Why African capital markets need an unshakeable foundation

Mary Njuguna

Principal Specialist, Capital Markets

Ever wondered what policemen, electoral commissions, regulatory bodies and parents have in common? You guessed it, they enforce norms in the spheres of their influence, a crucial role I deeply respect from my almost nine years as a staff member at a financial sector regulator.  I will explain why.

Regulation is an art, not a science

Enforcing norms and legal rules in any sector is about striking the perfect balance. Overregulation can stifle innovation, while insufficient regulation can encourage malpractice.  My previous experience at the Capital Markets Authority, Kenya involved gatekeeping roles similar to those of an immigration officer, ensuring only qualified participants entered the market. I was also involved in the development process for various pieces of capital market and broader financial sector legislation.  This practice highlighted the artful nature of regulation – balancing enforcement with facilitation to foster market integrity and trust.

Challenges in African markets

Unlike developed markets, capital market regulators in Africa have the dual mandate of regulation and development. Developing these markets requires specialised skills and significant resources in human, financial and IT capacities.  This is something that regulators understand very well – and it falls on all African governments and policymakers to appreciate this as well.  Reason being, capital markets are built on trust – market players must have confidence in the way the market is run, giving credence to how it operates.  Effective market regulation hinges on the ability to detect and respond swiftly to fraud and misconduct.  It requires strong regulatory frameworks and the right tools.  Specialised skills are also required.  These cost a lot but are necessary for market confidence and functionality.

The benefits of well-regulated markets

When markets are well run, everyone benefits, from issuers seeking capital to investors looking for returns. Where markets function optimally, they mobilise long-term capital in local currency to power the real economy.  For example, enabling a water company to raise USD 20m for water infrastructure maintenance and water conservation efforts in Tanzania or mobilising USD 95m to finance a green mobility project in Morocco. This showcases successful capital mobilisation for significant projects and the immense opportunity to replicate it.

The broader context

While regulation is important, it is not the sole factor. A stable political environment and conducive macroeconomic conditions contribute to a thriving capital market.  I believe that African governments’ appreciation for not only the macro-level issues but also the opportunities for supporting capital market growth is always needed.  By aligning government policies and incentives, like tax neutrality for specific securities and exemptions for green bonds enables more efficient capital-raising efforts by the private sector and encourages innovative financing solutions.

I believe African governments realise that reliance on public financing through external debt borrowing in hard currency is not an infinite pot.  As of 2022, external debt in sub-Saharan Africa stood at USD 833 billion and this rises and falls depending on currency volatility.  This type of financing is not sustainable, and it will not meet all the continent’s development needs. Alternative financing options include using capital markets or a mix of different types of capital and risk mitigation instruments like guarantees, insurance, and currency hedging mechanisms.   This is the time to deploy this creative mix of financing solutions to fund sustainable development.

The role of FSD Africa

But back to my main point – capital market regulation and development are not a walk in the park.  At FSD Africa, we have implemented several regulatory support initiatives – helping regulators strengthen their institutional capacity and build robust regulatory frameworks and long-term capital market development plans.

In March 2024, our efforts in supporting development of the capital market intermediaries licensing and monitoring legislation assisted the Ethiopian Capital Markets Authority in granting a license to its first investment advisor.  This is a foundational step in the establishment of the capital market and mobilisation of capital.  In addition, our work with various regulators and exchanges to design rules for sustainable bond issuances has promoted capital raising of approximately USD 1.2 billion across the continent.  Such initiatives demonstrate the potential of regulated markets to mobilise sustainable finance and support Africa’s development.

An all-hands-on-deck approach is needed from the government and other market facilitators to support regulators in fulfilling their mandates.  And these dual mandates were made for this time in history – for this time in the continent’s sustainable growth trajectory.  I am sure as we support the implementation of regulators’ statutory mandates which the drafters of capital market legislation envisioned, our economies will be better for it.