Capital markets refer to the part of the financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments. The first fully-fledged capital markets have their origins in the Netherlands in the Amsterdam Stock exchange where the Dutch East Indian Co. and the Dutch West Indian Co. allowed for participants to place their money in these companies while going on voyages, the victor getting back a share of the profits if the ships returned from said voyages. Eventually, these developed into the modern capital markets we know today such as the New York Stock exchange, Hong Kong stock exchange, and the London stock exchange. These capital markets have allowed countries to develop and expand their economies at relatively faster rates into some of the most sound economies we know today (obviously discounting the current economic climate caused by COVID-19).
So why is it a majority of African countries have neglected their capital markets? Why isn’t there as much participation in these markets? After all, what capital markets especially the stock market are the representation of the public faith in companies who they believe will make big economic strides for the better of the country.
According to the World Economic Forum, half of the world’s fastest-growing economies are in Africa with the continent’s biggest capital market and the stock exchange being the Johannesburg Stock Exchange in terms of market capitalization. There has been at least one African stock market in the top 10 best-performing markets since 1995, Uganda, Kenya, and Ghana being among the best performing in the world. So why is it that despite this performance there is little attention given to African capital markets and low levels of liquidity in such markets despite several studies showing a strong relation to stock market development and growth in Africa?
One of the possible explanations of this dilemma lies in the low-income levels in Africa. The majority of African economies have the biggest number of the working population in the informal sector. The informal sector doesn’t attract the kind of wages which allow for the possibility of income left after expenses to invest in such markets. Bearing in mind investment in the capital markets needs for the required participant to have some income they can put away for a long period (most likely a year) without feeling the burden of investing that money something that wages in the informal sector rarely allows for.
Secondly, very little to no attention is given to educate the masses on the benefits of rallying behind the capital markets in Africa. The majority of the participants in African capital markets are those who took an interest in the market and are mostly self-educated. This is as opposed to other forms of investment such as agriculture and real estate to name a few where you see a large number of people investing their money because these other forms of investment have received wider coverage on their benefits as opposed t capital markets. Another possibility being is that many see the capital markets as complicated and you don’t see anyone coming out to explain the various ways of investing in the capital markets and to demystify what quite a large number doesn’t know about the markets.
The markets’ performance can also be attributed to low levels of market regulation, compliance, and risk management. Take for example the Securities Exchange Commission(SEC) which regulates and oversees the markets of the New York Stock Exchange whose job is to monitor and audit companies that are listed on the various stock indexes such as the NASDAQ, the Dow Jones and the S$P 500. If there is a lack of such an almost omnipresent institution regulating these markets, then there is little to no investor confidence in the African capital markets because how will they be safeguarded from illegal trading activities such as fraud and insider trading. Empirical evidence shows a correlation between well-regulated markets and economic growth.
So with a few of these problems facing the African capital markets, is it then still justifiable to have hope in African capital markets to foster economic development. In my opinion of course and why not?
Firstly many private and institutional investors outside Africa have taken a keen interest in the emerging economies and markets of Africa to diversify their portfolios and hedge against their risks. Also, there is evidence of more and more participation of the African population in these kinds of markets. More and more people are taking an interest in capital markets as an alternative form of investment one of the biggest factors being companies that offer attractive growth rates hence investors have the option of selling their shares for a profit in case the companies do well or because of the attractive dividends paid out to shareholders.
So in conclusion, while the African capital markets face an uphill battle to become as profitable and as recognizable as other capital markets world over, the evidence suggests that sooner or later participation in the capital markets in Africa is inevitable owing mainly to their consistent performances and more and more Investors especially those outside of Africa taking a more than a keen interest in such markets.