Strong financial regulations will solve African stock markets illiquidity challenge

Gilchrist Badaka Laws are important in creating a conducive atmosphere that creates confident among investors, thus promoting reduction of illiquidity. That’s why is important that African stock markets can address the problem of illiquidity affecting them by developing laws that promote investor confidence. Illiquidity is the state of a security or other asset that cannot easily be sold or exchanged for cash without a substantial loss in value. Therefore, an illiquid asset cannot be sold quickly because of lack of ready and willing investors to buy the asset. Illiquidity scares away investors, as well as entrepreneurs who are looking for a fair valuation and ways of diversification of risks. Stock exchanges promote development if they are liquid by channelling money from the investors to entrepreneurs in the economy. Africa equity markets are illiquid because lack of information prevents inventors from taking part in stock trading. Many investors are still unaware on the importance of trading in stocks. So, they do not bother to put their money in any stocks. Other investors face the problem of valuation. Investors cannot get maximum return at low-risk for their investment if they do not access proper information about the investment and the associated risks. As a result, few securities traded in the African markets and the volume of shares traded per day is low with some stocks failing to trade at all for weeks in the market. Such scenarios discourage investors from putting their money into the stock market. Secondly, lack of advanced infrastructure and technology to ease trading affects market performance. Stock trading activity is being impeded by outdated trading, as well as clearing and settlement systems that many countries still operate. This causes inefficiency which reduces the attractiveness of African stock markets. Added to this is the cost of trading in securities which is sometimes much for a small scale investor. Finally, inadequate regulatory framework is another hurdle. A well-functioning financial system requires strong institutions and a sound legal framework. Investors will feel safe to put their money in the market for entrepreneurs if they are sure that there are laws that can protect them from unscrupulous market participants. Where financial regulation is weak, investor confidence in the market disappears. Consumer and property rights protection, contract enforcement laws and corporate governance are key elements for increasing the depth of financial markets and creating an enabling business environment. In many African countries, financial regulations are not well developed due to lack of adequate domestic research in local laws governing capital markets. We generally depend on foreign experts and foreign laws for our market. The result is that the laws created end up being less effective in regulating our markets. They are either too weak or too tough for our businesses. The objectives of a good financial regulation are to protect investors, as well as help build their confidence in the market; ensuring that markets are fair, efficient and transparent; reducing systemic risk and protecting businesses from malpractice. This is why prospectus rules require that companies issuing prospectuses make complete disclosure concerning the security and its financial statements in order to protect the investor from being misled. Internal market rules help in the ensuring that market trading is fair, efficient and transparent and for protecting businesses from malpractice. These include open trading time and reporting over the counter trading to the stock market. Therefore, considering the importance of stock market in the economy, it would be prudent for African governments and the private sector to invest more in research in the financial sector and laws affecting the sector. This will provide local solutions to local problems. This should go hand in hand with development local human skills to solve the problem knowledge gap in the financial market. Professionals, who are well vast with the securities law that can help to promote the sector, will be bold to push for reforms when they are convinced and sure of what they are proposing. It is through sound laws that investors will gain confidence to start to trade and illiquidity will disappear. The writer is a Kigali-based lawyer Email: gilchristbadaka@yahoo.com

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Strong financial regulations will solve African stock markets illiquidity challenge