By: Edwin Potsiwa
This week I have decided to present a case for the need of a derivative market as an integral part of the capital market in Zimbabwe. Zimbabwe’s financial sector has registered phenomenal growth when tracked back to the pre-liberalisation period. However the current macro economic problems have set back financial sector growth and sophistication due to a series of financial services company closures and a general lack of confidence in the banking system. It is during this period when the dream of a vibrant derivative market was thwarted as all derivative desks were closed. Zimbabwe as an emerging capital market can not afford to ignore the relevance of the derivative market. The global financial system has since incorporated a vibrant multi-trillion dollar (US$) derivative market. In fact statistics show that the derivative market is fast overtaking the market for the underlying assets.
A derivative market is one in which financial instruments called derivatives are traded. Put simply a derivative is a financial instrument whose value is derived from that of an underlying asset. Its value is determined by the value of another asset. Zimbabwe had introduced the most simple and common derivatives such as options and forward contracts. An option is a right but not an obligation to buy or sell an underlying asset (e.g. stock, currency, commodity, stock index or even another derivative!) at a price determined on the onset of the contract (exercise price) to be paid at a specified future date (expiration date). Other derivatives that I believe have scope in Zimbabwe at the moment include futures, swaps, FRAs and forwards. Derivatives are used as hedging instruments by almost all economic agents from all walks of life and in day to day activities. This week I was flipping the papers of a local daily paper and noticed an advert for someone intending to engage in swaps on rentals! The Zimace exchange, if revived can be used by the farmers. It is important to stress that, derivatives can not only be held for trading positions but also be traded for hedging a number of business risks. This is an area where regulators are sometimes sceptical about opening a derivative market. The case of Barings` Nick Leeson rings a bell. However a number of initiatives from various stakeholders need to be made to ensure a safe, efficient and vibrant derivative industry in Zimbabwe. Zimbabwe can not lag behind in this global trend. Below I suggest (and possibly introduce a forum for discussion) what is needed for the resuscitation of this critically important market. This week I will discuss the role of regulators in this initiative. The next article will discuss the role of financial and business schools as well as that of industry in the establishment of a Derivative market in Zimbabwe
Stringent regulation of the derivative market is a cornerstone for success and stability of the market. There is need on the part of regulatory bodies to train staff on the operation of derivative markets or even secondment to other markets like South Africa near home. Zimbabwe has excellent financial practitioners who can be able to devise appropriate regulations such as limit positions, tick values and establishment of a derivative exchange. Experience in other derivative markets show that regulatory changes need to be at speed with financial innovation to thwart emergence of unregulated activities that may adversely affect the entire financial market. Cases where regulation lags behind financial innovation lead to regulators closing or restricting certain derivative products mainly because of information gap that exist in the market, both from regulators, financial services consumers and the bankers. This gap needs to be closed to foster derivation market development. Macro economic policy stability is equally critical to facilitate this financial revolution called for. To start with, the market can take off with relatively simple derivative products such as forwards, futures, options and swaps which can easily be understood by financial widows and orphans.
Until next week, think derivatives
Rashid Mudala: 091 276 226
Shepherd Shambira :091 252 639
First Mutual Limited Head Office: (263) (04)886000/34
Fax: (263) (04) 886043