Investigating The Relationship Between Mandatory Contractual Savings And Stock Market Development In Sub-Saharan African Countries

This study investigates the relationship between mandatory contractual savings and stock market development in Sub-Saharan African (SSA). It also investigates the compatibility of the policies and regulations adopted in SSA countries, with the relationship between mandatory contractual savings and stock market development. Before the exploration of the relationship, an analysis of the characteristics of both mandatory contractual savings and stock markets was done.

 The rationale of the study is that establishing the relationship between between mandatory contractual savings and stock market development is expected to guide long-term policies pertaining to economic growth. Sub-Saharan African countries have unique features on savings and capital markets when compared to both developed and emerging economies hence they need policies that can be customized to them.

Using data from 1990 to 2018, time series data on Stock market development proxied by stock market capitalization, value traded and number of listed companies was used against  Assets of compulsory pensions (mandatory contractual savings), to establish the relationship between stock market develelopment and mandatory contractual savings through a Panel Vector Autoregressive(VAR) model incorporating the Granger causality analysis. 

Findings from this study are that mandatory contractual savings and stock market charactristics are both still ‘thin’ in most SSA countries except South Africa.  Coverage of mandatory contractual savings is only on a small proportion of the economically active total population. Activity on stock markets is very low, led by low listings and limited participation by institutional investors from within and without. Secondly, a positive relationship is found between mandatory contractual savings, stock market capitalization and value traded. This relationship runs from mandatory contractual savings to stock market development meaning that mandatory contractual savings are found to ‘cause’ stock market development. There are no causal relationships which seem to exist between mandatory contractual savings and number of listed companies.  

Recommendations mainly hinged on the poor performance of pension schemes in SSA which remains a major factor discouraging contractual savings, both discretionary and mandatory. Governments are advised to respond to the common shift from formal sector driven economies to informal sector driven economies obtaining in most countries in SSA. It is recommended to regrow formal sectors or incorporate informal sector to participate in pension schemes.