Money Markets. The development of securities markets usually starts with trading in a short-term money market instrument, often a government security. Money markets provide a noninflationary way to finance government deficits. They are a source of funds for commercial banks and other institutions, including DFIs and leasing companies. By enabling large corporations to issue short-term securities in the form of commercial paper, money markets make the corporate loan market more competitive and reduce the control of large commercial banks.
Investment banks are usually issuers and dealers in money market instruments; licensed dealers are often proxies for investment banks in developing countries with a dearth of such institutions.
One measure that promotes money market growth is issuing government securities at market rates. The reluctance of finance ministries to pay market rates on their debt is usually the biggest obstacle to the development of money markets.
In Morocco, financial sector liberalization has attempted to remove barriers to the growth of money markets. The system of mandatory placements on banks and institutional investors, such as Caisse de Depot et Gestion and insurance companies, to place a percentage of their funds in treasury bonds is being phased out.
Deregulation of interest rates will allow government securities to become more competitive with other bond instruments.
In Tunisia, mandatory placements have been abolished for banks and are being addressed in the case of insurance companies and social security funds. The Tunisian money market came into being in when certificates of deposit and commercial paper were introduced with maturities of up to five years and in , treasury bills were introduced with attractive yields and are issued through an auction process on the money market.
These developments are creating competition in the financial sector and making alternative forms of short-term finance available to private and public entities. Capital Markets. Capital markets provide equity finance as well as long-term debt through the issue of bonds for both the government and corporate sector.
By offering an array of financial instruments available to investors, capital markets increase competition and ensure the most effective mobilization and allocation of investible resources.
This lowers financial intermediation costs and contributes to productive investment and growth. Capital markets also facilitate the dispersion of business ownership and the reallocation of financial resources among corporations and industries.
Several developing countries, including India, Korea, Malaysia, Turkey, Mexico, and Chile, have active equity markets. Only a few countries have active bond markets; they include India and Korea. Currently only Egypt, Morocco, Tunisia, and Jordan have capital markets that are open to foreign investors. Currently, the capital-surplus countries represent about 85 percent of the total capitalization of Arab securities markets.
This ratio is expected to become better balanced when the proposed privatization programs of the capital-deficit countries Egypt, Morocco, and Tunisia are implemented 17 Table 5. The supply of equities in many countries has been limited by the reluctance of owners of private companies to dilute their ownership and control by issuing stock to the public and to comply with requirements to disclose information about their operations.
The availability of less expensive debt finance has also discouraged equity issues. The absence of an appropriate legal, regulatory and tax framework has further inhibited the development of capital markets.
Double taxation on dividends and capital gains, and the tax-free status of government securities has lessened the appeal of private equity and bonds. Investor confidence has been further undermined by the lax enforcement of corporate income taxes as closely held corporations are able to avoid taxes by showing depressed profits.
The lack of timely and accurate financial information has often resulted in speculative trading that has further hurt investor demand for securities in developing countries. The efficient functioning of financial markets also depends on institutions that lend and borrow little on their own account; investment banks, securities brokers and credit rating agencies.
Investment Banks. Investment banks are important constituents of securities markets; they are intermediaries for locating and collecting funds for their clients so they can finance new investment products. They are major players in the development of securities offerings. In addition, they arrange private placements, provide funds management, and perform corporate advisory and portfolio management services.
Investment banks have yet to play a major role in Arab countries, which are still in the process of developing their nascent capital markets. Investment bankers bring new securities to the market by purchasing whole issues of securities from corporate issuers or from public bodies and distributing them to institutional and individual investors. By making a firm commitment to purchase the securities from the company, the investment banker insures any risk associated with a new issue.
This service, known as underwriting, permits government and corporate entities to broaden their sources of long-term financing beyond the banking system. Underwriting is critical to the development of emerging markets where corporate or public entities are reluctant to raise equity capital without the guarantee provided by this service. Investment banks are also market makers in secondary markets. Corporate advisory services are a growing business for investment banks in emerging markets.
The private sector in many developing countries has been accustomed to functioning in heavily controlled and protected market environments that have provided inadequate preparation for businesses to respond to market signals. Investment banks can play an important part in advising businesses on how to compete in a more open and international economy. However, they also have a key advisory role in relation to project financing, i. While banks, long-term financing institutions, and institutional investors provide financing, investment banks arrange financing and can play a useful role in organizing loan syndications for large amounts of financing.
Investment banks also provide portfolio management services by investing funds on behalf of institutional and individual investors. Their investment decisions are based on specialized research and analysis of securities. Consequently, they help to curb speculative tendencies—especially in emerging markets that are afflicted by poor corporate disclosure practices—by serving as conduits for dissemination of timely and accurate financial information. Successful economic planning in developing countries depends on the ability to achieve a rapid and balanced growth of investment in both the government sector and the corporate sector.
This in turn hinges on an adequate transfer of household savings and foreign capital inflows to these sectors. This transfer requires the availability of diversified financial instruments and proper financial intermediation. Foreign capital flows to Arab countries have been limited by governmental policies restraining foreign private investment and favoring debt instruments over equities and financial intermediation in banking over the securities market.
The policy challenge involves increasing capital flows by relaxing regulations, reducing restrictions on international capital mobility, and establishing an appropriate institutional framework to ensure that an adequate proportion of financial savings flows into the equity market.
An increasing number of Arab countries are beginning to take steps to create the necessary infrastructure for securities market development. On the policy side, financial liberalization has to some extent already removed distortions that encourage financial flows into debt instruments through the banking system, and especially deposit type short-term instruments that have often led to financial instability.
Taxes on dividends and capital gains on sale of shares have been removed to put equity investment on par with other types of debt instruments Morocco and Tunisia. The governments of Arab countries can also play a key role in developing capital markets. In addition to policy reforms removing barriers to equity financing, the process of privatization must be expedited to create incentives for foreign investment.
Privatization through private placement or sale of shares on the still-emerging capital markets will encourage wider participation by domestic and foreign institutional investors and increase market capitalization substantially.
Privatization has been one of the forces revitalizing equity markets in several developing countries, including Mexico and Chile. Several Arab countries are implementing large-scale privatization programs Morocco, Tunisia, Egypt to stimulate direct and portfolio investment.
Demand for securities can be raised by encouraging foreign portfolio investment. Regulations and restrictions that impede the entry of international investors into domestic equity markets are being lifted.
Several countries remain concerned over foreign ownership of assets. But foreign portfolio investment is usually passive, and developing country concerns over volatile flows of money and increasing foreign control can be met by such means as the closed-end country fund, whose shares can be traded but not redeemed Morocco, Egypt, and Tunisia.
Governments can help to put in place an appropriate regulatory framework to increase investor confidence in securities markets. Regulations are needed to provide for accurate and adequate disclosure of corporate information to curb speculation and allow investors to make informed decisions.
There is a need to license securities intermediaries, establish minimum listing requirements, and curtail improper activities such as insider trading. Governments also have a crucial role to play in setting minimum capital requirements for securities firms. High minimum capital requirements relative to the size of the market will impede the formation of new securities firms investment banks , but if they have insufficient capital they will not be able to take on the risks of underwriting new issues nor will they be able to work as market makers and thus provide liquidity for the secondary market.
Another important aspect of regulation concerns concentration of ownership. Governments can take a variety of regulatory measures to encourage widespread ownership of equity through regulation of companies and securities markets. The development and deepening of capital markets in Arab countries will also require institution-building efforts as well as technical assistance from external sources and multilateral agencies.
IFC can play a role in supporting the creation of the institutional and regulatory framework for capital markets as well as help in the establishment of stock exchanges and stock market institutions in Arab countries that do not have formal securities markets.
In particular, IFC can assist in developing appropriate regulations to provide accurate and timely disclosure of financial information, ensure fair trading practices and listing requirements of companies, and prevent insider training. IFC can also help set up investment banks and securities houses to provide adequate financial intermediation services for equity markets in Arab countries.
So far, brokerage services have been rendered by commercial banks as a courtesy to their clients with no incentive to accelerate stock market activity.
Underwriting services are also absent in most Arab countries, which is a disincentive for companies to raise equity through public issues. Both brokerage and underwriting services are critical for the development of equity markets in Arab countries and should be addressed as a priority in institution-building efforts and in technical assistance programs. IFC can also support the development of local markets by helping to establish investment funds for individual countries or a group of countries to encourage foreign portfolio investment in the Arab countries.
These funds can best be established under a two-tier structure wherein the equity fund will be managed by a professional fund management company, to be set up with the participation of domestic financial institutions and suitable foreign technical partners.
This structure achieves two objectives: it creates a new financial instrument to channel resources into equity investments and establishes financial institutions with strong technical skills to successfully engage in such investments.
If properly structured, IFC may also invest in these funds and in their management companies. When capital markets in the Arab countries develop sufficient absorptive capacity, these funds will divest their investments by listing investee companies and selling their shares or through secondary public offerings to investors.
Clinvest France and Banco Exterieur de Espana Spain are the foreign technical partners for this fund. The nature and pattern of private capital inflows to developing countries has been clearly influenced by the presence or lack thereof of well—established securities markets, proper financial intermediation, and a variety of financial instruments to channel financial savings into direct or portfolio investment.
Nowhere has the importance of open and diversified financial markets been more visible than in several Latin American Mexico, Chile, and Brazil and East Asian economies Korea, Malaysia, and Singapore. Korea is a striking example of the successful transition from a heavily regulated financial structure to a more open, robust, and diversified financial system.
Korea initiated stabilization, structural adjustment and financial reform in the s. The government encouraged competition in the financial sector by relaxing barriers to entry, deregulating nonbank financial institutions, and allowing different institutions to offer a wide array of services.
Foreign financial institutions, including banks and insurance companies, were permitted to open branches. Many government—owned commercial banks were privatized. Preferential credit lending rates were eliminated and no new directed credit programs were introduced.
Controls on interest rates and capital flows were maintained until inflation was brought under control and exchange rates stabilized.
By the mid—s Korea had established macroeconomic stability and laid the foundation for a rapidly expanding financial sector that included primarily nonbank institutions and securities markets. Several Arab countries Morocco, Tunisia, Egypt are beginning to redress their closed-door policies by dismantling rigid investment regimes; others had already opened their doors, at least partially, to foreign investment Jordan and Oman , but investment flows are still constrained by the absence of diversified financial instruments and policies that have supported banks and DFIs over other forms of financial intermediation.
The interventionist financial policies of strict control over interest rates and channeling of subsidized credit to certain sectors have resulted in investments in financially questionable projects and a growing portfolio of non—performing bank assets in developing countries.
Financial sector liberalization in Arab countries should not be limited to the removal of credit allocation and interest rate controls and reform of the banking system, but seek to develop a more broadly based financial system that includes money and capital markets and nonbank intermediaries.
Active securities markets would increase the supply of equity capital and long—term credit, which is vital to maintain the solvency of the financial system and effectively mobilize domestic savings and foreign capital for investment.
Multilateral institutions such as IFC should play an increasing role in assisting Arab countries to build stable and competitive financial systems. International Monetary Fund , , pp. El-Erian , Mohammed A. Madarassy , Andrea , and Guy P.
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Internet: General. Management Information Systems. Web: Social Media. Health and Fitness. Diet and Nutrition. Diseases: Contagious. Diseases: Respiratory. Business and Financial. Health Policy. Natural Resources. Environmental Conservation and Protection. You should be aware, though, that project cycles can often last for several years, so being involved in a project from start to finish can require a substantial long-term investment on your part.
However, the smaller components within a given project cycle can provide many shorter-term opportunities. The IFI and the borrowing country identify projects that are appropriate for the country's development strategy and suitable for IFI support. Pre-feasibility studies are often required at this stage.
Once a proposed project has entered the project pipeline, the borrower and IFI technical staff study and define it further. The actual design and preparation of the project are the borrowing country's responsibility.
IFI staff conduct in-depth assessments of the technical, financial and economic elements of the project. The appraisal phase is the IFI's responsibility and culminates in a project plan. The IFI and the borrower negotiate the funding agreement and the project implementation plans. Negotiations result in a loan or funding document that is presented to the appropriate IFI board s for approval.
The funding becomes effective after board approval and after the country has signed the documents. Funds can now be disbursed, thus commencing the implementation stage of the project. Implementation of the project, including procurement, is the responsibility of the borrower and is carried out with minimal IFI assistance.
However, the IFI does oversee all major procurement decisions made by the borrower. Most of the funds are spent during this phase, which provides the bulk of the procurement opportunities for contractors. This final phase is an assessment of the project and of the results achieved. It is performed after the project has been completed and all funds have been disbursed.
Before you pursue a contract related to an IFI-funded project, be sure you understand the respective responsibilities of the IFI and the project's executing agency. The IFI and the executing agency do share some of the work of project preparation but the executing agency is responsible for all phases of project execution and procurement, which must comply with IFI regulations. These regulations and their related procedures are similar for all IFIs. The best sources of project information are contacts, partners and IFI staff in the donor and borrowing countries.
Often, however, project-related documents, procurement notices and contract awards are available as well on IFI websites. Reviewing this information in the context of the country strategy document will help you monitor the progress of active projects and assess future developments and therefore opportunities in the borrowing country.
Procurement notices represent the actual business opportunities in IFI-financed projects. These are generally posted on the IFI's website, and on independent websites that consolidate project information from major IFIs, UN agencies and foreign governments. These websites offer advanced search features and some will automatically notify you of opportunities that match your interests. Some are by subscription only, but most are free. For the procurement of goods, equipment, civil works and non-consulting services such as transportation and maintenance, most opportunities occur during the implementation stage of the project.
Most IFIs require the borrower to draft a procurement plan, which states in general terms what products and services will be needed, when they will be required, their approximate costs and the procurement methods to be used.
The procurement plan is published on the IFI's website and is updated regularly. The objective of ICB is to provide all eligible firms with timely notification so that they all have an equal opportunity to bid.
Borrowers must issue bid invitations or prequalification invitations in at least one local publication and in UN Development Business Online. In some cases, invitations will also appear on the IFI's website. Before bidding, always familiarize yourself with the procurement guidelines of the IFI that is providing the loan. These guidelines define the policies, procedures and procurement methods that have been agreed on by the borrower and the IFI.
Be aware, however, that the relationship between the supplier you and the borrower is governed by the bidding documents and your contract with the borrower, not by the IFI's procurement guidelines. All firms that prequalify by meeting the specified criteria for eligibility, financial capacity and experience are then invited to bid. Interested firms can obtain bidding documents from the borrower.
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