Capital Markets in the East African Community: Developing the Buy Side
Deep, liquid capital markets are fundamental to economic growth because they help channel the domestic savings of a nation to their most productive uses, and in so doing enable the private sector to invest, produce, and create jobs. But while much work has been done on improving the investment climate in developing countries for institutional investors, less work has focused on the institutional investors themselves. However, a crucial step in developing capital markets is to develop the domestic “buy side”—that is, to encourage greater participation of local and regional institutional investors such as pension funds and insurance firms in domestic capital markets. Most fundamentally, these large pools of savings can evolve into important sources of long-term finance for economic growth—for infrastructure, for example. In addition, a well-functioning buy side reduces an economy’s reliance on foreign portfolio investors, increasing macroeconomic resilience to shocks caused by sudden capital inflows and outflows.
Policymakers in developing countries, however, must find a regulatory balance that helps enable the development of the buy side into a force for capital-market deepening, financial stability, and long-term finance while at the same time upholding the fiduciary requirements of these institutions to protect the savings with which they have been entrusted. To foster this kind of balanced regulatory regime, it is fundamental for regulators to understand how domestic institutional investors respond to regulatory and other incentives.
In order to address this question, we undertook a comprehensive survey of buy-side institutions based in Kenya, Rwanda, Tanzania, and Uganda—focus countries for our study in the East African Community (EAC). Participating firms accounted for just under half of total assets under management (AUM) by the insurance and pension industries in these countries. Through questionnaires and interviews with key decision-makers in asset management and national regulatory authorities, we sought to understand how institutional investors manage their portfolios, the factors that influence their decisions, and the hurdles they face in taking a more diversified portfolio approach. We used these evidence-based findings to identify areas for potential policy and regulatory reform that can achieve the dual objectives of encouraging deeper capital markets and sources of long-term finance and ensuring that long-term savings are prudentially managed.