By: Almeira Paruque, FSDMoç Analyst.
A dynamic capital market is very important for the economic growth of countries and it has been the highlight of discussions around the globe, described as the link in facilitating the flow of funding from savers to investors. The most known markets internationally include the capital markets of London and New York, which are very electrifying trading places and it is not unusual to hear people referring to stocks or other securities that have risen or fallen overnight. However, do people really understand what the capital market is and how it operates? The term is still somewhat mystified in sophisticated domains and it tends to become even more puzzling in developing countries, particularly in Mozambique, where despite latest improvements, around 60% of the population remain excluded from the financial sector.
The origins of the capital market vary around the world and each country tends to record it according to its own history. Nevertheless, the roots of the capital market can be traced back to the 1500s, when stock markets started to emerge. It built from the trade of commodities’ debt, evolving to the trade of securities between those with savings and those in need of capital. There are many types of securities, each with its own characteristics, but the most commonly known are Equity or Stock, representing a company’s shares, and Debt (many times represented by Bonds) which as the name entails, represent funds that a company has borrowed from investors in the market, for a determined purpose. The securities, which were initially handwritten in sheets of paper, are nowadays mostly stored in electronic platforms, in the form of a registration.
In Mozambique, the capital market has its origins in 1997, when the government decided to put in place a stock exchange installation committee, through which the Mozambique Stock Exchange (BVM) was created, in 1998. All over the world, the stock exchanges have been created to allow an organized environment for the trade of securities, where participants can benefit from regulated markets, with established rules and guidelines and therefore, protection mechanisms. These platforms also allow ongoing trading (buying or selling) of securities and therefore transferability between different investors, which depending on supply and demand, may cause its prices to rise or fall.
As previously stated, the capital market is important to the economy because it allows the circulation or flow of funds between institutions and individuals, both from private and public sectors. Through the market, people can become owners of a company buy buying equity, as well as, it provides a space for borrowing capital (debt) from those who save or investors, repayable on a later date, with accrued interest. This process enables the conversion of savings into productive investment by allowing investors to make more money from they savings and the institutions that issue securities to finance their projects, which can contribute to a country’s development through the financing of infrastructure, to name a few: power, roads and the real estate sector.
As a program created to promote the formal financial inclusion of the underserved population in Mozambique, the Financial Sector Deepening Moçambique (FSDMoç) is engaged with the implementation of activities to foster development and, the participation of more Mozambicans in the formal financial sector’s markets, including the capital market. For instance, from 2016 to 2017, FSDMoç has offered support to BVM, by hiring a consultant that assisted in the elaboration of the Exchange’s Strategic Plan (2017 – 2021), which outlines short and long-term initiatives to be implemented by this institution, with the participation or collaboration of other market players.
Moreover, to respond to the lack of information on private equity in the country, FSDMoç has hired consultancy services to conduct a study regarding the legal framework of private equity in Mozambique. The study’s mission was to establish a clear definition, document experiences, identify the potential for internal savings and give recommendations that allow a conducive legal and regulatory environment to the various types of private equity investment.
Lastly, through a partnership with Banco de Investimento Global (Banco Big), FSDMoç has developed an intervention aimed at improving the understanding about the role and importance of the capital market as a source of financing and as an investment instrument, among the SMEs. The intervention culminated with a study on the financing alternatives for SMEs, presented to the public in December 11, 2018.
Despite all the initiatives outlined above, the capital market in Mozambique remains affected by a number of factors such as the outdated legislation governing the overall market and the low levels of financial literacy among the general population, mostly the low-income segment. When it comes to BVM, challenges often reported include the low number of listed companies, low number of trades or liquidity, weak supervision and intermediation and an outdated trading system.
To improve the response mechanisms to these challenges and others, the Financial Sector Deeping Africa (FSDA) has created a Capital Market Working Group, whose first meeting was held in December 6, 2018, during the 2nd FSD Network Conference, held from the 3rd to the 6th of December 2018, in Maputo City. The conference had the objective to gather different FSDs and stakeholders, to discuss pressing matters regarding the stage of financial inclusion across the African continent.
The Capital Market Working Group, organized with the objective to allow greater information sharing and provide an opportunity to better understand the status of the capital markets within the FSD Network, counted with the participation of six (6) FSDs, representing Africa, Rwanda, Nigeria, Mozambique, Uganda and Kenya. It followed a capital market training offered to market participants, including the Ministry of Economy and Finance, BVM and the banking sector, that helped to shape discussions of the working group.
Another initiative worth mentioning is the Africa Regulatory Support Programme, also developed by FSDA, with the objective to promote capital market regulators’ institutional capacity and strengthening, by developing masterplans and strategic plans, supporting debt market development, as well as knowledge management and peer learning on sustainable finance and finally, promoting the creation of a listing working group. The program is to be implemented in Ghana, Tanzania, Zambia, Zimbabwe, Rwanda and Mozambique.
The capital market’s contribution for society is undeniable and countries that fail to stay up-to-date on this market latest trends risk losing crucial opportunities for growth. Long term financing mechanisms, diversified pools of investment, strong intermediations systems and diverse financing modes can lead to great improvements in several sectors of the economy. Latest highlights for capital market development in Africa include the introduction of new products such as Islamic bonds or sukuks, mostly issued to foster investment in infrastructure, green bonds that are used to mitigate and/or adapt to climate change effects as well as, emerging technologies that improve trading processes such as mobile payments which allow direct market access (DMA) and the blockchain, which among other benefits, enables encrypted and more transparent transactions.
There are still many steps to be taken to advance capital market development in Africa and Mozambique in particular. FSDMoç believes it has positioned itself as an important player to assist different financial sector stakeholder, during the process of turning the capital and other markets into more inclusive environments for the underserved people.