Capital Markets

stock exchange Lagos, Nigeria; by S.Remeika

Deep, transparent, and accessible capital markets are a vital element of the financial sector. As a vehicle for long-term investment finance and for diversification of funding sources, capital markets strengthen the overall economy and render it more resilient in the face of economic shocks.

African financial markets are dominated by banks, but capital markets are slowly developing and are beginning to play an increasingly important role.

Since 1989 the number of active SSA stock exchanges has increased from five (South Africa, Zimbabwe, Kenya, Nigeria and Uganda) to the current seventeen. However, only a few of them – most notably the Johannesburg Stock Exchange – are active and well developed. Stock market capitalization remains low and, with the exception of Nigeria and South Africa, all sub-Saharan stock exchanges are characterized by a relatively low number of listed companies.

African bond markets are also in their infant stages of development. Sub-Saharan debt markets are dominated by government securities mostly of short duration, with activity focused on the domestic primary market and limited activity in the secondary market. Corporate debt markets are largely nonexistent in Africa, with the exception of South Africa and, to a limited extent, some North African markets. Benchmark yield curves either do not exist or, where they do, they seldom extend further than 5 years.

Capital market regulation models differ widely across Africa, as legislation and regulatory structures vary between jurisdictions, reflecting both local market conditions and varied historical backgrounds. In some countries, capital market regulation falls in the realm of the central bank’s regulatory powers; in others, it is within the regulatory prevue of the ministry of finance or an independent securities commission or authority; yet in others, the regulatory role is given to another ministry or office of the state, or to an exchange itself, as a self-regulatory organization.

Domestic institutional investors (such as banks, insurance companies, pension funds) and local private investors dominate the investor base in African capital markets. Boosted by social security reforms, pension funds and insurance companies are looking to channel increasing amounts of long-term savings into the markets. Improving financial literacy and good return prospects will foster increased participation of domestic private investors. Also, investors from the African Diaspora are expected to play a bigger role in the coming years.

The importance of international investors for African markets has increased over the last few years. From an international investor perspective, most of the continent’s markets are still considered to be frontier markets with high returns but also high risks and low liquidity. In recent years, however, a number of African governments have entered international markets through bond issues. As sovereign balance sheets improved following external debt relief and sound macroeconomic policies, the number of sovereign ratings in sub-Saharan Africa, a key precondition for issuing debt on international markets, has multiplied. However, to date only a minuscule share of emerging-market investments flows into African frontier markets.