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This paper examines the economic importance and the future of African stock markets. It
seeks to shed light on the controversial link between stock market and economic growth—
from both corporate finance and macroeconomic perspectives. It also discusses policy
options for promoting the development of the stock market in Africa.
Over the past few decades, the world stock markets have surged, and emerging markets have
accounted for a large amount of this boom. In Africa, new stock markets have been
established in Ghana, Malawi, Swaziland, Uganda, and Zambia. Prior to 1989 there were just
five stock markets in sub-Saharan Africa and three in North Africa. Today there are 19 stock
exchanges. Stock market development has been central to the domestic financial
liberalization programs of most African countries. It seems any program of financial
liberalization in Africa is incomplete without the establishment and development of stock
markets.
The drive towards the establishment of stock markets in African countries during the last few
decades may be linked to other important developments in the global economy. The financial
markets of many advanced countries have undergone tremendous changes and become
increasingly integrated. These changes have resulted from the operation of a number of
interrelated factors (Cosh, Hughes, and Singh, 1992):
• the progressive deregulation of financial markets both internally and externally in leading
economies;
• the internationalization of these markets;
• the introduction of a number of financial products allowing riskier and bigger financial
investments; and
• the emergence and the increasing role of new actors in the financial markets particularly,
institutional investors.
These developments in the financial systems of advanced countries have led them to seek
liberalization in the international trade and exchange of services in world trade negotiations.
The establishment of stock markets in African countries and the liberalization of capital
accounts can be seen as parts of this global liberalization trend.
The establishment of stock markets in Africa is expected to boost domestic savings and
increase the quantity and quality of investment. More generally, stock markets are seen as
enhancing the operations of the domestic financial system in general and the capital market
in particular (Kenny and Moss, 1998). Critics, however, argue that the stock market might
not perform efficiently in developing countries and that it may not be feasible for all African
markets to promote stock markets given the huge costs and the poor financial structures
(Singh, 1999).

The large amount of academic and policy interest shown over the past decade in promoting
stock market development in African countries raises a number of policy questions. What
benefits does a country gain from having a stock market? Are they playing an important role
in allocating capital to industry? What is the relationship between stock market development
and economic growth? What determines stock market development? How do you make the
stock market more functional to African countries? These are the types of questions
addressed in this paper.
The rest of the paper is structured as follows. The theoretical underpinnings of stock markets
and growth are discussed in the next section. Section III is an empirical study on the trends
and characteristics of African stock markets. The role of stock markets in financing corporate
growth is examined in Section IV. Section V analyzes the effect of stock markets on
economic growth in Africa. The determinants of stock market development in Africa are
examined in Section VI. Section VII discusses policy options for promoting stock market
development in Africa. Section VIII presents the summary and conclusions of the paper.

IMF Working Paper
African Department
Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges
Prepared by Charles Amo Yartey and Charles Komla Adjasi
August 2007

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