The regulatory and tax frameworks governing the Dar es Salaam Stock Exchange (DSE) form the backbone of Tanzania’s capital market infrastructure. At the core of this system lies the Capital Markets and Securities Act (CMSA), which establishes the Capital Markets and Securities Authority (CMSA) as the principal regulator. This Act provides a legal framework for licensing, enforcement, and investor protection, ensuring a transparent and secure investment environment. According to Mr. Beatus Mlingi, a research analytics manager from Vertex International Securities highlighted “The CMSA has been instrumental in fostering trust and stability, as reflected in the DSE’s growth in local market capitalization, which reached TZS 16.834 trillion (USD 6.3 billion) by mid-2024.” However, the Act’s stringent compliance requirements present significant challenges, particularly for small and medium-sized enterprises (SMEs), which often face high costs and administrative burdens. This dynamic underscore the need for a more inclusive approach to encourage broader participation.
Regulatory Frameworks
Building on the CMSA, an anonymous director of the Dar es Salaam Stock Exchange highlighted that the DSE Rules of 2022 provide a robust operational framework. These rules define listing requirements, trading procedures, and disclosure obligations, fostering transparency and standardization among market participants. By mandating high corporate governance standards, they enhance investor confidence and ensure market integrity. Despite their strengths, analysis reveals that the rigidity of these rules often poses significant challenges for smaller businesses. The intricate and time-intensive listing procedures, for example, deter many potential entrants, thereby restricting the market’s diversity and dynamism. Addressing these barriers through streamlined procedures and tailored support for SMEs could significantly expand the exchange’s reach.
Foreign investment is another critical aspect of the DSE, regulated by Tanzania’s foreign investor policies. These policies balance the need to attract foreign capital with protecting national interests, particularly in strategic sectors. Currently, foreign investors account for a substantial portion of the DSE’s market capitalization, contributing to liquidity and market depth. However, restrictions on foreign ownership in certain industries may deter large-scale investments, reducing the market’s competitiveness compared to regional exchanges with more liberal policies. Revisiting these restrictions, while maintaining safeguards for key sectors, could unlock greater capital inflows and stimulate economic growth.
Tax Policies
Complementing the regulatory framework, Tanzania’s tax policies provide incentives to encourage participation in the DSE. The corporate tax incentive, which reduces the tax rate to 25% for newly listed companies for three years, is a notable example. This provision has been effective in encouraging companies to list, driving a 15% annual increase in operational capacity for beneficiaries. However, its short duration limits its potential for long-term impact.
Similarly, the withholding tax on dividends for listed companies is reduced to 5%, compared to 10% for unlisted entities. This policy enhances the attractiveness of listed firms, driving higher liquidity and participation. Yet, the disparity in tax treatment creates competitive imbalances, potentially disincentivizing unlisted companies from pursuing public listings. Furthermore, the reduced tax rate results in foregone government revenue, presenting a challenge to balancing market growth with fiscal sustainability.
The capital gains tax exemption on listed securities is another pivotal incentive, encouraging investment and trading activity on the DSE. By exempting listed securities from the 10% capital gains tax applicable to unlisted securities, this policy drives market liquidity and attracts long-term investors. However, it may also encourage speculative trading, increasing market volatility. Additionally, the higher tax burden on unlisted securities creates equity concerns, potentially deterring investment in other segments of the market.
Lastly, the stamp duty exemption on transactions involving listed securities reduces trading costs, making the DSE more accessible to retail investors. This exemption has been a significant factor in the recent 20% growth in retail investor participation, improving liquidity and market activity. However, the policy’s narrow application results in lost revenue and competitive disadvantages for unlisted securities.
Tax-Based Recommendations
Tax policy reforms are fundamental to fostering inclusivity and competitiveness in Tanzania’s capital markets. Currently, corporate tax incentives for newly listed companies offer a reduced rate of 25% for three years, which has encouraged some growth but lacks the longevity needed to sustain impact. Singapore’s success with tax reforms provides an exemplary model: newly listed firms enjoy tax exemptions for up to five years, alongside financial grants covering up to 70% of listing costs. These policies contributed to a 40% increase in new listings over a decade, creating a vibrant and diversified market. By extending Tanzania’s corporate tax incentive to five years and introducing subsidies for SMEs covering 50% of listing costs, the DSE could attract 15 additional listings annually, potentially increasing market capitalization by TZS 2 trillion (USD 800 million) by 2030. Such reforms would not only reduce entry barriers for smaller firms but also enhance the exchange’s diversity and depth.
According to a tax consultant from one of Tanzania’s top four audit firms, revising withholding tax policies could significantly boost market participation. Currently, listed companies benefit from a 5% withholding tax on dividends, compared to 10% for unlisted entities, creating a disparity that may discourage unlisted firms from formalizing. Drawing from the Nairobi Securities Exchange (NSE) model, which uses tiered withholding taxes to reward unlisted companies meeting compliance and reinvestment benchmarks with reduced rates, Tanzania could implement similar reforms. Such a move could encourage 20% of eligible unlisted firms to formalize or list on the DSE within five years, potentially increasing annual trading volumes by TZS 500 billion (USD 200 million) by 2030. Additionally, extending reduced withholding tax rates to shareholder returns, such as bond interest and share buybacks, would align Tanzania’s tax framework with international standards and attract a more diverse investor base.
The capital gains tax exemption for listed securities has successfully spurred trading activity in the DSE but creates a disparity with the 10% tax applied to unlisted securities. This imbalance discourages investment in private markets, particularly SMEs. South Africa’s balanced approach offers valuable insights: listed securities are taxed at a minimal 3%, reducing speculative trading while maintaining investor confidence. Tanzania could adopt a similar system, generating TZS 1 trillion (USD 400 million) annually in additional revenue while fostering long-term investments.
A senior tax advisor remarked, “Introducing a tiered capital gains tax system or providing exemptions for reinvested gains could drive higher trading volumes and improve market liquidity. Additionally, establishing tax-free accounts, similar to the UK’s Individual Savings Accounts (ISAs), would encourage long-term participation in the stock market, helping retail investors build wealth while bolstering market stability. When paired with incentives for holding securities over extended periods, as demonstrated by India’s long-term capital gains exemptions, these reforms could reduce speculative trading, stabilize the market, and strengthen overall resilience.”
Complementing these reforms, adjustments to stamp duty policies could address inequities and fiscal constraints. Currently, listed securities enjoy exemptions, but unlisted securities face stamp duty requirements, disadvantaging smaller issuers like SMEs. Nigeria’s dual approach, which imposes a nominal 0.1% duty on listed securities and provides partial exemptions for unlisted securities in strategic sectors, has increased participation while recovering lost revenue.
A realistic projection for revenue from a 0.1% stamp duty on listed securities at the Dar es Salaam Stock Exchange (DSE) considers current trading volumes and growth potential. With a market capitalization of TZS 16.834 trillion (USD 6.3 billion) and an annual turnover ratio of 20%, the annual trading volume is approximately TZS 3.37 trillion (USD 1.26 billion), generating TZS 3.37 billion (USD 1.26 million) annually in the short term.
Reforms targeting SMEs and strategic sectors could raise the turnover ratio to 30-40%, increasing trading volumes to TZS 5-7 trillion (USD 2-2.6 billion) and revenue to TZS 5-7 billion (USD 2-2.8 million) annually. Long-term growth at 20% annually could see trading volumes reach TZS 50 trillion (USD 18.6 billion), generating TZS 50 billion (USD 20 million) annually within a decade, supporting fiscal goals while fostering market growth.
These changes would encourage broader market participation, particularly from sectors aligned with national priorities like renewable energy and infrastructure, fostering inclusivity while maintaining fiscal sustainability.
Regulation-Based Recommendations
A financial market specialist noted, “Regulatory reforms are essential for fostering market participation. Establishing an SME-focused board within the DSE, modeled after India’s Bombay Stock Exchange (BSE) SME platform, could greatly enhance access for smaller firms. Since its launch in 2012, the BSE SME platform has enabled over 400 SMEs to raise a combined $4.6 billion, driving growth and visibility. Tanzania could achieve similar success by targeting at least 50 SME listings by 2030. Tailored listing requirements, capacity-building initiatives, and subsidies for listing costs would reduce entry barriers, while active engagement from institutional investors would ensure liquidity, potentially boosting daily trading volumes by 20% within the next five years.”
Governance and compliance improvements are also necessary for enhancing investor confidence. Singapore’s Monetary Authority provides an effective example through its use of real-time digital compliance monitoring and automated enforcement systems. Introducing similar tools in Tanzania would streamline oversight, improving compliance rates among listed companies to 95% within three years. Additionally, governance training programs for SMEs and listed firms could raise the number of companies meeting listing standards, fostering a 20% rise in SME participation by 2030. Such measures would enhance transparency and trust, vital for attracting long-term institutional investors.
Development-Oriented Recommendations
Tanzania’s capital markets must align with national development goals to maximize their impact. Relaxing foreign ownership restrictions in non-strategic sectors, as demonstrated by Kenya’s Nairobi Securities Exchange, can attract substantial foreign investment. Kenya’s foreign investors now account for 51% of trading activity, contributing USD 1.1 billion annually. By revising ownership caps in Tanzania, foreign investor participation could rise from the current 40% to 55% by 2030, bringing an estimated USD 500 million in additional annual inflows. Clear regulatory guidelines and guarantees against policy reversals would further bolster investor confidence, ensuring a stable and transparent environment.
A capital markets analyst stated, “Innovative financial instruments like exchange-traded funds (ETFs) have the potential to drive diversification and growth in Tanzania’s financial markets. The U.S. provides a compelling example, with ETFs evolving into a $6 trillion market, accounting for 30% of market activity. Tanzania could replicate this success by introducing ETFs focused on regional indices or key sectors such as agriculture and renewable energy, aiming for these instruments to contribute 10% of DSE trading activity by 2030. Coupling ETFs with financial literacy programs, similar to Rwanda’s outreach efforts, could boost retail investor participation by 50% within five years, enhancing market accessibility and engagement.”
Technological Integration Recommendations
Technological advancements have immense transformative potential for Tanzania’s capital markets. Research highlights how India’s Zerodha revolutionized stock market access through its low-cost, technology-driven platform. By offering zero brokerage on equity delivery and a flat ₹20 fee for intraday trades, Zerodha attracted over 6.3 million active clients, accounting for 18.33% of India’s investors in 2022. This innovative approach not only democratized trading but also significantly boosted retail participation, setting a benchmark for leveraging technology to enhance market inclusivity and accessibility.
Tanzania can replicate this by enhancing “Soko la Hisa Kiganjani” with mobile money integration to improve accessibility, especially in rural areas. This could double retail participation to 40% of market activity by 2030, driving inclusivity, market growth, and fintech-aligned modernization in the DSE.
Automation of regulatory processes can further enhance efficiency and attract international investors. South Africa’s Johannesburg Stock Exchange (JSE) employs automated compliance tools to minimize fraud and streamline oversight. Projections indicate that implementing similar systems in Tanzania could reduce compliance delays by 50% and increase foreign investor activity from 40% to 55% by 2030. Such advancements would elevate the Dar es Salaam Stock Exchange (DSE), positioning it as a technologically advanced and globally competitive market.
Afterword
By integrating tax reforms, regulatory enhancements, development-oriented strategies, and technological advancements, Tanzania can transform the DSE into a dynamic and inclusive financial hub. Lessons from global success stories, such as India’s SME platform, Singapore’s tax policies, Kenya’s foreign investment strategies, and South Africa’s technological innovations, provide a clear roadmap for actionable reforms. These measures, tailored to Tanzania’s unique context, will foster market growth, attract diverse investments, and align with national development goals. Together, they will establish the DSE as a regional leader in capital markets, driving long-term economic prosperity and sustainable development.
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