Demystifying capital markets ‘myth’

To most people outside of the capital markets industry, what capital markets do and the value of what they provide is less obvious, particularly given the level of financial inclusion in Rwanda.

But, fortunately, according to the World Economic Forum, Rwanda’s level of financial inclusion is fast increasing, propelled forward by ambitious targets and innovative policy and regulatory approaches.

The 2008 and 2012 FinScope surveys showed that financial inclusion had doubled from 21 to 42 percent.

With such a large and rapid involvement of adults into the formal financial sector, ensuring that the ‘newly banked’ are able to effectively and responsibly select and use financial products is critical.

Rwanda, through its regulator the Capital Market Authority, is hoping to create a suitable financial environment to attract investment in critical areas such as infrastructure and direct the resources to more productive projects thus accelerating growth and creating jobs.

To achieve this, the Capital Market Authority is trying to lure Rwandans home and abroad, to save and invest in many platforms created after its transformation into a fully-fledged regulator, under Law No 11/2011 of 18/05/2011.

These platforms include the now popular RNIT Iterambere Fund and Rwanda Stock Exchange to mention but a few.

This national public education programme, initiated to educate the public about the culture of saving and investment, has seen many initiatives developed such as the annual CMA University Challenge that is organised in collaboration with Rwanda Stock Exchange and public education sessions held in universities and districts.

What is Capital Markets?

Capital markets are activities that gather funds from some entities and make them available to other entities needing funds. The core function of such a market is to improve the efficiency of transactions so that each individual entity doesn’t need to do research and analysis, create legal agreements, and complete funds transfer.

Effects on the economy

According to the World Bank Group report in 2015, the combination of high public investment and low export revenues had increased reliance on foreign financing, mainly in aid.

Steps to diversify and strengthen the country’s financial investments and institutions would stabilise Rwanda’s positive economic growth, and help ensure the poverty levels continue to drop.

Capital market is the prime tool that drives any economy on its path to growth and development because it is responsible for long term growth and capital formation by issuing of funds for long term investment, ensure an efficient and effective allocation of scarce resources for optimal benefits to the economy, reduce over reliance of the corporate sector on short term financing for long term projects and encourage inflow of foreign capital.

A key strategic goal of Vision 2020 is to make Rwanda an economic trade and communications hub in the heart of Africa.  This will require significant investment in infrastructure in the form of roads, power, rail, airports and telecommunications.

These plans also call for the active participation and expansion of the private sector in Rwanda’s economy which will require long-term investment in infrastructure and industry, which can only be provided through the mobilisation of domestic savings through capital markets.

So why invest in the capital market?

Investment is a necessary condition for creating wealth. Investment helps in realizing one’s dream such as buying a home, a vehicle, a farm, a factory, a business, or even education.

Investment puts your savings to work to earn returns. It is impossible to create wealth without investing. Investing gives you the key to secure the future. Investing can let you have a comfortable retirement. Investment is a time-honored practice for increasing wealth.

The national project in capital markets of Rwanda is the 10-year Capital Markets Master Plan, which is one of the interventions by the government aimed to promote domestic savings and bring sense of ownership of the capital market industry among the Rwanda population.

The writer is a final year student of finance at the University of Rwanda’s College of Business and Economics.

The views expressed in this article are of the author.

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