Conduits of Capital

Legal and regulatory reform
From the survey findings, it is clear that strengthening the legal and regulatory environment would be the single
most important contribution that donors could make towards bolstering investor confidence. The regulatory
environment for capital markets is fairly specialised and donors can play a useful role in linking policymakers,
regulators and central banks to scarce international expertise and providing funding for consultancy support.
Many countries have already adopted financial sector strategies, often embedded within strategies for economic
development, but the process of transforming these strategies into legislation, and then regulation, can be
inordinately slow because of the complexities of coordination and the absence of critical technical expertise.
It can also be the case that, even where specialist expertise is secured, solutions are proposed that are
inappropriate for the local context.
Mechanisms need to be put in place that drive regulatory processes and bring stakeholders together to build
consensus around policy and regulatory reform. While the decisionmaking is best done by local stakeholders,
donors can facilitate the decisionmaking process in numerous ways—paying for research, convening workshops,
assisting with procurement processes, and so on. The importance of the consensus-building process cannot
be underestimated. It is an unfortunate fact that in some Sub-Saharan economies, especially where there is a
strong socialist or statist economic tradition, there is a lingering suspicion towards capital markets development
(despite a stated recognition of the need for infrastructure and other investment) which means that insufficient
parliamentary time is given to much-needed legislative reform. That has to change.
One way to galvanise regulatory reform is to conduct cross-country research that benchmarks countries against
each other—for example, comparing tax rates or specific facets of legislation—and to benchmark countries
against relevant international standards.
A major challenge for many would-be onshore centres is that they start from a position of regulatory deficit—
absent or inappropriate regulation which needs to be fixed at a time when global financial markets regulation
(Anti-Money Laundering / Combating the Financing of Terrorism standards, Basel III, corporate governance
standards, etc.) is evolving very rapidly. In addition, many onshore centres are having to consider how to
harmonise their domestic regulatory frameworks with regional frameworks as processes of regional integration
gather pace.
These challenges would be serious enough for well-resourced regulators but many regulators, especially in
the capital markets arena, are small and rather weak, and most are under-resourced, not least because the
markets they oversee do not produce sufficient income (e.g., from listing fees or other levies) and so they are
forced to rely on government support.
FSD Africa is firmly of the view that supporting capital markets regulators on legal reforms, but also on internal
capacity strengthening, can be transformative in building investor confidence.
Finally, it is not simply a question of introducing new or better regulations. These also need to be enforced.
It is an unfortunate fact that while perfectly adequate regulation may exist, all too often it is not enforced,
perpetuating the perception that markets are rigged in favour of local interests.
Information
Building the information base is a clear opportunity for donors. Information, freely available to the market,
can be highly beneficial in a market building sense. There are innumerable ways that information can help to
strengthen the way markets function—by creating a baseline, allowing for target-setting and monitoring, making
a business case, highlighting problems, demonstrating impact through case studies, and so on. Research
(as mentioned above in the context of much-needed regulatory reform) is fundamentally about information
provision—to decisionmakers, investors, surveillance departments of regulators, and so on.
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