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 CĂ©lestin 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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