Role of stock markets in Arab world
There might be no consensus about the important role played by Stock markets in any given economy and the ability of these markets in steering that economy into certain economic cycles that ensure enhancing the growth of national economies. Stock markets also play an important role in shaping the financial, economic and monetary policies, plans and programs.
Stock markets in Arab counties came in line with the Arab governments’ policies and programs. It came also after such governments realized the importance of the role played by such markets in enhancing the comprehensive development processes taking place in their countries especially the capital market experience in many countries has been very successful.
It is a truth universally acknowledged that economic development at any country would require large capitals to achieve the prospective growth rates in their budgets. Stock markets may therefore become the ideal mean for collecting funds and channeling them into the different investment channels. They may also act as communication links among the sectors that have surpluses and other sectors that are in need for liquidity to fund their investments. This balance will definitely bring benefits to any country.
The main role of the stock markets is thus to avail funds needed to finance the projects promoted by existing or under development at reasonable terms that bring benefits for everyone.
Due to lack of financial resources and low capitals, especially in countries whose financial resources are limited, stock markets may be the only source and main provider for the capitals of such projects.
The main reasons behind many companies’ reliance on the funds provided by the stock markets in emerging economies to finance project include the lack of capitals and high risk. These factors limit the ability of such companies to get the required finance from commercial banks. Moreover, in most cases the finance should be made in foreign currency. The high risk associated with funding in local currency, difficulty in availing fund and foreign exchange risks make the regional and international banks unable in many cases to provide such finance. As for developing and Arab countries, money markets are still in emerging and developing phases. The Arab banking and financial system, which mainly consists of banks and financial co’s, is very active in offering finance to new set up Co’s.
Over the last decades, the sector has provided the required finance for such development projects. The funding policy of any bank or financial Co. states that founders should ensure a capital percentage in order to receive the necessary funding. Hence, the funding decision at any bank relies mainly on participation and risks, thus stock markets were established; whether primary and/or secondary markets. They will serve the founders and developers by ensuring capitals necessary to start any project, and assist in receiving funds from commercial banks. Unfortunately the banking systems limit their funding and commercial activities to certain sectors. Such financial Co’s are also reluctant to secure funding for certain sectors with high risks and/or incapable of satisfying their requested guarantees.
Some might say that banks; in Arab region in general and Gulf in particular, lack qualified personnel who have the ability to study different business environments and who have business acumen. The activities of such banks are limited to certain economic sectors due to a number of reasons, including inability to provide proper funding solutions and/or the administrative and legal complications they face in such processes given the applicable systems and procedures at these countries.
Recently, countries started to rely, almost completely, on strategic reserves and budget deficits through relying on primary markets to cover these financial requirements, in addition to ensuring the requirements of other economic sectors.
In a bid to promote stock markets, each country seeks to develop the proper legal and institutional setup for these markets to encourage and increase their ability to attract local and foreign investments. It is true that attracting foreign and local funds to invest in local stock market will increase foreign exchange reserves, creates more job opportunities, and increases the income and public revenues generated from income taxes, duties and other direct/indirect taxes.
“It is unlikely that the role played by stock markets in advanced industrial countries like the USA, UK or Japan, is the same one played in the less-advanced countries such as Arab, African and other countries” said one of the researchers. That goes back to several reasons; most important of which is that money markets at advanced countries are the pillars and basics of the economic structure.
This article has been written by: Lo’ai Badie Bataineh. He can be reached at Lbb_65@yahoo.com