The global capital market topical issues in recent times has been on issues such as introduction of dark pools as alternative trading platforms, blockchain technology, distributed ledger technologies, role of central counters parties (CCPs) in clearing and settlement of over the counter (OTC) transactions as well as exchange traded derivative instruments, etc — as it is, we are operating in the same global markets and competing for the same share of global capital for our economic development. While these are topical issues in the capital markets space, for us our key issues remains to be: lack of awareness and education by the public about matters of stock markets, mechanisms for enhancing more listings of cash-based instruments, tools for liquidity enhancement in the market, etc and this somehow make me think about our journey and far we are to getting there. Second generation plain-vanilla products such as real estate investment trusts (REITs), exchange traded funds (ETFs), closed-ended collective investment schemes, municipal bonds, industrial or infrastructure bonds, securities lending and borrowings, etc — seems to be in our distant future.
However, while I think of that, I am also mindful of what we have achieved in these two decades since the establishment of the stock market in 1998. So — what have we achieved? and most important what is the potential of stock markets development for our economy? I will explain: Since the enactment of the Capital Markets and Securities (CMS) Act, Cap. 79 of 1994 and the establishment of the Capital Markets and Securities Authority (CMSA) in 1996 there has been several development in the Capital markets space; notably: the operationalisation of the Dar es Salaam Stock Exchange; introduction of collective investment schemes; privatisation and listing of some state owned entities (albeit just a handful); listing and trading of government bonds at the exchange; listing of 27 equity companies and 16 corporate bonds in the exchange; growth of capital markets contribution to the gross domestic product (GDP), to about 20 percent (at the current market capitalisation of about Sh23 trillion); increase of number of Tanzanian investing through the exchange to about 500,000; demutualisation of the DSE to make it more effective in responding to markets needs and competition as well as its governance enhancement, etc.
Despite these milestones, the potential for capital market’s contribution to the economic growth and social economic development could be far much better. There are opportunities for creating awareness, increasing liquidity as there are opportunities for introducing second generation products as discuss global topical issues. And hey, if we could do better, what would that mean? To respond to such a question, one has to ask — what is the role of the capital market in an open society, whose economic model is market based and supposed to encourage private enterprise?
The existence and actually the growing of the capital market offers a variety of financial instruments that can enable economic agents with the country to raise efficiently priced capital and manage financial risks. Additionally, through assets with attractive yields and enough liquidity but with still risk characteristics, the capital market has the potential of encouraging savings in the long-term financial form. Capital markets as an integral part of the financial markets plays a pivotal role, essential for government, private enterprises and other institutions who are in need of long-term funds to source such funds. Government uses the capital market to raise funds for infrastructure development and state related activities; while the private enterprises use the market for business expansion, growth and development.
Taking into account its role in the market based economy, the capital markets occupies an important place, through their specific mechanisms, capital markets can efficiently succeed to give its contribution to the economic development of the society. The importance of the capital markets is more significant in the case of developing, frontier and emerging markets as it is for developed economies, being well-known for their contribution in reorienting financial resources to efficient activities, contributing to the economic reform, but also it supports in the privatization process of state-owned entities and also in implementing other economic empowerment and enterprises transparent-based policies. Economic growth in a modern economy hinges on an efficient and effective financial sector that pools domestic savings and mobilizes capital for productive projects and enterprises. Absence of effective capital market leaves most productive projects/enterprises which carry developmental agenda unexploited. But if exploited, capital market have the potential for connecting monetary sector with the real sector (such as agriculture, manufacturing, infrastructure development, etc) and therefore facilitates growth in the real sector and economic development. The fundamental channels through which capital market is connected to the economy, economic growth and development may be in the following aspect:
The contact between economic agents with deficit of money and the ones with monetary surplus can take place in a direct way (direct financing), but also by the means of any financial intermediation form (indirect financing), situation in which specific operators realise the connection between the real economy and the financial market. In this case, the financial intermediaries could be banks, investment funds, or other non-bank financial institutions. Furthermore, Capital market increases the proportion of long-term savings (in the form of pensions, life insurance, collective investment funds, etc.) that is channeled to long-term investment. Capital market enables contractual savings industry (pension and provident funds, insurance companies, health insurance schemes, collective investment schemes, etc.) to mobilise long-term savings from small individual household and channel them into long-term investments. Capital markets fulfills the transfer function of current purchasing power, in monetary form, from surplus sectors to deficit sectors, in exchange for reimbursing a greater purchasing power in future. In this way, capital market enables corporations to raise capital/funds to finance their investment in real assets.
The necessity of capital markets activities in an economy results in an increase in productivity within the economy leading to more employment, increase in aggregate consumption and hence growth and development. It also helps in diffusing stresses on the banking system by matching long-term investments with long-term capital. The existence of the capital market encourages broader ownership of productive assets by small savers. It enables them to benefit from economic growth and wealth distribution, and provides avenues for investment opportunities that encourage a thrift culture critical in increasing domestic savings and investment ratios that are essential for rapid industrialisation.
The capital market allows for risk dispersion between investors (for the diversifiable risk), the risk, that could be realized by the help of different operations or market orders.
or derivatives, makes the capital markets as a proper mechanism for risk diversification.
Capital market also provides equity capital and infrastructure development capital that has strong socio-economic benefits through development of roads, water and sewer systems, housing, energy, telecommunications, public transport, etc. These projects are ideal for financing through capital market via long dated bonds and asset backed securities. Infrastructure development is a necessary condition for long-term sustainable growth and development. In addition, capital market increases the efficiency of capital allocation by ensuring that only projects which are deemed profitable and hence successful attract funds. This, in turn, improve competitiveness of domestic industries and enhance ability of domestic industries to compete globally, given the current momentum towards global integration. The result is an increase in domestic productivity which then spill over into an increase in exports and, therefore, economic growth and development.
Moreover, capital market promotes public-private sector partnerships by encouraging participation of private sector in productive investments. The need to shift economic development from public to private sector to enhance economic productivity has become inevitable. Capital markets, therefore, assists the public sector to close the financial resource scarcity gap, and complement its effort in financing essential socio-economic development, through raising long-term project based capital. It also attracts foreign portfolio investors who are critical in supplementing the domestic savings levels. The capital markets facilitates inflows of foreign financial resources into the domestic economy.
The role of capital markets is vital for inclusive growth in terms of wealth distribution and making capital safer for investors. Capital markets creates greater financial inclusion by introducing new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ project needs and risk appetite.
Therefore, existence of the capital market creates a sustainable low-cost distribution mechanism for multiple financial products and services across the country. It enhances efficient financial intermediation. It increases mobilization of savings and therefore improves efficiency and volume of investments, as well as economic growth and development.
