Building the blocks for capital markets in Africa

Capital markets have incredible potential to contribute to Africa's development by allowing governments access to financing to drive their development agendas, companies to raise funds for productive expansion, and for the public to invest and build wealth.

However, capital markets in Africa face many challenges. These include a lack of instruments; low activity from issuers, intermediaries and investors; and a general lack of liquidity and depth. In addition, African capital markets struggle with inadequate regulatory oversight, with regulatory frameworks that may be outdated, or regulators who may lack capacity to effectively oversee the market.

Clearly, capital markets can only play their part in Africa's development if these challenges are overcome. This would allow them to function in a transparent, cost-efficient manner while protecting participants.

Recognising the importance of addressing these challenges, Genesis conducted an evaluation of FSD Africa's Africa Regulatory Support Programme, A Deep Dive Study on the Impact of Regulatory Interventions, across six geographically diverse African markets, including Zambia, Kenya, Ethiopia, Nigeria, Ghana and the region spanned by the West African Economic and Monetary Union (WAEMU).

FSD Africa had executed a number of regulatory interventions across these markets. These included the development of a capital markets master plan to guide Zambia’s long-term capital markets development; updates to collective investment scheme regulations in Kenya; a diagnostic on the taxation of investment products for Ethiopia; and the development of a regulatory framework for Islamic capital markets instruments in WAEMU.

Genesis assessed the successes and challenges that these interventions have faced in strengthening capital markets regulatory frameworks in Africa. This involved an extensive review of FSD Africa’s intention for each intervention; stakeholder interviews with the capital markets regulators within each market, as well as FSD Africa experts; and analysis of supporting information and documents to assess the overall performance of each intervention.

Critically, we designed a number of recommendations to inform FSD Africa's capital markets programming in future.

A few that stand out include:

• The ongoing need to build regulator and market participant capacity across African capital markets.
• The continued relevance of adapting international best practice for capital market development to the specific needs of each market.
• The importance of designing interventions with the potential to outlast macroeconomic challenges such as high inflation or risk of debt distress.
• The need for post-intervention support or “handholding”. Interventions are most effective when the regulators are given ownership of the process but receive support to maintain momentum and leverage external expertise to drive implementation forward.

Overall, the review found the interventions to be effective, relevant and coherent within the contexts of the markets in which they were implemented. While the road to drive capital markets development in Africa remains lengthy, the interventions will stand their respective markets in good stead over the long term. They represent important building blocks on the journey of building Africa’s capital markets.

Best wishes

Adriaan Slabbert | Soule?ma Abdennebi | Ashish Chakrabarti | Betty Chiwayu

Genesis Analytics Financial Services Strategy team