Establishment Of Capital Markets In Least Developed Countries Finance Essay - Free Essay Example

Today most economy around the globe are judged by the performance of their capital markets. Capital markets can play a significant position in the growth of economy and success of nations. Most of the African nations including those in Sub-Saharan Africa (SSA) have in recent times under gone financial area reforms such as streamlining and privatizing of nation owned banks and establishment of capital markets. In literatures there are many different views on the bond between the establishment and the development of capital markets and of economic growth and prosperity of a country. The other arguable issue in the literature is the vital role of institutions towards the economic growth of nations in general and to the performance of capital markets in particular. North (1996) showed that, differences in economic institutions are the foremost sources of cross-country differences in economic growth and prosperity. High quality institutions have optimistic influence on the deepness and progress of the financial sector of nations. Stallings and Studart (2006), institutions are even more important with respect to the capital markets, where the concern of confidence is crucial. This research proposal will primarily check with the literature about the relationship between capital market establishment and development and economic growth and the responsibility that institutions play in capital markets and attempt to identify and relate these to the Rwandan context. In the most developed capital markets, households are the key participants as investors. Saunders and Cornett (2004) claimed that in the U.S, households are the sole largest holders of business stock (holding 38.4 percent of all corporate stock outstanding in December 2001). But, the capital markets of less developed nations are very small-minded in terms of capitalization because of a restricted number of listed companies and narrow parti cipation of households (savers) this is either due to lack of competence or lack of knowledge as to the capital markets. Thus this research will as well examine the impact of the households (savers) in the capital markets in less developed nations in Africa including Rwanda. 1.2 Problem Discussion Regardless of a surge of international investor interest in the 1980s and 1990s, the African countries have been bypassed by the immense global capital flowing to developing countries. Cumulative capital flows to the developing nations have been rapidly greater than official development support flows since 1980s. But, Africa remains the emergent region in which development backing flows exceeds private capital flows (Senbet and Otchere, 2006). This was primarily attributed to the lack or absence of well developed financial sectors and the deprived business policies and institutions in African countries. Capital markets are an imperative part of an economy making it promising for industry, trade and business to develop without any hindrance in terms of capital. The capital markets serve a vital purpose in the growth and development of a company that wants to expand. For such companies with expansion plans and new projects in need of funding and investors looking for a better return, t he financial market is the best platform. The private sector usually lacks access to credit facilities. Investment, growth and economic welfare are all too low in developing countries. This is more severe in Africa, particularly in Sub-Saharan Africa (Platt, 1998). Most African countries, particularly those in Sub-Saharan Africa, have recently undergone extensive financial sector reforms. The reform package includes restructuring and privatization of state owned banks, the introduction of private banking systems, along with bank supervisory and regulatory schemes, the introduction of a variety of measures to promote the development of financial markets; including money and stock markets (Senbet and Otchere, 2006). Rwanda is one of the African countries that were engulfed for years severely with economic and political problems. Currently Rwanda has no proper capital market, though; it established a capital market in 2003. The Rwanda economy is not still doing anything good. A small number of economies in Africa and those in Asia and Latin America had performed well. There are many different factors that accelerate economic growth of a nation. Economic sector reforms such as establishment and development capital markets are thought to be one of the foremost variables to accelerate the financial growth of a nation. Given the existing economic policy, legal form of businesses the banking sector and institutions, the business communities, can Rwanda embark on the establishment of a capital market? Are there feasible conditions that can be justifiable to do so? Are there competent institutions in which confidences of the stock market participants depend on? worldwide organizations like International Monetary Fund (IMF) and World Bank (WB) as part of an effort of economic sector liberalization are pressuring Rwanda and many other African nations to privatize the state owned banks and establish stock markets so as to incorporate with the rest of the globe. This research will draw closer the conclusions and recommendations to establish a stock market in Rwanda, if there are feasible conditions that can be justified to do so. 1.3 Problem Statement Both economic markets (mostly capital markets) and institutions were coined by several commentators as to their relevant role and significance to the financial growth and success of nations. In developed financial markets such as in U.S. households (savers) are the foremost participants in the capital markets (Saunders and Cornett, 2004). Will this part of participants have a positive impact in the development of capital markets in less developed countries? What about in Rwanda? The purpose of this proposed research is primarily to consult with the Existing literature and will find out: whether capital market establishment in the least developed nations such as Rwanda is an alternative towards the economic growth and development. The responsibility of institutions toward the establishment and development of capital markets and whether capable institutions exist in Rwanda to get on the establishment of capital markets or not. Whether households savings will make a genuine/real impact on the overall performance, liquidity, and market capitalization of the capital markets in least developed African nations (with or without capital markets) or not. 1.4 Statement of Purpose The main purpose of the study/research will be to examine and review the literature on whether capital market establishment leads to the economic growth and development of least developed countries and what impact will institutions have on the performance of capital markets? 1.8 Research Method A research method can be quantitative or qualitative. the quantitative method is based on statistical observations and aims at generalizing a phenomenon through formal analysis of the selected data. The qualitative method is mostly characterized by descriptions instead of statistical data and intends to create a general understanding of the topic being studied. This research will use qualitative approach to deal with the 1st and 2rd research questions and for the 3rd research question, qualitative and to some degree quantitative approach. Part of this research will be conducted based on the existing literature (both theory and empirical studies) on the establishment and development of capital markets in least developed countries as well as on Institutions.