Mapping Out the Future for Rwanda's Capital Markets

How should Rwanda develop its capital markets? This was the subject of a three-day roundtable discussion held last October in Rubavu, Rwanda. The roundtable was organized by the Rwanda Capital Market Authority (CMA) and the Milken Institute's Center for Financial Markets (CFM), with support from FSD Africa. Highlights from that discussion, including points of consensus and debate, are captured in the Milken Institute's new publication, "Framing the Issues: Developing Capital Markets in Rwanda." Over the past decade, Rwanda has made considerable progress in achieving rapid economic growth and reducing poverty, supported by sound macroeconomic policies. Its business-friendly environment is now among the best in Africa. The government and its international development partners view deepening and diversifying the domestic financial system as essential to Rwanda's goal of transitioning to middle-income status. Last year, the Rwanda Ministry of Finance and Economic Planning gave the CMA a mandate to produce a 10-year Capital-Market Master Plan (CMMP) to guide reforms to develop Rwanda's capital markets. An overarching goal will be to deepen capital markets so that they intermediate long-term finance for private-sector-led growth and meet the country's infrastructure and other socioeconomic needs. The October strategic planning roundtable kick-started the process of mapping out capital-market reforms. The event gathered policymakers, regulators, issuers, investors, and capital-market experts from around the world, including senior officials from the government of Rwanda. The roundtable provided an off-the-record forum for frank and in-depth discussion about the opportunities and challenges Rwanda's capital-market stakeholders face, as well as how they can prioritize and sequence reforms. Participants also heard firsthand how other developing countries mapped out and launched their own capital-market reforms. The roundtable covered core questions that will inform the drafting of Rwanda's Capital-Market Master Plan, including:

• How should Rwanda develop its investor base, both domestically and regionally? What are innovative ways to mobilize household savings?
• Can other nonbank financing sources-such as private equity, financial leasing, and even crowdfunding-help "incubate" firms for future listings?
• How can Rwanda strike the right balance in accessing needed foreign-portfolio investment while guarding against risks of overreliance on this investment?
• How can capital markets in Rwanda and its East African Community partners take a regional approach to attracting new listings?
• Should the stock exchange target small and medium-sized enterprises (SMEs) in its outreach for new listings-and, if so, how?
• What can Rwanda learn from other countries about the process of planning and implementing capital-market reforms?

Roundtable participants strongly agreed that an immediate and ongoing priority is for Rwanda to develop a pipeline of prospective listings. Targeted outreach -including education and technical assistance - is critical to increasing the number of firms willing to list. Cultivating a high-growth-potential corporate base could also serve as an incubator for future listings, as would developing the local venture capital and private equity markets. Lessons shared by participants from other emerging markets underscored the importance of sequencing and developing capital markets to complement the banking sector, not compete with it. As an economy grows and becomes more complex, firms and households require a wider range of financial services - from banks as well as other financial intermediaries. Once larger firms begin to rely more on capital markets for longer-term financing, banks may increase lending further down the credit spectrum, to SMEs and households. Well-functioning, appropriately regulated local and intraregional institutional investors are vital to developing a stable investor base. Several participants flagged the need to mobilize small savers across EAC markets, perhaps through a regional fund, which also would advance financial inclusion. The role of non-EAC foreign investors was more heavily debated, however - particularly the degree to which bond issuers should rely on foreign capital. Regionalization emerged as a key cross-cutting issue. More cross-border listings and cross-border investment across the EAC's securities exchanges could help overcome local capital markets' impediments such as illiquidity, low market capitalization, and few listings. Greater cooperation across EAC capital markets in developing and sharing market infrastructure and intermediation services could unlock significant economies of scale. Throughout the roundtable, participants returned to the point that capital-market development should not be done for its own sake, but to spur growth of a diversified, inclusive economy that creates decent jobs and improves living standards. And, while best practices exist, there is no one-size-fits-all approach to developing capital markets. This blog post was originally published on the Milken Institute's blog website.
_________________________________________________________________ About the Authors Jacqueline Irving is a Director in the Center for Financial Markets at the Milken Institute. Previously, she was a senior economist at US Treasury, responsible for the migrant remittances and financial inclusion portfolio and a U.S. government delegate to the G20's technical working group on remittances. Jim Woodsome is a Senior Associate, Program Research Analyst at the Milken Institute's Center for Financial Markets. In this role, he conducts research, organizes events and helps manage initiatives related to the Center's Capital Markets for Development (CM4D) program.