23 October 2017

African Financial Markets Too Basic, Have Weak Laws

Underdevelopment of Africa's financial markets is setting back the African continent.

While there is consensus that offers vast opportunities, the reality is that financial markets in most countries on the continent are bogged down by structural challenges such as a lack of depth, limited access to foreign exchange, low capacity of local investors and weak regulations.

Besides, the majority of the financial markets on the continent are feeling the pressure of tight liquidity and a fragile macroeconomic environment and so remain largely fragmented, according to the inaugural Barclays Africa Group Financial Markets Index, released in partnership with the London-based Official Monetary and Financial Institutions Forum.

The report, a barometer measuring the progress and potential of Africa's financial markets, reckons that expanding and deepening financial markets across Africa is a central condition for the next stage of the continent's development.

"Mobilising these resources will help accelerate productive investment that contributes to sustainable domestic employment creation and generates income to service the underlying debt," said Peter Matlare, Barclays Africa Group deputy chief executive officer.

The index ranks the maturity, openness and accessibility of 17 financial markets in Africa, and South Africa is ranked the most developed financial market followed by Mauritius, Botswana, Namibia and Kenya.

Despite being among the fastest growing economies globally, Ethiopia ranks the lowest on the index, owing to the lack of a securities exchange, minimal local investor capacity and low enforceability of contracts.

In East Africa, the index ranks Kenya the most developed financial market based on parameters of market depth, access to foreign exchange, market transparency, capacity of local investors and macroeconomic opportunity. It is followed by Uganda, Tanzania and Rwanda.

South Africa, Egypt and Kenya score relatively highly for liquidity, which remains a major issue for most African countries.

While market capitalisation averages 61 per cent of gross domestic product across all countries, turnover is low. Excluding Egypt and South Africa, equity turnover is just 2.4 per cent while, excluding South Africa and Kenya, bond market turnover is just 4.2 per cent.

"High liquidity for Egypt and Kenya exists despite the low availability of international credit ratings for these countries. Boosting the ratings could lead to a rapid growth of these markets in coming years," says the report.

Across the continent, the capacity of local investors remains low. Apart from South Africa and Namibia, local participation is depressed. The report says the remedy is increasing the range of assets for local investors as well as boosting education around financial markets.

Access to foreign exchange also remains a substantial challenge in most countries despite its primary importance to local financial markets. Rwanda and Tanzania are two East Africa nations that have witnessed a substantial increase in capital controls over the past three years.

According to Célestin Monga, the African Development Bank's vice president and chief economist, developing financial markets on the continent is critical to providing additional growth and funding opportunities for local firms, access to long-term financing and helping them overcome some of the challenges of low lending rates and high costs across the continent.

"Financial market development also offers opportunities for international and domestic investors to enter fast growing African countries," he said.

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