The Role of the Capital Market in Boosting the Economic Growth of Rwanda.

“In the last few decades, the strategic role of the capital market as an efficient conduit of financial intermediation has been well recognized by researchers, academics, and policymakers as one of the key drivers of the economic growth of a country. Oke and Adeusi (2012)”

Introduction

Capital markets have been seen as very significant components of the financial sector of any economy. They are considered as playing a vital role in the mobilization of capital in many emerging economies.1 Analyzed generally, African capital markets have remained under-developed and they have to a large extent not achieved their intended objective. According to Samuel Kamndaya (2010), « many African capital markets are still immature and the market capitalization is mostly dominated by a few firms. He adds that African states have to attract international investors in order to grow their capital markets and move them to the next level in the years to come. This, however, will require most African countries to have massive economic, political and business reforms in order to win investors’ confidence».2 According to a report published by auditing firm PWC in its 2015 Africa Capital Markets Watch, the author of the report makes his introduction as follows: “This report surveys all new primary market equity initial public offerings (IPOs) and further offers (FOs) by listed companies, as well as high-yield (HY) and investment-grade (IG) debt capital markets activity, in which capital was upraised on Africa’s principal stock markets and market,

segments (including exchanges in Algeria, Botswana, Cameroon, Cape Verde, Côte d’Ivoire, Egypt, Libya, Gabon, Ghana, Kenya,, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Morocco, Rwanda, Seychelles, Somalia, South Africa, Sudan, Swaziland, Tanzania, Tunisia, Uganda, Zambia, and Zimbabwe).” The report highlights the fact that Rwanda is among few countries in which the capital market is contributing to the growth of the economy. Regarding the East African region, (Gaertner, Sanya, and Yabara, 2011) note that the East African Community (EAC) the Member States has been advocating for an expansion of capital markets and this has been done with regional integration. The authors further note that establishing well-operational homegrown capital markets is important for these countries because they need enormous amounts of sponsorship to construct infrastructure for continuous growth.

1 East African Journal of science and technology, Vol 5, issue 1, 2015. Accessed at https://www.eajscience.com on 26th March 2022. 2 Ibidem 3 Christian Mbabazi NAHAYO, Economic modeling of capital Market and investment sustainability in Rwanda, Thesis Submitted to the University of Rwanda, College of Business and Economics in Partial Fulfillment of the Requirements for the Award of a Master Degree of Master of Science in Economics, October 2018, Kigali, p.13

They conclude by noting that Capital markets are desirable as a substitute foundation of funding, complementing commercial banks, which govern the EAC financial sector with low attractiveness. 4 The capital market, and thus the stock market, play a major role in the economic growth of a country through their ability to mobilize long term savings for financing long term ventures to improve the efficiency of resource allocation through competitive pricing mechanisms, provide risk capital (equity to entrepreneurs), and encourage broader ownership of firms.

5 To recall, Rwanda is a small but fast-growing market, with a population of nearly 13 million people and a Gross Domestic Product (GDP, Current) of $10.354 billion, according to the World Bank. Before the COVID-19 pandemic, Rwanda enjoyed strong economic growth, averaging over seven percent GDP growth annually over the last two decades.

The Rwandan economy grew by more than nine percent (9%) in 2019 thanks to strong growth in the industry, construction, services, and agriculture. 6 In Rwanda, the idea of a capital market establishment started in 2005. The Rwandan capital market started as the Rwanda Over-The-Counter (OTC) Market on January 31 2008 and later grew to become the Rwanda Stock Exchange (RSE) in January 2011.

The RSE is operated under the supervision of Rwanda’s Capital Market Authority (CMA), previously known as the Capital Markets Advisory Council (CMAC) which reports to the Ministry of Finance and Economic Planning (MINECOFIN). The Capital Market Authority of Rwanda was established with the main objective of guiding the development of the capital stock market in Rwanda.

7. The capital market in Rwanda comes at a time when the economy is growing fairly steady and there is a need to raise capital both for firms and for economic growth.

8. In 2000, Rwanda adopted the vision 2020 which aims at transforming the country into a middle-income country with a knowledge-based economy. To achieve this, an annual economic growth target of 11.5% was required and this can only be achieved with at least 20% savings of GDP and domestic investment of up to 30% of GDP.

It is in this line that the Capital Market Authority was established by Law N°01/2011 of 10/02/2011 regulating the capital markets in Rwanda to guide the development of capital markets. Before the establishment of the Capital Market Authority (CMA), the Rwanda Capital Market Advisory Council (CMAC) 4 Ibidem P.15 5 UMUHOZA Cyuzuzo Gisele, factors influencing the development of the capital market in Rwanda, A case study of the Rwanda Stock Exchange, University of Rwanda, Thesis Submitted in partial fulfillment of the requirements for the degree of Master of Science in Economics, Kigali, July 2017, p .10 6 See https://www.trade.gov/country-commercial-guides/rwanda-market-overview. 7 Est African Journal of Science and Technology, op cit,p.259 8 Ibidem . # Corporate law, #business law, and investment law

Access the full article: The Role of the Capital Market in Boosting the Economic Growth of Rwanda:

https://bit.ly/3ODVZz1

Prepared by:

Abayo & Co. Advocates

• Jean Claude Mutabazi Abayo & Dieudonné Bashirahishize

• Phone Number : +250 788 300 535
• Email : info@abayo.law