Factors influencing the development of capital market in Rwanda

Abstract

This study investigates the factors influencing the development of the capital markets in Rwanda. The main objective is to study how macroeconomic variables affect the growth and development of the Rwandan Stock Exchange (RSE). We have also analysed the contribution of the RSE on the economic growth of Rwanda. To achieve the objectives of the study, quarterly secondary data from 2011 up to 2016 were used and both the two model were estimated using the Generalised Linear Method (GLM) method. The RSE performance has been measured by market capitalization. The macroeconomic variables used are the key repo rate, the inflation rate, and the money supply. The consumption has been used as conditioning variable. To analyse the second model, we have used the GDP as the dependent variable, while the market capitalization was used as the independent variable along with the capital formation and consumption as the conditioning variables. A 2SLS regression method was used to overcome the endogeneity problem. Our results have shown that among the four macroeconomic variables only the money supply has a statistically significant relationship with the market capitalization, as we found that an increase in money supply by one Frw will lead to an increase of market capitalization ratio by 0.003. The results have also shown that there is a positive relationship between the market capitalization and the GDP where an increase of market capitalization by one unit will increase the GDP by 0.19.