STIMULATING economic growth and development requires long-term funding, far longer than the duration for which most savers are willing to commit their funds.

This, however, constitutes a barrier to economic growth. In this regard, the capital market provides an avenue for the mobilisation and utilisation of long-term funds for development, hence it is referred to as the long-term end of the financial system.  Over the past few decades, globally, there has been an upsurge in capital market activity, and emerging markets have accounted for a large amount of this boom.

This suggests the growing recognition of the capital market as a tool for fast-tracking economic progress in developing economies.

The growing importance of stock markets around the world has reinforced the belief that finance is a vital ingredient for economic growth.

The role of stock markets in economic growth processes is to help companies raise finance through the issuing of shares, and providing a secondary market for trading of those shares.

Zimbabwe has been fortunate to have a stock market for many decades. According to the World Bank, there is now an overwhelming body of empirical evidence that stock market development plays a pivotal role in economic growth through the mobilisation of savings, and providing financial resources required for investment.

Keep Reading

The main body of the securities market can be divided into four parts: fund-raisers, investors, intermediaries, regulatory agencies, and self-regulatory organisations. Investment banks play an important role in different market entities, and play a special role as an intermediary and one of the main participants.

Investment banks, as intermediaries, act as a bridge between fund-raisers and investors, processing financial market information and providing it to the public. The securities market presents a social model in which information flows between different levels, which improves market liquidity and pricing efficiency. This will improve the efficiency of stock market operations.

As an underwriter, it issues bonds and raises funds for governments and corporations. At the same time, as investors, they have strong financial strength to activate the secondary market, adjust the movement of monetary funds, and constantly carry out financial innovation to make the financial market continue to develop.

There are several ways in which investment banks realise the effective allocation of funds, including securities, funds and enterprise mergers and acquisitions. Through securities issuance and fund management, investment banks have formed a large pool of capital resources and allocated funds to various departments and industries through security issuance and venture investment.

In this process, the marginal output of funds for investors to purchase a securities issuer is determined, and the reason why the issuer can issue securities also depends on the use efficiency of its funds.

Enterprises with good development prospects and high efficiency are more likely to obtain financing and venture capital through securities.

On the contrary, enterprises or industries with poor development prospects and in-efficient use of funds are difficult to finance through securities.

This promotes the flow and concentration of capital to industries or enterprises with high marginal output, and then promotes the allocation of human resources, materials and other resources to realise the optimal allocation of resources.

Investment banks help companies go public, but they are also post Initial Public Offering (IPO) regulators. Their massive investment of capital resources has a guiding effect on the market.

If the business and financial situation deteriorates and cannot bring high returns to investors, they will vote with their feet, that is, sell the shares of the company, causing the price of the company to fall.

The company may be acquired or delisted.

Since the beginning of the 21st century, there have been many well-known mergers and acquisitions. In 2005, Google quietly acquired Android for a mere US$50 million.

The number of Android apps reached 480000 in September 2011. With one billion devices installed in 2013, Android accounted for 78,1% of the global market. By the end of 2019, 2,5 billion devices were installed and Android accounted for 83%  of the global market. Android Google has also become one of the most important players in the mobile internet era.

All of this, of course, has been facilitated by investment banks. Therefore, investment banks play an extremely important role in optimising resource allocation, both as participants and as supervisors.

Investment banks get most of their funding from self-issued stocks and bonds, which means they donot face the risk of a run on their bank if their short-term investments go bad and the bank’s reputation suffers.  This allows investment banks to invest in businesses that are risky, with uncertain short-term prospects, but assessed to be likely to yield high returns over a decade or two. Often, such high-risk projects are innovative science and technology projects, and investment banks bring hope for the development of these small and medium-sized technology enterprises.

Due to a lack of capital incubation, leading to the abortion of technological innovation and technology and the development of the investment banking industry, the number of technology companies with good and advanced technologies has been decreasing.  

Paswavaviri is an analyst at Sublime Asset Management. — munashe@sublimeassetmanagement.co.zw