VIII. SUMMARY AND CONCLUSION: Stock Market Development in Sub-Saharan Africa
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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. The rapid development of
stock markets in Africa does not mean that even the most advanced African stock markets
are mature. In most stock markets, trading occurs in only a few stocks which account for a
considerable part of the total market capitalization. In addition, the market suffers from the
problem of low liquidity. Low liquidity means that it will be harder to support a local market
with its own trading system, market analysis, brokers, and the like because the business
volume would simply be too low.
The analysis in this paper shows that the stock market has been a surprisingly important
source of finance for funding the growth of large corporations in some African countries. In
Ghana, the stock market financed about 12 percent of total assets growth of listed companies
between 1995 and 2002. In South Africa, new equity issues accounted for 18 percent of total
assets growth between 1996 and 2000. External debt contributed 61 percent of total
financing, and retained earnings financed the remaining 21 percent. In Zimbabwe, equity
finance contributed 8 percent to the funding of listed corporations between 1990 and 1999. In
all of these countries, the stock market is the most important source of long term external
finance.
Thus, the stock market has made important contributions to corporate growth in Africa in the
recent period. However, the shortcomings inherent in a stock market based system require us
to examine whether the economy as whole has benefited through, for example, greater
aggregate savings and investment or increased productivity of investment. There is little
systematic evidence on this issue for African countries. We provide some econometric
evidence, however, that through the value of shares traded, the stock market is positively
associated with economic growth in Africa. This result might however also be because of the
dominance of the price effect.
What determines stock market development? Recent empirical research has identified
macroeconomic stability, robust economic growth, well developed banking sector, and good
quality institutions as important for stock market development. Garcia and Liu (1999) found
income level, banking sector development, domestic savings and investment, and stock
market liquidity as important determinants of stock market development in emerging
markets. Yartey (2007b) finds that a percentage point increase in financial intermediary
sector development increases stock market development in Africa by 0.597 percentage points
controlling for macroeconomic stability, the level of economic development, and the quality
of legal and political institutions. He also finds good quality institutions such as law and
order, democratic accountability and limited corruption as important determinants of stock
market development because they reduce political risk and enhance the viability of external
finance.
Looking ahead, African stock exchanges face a number of challenges before they could enter
a new phase of rapid growth. The first is the challenge of stock market integration. Many
analysts have argued for the regionalization of stock markets in Africa as a way of addressing
the problem of low liquidity. Preconditions for successful regional approaches include
harmonization of legislations such as bankruptcy and accounting laws and a liberalized trade
regime. The second is the challenge of demutualization to solve the governance and
profitability problems. Demutualization would be more relevant after African stock markets
have consolidated gains on technological and regulatory reforms. The third and most critical
issue is the need to eliminate existing impediments to institutional development. These
include a wider dissemination of information on these markets, the implementation of robust
electronic trading systems, and the adoption of central depository systems. In addition, sound
legal and accounting framework, private sector credit evaluation capabilities, and public
sector regulatory oversight should all be strengthened.
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
VIII SUMMARY AND CONCLUSION Stock Market Development in SubSaharan Africa - To learn more about this author, visit International Monetary Fund's Website.
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