Strengthening the capital market, the need of the hour to re-energize economic growth

President Solih during a previously held Capital Market Forum | Photo: The Edition

Capital markets usually function as the growth engine for developing economies. It basically supports generating capital for the existing and new businesses. The East Asian economies, particularly Singapore being a small island nation have shown the roadway, how a vibrant financial market can. All these markets not only generate capital locally, but attracts huge amount of foreign investments through their stock exchanges and other capital market instruments. The more you are closed, the more you are restricted for capital options.

The Maldives Stock Exchange was established in 2006 initially by the Capital Market Development Authority (CMDA) and later Maldives Stock Exchange Company Pvt. Ltd (MSE) was licensed by CMDA to operate the Maldives Stock Exchange, in January 2008. However, as of now there are only 10 Companies listed in the stock exchange with dismal movement of stock turnover. Due to regulatory restrictions foreigners are not permitted to trade in the stock market. On the other hand, there is large component of foreign investments in the resort sector without any or minimal link to the local capital market.

While close monitoring and heightened risk management are vital for the stability of the financial system, creating healthy competition, becoming flexible in setting up foreign investments in the financial sector, revisiting the capital market platforms, and thinking liberal in terms of foreign participation in the stock market will provide room for further investments and bring in vibrancy into the market.

The gap for at least one or two players in the non-banking financial sector is visible to create a competitive momentum and thereby increase market efficiency. Attracting foreign investors will become more easy with a vibrant capital market in the country because that would provide confidence in terms of more capital generation in the event of further capital requirement while it will also provide exit platforms in case of emergency.

Further, elevating financial literacy among the household, corporate and SME sectors is yet another requirement in order to increase savings and investments. This will also help them to understand and identify alternative sources of finance or capital for further investments.

Maldives too has a dream of becoming the hub for Islamic Financial market in the South Asian region and its not too far away. Though the discussions have been restricted to forums and the press, visibly very little strategic moves have taken place towards this dream. While appropriate regulatory framework with a strategic approach for further development of the market is vital, state support for existing and new Islamic Finance Enterprises by way of tax holidays or other benefits would induce faster development of the sector.

At a time when the economy is downward, while various other measures are being taken by the state, strengthening the capital market will help setting the foundation for a long-term recovery and sustainable growth of the economy.

Editor’s Note: Mr. M. Fawas Farook is a regular opinion writer to Maldives Business Review with valuable insight towards Islamic Compliance Financing and Islamic Banking. He is also well versed and educated on business and technical consultancy and analysis.