Regulation and supervision of the financial system play a great role in determining both its stability and the extent of services provided. Regulation and supervision are typically aimed at the protection of investors from the potentially opportunistic behavior of insiders. Investor protection helps solve agency problems and information asymmetry arising from inside information.14 This helps in making optimal decisions, increasing access to external finance and resulting in productive investment and eventually higher firm growth (La Porta, Lopezde1Silanes and Shleifer, 2003). There is the need for a well structured and clear rule of law, within an efficient judicial system, which allows for contract repudiation and expropriation risk in this regard.
Regular disclosure, transparency and enforcement form an integral part of regulation and supervision. Important disclosure requirements include relevant information with regards to transactions, accounting and the identity of ultimate beneficial owners. They must be nonetheless simple and supportive of the legal and accounting framework (Friedman and Grose, 2006). Similarly enforcement procedures need not be long, cumbersome and expensive. Enforcement essentially requires compliance and the ability to prosecute. The presence of a securities regulator is important in this regard to ensure enforcement. Such enforcement can also be complimented by effective private laws on contracts and dispute resolutions (Lopez-de-Silanes, 2004). The presence of strong corporate governance mechanisms also help boost investor confidence in regulatory issues.
Strict ethical and conduct of business rules could be developed for members of African stock exchanges. Rules must follow international best practices but at the same time reflect local structures and needs. Emerging African markets should also implement rules that are “necessary” rather than what would be “nice” (Friedman and Grose, 2006). In Africa though, there are laws and rules for regulation and supervision. The real challenge is the shortage of experienced supervisors and the absence of a strong tradition favoring compliance with the rules and discouraging regulatory forbearance (Vittas, 1998).
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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The IMF is an international organization
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