1.

0 INTRODUCTION

There is no such as a market for capital, that is, the economic Capital
goods themselves. But there is a market, or rather a group of markets,
for the dollar instruments that represent either title to or claims capital
and to the other resources owned by government, business and
individuals. Just as economic capital represents assets of a more or less
permanent nature, capital can mean the money value of the
instruments of ownership and of long term claims to assets, and capital
markets to mean the markets in which these instruments are
exchanged.
Normally a business enterprise needs finance for two purposes: Buying
capital equipments and fixed assets like machinery, tools and
implements, power plants, construction of factory and workshops and
many others which are considered to as long term capital
requirements. Buying row materials, holding the stock of finished
goods, for payment of wages and others which are referred to as short
term capital requirements.
Thus an industrial house or production has to borrow short term as well
as long term funds. The Money market caters for short term capital
requirements only. The long term capital needs are satisfied by the
capital market.

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2.0 CONCEPT OF CAPITAL MARKET

The term Capital market is used to describe the institutional;

arrangements for facilitating the borrowing and lending of long term
funds. Usually stress is laid on the markets for long terms debts and
equity claims, governments security(,mortgages, debentures, shares,
stocks ,bills of exchange, treasure bills , bonds and others ),which are
instruments of long term debts. Thus the capital market embraces the
system through which the public takes up long term securities either
directly or through intermediaries. It consists of a series of channels by
the savings are mobilized and made available to the entrepreneurs or
business for under taking investment activities. (Mithan. 2002)
Conventionally, short term credit contracts are classified as money
markets instruments, while long term debt contracts and equities are
regarded as capital market instruments.. Normally there is no clear
demarcation between money market and capital market because
always, the same institutions participate ion the activities of both
markets and there is a flow of funds between two markets

Capital markets are markets where people, companies, and

governments with more funds than they need (because they save
some of their income) transfer those funds to people, companies, or
governments who have a shortage of funds (because they spend more
than their income). Stock and bond markets are two major capital
markets. Capital markets promote economic efficiency by channeling
money from those who do not have an immediate productive use for it
to those who do. (James Woepking, 2007)
The capital market is the market for long-term funds with maturities in
excess of five years. The largest capital markets include common

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stocks, bonds and mortgages. Capital market funds are used for more
permanent financing purposes. The primary financial assets/securities
found in the capital markets include:

Shares;
A financial security issue joint stock company a means of raising along
term capital.

Stocks:
A financial security issued a joint stock company or by the government
as a means of raising long term capital

Debentures:
A means of financing companies through fixed asset loan, secured
against company assets. A company may give particular assets either
current like particular machine or forth coming like future sells revenue
as a security for loan.

Bills of exchange
A financial security representing an amount of credit extended by one
business to another for a short period of time which is usually three
months.

Treasury Bills
A financial security issued by a countries central bank as a means for
the government to borrow for short period of time

Bonds:
Financial security issued by businesses or government as a means of
borrowing long term funds.

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Treasury bonds:
These are bonds and notes issued by the U.S. Treasury. Notes have
original maturities of 1-10 years while bonds have maturities of 10-30
years. Because these securities are backed by the taxing authority of
the U.S. government, they are considered risk free.
Federal agency bonds:
These are bonds and notes issued by government agencies.

Corporate long-term bonds:

These are bonds issued by corporations in which the borrowing terms
are spelled out in a bond indenture. The indenture spells out term,
interest rate, collateral offered, if any, and any restrictive covenants
affecting the borrower.

State and local bonds:

These are bonds issued by local, county and state governments and
agencies of these government units. These bonds are typically used to
finance schools, public buildings, and transportation infrastructure.

Common stock:
Common stock is a contract evidencing ownership in a corporation.
Stock gives the owner a residual claim on the income and assets of the
company after all debt obligations are paid off and the right to vote for
directors and on other important issues.

Preferred stock:
This stock usually provides an investor a fixed dividend return and a
preference before common stock holders in event of sale or liquidation
of the firm.

Mortgages:

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 Mortgages are long-term loans collateralized by real property.
Mortgages are used to finance residential and nonresidential properties
such as office buildings, shopping centers, warehouses, and other
income-producing real estate.
Once the securities are issued can be bought and sold either on the
capital market or stock of exchange. (http:// www.emerging-
market.org/)

3.0 TYPES OF CAPITAL MARKETS

There are two types of Capital Markets namely, Primary and Secondary
Capital Markets.

3.1 Primary Markets

The primary market is where new securities (stocks and bonds are the
most common) are issued. The corporation or government agency that
needs funds (the borrower) issues securities to purchasers in the
primary market. Big investment banks assist in this issuing process
The banks underwrite the securities. That is, they guarantee a
minimum price for a business's securities and sell them to the public.
Since the primary market is limited to issuing new securities only, it is
of lesser importance than the secondary market.

3.2 Secondary Markets

The majority of capital transactions take pace here they include stock
exchanges, bond markets, and futures and options markets, among
others.
All of these secondary markets deal in the trade of securities.
The term "securities" encompasses a broad range of investment
instruments. You’re probably most familiar with stocks and bonds.
Investors have essentially two broad categories of securities available
to them: equity securities (which represent ownership of a part of a

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company) and debt securities (which represent a loan from the
investor to a company or government entity

4.0 INSTITUTIONAL STRUCTURE OF CAPITAL MARKET

The structure of any market is composed of sources of demand for and

supply of long term capital (money capital).

4.1 The Demand For Capital

The demand for capital comes from various categories of borrowers
such as central and state governments, local authorities and private
industrial manufacturing or agricultural group(joint stock companies).in
many countries ,especially developing countries the government
constitutes an important source for demand of capital funds especially
those which were dominated by government planned economy. There
has been an increasing. .trend of public borrowing in countries for the
last three decades, especially in developing countries. The central and
state governments and local public bodies have floated loans by
issuing securities, bonds, and other financial instruments the duration
of which range from five to fifteen years.
In the private sector, a large demand for long term capital through the
capital market comes from the joint stock companies. These
companies raise funds or money capital by the following methods:
1) Issuing shares
2) Selling debentures
3) Borrowing from specialized financial institutions called
development banks.
4) Inviting fixed deposits from the general public
The local public bodies such as municipal corporations or councils the
so called local authorities in Tanzania. Have also been borrowings in

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large scale in recent years. They borrow in order to finance the huge
capital expenditure. Therefore, local authorities engage in capital
market transactions.

4.2 The Supply Of Capital In A Capital Market

There are many channels for supply of funds to the capital markets; a
large part of the funds is obtained directly from the individual investors
through equity capital. There are specialized financial institutions such
as development banks which also supply capital funds to industries or
productive sector for investment activities. In the capital market there
are other sources called intermediaries such as Provident Funds, Health
Insurance Funds, Public Pension Funds, and Insurance Corporations.
Again in recent years Provident Funds are becoming very significant
medium of savings for the working classes, but their money do not flow
in the private sector investment because it is mostly invested in
government securities, government small savings and other trustee
securities.
Today commercial banks are participating to the capital markets
transactions. Though, basically, commercial banks are limited to short
term lending, but present there are showing interest of catering for
medium and long term credit needs of industry and agriculture through
subscribing to the share capital and debentures of specialized financial
institutions. However there are factors which restrict entry of
commercial banks into the capital markets
1. The liquid rate of commercial bank is under pressure to slow rate
of deposits growth against the high demands for credit by
industrial sector.
2. Term lending in capital markets as a specialized task can not be
easily undertaken by every bank or every branch of a bank.
3. Term lending in capital market involve high risk

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Generally a central bank remarks for commercial banks extension of
medium and long term credit within the limits which safeguards the
limits, closer knowledge of credit worthiness of borrowers and absence
of procedural delays in their dealings.

4.3 The Structure Of Interest Rates In Capital Markets

The period of lending and borrowing in the different transaction of
money and capital market are not uniform. The holding period and
expectations risks undertaken by investors in parting with liquidity, is
however different. On different risk premium the compensation
payable, the rate of interest rates in bound to be different in fact the
risk involves adding a bound of different maturity to the asset portfolio
over an individual is not constant. The aversion depends on number of
factors such as investors holding period.

5.0 FACTORS THAT LEAD TO GROWTH OF CAPITAL MARKET

5.1 Information/ Communication Technology
5.2 Improved Macro economic fundamentals
5.3 Monetary stability
5.4 Higher economic growth
5.5 General economic and specific capital markets reforms
5.6 Privatization and enterprises
5.7 Financial liberalization
5.8 Improved institutional framework for investors

6.0 ROLE (ADVANTAGES) OF CAPITAL MARKETS

Capital markets comprise the main institutions that intermediate
capital from savers to users of the capital. Experts generally agree that
capital markets are comprised of: Stock & bond markets Banks,
pension funds, mutual funds, insurance companies and other
aggregators of funds on a huge scale.

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As it is, capital markets play a very important role in the development
of any nation:
They are the means through which savings are mobilized to enable
investments in viable areas to happen.
They enable profitable successful companies to be rewarded while
mediocre performers are punished accordingly
Well functioning and regulated markets can also act as a catalyst to
the mobilization of foreign investment, which can spur massive
development of a developing country like in the cases of China and
India.
Provision of an efficient and transparent trading platform by: -
Enabling investors to vary their holding periods for securities by
offering an exit mechanism through the secondary market.
Allowing for “investment discrimination” function by encouraging
disclosure and disseminating market information.
Make risks explicit. Price, package and manage risk, but do not reduce
risk. Allows visualization of the risk/return tradeoff.
Capital markets improve social welfare by allowing funds to move from
those without productive investment opportunities to those with such
opportunities. Consumers also benefit by being allowed to make
purchases when they need them the most.
In short, there are many positive gains to be had by operating a proper
capital market.

7.0 EMERGING CAPITAL MARKETS

7.1 DEFINITION.
Emerging Capital Markets are capital markets that are found in
emerging, or developing, market economies. An emerging market is
the term adapted for markets that are making rapid progress towards

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emulating best practices elsewhere in the world. Generally, an
emerging market is one that amongst others:
• Has a satisfactory rate of return when compared to other global
markets
• Has a sufficient competent professional to help in driving such
markets
• Has a regulatory framework that supports, rather than impedes
growth of the market
• Is in the process of undertaking reforms and developments to
make the market an engine of development in a particular
country.

Emerging market economy is also defined as an economy with low-to-

middle per capita income. Such countries constitute approximately
80% of the global population, representing about 20% of the world's
economies.
Although a loose definition, countries whose economies fall into this
category, varying from very big to very small, are usually considered
emerging because of their developments and reforms. Hence, even
though China is deemed one of the world's economic powerhouses, it
is lumped into the category alongside much smaller economies with a
great deal less resources, like Tunisia. Both China and Tunisia belong to
this category because both have embarked on economic development
and reform programs, and have begun to open up their markets and
"emerge" onto the global scene. Emerging Market Economies are
considered to be fast growing economies.

8.0 CHARACTERISTICIS OF EMERGING MARKET ECONOMIES

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Emerging Market Economies are characterized as transitional; meaning
as they are in the process of moving from a closed to an open market
economy while building accountability within the system. Examples
include the former Soviet Union and Eastern bloc countries-China,
Korea, Indonesia, Malaysia, Singapore and Hong Kong.

As an emerging market, a country is embarking on an economic reform

program that will lead it to stronger and more responsible economic
performance levels, as well as transparency and efficiency in the
capital market. An EME will also reform its exchange rate system
because a stable local currency builds confidence in an economy,
especially when foreigners are considering investing. Exchange rate
reforms also reduce the desire for local investors to send their capital
abroad (capital flight). Besides implementing reforms, an EME is also
most likely receiving aid and guidance from large donor countries
and/or world organizations such as the World Bank and, International
Monetary Fund.
Another key characteristic of the EME is an increase in both local and
foreign investment (portfolio and direct). A growth in investment in a
country often indicates that the country has been able to build
confidence in the local economy. Moreover, foreign investment is a
signal that the world has begun to take notice of the emerging market,
and when international capital flows are directed toward an Emerging
Market Economy, the injection of foreign currency into the local
economy adds volume to the country's stock market and long-term
investment to the infrastructure.

For foreign investors or developed-economy businesses, an Emerging

Market Economies provides an outlet for expansion by serving, for
example, as a new place for a new factory or for new sources of
revenue. For the recipient country, employment levels rise, labor and

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managerial skills become more refined, and a sharing and transfer of
technology occurs. In the long-run, the Emerging Market Economies's
overall production levels should rise, increasing its gross domestic
product and eventually lessening the gap between the emerged and
emerging worlds.

9.0 CHALLENGES/RISKS OF EMERGING CAPITAL MARKETS

9.1 Civil wars and revolution

Because these markets are in transition and hence not stable,
emerging markets offer an opportunity to investors who are looking to
add some risk to their portfolios. The possibility for some economies to
fall back into a not-completely-resolved civil war or a revolution
sparking a change in government could result in a return to
nationalization, expropriation, and the collapse of the capital market.

Delicate exchange rate fluctuations could transform into an all-out

devaluation resulting merely from investors speculating in the
possibility of political disorder or losing faith in the banking system.
Because the risk of an EME investment is higher than one of a
developed market, panic, speculation and knee-jerk reactions are also
more common - the 1997 Asian crisis, during which international
portfolio flows into these countries actually began to reverse
themselves, is a good example of how EMEs can be high-risk
investment opportunities.
However, the bigger the risk, the bigger the reward, so emerging
market investments have become a standard practice among investors
aiming to diversify while adding risk..

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9.2 Local Politics vs. Global Economy
An emerging market economy must have to weigh local political and
social factors as it attempts to open up its economy to the world. The
people of an emerging market, who before were protected from the
outside world, can often be distrustful of foreign investment. Emerging
economies may also often have to deal with issues of national pride
because citizens may be opposed to having foreigners owning parts of
the local economy.

10.0 STOCK MARKETS IN AFRICA

The evolution of stock markets in Africa in recent years has been rather
dramatic, as countries have sought not only to mobilize domestic
resources but also to attract foreign direct investment. Accordingly,
activity in a number of stock markets that had been dormant for years
picked-up significantly. In a number of established stock exchanges,
activity has been boosted by increased listings of companies; mostly
made possible by privatization of state-owned enterprises. At present,
there are about twenty stock exchanges in the continent.

However, many African stock markets are characterized by a relatively

limited number of scrip, which are held to a substantial extent in
perpetuity by few insurance and pension funds. The participation by
individual savers/investors is significantly limited in a number of
markets. The result is that African stock markets (with the exception of
Johannesburg) are illiquid. Widening stock market access beyond
national boundaries to other stock markets in the region should
enhance stock market liquidity and provide savers/investors with
significantly more diversified risk opportunities. To this end, the
establishment of the West African Regional Stock Exchange in Abidjan

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in 1998, whose scrip will encompass issues in the eight countries of the
West African Monetary Union is already a very encouraging step
forward.

Moreover, opening up an emerging economy means that it will also be

exposed to not only new work ethics and standards but also cultures as
well: indeed the introduction and impact of, say, fast food and music
videos to some local markets has been a by-product of foreign
investment. Over the generations, this can change the very fabric of a
society and if a population is not fully trusting of change, it may fight
back hard to stop

11.0 CHALLENGES FACED IN AFRICAN STOCK MARKETS

11.1 Macroeconomic factors

Fiscal discipline perceived as weak and unstable in some countries.
Only 24 out of the 53 African countries have received an international
rating on fiscal discipline.

11.2 Market size, access and regulation

Limited maturity and lack of benchmark securities
Capital controls, withholding taxes and perceived risk of regulatory
changes
Complex disclosure requirements and lack of intermediaries
Weak Corporate Governance

11.3 Institutional and operational infrastructure

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11.3.1 Small number of active market makers, limited market
liquidity and lack of transparency
Reliable financial data improves market makers’ willingness to transact
Access to standardized and historical data enables more relevant
stress testing
Accurate data enhances risk management tools
Market illiquidity, low transaction volumes

11.3.2 Lack of hedging/derivative

Financial innovation and structured products are highly dependent on
data/pricing availability.

11.3.3 Imperfect market knowledge and information

dissemination
The existence of both public and private data providers improves
market knowledge and enhances information distribution.

11.3.4 Lack of contingency planning

Reliable database infrastructure facilities business continuity and
disaster recovery provisions.

12.0 RECCOMENDATIONS FOR IMPROVEMENT STOCK MARKETS

IN AFRICA

Technological infrastructure must be enhanced for quick settlement

and clearing operations.

Training programs in financial analysis and portfolio management is

needed.

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Training in financial reporting for financial journalist is required.

In order to broaden participation of indigenous investors in stock

market activities appropriate schemes (Ex. Employee Share Ownership
Plan) must be implemented.

The government through its appropriate agencies should encourage

the development of capital markets and participation in the market
through meaningful media campaigns and other public awareness
techniques.

Reduction of policy barriers to capital mobility

Reduction of barriers to trade in financial services (fair market access

for cross-border participants)

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13.0 CONCLUSION
The existence of well-functioning capital markets and especially stock
markets is essential to the mobilization of resources both internally and
externally. For these securities markets to operate with some degree of
efficiency, the conditions are: a stable macro-economic environment;
an appropriate capital market infrastructure; and an adequate
regulatory, legal and supervisory framework in order to protect
investors, promote public confidence, and guarantee market discipline.

Securities market a part of capital market is extremely efficient in

absorbing information about individual stock and about stock market
as a whole.
The modern financial market system is a modern economy transforms
resources over space, time and sectors.

Flow of fund in financial system occurs through financial markets and

intermediaries, the purpose of efficient financial system is to transfer
resources is transfer resources, manage risks, sub divide and pull fund
and clear transaction.

Interest rates are the price paid to the borrowing funds. They are
measured in dollar paid back per year per dollar borrowed or in percent
per year. People are willing to pay interest rates because borrows funds
allows them to purchase goods and services to satisfy consumption
needs or make profitable investments.

A wide variety of interest rate are observed because of several factors

like term or maturity of loans, the risk and liquidity of investments, and
task treatment of the investment.

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Nominal or money interest rates rise during inflation ally period
reflecting the purchasing power of money declines as price rises to
calculate the interest yields of real goods and services we use the real
interest rates which equal to nominal or money interest rates minus
rate of inflation.
14.0 REFERENCES

Baumol, W.J. (1965), The Stock Market and Economic Efficiency. New
York. Furham University Press.

Bencinega, V. R. (1991), Financial Intermediation and Endogenous

Growth; Review of Economic Studies, 58(2);195-209

Bhanduri, S.N. (2007) Are stock Markets Side Shows, Some Stylized
Facts from an Emerging Economy, (India).

Bhide, A. (1993) The Hidden Cost of Stock Market Liquidity, Journal of

Financial Economics, 34(1);31-51

Internet website: www.tutor2u.net, (visited at 26/03/2008) Capital

Market.

Industrial Development (Www.Unido.Org Website)

Hardwick, P. (1999) An Introduction to Modern Economics, 5th Edition

Mnnar, H. G. (2005) International Economics, 2nd Revised Edition

Mithan (2002) Money, Banking, International Trade And Finance

Macroeconomics Economics

Levine, R. (1998), Stock Markets, Banks, and Economic Growth,

American Economic Review, 88(3); 536-58

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