The financial market is the market where buyers and sellers engage with finance. The capital market and the money market are the two wheels of the financial market. Whereas the money market is recognized for short-term investments, the capital market is recognized for long-term investments. In Nepal, the NRB and SEBON are the continuous regulators of the money and capital markets.
In general, the capital market deals with long-term financial instruments and commodities. In other words, the capital market is a market in which buyers and sellers trade financial assets with maturities of more than one year (e.g., bond, equity share, preference share, debenture, zero-coupon bond, secured premium notes). Capital markets are an important source of funding for businesses. Simply said, capital markets are places where money is transferred from those who have excessed (saved) it to those who require it (Investors). The capital market is made up of two parts: the main market and the secondary market. The primary market is concerned with issuing new stock to the public, while the secondary market is concerned with the exchange of already issued stocks. The capital market not only provides finance to the government and companies, but it also provides socioeconomic aid to the country (Alam & Hussein, July 2019). The capital market trades all types of stock shares and bonds, as well as all types of lending and borrowing. Many studies throughout the world already acknowledge that the capital market has a significant positive impact on the country’s overall economic growth. Economic growth is defined as a rise in aggregate production in an economy, and it is typically measured in terms of Gross Domestic Product (GDP).
Funds are mostly mobilized in the capital market. The major operations of the capital market are the mobilization of a nation’s savings through the import of foreign money and foreign investment. The capital market is a powerful tool for increasing the country’s productive capacity.
The established stock market decreases the problem of businessmen’s liquidity and productivity shortages to the investment fund while also increasing the economy’s production capacity, which leads to economic growth (Ross & Zervos, 1999). Countries with developed capital markets have less business cycle contraction and economic downturn than countries with less developed capital markets. Furthermore, the World Bank claims that a growth in the banking and stock markets contributes to a rise in the country’s actual GDP. Many researchers conduct research to determine the relationship between the capital market and the economic growth of a specific country, such as (Nieuwerburgha, Buelensb, & Cuyversb, 2006) did on Belgium and (Choong, Yusop, Law, & Sen, 2003) did on Malaysia, and they discovered strong evidence that stock market development leads to economic growth. In Nigeria, one of the authors used regression analysis and the Granger-causality test to determine the long-term relationship between the stock market and economic growth, and they discovered a positive and substantial association between GDP growth turnover ratios.
Capital markets are a network of specialized financial institutions, as well as a variety of mechanisms, processes, and infrastructure that promote the meeting of providers and users of medium to long-term capital in diverse ways. For economic growth, the capital market is critical in bridging the gap between capital suppliers and users, encouraging savings and investments, facilitating the efficient allocation of scarce financial resources, financing utility and infrastructure development, and financing private sector partners. The capital market contributes significantly to the GDP of both developing and developed countries.
Poor and weak capital markets are typically costly and illiquid, discouraging foreign investment. Poor capital market structures not only deter international investors, but also impose economic consequences on local citizens (Garcia, 1995). In this section, we look at the capital market’s role in Nepal as a developing country.
SEBON is the capital market regulatory organization in Nepal. The primary function of SEBON is to develop a system to ease the exchange of financial securities or assets by bringing buyers and sellers of securities together. Its primary duty is also to mobilize savings and channel them into productive investment for the country’s commerce and industry development. In Nepal, the capital market was established of 1936 with the issuance of shares in Biratnagar Jute Mills Ltd. HMG Nepal also issued a government bond through Nepal Rastra Bank in 1964 to collect development spending. Later, on June 7, 1993, SEBON was founded with the purpose of building, enabling, and sustaining a capital market that is credible, fair, efficient, accountable, and transparent. Under SEBON, NEPSE operates under the Securities Act of 1983, with the primary function of facilitating transactions on its trading floor through market intermediaries such as brokers, market makers, and so on. The number of companies listed in NEPSE is 293 (Sansar, 2020). The stock exchange’s annual turnover has ranged between Rs 323.48 billion in 2067/068 to Rs 1792.26 billion in 2076/077.
|S.N.||Year||Market Capitalization (in Billion)||GDP (in Billion)||Economy growth Rate (in %)||NEPSE Index|
Except for 2072/2073, we can observe that the NEPSE index, market capitalization, and economic growth improve steadily in the table above. GDP was low in 2072/2073 as a result of the earthquake and the block at the border with India, as well as the impact on supply. And the NEPSE index was high because all commercial banks are required to maintain a minimum paid-up capital of Rs 8 arba, so they issue rights to share and bonus shares at a high margin, which has a direct impact on the NEPSE index. Also, we can observe that the economic growth in 2073/74 was 6.94, which was the highest throughout the ten-year period from 2067 to 2077, and the Nepse index was fairly high in that year, at 1582. Similarly, there were 66 listed businesses in NEPSE in 1993 and 293 in 2020, indicating that Nepal’s capital market is expanding steadily and positively. Also, overall market turnover was Rs 8360.1 million in 2006/07, and it increased to Rs 132340.3 million in 2016/17. In 2008, there were 51294 share transactions, whereas there were 153693 in 2016/17. To summarize, industrialized economies often have a fully developed capital market, whereas undeveloped nations typically have a premature capital system with few financial instruments. The Nepalese market has a long way to go, but they have recently advanced and developed in terms of technology and process improvements. Despite the fact that SEBON has several flaws, the Nepalese market is steadily improving.