- Financial markets provide liquidity essential for bolstering economic growth and stability.
While well-regulated financial systems are essential for macroeconomic stability - Good financial markets are critical in channeling resources into productive investment and fostering growth.
- Strengthening judicial systems and enforcing regulations are thus central to deepening financial systems. Protecting creditors‘ and borrowers‘ rights, enforcing contracts, and establishing transparent information-sharing mechanisms are also prerequisites for financial deepening.
Financial markets play a vital role in enhancing the smooth operation of economies by allocating resources and creating liquidity for businesses and entrepreneurs. The markets make it easy for investors and traders to trade their holdings. They additionally create security products that provide returns for investors/lenders and make these funds available to those needing extra financing.
Stock market, bond market, forex, commodities, and the real estate market, just to name a few, are examples of commodities in financial markets. Moreover, they can be divided into capital markets, money markets, primary vs. secondary markets, and listed vs. OTC markets.
Financial markets provide liquidity essential for bolstering economic growth and stability. Without financial markets, capital cannot be allocated efficiently, and economic activities such as commerce and trade, investments, and growth prospects would be significantly diminished.
While well-regulated financial systems are essential for macroeconomic stability, good financial markets are critical in channeling resources into productive investment and fostering growth.
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Financial markets performance and growth in Africa
Before the 1980s, the financial sectors in African countries were generally depicted as underdeveloped, risk-averse, highly concentrated in urban areas, and offering only a limited range of financial services. However, since the beginning of the 1980s, several African countries have adopted policies aimed at creating environments conducive to financial intermediation. These include strengthening the institutional framework for banking regulation, promoting monetary policy autonomy, and establishing central bank credibility.
The results have been relatively impressive. The dominance of state-owned financial institutions has been drastically reduced, restrictive regulations have been dismantled, and new financial products and innovative delivery systems have been encouraged. At a regional level, there have been growing cross-border banking activities with robust network development in pan-African banks. All these have significantly changed the financial landscape in Africa.
The past two decades have also registered heightened interest in African monetary integration. For example, there is the West African Economic and Monetary Union (WAEMU), with its members pegging their West African CFA franc, first to the French franc and now to the euro. There is also the Communaute Economique et Monetaire d’Afrique Centrale (CEMAC) with Cameroon, Chad, Republic of Congo, Central African Republic, Equatorial Guinea, and Gabon as members.
The Southern African Development Community planned to establish a monetary union in 2016 and have a single currency by 2018. The East African Community also planned to establish a monetary union by 2025. Ultimately, these regional initiatives are expected to result in the establishment of a single monetary zone for Africa, with an African Central Bank by 2028, as indicated in the United Nations Conference on Trade and Development, 2014.
Impacts of financial markets in Africa
Financial Markets excellence
Moreover, financial markets reduce the costs of gathering, processing, and monitoring investment information and, therefore, help decrease problems of unequal access to information inherent in the relationships between investors. This influences resource allocation within and between sectors, producing structural dynamics that enhance economic productivity and employment creation.
Additionally, Financial development contributes to economic growth by promoting the mobilisation of savings, improving the efficiency of resource allocation, and stimulating technological innovation.
A developed financial sector enables more human activities by making finances available for short—and long-term projects and innovations. This facilitates the circulation of money while managing risks.
Obstacles to efficient financial markets in many African countries
Despite the noteworthy developments in Africa’s financial sectors during the past two decades, there are still challenges in many different areas. The financial systems remain small in both absolute and relative terms.
Notwithstanding the positive developments, African growth has not yet proven to be sustainable and fully inclusive. While GDP growth and macroeconomic stabilisation have encouraged private investors, they still largely depend on commodity prices, leaving the continent extremely vulnerable to a downturn.
This has been illustrated by the Crisis, whose main transmission channel in the continent was the collapse of export revenues following the decline of the world demand for mineral and fossil resources. Therefore, Africa must diversify existing resources into productive investment to stimulate productivity, create employment, provide individuals and enterprises with essential utilities, and contribute to efficient natural resource management.
Banks tend to favour large enterprises and government assets to minimise risk. By the same token, because of the lack of information on creditors and the perceived default risk, there is a fragmentation of the financial system, with a large part of the population lacking access to formal financial institutions.
Critical policies for the development of African’ financial markets
Macroeconomic stability, diversified financial products, effective enforcement of laws and regulations as well as functioning registration systems for assets. Transparency and availability of information are also crucial to reducing screening costs and preventing adverse selection.
The institutional framework remains central to the smooth functioning of financial systems, as well as well-established property rights and an efficient judicial system. This will foster investors‘ confidence while lowering screening and monitoring costs. In many African countries, institutional capacity is concerned with issues concerning property rights, cadastral systems, and contract enforcement.
Strengthening judicial systems and enforcing regulations are thus central to deepening financial systems. Protecting creditors‘ and borrowers‘ rights, enforcing contracts, and establishing transparent information-sharing mechanisms are also prerequisites for financial deepening.
Financial markets prospects in growing African economies
The banking sector has been unable to tap into the large “under/unbanked” segments of populations across the continent, thereby keeping large segments of the economy non-monetised and creating space for the informal financial sector to flourish. Since the liabilities of size will remain a problem for many years to come, research and innovative approaches are required to deepen and broaden financial services and extend their outreach beyond the urban centers of Africa.
For instance, demand for payment transactions must be stimulated within and between economies to make such services commercially viable. Innovations such as cell phone-based services like M-Pesa in Kenya must motivate entrepreneurs and researchers to think outside the box and develop new viable service delivery mechanisms.
