It is easy to underestimate the pace of change in frontier and emerging markets. Barriers to commerce are falling quickly, with many governments in Asia, Africa and the Middle East committed to making life easier for investors, as a means of attracting overseas capital and knowledge. Some even see an opportunity to steal a march on Europe and North America, by embracing smarter regulation and digital finance. Benefits can be seen in markets where local regulators are open to discussions with market participants to help them make this transition.
Lessons from Greater China
When it comes to nimble regulations, frontier and emerging markets can take inspiration from China, Hong Kong and Taiwan, whose regulators long ago realised that when it comes to financial services, success means quickly updating the rules to reflect changing circumstances and technology. This has never been more important than over the past 18 months, as COVID-19 lockdowns presented a stark choice between innovation, on the one hand, and paralysis on the other.
Regulators across Greater China have been open to suggestions for how to adapt the rules to the new environment while reducing network risk. In Taiwan, for instance, foreign institutional investors seeking to open a brokerage account must submit physical paperwork in order to do so – something made much more difficult by social-distancing and remote-working during the pandemic.
Financial institutions, including Standard Chartered, have been working with the Taiwan Depository & Clearing Corporation to find a better system, one that is more resilient to this kind of disruption. The result is the eSMART system, which will allow securities dealers to digitally handle, transfer, and maintain various book-entry transfer documents via the new platform.1 It is hoped that the platform will launch before the end of this year.
Regulators in the region are amenable to easing such pain-points, but first they must know where they are, which is why industry engagement is important. In China, for instance, until recently there were two different regulatory and quota regimes for Qualified Foreign Institutional Investors (QFII) and for RMB Qualified Foreign Institutional Investors (RQFII).
This system complicated the repatriation of profits, hindered trading and created a burdensome amount of documentation. Standard Chartered and other financial institutions made representations to regulators such as the People’s Bank of China, China Securities Regulatory Commission and the State Administration of Foreign Exchange in order to explain how the system could be streamlined to encourage more activity.
China’s regulators listened. In June last year, they published new QFII/RQFII rules to simplify market access and expand the scope for investment. These included more flexible funding arrangements, relaxation of the rules surrounding the repatriation of profits, and the elimination of the quotas.2
This was not only helpful to global banks and our customers but, by making foreign exchange easier, it also furthered the Greater Bay Area concept, the policy to enhance the links between the economies of Hong Kong, Macau and Guangdong, each of which have their own currencies and regulatory regimes. There remains plenty of scope for tighter links in future. For instance, currently, trading between Hong Kong and China via Stock Connect grinds to a halt if there’s a public holiday on either side, and sometimes for days beforehand.3 Standard Chartered is advocating a new system that avoids this downtime, so that investors can react in a timely way to market fluctuations on those days.
Helping higher-barrier markets improve access
Regulators in Greater China understand that they can attract greater investment into their market by working with market participants to create smarter regulations. This realisation has spread to other frontier and emerging markets that may not be associated in investors’ minds with receptive administration and regulation. Standard Chartered works across Asia, the Middle East and Africa, and we are witnessing this transformation firsthand, along with some impressive growth rates.
Take Kenya. There, recent governments have devoted time and energy to improving the business environment, and the results are paying off – the East African nation now ranks above countries such as Italy and Chile in the World Bank’s widely watched Doing Business ratings.4 This spirit of reform has extended to financial services, including when it comes to open conversation.
A law in 2019, for example, reduced the threshold of shares that a bidder would need to acquire a company from 90% to 50%. With just half the equity, the new owner would be able to buy-out the minority shareholders on a mandatory basis and then de-list the company from the Nairobi Stock Exchange.
Given that the Doing Business index includes the protection of minority shareholders as one of its key metrics, having such a low threshold was likely to have a negative effect on Kenya’s ranking, which Kenya’s national assembly is keen to improve still further.5 Leading Kenyan and international banks, including Standard Chartered, lobbied the government to revise the legislation, and in February 2020 the 90% threshold was restored.6
Indonesia is another country often perceived as presenting high barriers to entry, an impression compounded over the past year by the disruption caused by the pandemic. There, Standard Chartered, together with custodian bank association ABKI, has worked with the Indonesia Central Securities Depository (KSEI) to expedite the launch of the eASY.KSEI platform, to help mitigate the disruption of COVID-19. The platform allows investors to attend general meetings of shareholders virtually, where previously physical attendance was required, and it includes an e-Voting and e-Proxy system.
eASY.KSEI went live on 20 April 2020. Its advantages go beyond social distancing: being an archipelago of five main islands and thousands of smaller ones, travelling around Indonesia can be challenging, so digital solutions make sense. The same is true of the Philippines: there, the central bank, the Securities and Exchange Commission and the Philippine Depository & Trust Corp have permitted the electronic submission of reports and documents during the community quarantine, and have accepted digital signatures. Standard Chartered is working to persuade them and government departments such as the Bureau of the Treasury and Bureau of Internal Revenue to make these changes permanent, in order to unlock the efficiency-gains of digital processes.
Sharing experience through engagement
This kind of engagement should not be seen so much as lobbying as the sharing of experience. By sharing what we’ve learnt from working not only in their domestic markets but in many others, Standard Chartered can engage regulators on the developments and changes that would drive greater market participation.
This collaborative approach also allows us to help our own clients reduce their risks from operating in such markets. That in turn makes frontier and emerging markets more attractive to investors, expediting their national growth and strengthening their resilience to external shocks.