This Week: Realizing the importance of capital markets in Economic growth in Zambia

Kelvin ESIASA

Kelvin ESIASA

By Kelvin Esiasa

One of the people that is so passionate about the capital market in Zambia is Ms. Mundia Mutomboi Securities and Exchange Commission Director for Market Development and Supervision.

Every time I had a discussion with her on capital Markets in Zambia she is always provoking my thoughts on the development of Capital Markets. Sitting with her for ten minutes one would be amazed the ideals she has on how Capital Market can be developed in Zambia.

There are also many Zambians that are passionate about the capital markets in Zambia. One time I had chat with a gentleman who had been challenging me to convince my colleagues at the college to introduce courses that would train professionals in capital markets.

Of late I have also noticed parents seeking advice on how their children could study Actuarial sciences and other courses in financial markets.

In deed there is more to do with the capital markets in Zambia. The media reported that Bank of Zambia (BoZ) had admitted that Zambia’s capital market is too small and weak to support Zambia’s desired growth prospects and urgently needs a boost to keep up with the thriving economic trends. Dr Ng’andu admitted that the LuSE was too small and that the pensions and insurance should come on board to help provide financing to the banks or directly offer long-term loans to the business community.

While Barclays Bank of Zambia Mr. Sarviour Chibiya said that while commercial banks may be getting the criticisms from various quarters including the Government for not fully supporting the economic growth in Zambia, the other forms of financing that could be used by the local economy were weak. Mr Chibiya said various forms of capital markets were a source of finance for long-term loans for banks but regretted that Zambia did not have a well developed capital market that the banks could run to for funds to support long -term loans.

Saritha Pujari (yourarticle library.com) describes capital markets as a market which deals in long-term loans, supplies industry with fixed and working capital and finances medium-term and long-term. Pujari described that capital market play an important role immobilizing saving and channel them into productive investments for the development of commerce and industry. While Joackim Mumba (CBU MBA desertation, 2005) defined capital Markets as a market that provides funds through the issuance of instruments called bonds, share scrips, rights and debentures for long-term investments.

Capital markets are different from money markets, money markets are used for the raising of short term finance, sometimes for loans that are expected to be paid back as early as overnight. Whereas the capital markets are used for the raising of long term finance, such as the purchase of shares, or for loans that are not expected to be fully paid back for at least a year.

Funds borrowed from the money markets are typically used for general operating expenses, to cover brief periods of illiquidity. When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods, which will be used to help increase its income.

Regular bank lending is not usually classed as a capital market transaction, even when loans are extended for a period longer than a year. A second difference is that lending from banks and similar institutions is more heavily regulated than capital market lending. A third difference is that bank depositors and shareholders tend to be more risk averse than capital market investors.

Borrowing the word of   Anil nandyala  Capital Markets play a significant role in any economy from allocation of Capital and Risk to Policy Making. If there is any single factor that makes a huge impact in improving the GDP of a country, it is the effective allocation of capital to the Industry and Government. Capital Market is the best channel to route the savings into long-term productive use. If a country develops and adopts best Capital Market practices they create multiple effects and helps in reviving the economy.

Capital market is the heart of any economy through which the savings are channelized into effective long-term investments. A developed and vibrant Capital Market immensely contributes towards speedy economic growth and development. One of the major economic benefits generated by development of the Capital Markets is improved allocation of capital. The other major economic benefit generated by development of the Capital Markets is improved allocation of Risk. Capital Markets facilitates investors to earn returns based on their risk taking ability.

Capital Markets is a good channel to move idle savings to most productive units in the economy. The advantage of investing in Capital Markets is the price of the securities fluctuates in response to change in supply and demand and can be brought and sold to third parties. As a result, the investor usually has a good idea of what the securities are worth and can obtain liquid funds by selling the securities. The capital market encourages economic growth. The various institutions which operate in the capital market give quantities and qualitative direction to the flow of funds and bring rational allocation of resources. They do so by converting financial assets into productive physical assets. This leads to the development of commerce and industry through the private and public sector, thereby inducing economic growth.

Capital Markets play an important role in improving policy framework of a country. This is because when policy makers embark on bad policies the equity and bond prices tend to fall. Capital markets anticipate the future prospects of a country thus they reduce politicians incentives to do things that provide short-term gains, but that brings long-term costs that will hurt the economy. A well-developed capital market comprising expert banking and non-banking intermediaries brings stability in the value of stocks and securities. It does so by providing capital to the needy.

Capital market has played a crucial role in supporting periods of technological progress and economic development throughout history. Among other things, liquid markets make it possible to obtain financing for capital-intensive projects with long gestation periods. The existence of deep and broad capital market is absolutely crucial and critical in spurring the growth our country. An essential imperative for India has been to develop its capital market to provide alternative sources of funding for companies and in doing so, achieve more effective mobilization of investors’ savings. Capital market also provides a valuable source of external finance.

In conclusions I would like to agree with the sentiments by former Bank of Zambia Governor Dr. Ng’andu Bwalya on the need to review the capital markets in Zambia. There is need to deepen the financial sector so that people can benefit and develop the country. The capital markets like the stock exchange and pensions and insurance should stimulate the money market and then the economy.