For low- and middle-income countries (LMICs) to develop, larger flows of savings must find their way into productive projects. Capital markets are a powerful channel for that. Relative to bank credit, capital markets can support longer-term and larger-scale financing needs, contributing to growth and financial stability (Carvajal et al., 2019).
A recent IFC report shed new light on how capital markets affect firm growth in LMICs, drawing on a unique database of 80,000 firms across 147 countries over three decades. This blog highlights three messages from the IFC’s research and reflects on sub-Saharan Africa’s (SSA) status as an outlier – the motivation for our report published this week, A mobilisation machine: International corporate bonds in sub-Saharan Africa, about how international bond markets in SSA can become a much-needed “mobilisation machine.”
1. Capital markets deliver real development impact
A central question is whether capital markets genuinely drive development. While previous studies have highlighted correlations between aggregate capital market growth and macroeconomic indicators, such as GDP and financial stability (Carvajal et al., 2019), there has been less focus on firm-level effects. The IFC authors use a method (local projection) that compares the performance trajectory of firms that issue securities against similar firms—operating in the same industry and country—that do not.
Their analysis focuses on firm productivity, output and employment growth. While this method shows us how issuers differ from similar non-issuers, the authors caution that we cannot infer capital market access caused issuers to perform better than other firms. That is because high-performing firms may “self-select” into capital markets. Nonetheless, the IFC’s analysis shows that capital market issuance is followed by increases in physical capital (+17%), employment (+8%), and sales (+11%) on average, relative to comparable firms, with larger increases for first-time issuers. These effects persist for up to four years.
Importantly, capital markets also appear to improve economy-wide efficiency by allocating capital to firms with higher marginal returns to capital (MRK)—a indicator of financial constraints (because a high MRK suggests an unexploited investment opportunity). After issuance, MRK declines by 6%, indicating that capital markets help relax these constraints. This effect is statistically significant only for new issuers, implying that the boom in “new participants” in LMIC capital markets has been the driving force behind their contribution to productivity improvements.
At the aggregate level, the impact is substantial. In low-income countries, issuance activity accounts for:
- 53% of capital growth
- 7% of employment growth
- 11% of productivity growth
New, previously constrained firms contribute disproportionately. While causality caveats remain, the evidence strongly supports capital markets’ importance for development.
2. LMIC capital markets are bigger, broader, and more domestic
Since the early 1990s, LMIC capital markets have expanded dramatically—from $24 billion in cumulative net issuance (CNI) in 1990 to $6.9 trillion in 2022, outpacing GDP growth.[i] This includes 45 LMICs (32 middle-income, 13 low-income) that had never seen a firm issue securities before 2000.
The number of issuing firms grew from 255 to nearly 6,000 annually, making markets less concentrated. This matters: highly concentrated markets dominated by a few large firms are linked to inefficient capital allocation, slower innovation and higher inequality (Bae et al., 2021, Gans et al 2019). More issuers mean more economic dynamism.
Another shift is the rise of domestic capital markets, which now account for 76% of CNI, up from 62% in the 1990s. Domestic markets allow smaller, younger firms to raise capital in smaller amounts. In 2010–22, the average international issuance was $503 million, compared to $155 million domestically. This aligns with the phased nature of capital market development—domestic markets are a crucial early step (Demekas & Nerlich, 2020).
[i] CNI is defined in the book as the sum of equity issuances and bond issuances since the beginning of the period minus bonds that have matured. All data from this blog is sourced from the World Bank’s Capital Markets Portal, unless noted otherwise.
3. Capital markets are catching up to bank credit
Historically, banks have been the primary source of firm financing in LMICs. But as economies grow, capital markets increasingly supplant bank lending. In 1990–95, bank financing in LMICs was 12 times greater than capital market issuance. By 2016–22, that ratio had narrowed to 3:1. This shift benefits even non-issuing firms—by freeing up bank credit or creating linkages with issuing companies. It also reflects the natural sequencing of financial development, where capital markets grow alongside banks (Carvajal et al., 2019).
Banks themselves benefit too. Long-term lending becomes more viable when banks can raise long-term capital. The 2024 EIB Banking in Africa Survey found that “lack of funding” was the top constraint to bank lending to large firms. Bond issuance can help banks expand lending to smaller firms as well (World Bank, 2020).
But SSA is falling behind
While LMIC capital markets have boomed, SSA has lagged. The region accounts for less than 3% of LMIC CNI, despite making up 5% of LMIC GDP. In bond markets, SSA’s share of the market is just 1%. South Africa alone represents nearly three-quarters of SSA issuances between 2010 and 2012. The number of issuing firms in LMICs has grown 23-fold since 1990. In SSA, it peaked in 2014 and has since declined by 65%—only 36 firms issued in 2022.
This matters because large firms play a critical role in development—driving productivity, creating quality jobs, and generating tax revenues. Underdeveloped bond markets are a key reason for SSA’s “missing top” of high-potential firms. That’s why we’ve published a new report focused on SSA’s international bond markets and what development finance institutions (DFIs) like BII can do to stimulate them. We see bond markets as a “mobilisation machine”—a way to unlock fresh capital and address financial constraints for firms that can drive SSA’s economic transformation.
