The development of the banking sector is important for stock market development in Africa.
At the early stages of its establishment the stock market is a complement rather than substitute for the banking sector. Developing the financial intermediary sector can promote stock market development. Many East Asian countries are successful examples. Support services from the banking system contribute significantly to the development of the stock market. Consequently, liquid inter-bank markets, largely supported by an efficient banking system, are important for the development of the stock market. Conversely a weak-banking system can constrain the development of the stock market. On the empirical front, Demirguc1Kunt and Levine (1996) found that most stock market indicators are highly correlated with banking sector development. Countries with well-developed stock markets tend to have welldeveloped financial intermediaries. Yartey (2007b) finds that a percentage point increase banking sector development increases stock market development in Africa by 0.59 percentage point controlling for macroeconomic stability, economic development and the quality of legal and political institutions.
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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