KAMPALA – In Uganda, there is little attention that is given to the role played by capital markets and their effect on economic growth. Dominant capital markets enable nations from across the world to grow in terms of the economy by assisting them to generate much needed financial resources and skills needed to achieve their economic goals. In any country, it is necessary that initiatives that encourage growth and investments are promoted.
Capital markets can be defined as a place where various players trade different financial instruments. They are avenues where savings and investments are channeled through suppliers of capital and those in need of the capital. Thus, the capital market comprises of institutions and mechanisms through which medium and long term funds are pooled and made available to individual businesses and governments. They mainly consist of the primary and secondary markets. Primary markets are where new securities issued and sold, a secondary market is where already issued securities are traded. The most common capital markets are the stock market and the bond market. Over the past few decades, globally there has been an upsurge in capital market activity.
To some of the people who work in and around the financial industry its evident that capital markets play a critical role in channeling investment into the economy to help drive growth. But the role capital markets play is often complex and so what confusing to those outside the industry. So, how do capital markets spur economic growth?
Capital markets can play an essential role in enhancing economic development through efficient inter mediation of savings into productive investments and in encouraging the expansion of entrepreneurship. The capital market can contribute to the growth of entrepreneurship by facilitating the entrepreneurs to raise funds from surplus savers and consequently finance investment. For instance, if an industrialist with a viable new investment or expansion proposal is unable to execute his plan due to financial crisis then he can issue securities to meet the required deficit.
These markets also encourage firms to raise funds to finance their investment in real assets. An increase in assets promotes growth in the form of demand for labour, demand for goods and services and it further increases growth in production, which spirals out to growth in the economy.
Capital markets provide an alternative source of funding that can complement bank financing. Capital
markets can offer better pricing and longer maturities, as well as access to a wider investor base. They can also offer funding for riskier activities that would traditionally not be served by the banking sector, and by doing so contribute significantly to innovation in an economy.
They provide equity capital for infrastructure developments that provide for construction of roads, energy, housing, telecommunications, public transport and many more. Government bonds are the present means of financing such needs and provide the investors with low-risk appetites a guaranteed payback after the fixed term with an attractive interest rate. Furthermore, they promote public private partnerships by encouraging participation of private sector in productive investments.
For investors and savers, capital markets can offer more attractive investing opportunities with better returns than bank deposits, depending on risk profile, liquidity needs. With a wider range of securities and instruments offered, capital markets can help investors diversify their portfolios and manage risk.
In developing countries like ours, the significance of capital market is paramount. In this market, various types of securities help mobilize savings from various sectors . Capital markets enable pension funds ,provident funds, insurance companies and collective investment schemes such as unit trusts to mobilize long-term savings from small individual household and channel them into long-term investments.
We can agree that capital markets have the power to influence economic growth. Therefore the onus is on the government and capital markets authority to put up measures to stem up investors’ confidence in the market and encourage more foreign investors to participate in the market to encourage improvement on market capitalization.
The author, Hassan Kitenda is an equity and fixed income analyst.