In the previous discussions, we saw that the primary role of the financial system in an economy is to mobilize savings from the surplus economic units and channel same to the deficit units thereby ensuring effective and efficient allocation of resources for the optimal benefit of the citizenry.
It was also seen that the capital market is the arm of the financial system for the mobilisation of savings for medium to long term investments. Today’s focus would be on how the capital market acts as a potent catalyst in the economic development of nations.
In a paper titled “Making Capital Markets Work for Smes in Africa” at the 2010 Kikonyogo Capital Markets Awards in Kampala, Uganda, the Director General of the Securities and Exchange Commission (SEC) Nigeria, Ms Arunma Oteh rightly identified the capital market as a crucial component of a good working financial system and a critical vehicle for a nation’s development. Advising on the need for African countries to strive to develop their markets, she said, “The development of a strong capital market is imperative because theoretical and empirical literature have shown that there is a strong, positive correlation between capital market development and economic growth of any nation”.
The capital market positively impacts both investors and companies or governments that source funds from the market in various ways. However, the economy as a whole is the greatest beneficiary of the capital market. This is because all other benefits, both to investors and issuers of securities in the market all crystallize to benefits to the economy in general. In specific terms, some of the benefits that accrue to the economy generally from capital market activities include:
Mobilization of Savings: The capital market is a veritable medium for cultivating a savings culture among the citizenry. It is an effective and efficient platform for mobilization of savings at all levels from both the least or uneducated to the very big or highly educated in the society. It encourages savings mobilization across income levels and geographic spreads.
Channelling Savings into Investments Out-lets: The little savings by individuals from across the length and breadth of the country, when pooled together becomes a huge chunk of investible funds that can be channelled into the productive sectors of the economy. The capital market provides the mechanism for the pooling together of these funds and turning them into long term investments through public offers for subscriptions and bond issues by public companies and governments.
Promotion of Real Sector of the economy: Funds raised from the capital market are usually tied to expansion, modernization or restructuring of plants, equipments and infrastructure. This reduces wasteful and frivolous consumption while promoting growth of the real sector of the economy.
Creation of Employment: Direct and indirect employment are created and sustained through activities in the capital market. All key players in the market like stockbrokers, registrars, issuing houses, and auditors as well as regulators in the market, to mention but these few, all contribute to direct creation of employment. Moreover, providing long term funds for expansion and modernisation of businesses increases not just their productive capacity, but their capacity to employ more people along the value added chain.
Wealth Redistribution and Poverty Reduction: Activities in the capital market in many ways promotes wealth redistribution and poverty reduction. The funds realized through public offers by companies enhance their productive capacities giving room to more employment generation. Moreover, the companies are more positioned to make more profits and pay higher dividends and bonuses to their shareholders as well as taxes to the government. The capital market therefore, provides a direct means of income/wealth redistribution.
Promotion of Entrepreneurship: Plenty of good business ideas die with their owners because of lack of funds to realize them. The capital market provides an avenue for entrepreneurs who may not have the required volume of funds to realize their ideas to source for funds. The modus operandi of the capital market makes it very easy for owners of good business ideas to meet with owners of investible funds. The system provides a mutually beneficial arrangement for the two groups to meet their objectives.
Liquidity in the Economy: Capital market activities provide liquidity in the economy hence oiling the wheel of societal development. The daily trading activities in the capital market ensures that money move in all directions of the economy. It can therefore rightly be said that the capital market provides the best wealth circulatory system in a national economy.
Promotion of Good Corporate Governance: Operations of the capital market require mandatory disclosure of accurate timely and detailed information concerning all activities of participants. The market is information driven and ensures accountability, transparency thereby promoting good corporate governance.
Measure of economic Performance: The capital market is equally a good measure of the economic performance of a country. The All-Share Index and Market Capitalization, which are performance indices of a country’s capital market, is also a veritable mirror of the performance of the country’s economy.