An analysis of factors affecting the development of capital markets in Uganda: a case of the Capital Markets Authority and other market players

Abstract

The study examined the various factors that affect development of capital markets in Uganda, A case study of Capital Markets Authority and various other market players. The study was based on several objectives including, analyzing the effect of financial literacy on development of capital markets, establishing the influence of regulatory framework on development of capital markets and assessing the effect that Tax policy has on development of capital markets. The study was grounded by Efficient Market Hypothesis, capital asset pricing model and the arbitrage pricing theory. The study was quantitative in nature. The study adopted a descriptive and cross-sectional design which enables the researcher to keep track of the research activities and help to ensure that the ultimate research objectives are achieved. The sample size considered was 250 employees as the study adopted census sampling method with a response rate of 90%. Findings established that the role of financial knowledge can never be overlooked. Being a very alienated concept to investors, the policy makers are seen as making great strides in making stock markets an integral factor to investment decisions made by investors. Findings show that stringent regulations have barred majority of players from indulging in the sector. Majority of the respondents decry the inflexible regulations that continuously scare away potential investors. Findings indicated that Uganda’s legal, regulatory and supervisory framework for capital markets is inflexible and restrictive. Findings also indicated that policymakers consider the impact of any tax changes on the capital market to ensure the stability of the market. It was concluded that an announcement of changes in tax policy will impact on investment in the short run. The study further recommends that there is a need to build trust and confidence in the market by the government and the regulator. Aggressive public education and advertisements, development of an effective legal system, reduction or complete removal of uncertainty regarding the benefits of the resulting investments, ensuring political stability to guarantee safety of investments, a failsafe banking sector and economic environment and strict enforcement of capital market regulations. There is also a need to speed up the process of the liberalization of the pension sector, compilation of potential issuers of both equity and debt and raising their awareness of the benefits and relevance of capital markets for their operations. The minimum requirements for trading securities also need to be relaxed in order to accommodate companies that have shares that are transferable to members of the public, yet they do not meet the stringent listing requirements.