INTRODUCTION

The financial system within the capital market refers to the network of institutions and mechanisms
that facilitate the raising of long-term capital. This system connects businesses and governments that
need funding for long-term projects with investors who have surplus funds to invest. It includes
institutions like stock exchanges, investment banks, regulatory bodies, and depositories. These
institutions work together to ensure the efficient flow of funds, price discovery of securities, and
protection of investor interests.

The financial market is a broad term that refers to any place where financial instruments are traded.
These instruments can include stocks, bonds, currencies, and derivatives. Financial markets play a vital
role in the economy by facilitating the flow of capital between investors and businesses. They also help
to determine the price of these assets, which can impact everything from corporate investment to
interest rates. There are many different types of financial markets, each with its own unique function.
Some of the most common types include stock markets, bond markets, foreign exchange markets, and
money markets1.

A capital market is a financial marketplace where long-term investments are bought and sold. It's
essentially a platform that connects businesses and governments seeking capital for long-term projects
with investors who have surplus funds.2

Here's a breakdown of how capital markets function:

(I) Suppliers of capital: These are typically individuals, banks, and institutional investors with extra
money to invest.

(ii) Demand for capital: Businesses and governments that need funding for long-term projects, such as
expanding their operations or funding infrastructure development, turn to capital markets to raise
capital.

Capital markets play a crucial role in facilitating economic growth by:

(iii) Mobilizing savings: By channeling savings from individuals to businesses that can invest them in
productive ventures, capital markets contribute to economic expansion.

(iv) Allocating capital efficiently: Capital markets help allocate capital to its most productive use, as
investors are more likely to fund businesses with strong growth prospects.

(v) Price discovery: Capital markets determine the price of financial assets, such as stocks and bonds,
which reflects the risk and return associated with these investments.

There are two main types of capital markets:

1
https://www.investopedia.com

2
Anjan v.thakor. financial System Design.An overview in journal of banking and Finance (1996) 917-948
 (I) Primary market: This is where companies and governments issue new securities to raise capital for
the first time. Investors buy these securities directly from the issuer in an initial public offering (IPO) or
debt issuance.

(ii) Secondary market: This is where investors buy and sell securities that have already been issued. The
secondary market provides liquidity to investors, allowing them to easily buy and sell their holdings.

Some of the well-known capital markets include the New York Stock Exchange (NYSE) and the NASDAQ
Stock Market in the United States, the London Stock Exchange (LSE) in the United Kingdom, and the
Tokyo Stock Exchange (TSE) in Japan.

HISTORICAL DEVELOPMENT OF FINANCIAL SYSTEM, FINANCIAL MARKETS AND CAPITAL MARKETS

The financial system, financial markets, and capital markets have all evolved over centuries, but their
roots can be traced back to ancient Mesopotamia, where early forms of credit and money lending
emerged. Here's a brief overview of their historical development:

(i) Early origins (ancient Mesopotamia to Middle Ages): Basic financial instruments like loans, bills of
exchange, and insurance contracts were developed to facilitate trade and commerce.

(ii) Rise of financial markets (17th-19th centuries): The establishment of stock exchanges, such as the
Amsterdam Stock Exchange in 1602, marked a significant development. This era also saw the growth of
government bond markets and insurance companies.

(iii) Modern financial system (20th-21st centuries): The 20th century witnessed the rise of central banks,
globalization of financial markets, and the development of new financial instruments like derivatives.
The use of technology has further accelerated innovation in recent decades.

HISTORICAL DEVELOPMENT OF FINANCIAL SYSTEM, FINANCIAL MARKETS AND CAPITAL MARKETS IN

Tanzania's financial system, financial markets, and capital markets have undergone a significant
transformation since independence. Here's a simplified timeline of their development:

(i) Pre-1990s: The system was dominated by state-controlled banks and financial institutions. Monetary
and capital markets were practically nonexistent3.

(ii) 1990s: A series of financial reforms were introduced, paving the way for a market-based financial
sector. The Banking and Financial Institutions Act4 opened doors for private domestic and foreign

3
https://www.bot.go.tz

4
The Banking and Financial Institutions Act (1991)
investors5. The establishment of the Bank of Tanzania Act6 and the Capital Markets and Securities Act7
facilitated the development of money and capital markets.

(iii) Post-1990s: The Dar es Salaam Stock Exchange (DSE) was incorporated in 1998, marking a milestone
for the capital markets. The Capital Markets and Securities Authority (CMSA) was established to regulate
securities business and promote the growth of the capital market.

HISTORICAL DEVELOPMENT OF FINANCIAL SYSTEM, FINANCIAL MARKETS AND CAPITAL MARKETS IN

The financial systems, financial markets, and capital markets in sub-Saharan Africa have evolved
considerably, but generally lagged behind more developed economies. Here's a concise breakdown of
their historical development:

(i) Pre-colonial era: Traditional financial instruments like rotating savings and credit associations existed
to facilitate lending and saving within communities.

(ii) Colonial era: Colonial powers established formal financial institutions primarily to serve their own
interests. Banking systems focused on financing government activities and commodity exports.

(iii) Post-independence (1960s-1980s): Many countries prioritized state-controlled banks and directed
credit allocation, hindering development of market-based financial systems.

(iv) Financial reforms (1990s-present): Economic liberalization and structural adjustment programs in
the 1990s led to reforms aimed at creating more efficient financial systems. This included establishing
central banks, liberalizing interest rates, and promoting private sector participation.

(v) Capital market development: Capital markets have grown in recent decades, with several stock
exchanges established across sub-Saharan Africa. However, they generally remain less deep and liquid
compared to developed markets.

SOURCES OF CAPITAL MARKETS AND SECURITIES LAW

Capital markets and securities laws stem from a combination of sources:

(i) Legislation: This forms the primary source of capital markets and securities law. National
governments enact laws to regulate the issuance, trading, and servicing of securities, as well as the
conduct of market participants.

(ii) Regulatory bodies: Regulatory bodies like the Securities and Exchange Commission (SEC) in the US or
the Capital Markets Authority (CMA) in Kenya are empowered to create rules and regulations that
supplement existing legislation. These rules provide more specific guidance on how the laws should be
5
https://www.researchgate.net

6
Bank of Tanzania Act (1995)

7
Capital Markets and Securities Act (1994)
interpreted and enforced. In Tanzania the primary regulatory body for capital markets and securities law
in Tanzania is the Capital Markets and Securities Authority (CMSA). The CMSA is responsible for:

* Issuing licenses to market participants like stockbrokers and investment advisors

* Regulating the issuance, trading, and servicing of securities

* Overseeing the activities of the Dar es Salaam Stock Exchange (DSE)

* Protecting investor interests by enforcing securities laws and regulations

* Promoting the growth and development of the capital market in Tanzania

(iii) Self-regulatory organizations (SROs): Industry associations may establish their own set of rules and
codes of conduct for their members. These SRO rules typically complement and reinforce existing legal
and regulatory requirements.

(iv) Court decisions: Judicial interpretations of laws and regulations also contribute to the development
of capital markets and securities law. Court rulings can clarify ambiguities in the law and establish
precedents for future cases.

NATURAL ROLE, IMPORTANCE AND FUNCTIONS OF CAPITAL MARKETS IN FINANCIAL SYSTEM

Capital markets play a natural and vital role within the financial system by acting as a bridge between
entities with excess funds (investors) and those needing capital (businesses and governments). Here's a
breakdown of their key functions and importance:

(i) Mobilization of savings: Capital markets channel surplus savings from individuals towards productive
investments, fostering economic growth8.

(ii) Efficient allocation of capital: By connecting investors with businesses based on return and risk
profiles, capital markets ensure capital flows to its most productive use9.

(iii) Price discovery: Through buying and selling activity, capital markets establish fair market prices for
securities, reflecting their inherent risk and return potential.

(iv) Economic growth: Capital markets facilitate financing for businesses and governments, enabling
them to invest in infrastructure, innovation, and job creation, ultimately driving economic expansion.

Conclusion,Financial markets are the cornerstone of a healthy economy, serving as a platform for
efficient allocation of capital and facilitating economic growth. They provide a mechanism for businesses
and governments to raise long-term funds for investments, while enabling investors to earn returns. By
channeling savings from individuals to productive ventures, capital markets contribute to economic
expansion.
8
https://www.shiksha.com

9
https://academic.oup.com