The Lusaka Securities Exchange is the only active Securities Exchange in Zambia. The other 2 that have attempted to set up, have died by the sword of the commission. The Lusaka Securities Exchange has a virtual monopoly on equities and bonds in Zambia.
3. The Securities Brokerage industry has 6 firms participating in it. However, 66% of all clients and 80% of turnover is with 2 firms. The Consumer Protection and Competition Commission has even launched cartel investigations on them.
   

This chronic Lack of financial markets innovation has left the market experiencing;

1. Slow Growth in Assets Under Management
2. Slower and lower levels of financial inclusion due to Lack of simplified, Low-income inclusive market products and services.
3. The Lack of Asset Class innovation has led to the same stale products which fail to resonate and connect with the Zambian investors.
4. Slow growth in listed companies to the point that 23 years after the launch of the stock exchange there are still less than 25 listed companies on the market.
5. Lack of Fin-Tech integration to take the capital markets to the fastest growing financial service delivery method, mobile technology.

Job growth in Capital markets have been slow and few to speak of because of lack of market growth, crushing the dreams of young graduates, who aspired to become stockbrokers and fund managers, after watching TV shows like BILLIONS.

Here are some regulatory reforms that are desperately needed to remedy this;

1. PLACE EXPRESS ECONOMIC RIGHTS AND BUSINESS FREEDOMS IN OUR NATIONAL CONSTITUTION. Make the right to start a business an expressly stated civil right that is enshrined in the constitution. This will create a legal grounding for protection against Regulatory overreach. The regulators are regulating the industries but who is regulating the regulators? So, therefore, the nation must assign the constitution to regulate the regulators.
2. PROHIBIT ALL REGULATORY AUTHORITIES AND ENTITIES FROM ERECTING FINANCIAL AND NON-FINANCIAL BARRIERS. This also includes excessive time taken to process applications, cumbersome procedures and burdensome requirements.
3. PROHIBIT FORCED MEMBERSHIP OF INDUSTRY ASSOCIATIONS.
4. ADOPT A NATIONAL POLICY OF LIGHT TOUCH REGULATION. Industry growth and job creation should be prioritized above regulation. The Zambian economy must seek to make high levels of intense competition and basic rules, the front-line form of regulation. Assign the judiciary to handle disputes and only bring the regulator where competition and the courts have failed.
5. INTRODUCE A MOVEMENT OF REGULATION THROUGH PLATFORM PROVISION. Tech Platforms have proven that they are the most market effective but still small-business friendly way to regulate. These platforms help absorb some of the capital costs they would otherwise require.
6. REJECTED APPLICATIONS SHOULD BE JUSTIFIED IN WRITING TO THE APPROPRIATE MINISTRIES. These rejections should also be challengeable in court.

Here are some industry specific reforms to the capital markets to help improve entry:

1. The commission needs to remove, or waive, the entry level license fees for the first 2 to 3 years of business.
2. Reduce the licensing process to 14 days from 90 days.
3. Digitize and create a self-service licensing process, to reduce cumbersome human intervention.
4. Create a cloud-based digital markets management open access platform. This should include features like fund management, trading, exchanges, customer on-boarding and more. This will give the commission better quality control through facilitation rather than exclusion.
5. The commission must abolish forced membership to the capital markets association as it only serves as a market deterrent.
6. The Commission must justify all rejections in writing to the Ministers of Finance and Trade and Commerce.
7. Create a regulatory overreach function in the courts to report the regulators.
8. Adopt a GROWTH-FIRST Policy of the securities and investment market.
9. Repeal and replace the Securities Act of 2016 and introduce a lighter version of the act. The new version should roll back cumbersome rules and excessive powers of the commission or at least create more accommodative tiers that cater specifically for local players and youth enterprises who want to participate in the capital markets.

Such changes should promote more financial innovation and inclusion. This should also allow the capital market to play the role of growth engine rather than just a rich boys club. This calls for a strong and stern reduction in regulatory powers and bureaucratic structures through change of law. Zambia needs to change to a PRO-LOCAL PRIVATE BUSINESS approach to regulation. Finally Zambia needs to REGULATE THE REGULATORS. This is not just a capital markets problem, it’s a cross industry problem and the capital markets are just the test case.

 

It is up to every citizen, public official, thought leader and stakeholder of the nation to finally turn their attention to the problem of excessive regulation in Zambia. The nation must put an end to this hostility towards entrepreneurs that many of the regulatory authorities, such as the Commission, have towards the, already few and far between risk-takers and change-makers amongst us who conduct the most patriotic activity of job creation. Over 90% of voting-age citizens of Zambia see jobs and the economy as the key issue that governs their vote. Ironically, hostile regulators, such as the commission, are actively working to supersede the will and the desires of the PEOPLE for the sake of their own power plays and thus, as usual, Democracy Is Taken Down And Destroyed By A Shadow Cabal Of Unelected Bureaucrats.

By Daniel Mwamba Chairman Zambia Road Safety Trust (ZRST)

In the wake of the Nakonde-bound Likili Motorways Bus horror leading to the death of five innocent people and leaving more than 45 injured, witnesses reports of surviving passengers in this fateful bus, have raised the issue that the driver was over-speeding, and they saw it that it was just a matter of when and not if the accident will happen.

It’s evident that speeding endangers not only the life of the speeder but all of the people including the passengers, and other people on the road around them.

This is a problem we all need to help solve. Speeding is more than just breaking the law. The consequences are far-ranging greater potential for loss of vehicle control, reduced effectiveness of occupant protection equipment (seatbelt), increased stopping distance after the driver perceives a danger, increased degree of crash severity leading to more severe injuries or even death, economic implications of a speed-related crash and increased fuel consumption/cost, etc.

I want to emphasize two key points here about excessive speeding: first, the urgent need for tougher action to tackle speeding offenses by the government; and, secondly, the need to explore how to improve road safety and reduce the number of unnecessary deaths that occur on our roads.

It is my strongly held belief that collisions and road traffic accidents are not inevitable and that we should not accept them as such. Whereas society expects high safety standards in many aspects of our lives in which there are inherent risks, there sometimes seems to be a different culture on the roads.

There is no doubt that inappropriate speed is one of the most serious road safety problems on Zambia’s roads, and causes death and injury to thousands of people each year. Unfortunately, Zambians have not yet accepted the danger caused by speeding drivers in the same way as the danger caused by drink-drivers.
And I do not think that any of us will be surprised by the fact that speeding is the most common driving offense on Zambia’s roads according to the police, which currently accounts for around a half of all road fatalities.

Let us review penalties for speeding offenses, especially those leading to the death of innocent people.

The Zambia Road Safety Trust (ZRST) has produced guides and toolkits to help spread the message about safe driving, including tips on what you can do if you encounter a speeding driver on the road. ZRST is also working with government road safety agencies (Police and RTSA) to heighten awareness of the speeding problem in Zambia and help deliver effective enforcement countermeasures to combat it.