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Evaluate and discuss the role and importance of the local and international financial markets in resource mobilisation, for economic growth and development of your country in the last three years SUPERVISORS NAME: Mr. Kilimba

Prepared by: FRED RAPHAEL Reg. No. 19EDA10107


1.1 Meaning of key terms: A market is the combination of traded instruments, transacting counterparties (market participants) and the trading infrastructure that includes rules, conventions, settlement processes and information. By consequence, the systemic importance of a market derives to a certain extent from the systemic importance of the institutions that participate and use this market. The size of activity in a market measured either by the volume of transactions or by the number of participants, is a key determinant of the potential economic costs in the case of malfunction. The transactions volume metric is a proxy of aggregate (gross) exposures of participants in this market while the number of participants points to the number of institutions that will be affected Financial markets and instruments in a country represent a key channel of funding from savers to investors, a source of liquidity, and support the management and pricing of risk. These services are underpinned by financial infrastructure in the form of the clearing and settlement of financial transactions, as well as the trading, pricing and liquidity of financial instruments. Financial institutions perform critical functions in financial markets, including credit intermediation, maturity transformation, the provision of savings vehicles, risk management and payments services, and the support of primary and secondary funding market functioning. The financial system comprises all financial markets, instruments and institutions.

1.2 Financial markets & their roles in Tanzania Tanzania embarked on financial liberalization in 1992 aimed at sustaining growth in the real sector by boosting resource mobilization, motivating competition in the financial market and enhancing quality and efficiency in credit allocation. These reforms have changed the direction and quality of financial services offered in the country. New merchant banks, commercial banks, bureau de change, insurance companies, stock exchange and related financial units have been established. The entry of new banks and non-bank financial institutions has enhanced the competition and improved the quality and type of financial products and services provided. Currently, there are more 30 registered banks and 10 non-bank financial institutions. Each of these institutions play an important role in financial resource mobilization 2. The Role of Financial Intermediaries that Provide financial Services in Tanzania: There are four main levels of financial intermediation that provide payment services to the Government, corporate bodies and individual customers. The levels are: a. Central bank b. Commercial banks c. Non- Bank financial institutions Deposit taking Non Deposit taking d. Service Providers Institutions The Bank of Tanzania is the central bank of the country and as such performs central bank functions described below in section 1.3. It is a banker to the government and, it handles payment transactions between the government and the general public. The Bank of Tanzania

is also a settlement agent for commercial banks in Tanzania, and hence keeps settlement accounts of the said banks. Commercial banks provide a wide range of banking services to the public. They are the only category of financial intermediaries that are allowed to participate in the interbank clearing and settlement processes. Non-bank financial institutions are grouped into deposit and nondeposit taking financial institutions. Deposit taking institutions mobilize deposits and incur liabilities other than demand deposits. These include time and saving deposits, and various customized deposit schemes. They also provide banking services and participate in money market operations. These institutions also include micro-finance institutions and Tanzania Postal Bank that has a wide network in rural areas. Non-deposit taking institutions are those, which offer leasing and hire purchase services and development financing. These include pension funds, insurance companies. They provide services on micro levels. Other institutions that provide payment services include Bureau de change institutions which provide a retail foreign exchange market. Others are savings and credit societies. The role of the Central Bank The primary objective of the Central Bank is to formulate and implement monetary policy directed to the economic objective of maintaining price stability conducive to the balanced and sustainable economic growth of Tanzania. As a Central Bank, the Bank of Tanzania is the sole issuer of currency, the banker to the banks and Government, and advisor to the Government. Statutorily, also the Bank has been vested with the responsibility of supervising and regulating financial institutions so as to ensure safety and soundness of the financial system. The Bank of Tanzania also co-ordinates the national payment systems modernization initiatives in the country. The Bank assumes such a

responsibility as part of its statutory role of ensuring that there is a well functioning and effective efficient payment system and financial markets in the country. The Bank is also the settlement agent for interbank transactions. General Responsibilities The primary responsibility of the BOT is to formulate and implement monetary policy directed to the economic objective of maintaining price stability. The BOT is the sole issuer of notes and coins, which purposely influences the amount of currency in circulation thereby providing non-inflationary liquidity in the economy. As the bankers bank it accepts deposits of prudential reserves for the commercial banks, discounts commercial and government paper. BOT is the settlement agent and acts as a lender of last resort to the banks. It also involves the provision of central clearance facilities for interbank transactions. The BOT is the banker and the fiscal agent for the Government and advises the Government on matters related to its functions. The BOT is also a guardian of the countrys international reserves, which include gold and foreign currency reserves. It is also the supervisor of banks and financial institutions to ensure implementation of prudential controls in the financial system. Further the amended Bank of Tanzania Act 2003 gives the Bank specific statutory powers to oversee payment system in the country. Concerning modernization of the payment systems the BOT spear heads this by facilitation and developments of various payment, clearing and settlement systems. Provision of Settlement Facilities The BOT is the settlement bank for the commercial banks. It provides settlement through the clearing accounts of commercial banks maintained at the BOT. Commercial banks with settlement accounts in the BOT may use these accounts to settle their liabilities in the securities market, and the inter-bank foreign exchange market.

Relationship between monetary policy and payment systems To ensure that the activities of banks continue smoothly, the central bank uses its refinancing and open market policy to accommodate banks to assist them to meet their interbank obligations. Within the framework of the refinancing policy, the BOT establishes conditions for refinancing commercial banks. The refinancing policy can be the discount policy or the Lombard policy. Banks can take up intraday and overnight credit according to the value of the collateral deposited. This liquidity facility creates the possibility for absorbing daily fluctuations, stemming from a concurrence of circumstances in the payment systems. However the volume of credit supplied by the BOT is subject to monetary policy considerations. Efficiency in the payment systems, is one of the important factors that catalysis attainment of monetary policy objectives.

The Role of Other Private and Public Sector Bodies In Payment Systems Other entities that play a role in the Tanzania payments system include those that provide payment services, setting national payment systems policies, accounting standard, establishing rules and regulations, and providing Payment System infrastructure services. The National Payment System Advisory Council (NAC) NAC is the supreme body involved in policy matters. It gives directions and oversees the developments of the payment systems throughout the country. Its key functions include sanctioning reports and recommendations submitted by its specialized committees Tanzania Bankers Association (TBA) This is an association whose members are all commercial banks. Its main objective is to safe guard matters of common interest to its members. TBA is key stakeholder in payment system, as its members are

the only institutions that participate in inter-bank clearing and settlement operations. Bankers Clearing Houses There are five Bankers Clearing Houses situated in 5 major cities. BOTECH at DSM Connectivity of 4 clearing Houses (Arusha, Mwanza, Mbeya & Zanzibar) Membership is limited to licensed commercial banks. Their main role is to facilitate the clearance of paper-based inter-bank instruments, principally cheques. Tanzania Institute of Bankers (TIOB) The TIOB is a professional body and acts as a regulatory and disciplinary body for banking skills and profession also conducts all bankers research activities and runs professional examinations. Membership covers commercial banks, non-bank financial institutions and individual members from the banking sector. The National Board of Accountants and Auditors (NBAA) NBAA is the overseeing authority and regulatory body for both accounting and auditing standards. Accounting issues in payment systems are influenced by standards issued by this body.

The Tanzania Communication Commission (TCC) TCC has been entrusted to oversee and regulate all communication activities in the country. It is the only body having responsibility for issuing licenses to all operators of communication services. Communication and network infrastructure is therefore affected by TCC regulations.

Data Communications and Courier Service Providers There are several companies, which provide communication and network infrastructure services for National Payment Systems operations. These include voice and data communications service providers and courier service providers. These service providers are licensed and regulated by TCC. Dar-es-Salaam Stock Exchange: The DSE is a non-profit making body created to facilitate the Government implementation of the economic reforms and in future to encourage the wider share ownership of privatized and all the companies in Tanzania. 3. IMPORTANCE OF LOCAL AND INTERNATIONAL FINANCIAL MARKETS IN RESOURCE MOBILISATION FOR ECONOMIC GROWTH 2.1 Does the financial system matter for economic growth? In the financial system funds flow from those who have surplus funds to those who have a shortage of funds, either by direct, market-based financing or by indirect, bank-based finance. The former British Prime Minister William Gladstone expressed the importance of finance for the economy in 1858 as follows: "Finance is, as it were, the stomach of the country, from which all the other organs take their tone." According to cross-country comparisons, individual country studies as well as industry and firm level analyses, a positive link exists between the sophistication of the financial system and economic growth. While some gaps remain, financial system is vitally linked to economic performance. Nevertheless, economists still hold conflicting views regarding the underlying mechanisms that explain the positive relation between the degree of development of the financial system and economic development. Some economists just do not believe that the finance-growth

relationship is important. For instance, Robert Lucas asserted in 1988 that

economists badly over-stress the role of financial factors in economic growth. Moreover, Joan Robertson declared in 1952 that "where enterprise leads, finance follows". According to this view, economic development creates demands for particular types of financial arrangements, and the financial system responds automatically to these demands. Other economists strongly believe in the importance of the financial system for economic growth. They address the issue of what the optimal financial system should look like. Overall, the notion seems to develop that the optimal financial system, in combination with a well-developed legal system, should incorporate elements of both direct, market and indirect, bank-based finance. A well-developed financial system should improve the efficiency of financing decisions, favouring a better allocation of resources and thereby economic growth. Both market and bank-based financial systems have their own comparative advantages. For some industries at certain times of their development, market-based financing is advantageous. For example, financing through stock markets is optimal for industries where there are continuous technological advances and where there is little consensus on how firms should be managed. The stock market checks whether the manager's view of the firm's production is a sensible one. For other industries, bank-based financing is preferable. This holds in particular for industries which face strong information asymmetries. Financing through financial intermediaries is an effective solution to adverse selection and moral hazard problems that exist between lenders and borrowers. Banks in particular have developed expertise to distinguish between good and bad borrowers. Economies that have both well-developed banking sectors and capital markets thus have an advantage. Furthermore, in times of crisis in either system, the other system can perform the function of the famous spare wheel.

The financial system is also particularly important in reallocating capital and thus providing the basis for the continuous restructuring of the economy that is needed to support growth. In countries with a highly developed financial system, we observe that a greater share of investment is allocated to relatively fast growing sectors. Nowadays, the lack of a well-developed stock market would be a particularly serious disadvantage for any economy. Equity is essential for the emergence and growth of innovative firms. Today's young innovative high-technology firms will be the main drivers of future structural change essential for maintaining a country's long-term growth potential.

Contribution of Dar es Salaam Stock Exchange (DSE) and Capital markets Securities Authority in resource mobilisation for economic growth and development of in Tanzania in the last three years.
Since its commencement in 1998, the DSE has played a crucial role in savings mobilization and the provision of investment opportunities for Tanzanians. It has enabled more than 116,651 Tanzanians to own shares in the companies listed. The DSE has also enabled the Government to raise TZS 58.74 billion through sale of its shares by way of Initial Public Offers as well as through secondary market trades at the DSE. DSE facilitates mobilization of resources and directing them to the productive sectors of the economy and help meeting governments efforts aimed at reducing poverty by encouraging savings to Tanzanians through listed shares.


DSE continues playing a pivotal role in the achievement of the National Development Vision 2025 which aims, among other things, at improving the quality of life in the country to higher standards. Through the DSE, the Government has sold shares worth Tshs.54.63bn. With respect to corporate bonds nine bonds worth Tshs.102.6 bn have been listed and the Government itself has listed eight. In a modern economy, a Stock Exchange is an important avenue for resource mobilization to finance investment activities with a view to fostering national economic development. For instance, both the Central Government as well as local Governments are benefiting by way of floating their infrastructural bonds through the DSE thereby raising capital for big projects such as building of infrastructures (roads, Bridges, airports, harbours, hospitals, energy, water etc. Whose funding requires large amounts of money?

The Government is also fully aware of the potential of the DSE as a vehicle for mobilization of capital for entrepreneurial economic growth. CMSA and DSE are now at an advanced stage to operationalise a market segment that will target the Small and Medium Enterprises (SMEs) as a one way of supporting large numbers of people. This window will give an opportunity to small and medium size companies, which dominate the private sector in the country, the avenue for raising capital funds from the public. Secondly, to create a strong and competitive economy; and thirdly, to ensure good governance and the Rule of law. It is because of this recognition of the role played by the DSE that the Government has continued to support the DSE by Continuing to take deliberate measures like providing fiscal incentives such as the application of preferential withholding tax on dividend for companies listed at the DSE, zero withholding tax on interest income from listed

bonds whose maturities are three years and above, not charging capital gains tax for gains arising out of the DSE transactions, and excluding from stamp duty all DSE transactions on listed securities. In addition to these fiscal incentives, the Government has continued to assist both CMSA as well as the DSE in carrying out public education programmes. Support in capital markets development will enable our country to develop a vehicle for private sector sustainability. The Government understands that the DSE is still at its infancy stage of development. However, the Government also understands that for the DSE to succeed it must continue to improve its services. On this score, the Government has assisted the DSE to acquire the Automated Electronic Trading System to assist the DSE to offer services efficiently and in accordance with acceptable international standards. We believe that good services are important for social and economic development of our people. The Government understands the benefits that electronic trading will offer and enable the DSE meet investors and Issuers current and future requirements whilst increasing Liquidity, accuracy and transparency. It is the Governments hope that the DSE together with its stakeholders will maintain this system and continue to value it. DSE is still facing several challenges in its endeavour to achieve its objectives public awareness campaign to all Tanzanians so that they all understand the opportunities offered by capital markets in order to make the difference and enhance poverty reduction. In the same vein, the DSE is in the forefront in designing new products to be offered to investors. In the near future a large number of infrastructure bonds will be listed on the DSE.


REFERENCES The Dar-es-Salaam Stock Exchange (2003).Retrieved January 28, 2010 from The Capital Market and Securities Authority (2006).Main Report. A Study on Feasibility and Implementation of the Appropriate Market Segments for the Capital Markets in Tanzania. June 16th 2006