About two weeks ago, Rwanda Development Board complained that World Bank’s new methodology in conducting Doing Business Report had been adjusted without prior communication.
The report ranked Rwanda 2nd in Africa and 38th best place to do business globally, 10 places down from the previous report. This, according to WB, was due to the fact that Rwanda has less than 10 companies registered on the stock market.
The stand-off leads to questions: What does a stock market has to do with a country’s economy or ability to do business? Why is so important or how does it work anyway?
Chief Executive Officer of Rwanda Stock Exchange (RSE), Celestin Rwabukumba, shed light on the subject noting that it creates a platform where owners of capital or public invest in entrepreneurship or businesses.
This can be done through buying shares of the business or lending them money to be paid with interest, or bonds.
Stock market as a mirror of economy
Stock market has far more reaching implications to the economy, he said.
Stock market is about financing, which every economy needs.
In a stock market, capital flows towards good operating businesses and good business ideas are driven by projections of returns. Therefore, a firm’s performance on the stock market can indicate whether an enterprise is prospering or not.
"It is the mirror of underlying economy” Rwabukumba explains.
The most important use of stock market is to raise long-term finance and promote corporate governance. These are both indicators of a growing economy. In the context of Rwanda, the stock market relatively plays a huge role in the economy.
For instance, according to Rwabukumba, $1 billion has circulated in Rwanda stock market so far this year. The value of shares (excluding the value of bonds) in the market is almost half the country’s GDP, $3.4 billion.
"If the assimilated capital from the stock market is used efficiently, this is where we see jobs being created, businesses blossoming and economy growing,” he explained.
Besides, the stock exchange is the cheapest alternative to acquiring capital for either businesses or the government. This is because the exchange involves two parties, the investor and the entrepreneur without mounted interests.
Status-quo
With over Rwf9 billion in Rwanda Stock Exchange and eight companies registered, RSE is still enforcing and sensitising businesses and individuals to recognise stock market as important as it should be.
Talking about the World Bank Doing Business Report, Rwabukumba admitted that the report is globally fair but "contextually wrong”.
"RSE is too young to compete globally. It was competing against 60-year-olds and so markets in Kenya and United States with only eight years of experience,” he noted.
Nevertheless, mechanisms to strengthen Rwanda’s stock market are in place and seem to be working, he said.
"There is hope that people will understand stock market as the best long-term way of both saving and investing because so far, 10 per cent of our investors are retailers,” Rwabukumba said.
editor@newtimesrwanda.com