By: Udaibir Das
This article originally appeared in the OMFIF on April 11, 2025.
The promise of markets and the reality of constraints
In a vulnerable low-income country, what an entrepreneur typically lacks is not ideas, ability or demand – but financing. Local banks are often undercapitalised, ill-prepared or unwilling to take on risks and capital markets, where they exist, are thin, shallow or inaccessible. The absence of reliable, scalable financing channels thus continues to constrain the entry and growth of new firms and start-ups limiting their economic role to drive structural transformation.
The World Bank’s recent report, ‘Financing Firm Growth: The Role of Capital Markets in Low- and Middle-Income Countries’, sheds light on the scale of this challenge. Drawing on firm-level data from over 100 countries, the report finds that when firms raise capital through markets, their physical investment rises by 8-16% in the following year. Markets, it argues, are not substitutes for banks – they complement them by freeing up credit for smaller borrowers and supporting longer-term investment behaviour.
This message is timely. As concessional finance declines, vulnerabilities mount and aid priorities shift, vulnerable low-income countries must increasingly rely on domestic sources of funding. Efficient capital markets are not a luxury – they are foundational infrastructure for economic growth. Critically, the shift has to be for firms and entrepreneurs – not governments – to borrow to invest, scale and create jobs.
Scope and limits of the evidence
While the report appropriately limits itself to assessing firm-level effects, its findings raise important questions about institutional feasibility. In many vulnerable low-income economies, the legal, supervisory and macroeconomic preconditions required for capital markets to function remain weak or missing. The challenge is not in demonstrating the benefits of markets, but in understanding how such markets might emerge and endure.
The report’s methodology provides valuable cross-country evidence. Yet the analysis could have examined variation across country contexts further, particularly those where markets are still nascent.
Missing institutional architecture
Will capital markets ever become a reality in vulnerable low-income countries? And if not, then what are the alternatives?
After all, the multilateral technical market building efforts from the International Monetary Fund and the World Bank have been active for several decades. The policy frameworks of these vulnerable low-income economies have placed financial systems and capital markets as a reform priority. Yet, these countries are far from meeting their day-to-day financing needs from the local markets.
Could one avenue lie in regional approaches towards capital markets? For small economies, developing national capital markets may be economically inefficient. Regional platforms, such as the West African Bourse Régionale des Valeurs Mobilières, allow participating countries to pool listings, liquidity and infrastructure. They offer scale that no individual country could achieve alone. However, such arrangements would still depend on legal harmonisation, supervisory coordination and sustained macroeconomic discipline – preconditions that cannot be assumed.
A related issue is prioritisation. The World Bank’s report does not differentiate among countries based on structural vulnerability, nor does it tailor its insights accordingly. Yet such distinctions matter. The United Nations identifies 46 least developed countries, the World Bank’s International Development Association lists 75 recipients of concessional finance and the IMF’s Poverty Reduction and Growth Trust supports 69 low-income economies. These classifications, though widely used in development finance, are rarely employed to shape capital market and broader financial sector reform or to calibrate expectations – despite vast differences in institutional and fiscal capacity.
Learning from practice, not just principle
Some are attempting to bridge the gap between evidence and implementation. The African Development Bank, through its Capital Markets Development Trust Fund, has provided tailored legal reform and technical support in over a dozen vulnerable countries. OMFIF’s Absa Africa Financial Markets Index has also grown into a useful regional benchmark, tracking progress in regulatory effectiveness, settlement infrastructure and investor participation. The IMF and World Bank continue to assist countries who wish to implement market development and macroeconomic stabilisation strategies.
Private-sector contributions, by contrast, have been more limited. While some international consulting firms have produced capital market scorecards and diagnostics, many of these rely on assumptions of macroeconomic stability and institutional maturity – conditions often absent in vulnerable economies. These efforts also tend to understate the role of political economy constraints and the hybrid structures through which finance actually flows.
Most documented case studies of success in capital market development focus on upper-middle-income countries. The experiences of smaller and more vulnerable economies – where reforms have been incomplete or politically constrained – remain underexplored. These cases may not yield clean narratives, but they better reflect the institutional realities many countries face. They also suggest the need for more creative, non-traditional policy approaches.
Beyond markets
The international community must move beyond blueprint-based thinking. Capital market development is not a linear process. Political volatility, external shocks and capacity gaps frequently disrupt reform efforts. In such environments, success depends less on ideal models and more on adaptive strategies – ones that allow countries to experiment, iterate and ‘fail forward’ while building institutional confidence over time.
In the near term, policy-makers in vulnerable economies may need to prioritise alternative financial architectures. Public development banks could anchor long-term finance; regional liquidity facilities could underwrite infrastructure investment; and mobile financial ecosystems could broaden access for smaller firms. In many cases, reinforcing informal or semi-formal channels may offer greater development impact than prematurely attempting to engineer deep capital markets.
Ultimately, the hardest policy questions lie not in reaffirming the value of capital markets, but in charting viable, politically and institutionally grounded pathways towards them. For vulnerable low-income economies, where capital market emergence remains uncertain, the priority must be not just vision – but realism.
Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, a Senior Non-Resident Adviser at the Bank of England, a Senior Adviser of the International Forum for Sovereign Wealth Funds, and a Distinguished Fellow at the Observer Research Foundation America.