Economic growth is largely influenced by various factors key among them include labor, deregulation, infrastructure, capital, technology amongst others. A well-thought-out financial system enables an economy to fully exploit its growth potential.
According to the World Bank, an estimated USD 4.0 trillion in annual investment is required for developing countries to achieve the Sustainable Development Goals (SDGs) by 2030.
Globally, Capital Markets play a key role in financing infrastructure development, large enterprises, and Small and Medium Enterprises (SMEs). In recent years the link between the role of capital markets in spurring economic growth is rapidly increasing with notable developments realized across various sectors of the economy.
Most of the investments in the Capital Markets are long term in nature and it is paramount that all players understand the products in the market before issuing them to raise funds and/or before buying into them as investments.
The financial services sector particularly has a vital role in educating the public by giving information and answering all questions regarding the Capital Market solutions available to their customers in order to ensure they maximize returns on investments.
The pandemic as an example caused a lot of volatility in most markets across the globe over the last two years with the Kenyan equities market registering a marginal growth of1.6% last year. Despite the periodic volatility, it is important to state that Capital Markets continue to play an important role in economic development more so as a source of funding for businesses and individuals.
The money market is also particularly important in reallocating capital and thus providing the basis for the continuous restructuring of the economy that is needed to support growth. In countries with highly developed money market structures and institutions, we observe that a greater share of investment is allocated to relatively fast-growing sectors.
The Kenyan Capital Market for example has achieved significant milestones over the years in effect catalyzing economic growth. Some of the most recent developments are diversification of the product offerings to include Real Estate Investment Trust, unlisted Green Bonds, Exchange Trade Funds, Securities Lending & Borrowing and a slowly rebounding corporate bonds market. Further, we have made great strides in facilitating an efficient capital markets infrastructure and increased investor education and public awareness.
The developments in Kenya Capital Markets notwithstanding, there are still factors that hinder significant growth of the markets. As much as the investor education and public awareness has increased, there is still inadequate knowledge among some investors and the general public and this is one of the biggest challenges curbing active participation in the market and consequently slowing down growth. Other challenges include past failures by corporates which leads to lack of trust and confidence from the investing public, the cost and complexity of issuing securities is also restraining potential issuers who play a catalytic role in market development just to mention a few
We still have a lot to do to ensure the capital markets deliver their full potential in their role in the Kenyan economy. In order to deepen the capital markets, it is imperative for financial institutions and other key stakeholders to provide more products and value adding services in line with technology advancements and supervisory frameworks. We should continue to make advancements including borrowing from other countries structures that will serve to improve liquidity and transparency within our capital markets.
On the other hand, even as financial institutions and other key players continue to educate and train on Capital Markets, the public should take time to understand the various product structures to align their return expectations and participate in those they can tolerate the risk. People interested in making investments should take advantage of professional financial advisers to guide them appropriately through their investment journey to meet their financial and investment objectives through the various opportunities within the capital markets space.
The Writer - Victor Odendo, is the Head & Principal Officer at Natbank Trustee & Investment Services Limited, the investment subsidiary of National Bank of Kenya Limited.