RWANDA CAPITAL MARKET AUTHORITY
(CMA) UNIVERSITY CHALLENGE
ACTIVITY: ESSAY COMPETITION
TOPIC: THE
ROLE OF CAPITAL MARKET IN THE DEVELOPMENT OF THE RWANDAN ECONOMY
INTRODUCTION
In
order to understand the role of capital market in the development of the
Rwandan economy, a brief knowledge about Rwandan economy and capital markets is
crucial to help all readers of this essay to assess the relationship between
financial markets and the economy in general.
In recent times, the Rwandan economy has been one of
the fastest growing in Africa, and in the world. Like many other developing
countries, a big part of Rwandan economy is based on agriculture but Rwanda
remains a small, landlocked country which faces many problems including
poverty, high energy and transport costs, high population density, and limited
resources. Fortunately, Rwanda has formulated many strategies for economic
recovery and development including EDPRS (2008-2012). Apart from that, Rwanda
has enjoyed strong economic growth rates, creating new business prospects and
lifting people out of poverty. The Government of Rwanda is now trying to
develop the Rwandan economy and reform its financial and business sectors. It
is in that financial sector that Rwanda has put capital market to help his
people in financial issues especially those who want to raise capital.
What is then “capital market”? Financial markets are
markets in which financial assets can be purchased and sold. They are markets in which funds are transferred from people
who have an excess of available funds to people who have a shortage. Therefore,
they facilitate
the flow of money and/or capital from surplus entities to deficit entities.
Among financial markets include Money market and Capital market. Capital markets are markets that trade equity and debt instruments
with maturities of more than one year. The major supplies of capital market
securities are corporations and governments. The markets are all about raising
capital and matching of those who want capital with those who have it.
Financial
markets such as bond and stock markets are crucial to promote greater economic
efficiency by channelling funds from people who do not have a productive use of
them to those who do. Financial activities in capital markets also have a
direct effect on personal wealth, the behaviour of business and consumers, and
cyclical performance of the economy.
In capital
allocation process, capital flows efficiently from those who supply capital to
those who demand it. Suppliers of capital – individuals and institutions with
“excess funds.” These groups are saving
money and looking for a rate of return on their investment.
Demanders or users
of capital – individuals and institutions who need to raise funds to finance
their investment opportunities. These groups are willing to pay a rate of
return on the capital they borrow.
The
role of capital market in the development of Rwandan economy
After examining the Rwandan economy and the capital
market, it is easy now to extract the relationship between the two and their
effect on each other. The presence of capital market encourages investment in
securities, thus economic development of the country in general. Rwanda, like
other developing countries, is facing problems of poor economic growth. So the
capital market is critical in improving the national economic growth.
The following are some key elements showing the role
of capital markets in the development of Rwandan economy.
The capital market in Rwanda improves the efficiency
of capital allocation. Efficient capital allocation means that funds are
allocated to the investments projects that bring the most value to the economy
of Rwanda. This is through mobilizing
savings for investment. When people draw their savings and invest in shares, it
leads to a more rational allocation of resources because funds, which could
have been consumed or kept in unused deposits with banks, are mobilized and redirected
to promote commerce and industry. Once only most productive investments
projects are chosen and financed, the economy of Rwanda grows due to successful
investments.
The
Rwanda capital market play an important role in Rwandan economy in that it provides
source of long-term finance for long-term investments. The stock market will also provide capital to entrepreneurs. As
economies develop, more funds are needed to meet the rapid expansion. The stock
market serves as a veritable tool in the mobilization and allocation of savings
among competing uses which are critical to the growth and efficiency of the
economy. The stock market thus will
enable government and industries to raise long-term capital for financing new
projects, and expanding and modernizing industrial or commercial firms. It is
in this regard that the Rwandan stock market is expected to become a financing
source for entrepreneurs who wish to run their projects in Rwanda. This
help in spreading stresses on the banking system by matching long-term
investments with long-term capital.
At
any stage of Rwanda’s development, both the government and the private sectors
would require long-term capital. For instance, companies would need to build
new factories, expand existing ones, or buy new machinery. Government would
also require funds for the provision of infrastructures. All these activities
require long-term capital, which is provided by a well functioning stock
market. The Government and even local authorities may
decide to borrow money in order to finance huge infrastructure projects by
selling another category of shares known as bonds. These bonds can be raised
through the stock exchange whereby members of the public buy them. When the
Government or the local authority gets this alternative source of funds, it no
longer has the need to overtax the people in order to finance development
Also, the creation of a stock market in Rwanda will
attract investors, especially from East Africa, who wish to extend their shares
by investing them in the new stock exchange as Rwanda is largely opening its
doors to the East African Community. This is because Capital markets provide an
ideal platform for transparency in transferring management from the private to
the public sector by floating shares to the general public.
Stock
markets are positively correlated to sustained economic progress. The stock
market is said to be efficient if the price of stock incorporates all available
information in the market place. Thus the stock price in an efficient market gives
us a good measure of the firm’s performance and its long-term value. An
efficient stock market can enhance the growth by mitigating moral hazard and
consequently increasing productivity. In addition, the stock market disciplines
managers indirectly through change of ownership. If the managers are not doing
a good job, the stock price declines and such firms are ten takeover targets
for investors, who will increase the value of the share by replacing current
managers. And this will result in increased performance. Hence, the development
of the economy will occur.
The
capital market has an important role in the development of Rwandan economy
because it has an effect on entrepreneurs. Today, the government of Rwanda is
encouraging people to be self employed by creating jobs for themselves and for
others. This should e done through entrepreneurship. The capital market then affects entrepreneur
because it create investment
opportunities for small investors: As opposed to other businesses that require
a huge capital outlay, investing in shares is open to both large and small
investors because a person buys the number of shares that he can afford.
Therefore the stock exchange provides an extra source of income to small
savers. An entrepreneur considers not only the profits generated in a
new venture but also the possibility of a surplus gain through selling the
venture to the public. The stock market reduces then the transaction costs of
trading the ownership of assets and thereby opens the way for emergence of an
optimal ownership structure. So the capital market helps in transferring the
ownership.
An
other importance of capital market in the development of Rwandan economy is
that it provides equity capital and infrastructure development capital that has
strong socio-economic benefits ( roads, water and sewer systems, housing,
energy, telecommunications, public transport, etc.) ideal for financing through
capital markets via long dated bonds and asset backed securities.
Rwanda
capital market contributes to economic growth of Rwanda through the specific
services it performs either directly or indirectly. Notable among the functions
of the stock market are mobilization of savings, creation of liquidity, risk
diversification, improved dissemination and acquisition of information, and
enhanced incentive for corporate control. Improving the efficiency and
effectiveness of these functions, through prompt delivery of their services can
augment the rate of economic growth of Rwanda.
Stock
market also affects economic activities through the creation of liquidity. Liquid
equity market makes available savings for profitable investment that requires
long-term commitment of capital. Stock markets can affect economic growth when
they are internationally integrated. As Rwanda has joined East African
Community (EAC).This enables greater economic risk sharing, because high return
projects also tend to be comparatively risky, stock markets that facilitate
risk diversification encourages a shift to higher-return projects.
The
Rwanda capital market also promotes public-private sector partnerships and
encourages participation of private sector in productive investments. It
assists the government to close resource gap, and complement its effort in
financing essential socio-economic development, through raising long-term
project based capital.
Capital
market provides a gateway to Rwanda for global and foreign portfolio investors,
which is important in supplementing the low domestic saving ratio. This
accelerates economic growth which may also result to acquire information about
firms. Rewards often come to an investor able to trade on information, obtained
by effective monitoring of firms for profit. Thus, improved information will
improve resource allocation and promote economic growth.
Once
financial market are set, there is a provision of avenues for investment
opportunities that encourage a thrift culture which is important in increasing
domestic savings and investment ratios that are essential for rapid
industrialization. Stock exchange will then encourage investments by enabling
unused money and savings to become productive by bringing the borrowers and
lenders of money together at a low cost. Specifically, the stock market will
provide easy access to long term financing and
allow the Rwandan government and industry to raise long-term capital for
financing new projects, and expanding and modernizing industrial or commercial
companies.
Redistribution
of wealth by giving many people a chance to buy shares of listed companies helps
people to become part-owners of
profitable enterprises, the stock market helps to reduce large income
inequalities because many people get a chance to share in the profits of
businesses that were set up by other people. The Rwanda capital market encourages
broader ownership of productive assets by small savers to enable them benefit
from economic growth and wealth distribution. This occurs when it gives
dividends earned on shares and this represents an equitable distribution of
wealth which is a key indicator of poverty reduction to Rwandan people and
other investors in general.
Capital
Markets also create wealth and employment by mobilizing funds within the Rwandan
economy and injecting them into large projects. As the value of shares goes up,
it also encourages thrift savings, thereby creating wealth for shareholders.
Without savings you cannot invest, or it can be hard to do. So savings are
critical for investment.
The
other element which shows the role of capital markets in the development of
Rwandan economy is that it indirectly controls
on company management. One of the roles of the capital market authority in its
regulatory role is to monitor the market to ensure that it is working
efficiently, fairly and transparently. Therefore it has been raising
requirements for new corporations seeking listing. These requirements relate to
the submission of all financial information regarding companies whose
securities are sold on the stock exchange. Such requirements exercise a control
on a company management and keep its malpractice in check.
CONCLUSION
There
is no doubt that the capital market in Rwanda promotes economic growth. It
serves as an important mechanism for effective and efficient mobilization and
allocation of savings, a crucial function for Rwandan economic development. The
primary role of capital market is to facilitate trade in the stocks of
companies by connecting people who seek money with those who can provide it.
There
are many other roles which can be summarized as follows: mobilization of
savings for investment projects, creating investment opportunities for small
investors, raising government capital for development projects, control on
company management, and source of raising long term risk capital;
enhancing corporate governance; diversification and financial services growth,
market monitoring, redistribution of wealth which has effects on entrepreneurs,
providing source of long-term finance for long-term investments and provide
equity capital and infrastructure development capital.
The
Rwanda capital market will also attract investors and promote public-private
sector partnerships and encourages participation of private sector in
productive investments. Capital markets serve as avenues for investments
opportunities that encourage thrift culture of savings.
Furthermore,
to increase performance, the Rwanda capital market and Rwanda stock exchange
have to compliment with local commercial banks in term of investments because
economies that have a well developed banking sector and thus capital market
have an advantage. It is also important to have other financial institutions in
charge of education whose responsibility is to educate the public on the
benefits associated with investing in stock markets.
N.B:
This information is the original work of the owner (HIMBAZA AUGUSTIN).
All rights are reserved to the owner and this work is for academic
purposes only. Any abuse of this information will be punished lawfully.
RWANDA CAPITAL MARKET AUTHORITY
(CMA) UNIVERSITY CHALLENGE
STUDENTS
PARTICIPATION FORM
NAMES:
HIMBAZA Augustin
FACULTY:
MANAGEMENT
DEPARTMENT:
FINANCE
UNIVERSITY:
SCHOOL OF FINANCE AND BANKING (SFB)
EMAIL
/ TELEPHONE: ahimbaza@yahoo.fr / 0785148717
ACTIVITY:
ESSAY COMPETITION
MODE
OF SUBMISSION: E-mail: universitychallenge@cma.rw
*Submitted to CMA University Challenge on 10th January, 2012 and posted on 4th Feb, 2012
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