4. Significance of Capital Markets

Growth rate of an economy depends on infrastructure development, which in turn requires deep capital markets as banks may be averse to the risk or to the funding tenures.

Capital markets have several beneficial features for different participants in the economy. For a Company or entity in need of funding:

♤ Capital markets provide an alternative source of funding that can complement bank financing.

♤ Capital markets can offer better pricing and longer maturities, as well as access to a wider investor base.

♤ They can also offer funding for riskier activities that would traditionally not be served by the banking sector, and by doing so contribute significantly to innovation in an economy.

For Government:

♤ A developed local capital markets can increase access to local currency financing and thereby help manage foreign exchange risk and inflation better.

♤ Local markets have the benefit of more easily tapping local investors, and often local banks.

♤ It can allow them to finance fiscal deficits by borrowing from local markets without exchange rate risk.

♤ The creation of local capital markets is enormously beneficial to governments attempting to finance development internally.

For Investors and Savers:

♤ Capital markets can offer more attractive investing opportunities—with better returns— than bank deposits, depending on risk profile, liquidity needs, and other factors.

♤ With a wider range of securities and instruments offered, capital markets can help investors diversify their portfolios and manage risk.

♤ This is particularly important for institutional investors, including pension funds and insurance companies.

For the Economy as a whole:

♤ Well-developed capital markets provide benefits at the macroeconomic level by supporting monetary policy transmission, which is facilitated through liquid securities markets.

♤ They can serve the financial sector by enhancing financial stability and reducing vulnerabilities to exchange rate shocks and sudden interruptions of capital flows.

♤ World Bank Group research has shown that emerging market countries with robust government bond markets were better able to manage the 2008 global financial crisis, averting major economic dislocations and helping firms and citizens maintain financial solvency and liquidity.

In this way, capital markets have a deeper impact on society. Through the use of derivatives, well-developed markets provide risk management tools not only to market participants, but also to end users as diverse as companies and agriculture producers.