The Empirical Evaluation of the Association between Derivatives Markets and Market Factors in Zimbabwe and Botswana

Abstract

The study evaluated the association between financial markets and financial stability (as measured by bank credits to deposits), financial efficiency (as measured by bank costs to income ratio), financial access (as measured by bank accounts per 1000) and financial depth (as measured by bank deposits to GDP). A Generalised Linear Model (GLM) was run from the year 2009 to the year 2021. The GLM revealed at 99% level of confidence that, the financial markets are significantly and positively related to financial efficiency as measured by bank costs to income ratio. It is further observed that financial markets with higher bank costs to income ratio catalyses derivative usage. However, in contrast the financial markets were observed to have a negative significant relationship with the other constructs used in the model at 99% level of confidence. The results of the document review exposed the reason for non-use of derivatives as unique to each market relating possibly to differences in economic, political, financial infrastructure, market infrastructure, legal and regulatory and market timing. More so document analysis revealed that an evolving benefit of derivatives is enabling channelling of capital to sustainable investments. It is recommended that promotion of financial efficiency in the financial markets must be the main thrust of the policy makers through the establishment of properly functioning derivative markets in Zimbabwe and Botswana. Further policy makers must implore the use of sustainability linked derivatives (SLDs) in their markets as a vital option to allocate capital to environmentally friendly investments.

Keywords: Document Analysis, Financial Development Indicators, Financial Efficiency, Generalised Linear Model (GLM), Sustainability Linked Derivatives (SLDs).

DOI: 10.7176/RJFA/14-20-07

Publication date: December 31^st 2023