Why capital market development matters and where the focus should be

This report by FSD Africa argues that domestic capital market development is essential for African economies to mobilize long-term finance for climate adaptation, infrastructure, and demographic shifts, especially as bilateral aid and foreign direct investment decline. It suggests that while public equity markets are often prioritized, they are frequently impractical for smaller or frontier markets due to high costs and information asymmetries. Instead, the report advocates for a focus on strengthening the savings base through pension reforms and macro-financial stability, developing corporate bond markets, and utilizing hybrid public-private structures, guarantees, and pooled investment vehicles to channel institutional capital into infrastructure, housing, and MSMEs.

• Domestic capital markets have become essential for African economies due to increasing financing needs for climate change, natural capital restoration, and demographic pressures, compounded by a decline in bilateral development assistance and foreign direct investment since 2018.
• The foundation for capital market development relies on macro-financial stability and pension reforms to strengthen the domestic savings base. Evidence from 30 low and middle-income countries shows that mandatory funded pension programs can lead to a quadrupling of domestic net issuance activity as a percentage of GDP within four years.
• Public equity markets are often limited in their impact in emerging and frontier African markets because of high fixed costs—including investment bank, legal, and disclosure fees—and structural impediments such as SME owners' reluctance to dilute control.
• Corporate bond markets offer a more immediate alternative to bank financing, provided there is strong political commitment to macroeconomic stability and the establishment of government security benchmark yields. Malaysia is cited as a success story, where local currency corporate bond issuance grew from US$ 840 million in 1990 to US$ 10 billion by 2019.
• African economies may benefit from hybrid markets that combine public approval and disclosure processes with regulatory accommodations for alternative assets. Key tools to enable this include first-loss guarantees, pooled investment vehicles, and project preparation platforms to create bankable projects in infrastructure, housing, and MSMEs.

APA

Osano, E., & Fuchs, M. (2026). Why capital market development matters and where the focus should be. FSD Africa. https://fsdafrica.org/wp-content/uploads/2026/05/Why-Capital-Market-Development-matters-and-where-the-focus-should-be-FINAL.pdf

Chicago

Osano, Evans, and Michael Fuchs. Why capital market development matters and where the focus should be. FSD Africa, 2026. https://fsdafrica.org/wp-content/uploads/2026/05/Why-Capital-Market-Development-matters-and-where-the-focus-should-be-FINAL.pdf.

Wikipedia

{{cite report |last1=Osano |first1=Evans |last2=Fuchs |first2=Michael |title=Why capital market development matters and where the focus should be |publisher=FSD Africa |date=May 2026 |url=https://fsdafrica.org/wp-content/uploads/2026/05/Why-Capital-Market-Development-matters-and-where-the-focus-should-be-FINAL.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{osano2026why, author = {Osano, Evans and Fuchs, Michael}, title = {{Why capital market development matters and where the focus should be}}, institution = {FSD Africa}, year = {2026}, month = may, url = {https://fsdafrica.org/wp-content/uploads/2026/05/Why-Capital-Market-Development-matters-and-where-the-focus-should-be-FINAL.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }