The Role of Capital and Money Markets in Economic Growth: What can be done to improve the financial sector in Malawi?

This paper discusses the role of the financial system in economic development by assessing the development and efficiency factors of capital markets in Malawi. Popiel and Stiglitz (2002) have
argued that the development of the financial sector is important in aiding economic development. The financial sector which is composed of both money and capital markets is important in indirectly linking small savers who have surplus money to big investors who have brilliant ideas but do not have funds to implement their thinking. Ross et al (2003) and Bodie et al (2005) show that among the many roles the financial system plays, the major one is that of making investment and consumption funds available. This is what makes the economy to move.

According to Ngalawa (1999) the private sector is the engine of economic growth and development. Chipeta (1993) argue that in modern economic ideologies of liberalization, it is inevitable that the private sector is the power horse. Economies must rely upon them to improve the welfare of people through enhancement of employment among others. Governments are now charged with the responsibility of making the playing ground level for all parties and improving all macroeconomic fundamentals in order to facilitate the growth of industry. Lall (1993) laments that without a proper government regulation and financial system, growth of industry should not be even talked about.

An efficient and vibrant financial sector is critical to economic growth because such a system allocates investment resources following good economic principles. There cannot be a private sector if there are no funds. A brilliant idea such as one to add value to ground nuts cannot take-off if the financial market cannot provide the resources at a competitive price. This paper looks at some of the problems capital markets face in Malawi as impediments for the growth of the private sector in Malawi.