News papers have published much information about capital markets urging us to invest in shares and bonds. This is indeed a very good idea that suits such a low developed country like Rwanda.
News papers have published much information about capital markets urging us to invest in shares and bonds. This is indeed a very good idea that suits such a low developed country like Rwanda.
Despite such continuous suggestions, in Rwanda we cannot access these financial products apart from the central bank —Treasury Bills (TBs) only, the issuer of these investment products in Rwanda is also unknown. In East Africa it’s only Kampala, Nairobi and Dar es Salaam that have developed markets for these financial instruments.
In August 2005, a meeting was held in Hotel Novotel and the vice governor of the National Bank of Rwanda also head of the Rwanda Securities Exchange task force by then put it very clear that the first structure of the Rwanda Securities Exchange would be complete by the end of the year 2005.
By that we kept speculating that may be by the end of 2006 we would be having at least a company listed on the Rwanda Securities Exchange or Kigali securities exchange and may be other government securities also listed for potential investors.
Whereas there are companies like Kenya Airways Limited and East African Breweries Limited listed on all the three stock exchanges of East Africa, Jubilee Holdings Limited also cross listed on The Nairobi Stock Exchange (NSE) and the Uganda securities exchange, here in Rwanda we have no company listed on any of the stock exchanges.
But may be it’s time for us to rip the benefits of our reforming financial sector since signs show that much is in place to have a fully fledged stock exchange.
This is because an initiative is underway to set up the secretariat that will run the operations of the capital markets.
Recently the chairman Capital Markets Development Advisory Council a committee instituted to fast track the establishment of a capital market in the country Henry Gaperi said that they had reviewed the legal frame work and examined the kind of legislation that needs to be in place, so that if the capital market begins, it runs smoothly.
Gaperi said the 11 man council that was appointed comprises of representative from the Private Sector Federation, Central Bank, Insurance sector, Ministry of Finance, Pension Fund, business community (manufacturers), one independent individual and a legal expert.
But we need to understand what capital markets are and then money markets then distinguish the two. Money markets are markets in which short term securities are traded. Such securities mostly have maturity period of one year or less.
The other important thing to note though is that such instruments can be easily turned into cash (highly liquid) at relatively low price. It’s away of borrowing and lending money on the short term basis.
One must understand that this kind of market brings together deficit and surplus spenders on a short term basis. Instruments traded in this market include Treasury bills, commercial papers, Negotiable certificates of deposit (CIDs) among others.
Capital markets on the contrary are markets where long term securities are traded. Capital markets bring together deficit and surplus spenders who may want to borrow or lend on along term basis.
Products like shares, bonds issued by private companies and government, units in collective investment scheme, commercial papers and notes that are long term in nature are traded.
Benefits
It’s one way of saving; as you know Africans are faced with a poor saving culture with most people utilising all their little earned incomes yet even the few who try to save prefer saving their money in long term properties that hardly generate much revenue.
It offers an alternative to investment and besides most of the asset investments undertaken carry less risk. Usually most of the investments are highly risky compared to investment alternatives at a stock exchange.
One may ask if there is no risk in financial instruments, the risk is always everywhere but are we certain that the risk will occur then try to avoid it. Here we are talking about two types of risk that is certainty and uncertainty risk. The latter is caused by both macro and micro-economic factors while the former is a result of macro-economic factors only.
When looking at certainty risk, it’s a must that it has to occur because factors that cause it like inflation, interest rates, exchange rates name it are always a must in normal economy. So the price that an investor pays for a share at a stock exchange only covers certainty risk.
However with uncertainty risk one may not know whether it will happen because it results from uncertain factor like competition, poor management, market and changes in the political situations of a country.
Here an investor pays the price that covers both micro and micro-economic factors mentioned. Therefore a rational investor tries to mitigate risk in order to realise higher returns from the investment.
Another important function of this institution is to ensure that capital is re-allocated from the non-productive sectors to the productive sectors of the economy that’s why it’s even a source of long term financing for both government and companies.
Issuing of government securities with diversified maturities act as an engine to economic growth and will help government to consolidate the debt due to Caisse Sociale du Rwanda (CSR).
Players in the market
The capital market comprises of different participants raging from stock brokers, investment advisors, fund managers, a stock exchange and the regulator. All these play different important roles but the most crucial one is that of a regulator of protecting investors’ moneys.