Local financial markets ‘not ready for advanced instruments’

As the Dar es Salaam Stock Exchange (DSE) shows bullish momentum, experts believe CFDs could bring more dynamism to the market. However, significant hurdles remain, including regulatory challenges, the need for infrastructure development, and investor education.

Advisory and Research Manager at Zan Securities Ltd Mr Isaac Lubeja, believes that CFDs could bring diversity to Tanzania’s financial markets.

He noted that DSE’s total market capitalisation has surpassed the Sh18 trillion mark for the first time since 2019 to reach Sh18.24 trillion—marking a 24.89 percent year-to-date increase. “We feel additional financial products, particular derivatives such as CFDs, could be an important addition to the market, opening the door to other derivative products,” he says.

Mr Lubeja also highlights the growing interest in speculative trading among younger investors.

“There is growing interest in diversified investment opportunities among Tanzanian investors, particularly with speculation and taking advantage of price movement as opposed to holding an asset for the long term,” he says.

However, Mr Lubeja emphasises that introducing CFDs would be a gradual process.

“If adopted, we expect participation to be low in the early years as more awareness and education still need to be done for spot trading, let alone derivatives. Moreover, the infrastructure for trading and managing such derivatives would need to be developed, along with risk management protocols and support systems, to fully prepare the market,” he opines.

Orbit Securities’ Investment Analyst, Mr Ammi Julian, also shares the sentiment that the Tanzanian market isn’t entirely ready for CFDs without preparatory investor education and infrastructure. “While there’s a foundation of investor interest in trading and investment products, substantial education and market awareness would be essential to ensure Tanzanians fully understand the risks and mechanics of CFDs,” he remarks.

Certain asset classes would attract early interest if CFDs were introduced. According to Mr Julian tech stocks and major currency pairs like the euro/dollar (EUR/USD) pair will likely appeal to Tanzanian investors.

“Commodities like gold and oil, which are often influenced by global trends and have seen rising interest, could appeal to those looking for exposure beyond the local market,” he notes.

The regulatory landscape is another factor that could influence the adoption of CFDs in Tanzania.

Chief executive officer of the financial firm Exodus Advisory, Mr Ramadhan Kagwandi, says Tanzania’s financial sector remains tightly regulated.

“Derivative transactions, including swaps, face strict regulations by the Bank of Tanzania (BoT). Since 2015, swaps and derivatives in Tanzanian shillings are restricted to licensed banks with specific conditions, limiting exposure to residents and prohibiting short-term transactions with non-residents,” he said.

While CFDs could bring diversity to Tanzania’s financial landscape, experts agree that the timing must align with market readiness.

“The current regulatory framework and market maturity suggest that introducing CFDs may be premature for Tanzania. Developing existing financial instruments and market infrastructure, as per the Master Plan, would be prudent before considering complex derivatives like CFDs,” he explains.

He adds that Tanzania’s financial markets, such as the DSE, remain in a developmental phase.

“Liquidity and market depth are limited, and the Financial Sector Development Master Plan (2020/21–2029/30) outlines strategies for enhancing financial sector contributions to economic growth,” notes Mr Kagwandi.

While CFDs offer potential benefits, such as giving investors access to international markets and enhancing market diversification, experts agree that introducing them prematurely could expose investors to unnecessary risks.