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What you need to know about the growth of Africa’s financial markets

The rise of the stock exchange, bond markets, and equity markets have caused a revolution in the African financial markets. Some of the things they need to strengthen are access to foreign exchange, market depth, market transparency, tax and regulatory environment, macroeconomic opportunity and the enforceability of financial contracts, collateral positions, and insolvency frameworks.

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The emergence of the stock exchange, bond markets, and equity markets have caused a revolution in the African financial markets industry.

In 1990, there were only five stock markets. Now, there are 29 stock exchanges for 38 countries, including two regional ones.

In recent years, Africa has been harnessing its own potential and improving the state of the continent’s economy. Its financial markets have gained more access to the global standards of service. However, a lot of reforms are still needed in order to improve their competitiveness.

6 pillars to improve infrastructure

Absa Africa Financial Markets index highlights six pillars that need progress to help individual African countries improve their financial infrastructure. They are:

  • access to foreign exchange
  • market-depth
  • market transparency
  • tax and regulatory environment
  • macroeconomic opportunity
  • enforceability of financial contracts, collateral positions, and insolvency frameworks.

In 2018, Kenya was ranked third by the Absa Africa financial markets index. Kenya came after South Africa and Botswana in terms of attractive financial markets in Africa. Stronger policies and new products were among the pillars that anchored Kenya’s success.

Africa’s market integration faces several obstacles. Low liquidity, lack of product diversity, excessive controls and administrative procedures in the forex market. Limited prospects for new listings also hamper African capital markets.

Good market capitalization

Weak policies have for a long time hampered investors, both local and international, from participating in the capital markets.

African countries need to facilitate liquidity in the markets through policy initiatives that attract local investors. From this point, it can enable development in financial products and increased asset acquisition. Ultimately, it will lead to market capitalization.

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South Africa is home to the Johannesburg Stock Exchange (JSE), which ranks top on the Absa index with a total listed equities value worth $1.1 trillion. Its financial market is credited for the country’s currently strong GDP. Market capitalization is relatively higher, at more than 100% of the GDP.

For the weak performing African financial markets like Cameroon and Mozambique, the market cap is less than 5% of GDP.

Regulatory frameworks

Regulatory frameworks should enhance good investment opportunities through policies. Couple this with scaled-up access to foreign markets to bring in more foreign exchange. Strong legal and enforcement frameworks supporting financial agreements can attract international investors.

A well-regulated market will also have measures that facilitate transparency. Transparency in financial markets builds investors’ confidence.

Africa financial markets
Africa’s financial markets need to focus on improving trade and settlement infrastructure. (Source)

No losers in the market, only gainers

The success seen in South Africa’s JSE should spread to the rest of the continent. Africa needs to focus on improving the trade and settlement infrastructure, to facilitate growth in the financial markets and to achieve economic liberation in the long-term.

A strong financial market will also help African countries access the funding needed for elevating the continent’s status. Through bond markets, locals can fund their economy and reduce the amount of money acquired through foreign funds.

Africa’s financial market is set to reach global standards if every nation in the continent sets a competitive attitude in the industry.

Kuria Irungu is a freelance journalist with an interest in research and writing from a free thought perspective. He reads and writes on different topics but has a particular interest in Diplomacy, Business, Entrepreneurship, Forex, and Financial Investments. He believes in the power of the pen. 'Writers never die they are survived by their writings.'

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