VI. B. Banking Sector Development: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?

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, Demirguc-

Kunt 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

Author:.

The IMF is an international organization of 185 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. Since the IMF was established its purposes have remained unchanged but its operations—which involve surveillance, financial assistance, and technical...

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