A Decade Of Technical Reform Has Changed What African Financial Markets Can Actually Do
A Decade Of Technical Reform Has Changed What African Financial Markets Can Actually Do
Africa’s financial-market development has advanced substantially over the past decade, with the growing sophistication of markets across the continent reflecting years of institutional reform that have progressively expanded their capacity to facilitate investment and support more complex financial transactions.
The effects of these reforms are increasingly evident in the ability of markets to price and transfer risk, support a wider range of funding structures and give investors greater certainty over how transactions will be executed and enforced. That has come through, among others, stronger foreign-exchange frameworks, more robust legal foundations for collateralised and derivative transactions, and a steady broadening of the instruments available to issuers and investors, while digital access and better credit information have widened the channels through which capital can enter and move through domestic markets.
There are still challenges though, some of which the continent has yet to fully overcome even after a decade of reform.
Secondary-market liquidity is still thin in many countries, foreign-exchange access can still be constrained by weak interbank markets and convertibility pressures, and legal certainty is not yet uniform, with several jurisdictions still working towards complete netting frameworks and wider alignment with international standards. The progress is real, but it has not removed the structural frictions that limit how efficiently capital can move through many African markets.
Much of the progress, however, reflects deliberate institutional choices which, taken individually, can appear technical or incremental, but which over time have materially changed the conditions under which capital is intermediated on the continent. The timing of these developments is particularly significant, given the difficult global financial environment in which African economies are seeking to attract investment and mobilise capital for their development. The years after the pandemic, together with episodes of sovereign distress and more difficult access to international capital, exposed the limits of relying so heavily on external funding. As foreign capital became scarcer, the cost of leaving domestic markets underdeveloped became harder to ignore, giving countries stronger reason to deepen local markets so they could absorb more financing at home and provide the instruments needed to manage currency and interest-rate risk.
That, in turn, brought greater attention to the infrastructure and international standards required for those markets to function more effectively.
A comparison of the earliest editions of the Africa Financial Markets Index (AFMI) – a cross-country benchmark of financial-market development produced by Absa and OMFIF – with its more recent findings shows both how far the continent’s markets have progressed and where longstanding constraints remain. In 2017, for example, the limits of market depth were still pronounced across much of the continent, with bond trading generally thin outside a small number of markets. Although 11 of the 17 countries covered by the inaugural AFMI had established secondary bond markets, activity was limited: excluding South Africa, traded bonds averaged only 14% of bonds outstanding, and international connectivity was similarly narrow, with only South African rand-denominated local bonds clearable through platforms such as Clearstream or Euroclear.
In recent years, more markets have diversified into instruments such as sukuk, sustainable-finance products, repurchase facilities and structured finance, while improvements in settlement infrastructure and other market reforms have strengthened the mechanics through which securities can be transacted. Domestic markets are also beginning to support a wider range of financing needs, including infrastructure funding, suggesting that their development is becoming broader and more functional.
Almost all AFMI economies are now meeting the index’s FX reporting standards and 13 have adopted the FX Global Code, while some markets have gone further in changing how their FX systems operated – Nigeria by unifying fragmented windows and clearing a $7bn backlog, Uganda by liberalising its regime and strengthening interbank liquidity, for example. Reporting practices are now broadly aligned with international standards across AFMI economies, while the legal foundations for more sophisticated transactions have widened considerably, with nine jurisdictions having adopted netting legislation and five holding clean legal opinions from international trade bodies.
Climate stress testing and ESG standards have also become part of the market-development framework, reflecting a regulatory perimeter that is broader than it was at the start of the period. All AFMI economies now release annual budgets and report the outcomes of monetary-policy meetings, while macroeconomic data are broadly accessible across the index. The emergence of digital and virtual assets has brought another dimension to this evolution, with a growing number of African countries recognising the need for formal regulatory oversight as these assets become more widely used. Several countries have already enacted legislation governing virtual assets, while others are expected to follow as policymakers work towards providing greater legal certainty for their integration into established financial systems.
All these changes have narrowed the distance between Africa’s most developed financial markets and a growing group of markets that are now much closer to that frontier.
As global markets evolve, the standards, instruments and risks that domestic systems need to accommodate will evolve with them, because there is no final endpoint to financial-market development. The task confronting the continent, then, is to keep adapting as these goalposts move.
One thing is for sure: Africa’s financial markets have certainly not stood still, and while there is much still to do, much has already been achieved.