An investigation into the role of custody services in the development of capital markets: A case study of Zimbabwe

Abstract

The growth in investors’ assets globally calls for a solution in tracking investments. Keeping track of the investments’ performance or any corporate events can be a daunting task. The opportunity cost of failing to track the various investment portfolios in different countries can be costly. As such most investors globally appoint custodians to handle the activities of their investments. Custodians serve the role of safekeeping of securities and ensuring that communication is done within the prescribed time to safeguard against any losses to the investor.

This study was generated to investigate the role played by custodians in the development of capital markets in Zimbabwe. The main anchoring objectives of the research include investigating the rate of adoption of custody services by securities participants in Zimbabwe; identification of factors affecting custodians’ performance in Zimbabwe; assessment of risks faced by custodians; and examining the role of the Securities Commission of Zimbabwe in the securities market. The researcher obtained theoretical and empirical literature on the problem under study from developed and developing nations. The researcher used a survey approach and there was inclination towards the use of interviews as the problem under study was considered technical and needs more focused information, ideas and responses.

The main findings of the study revealed that the major roles of custodians in Zimbabwe capital markets are settlement, safekeeping, asset servicing and client reporting. The custodians are acting as an intermediary between the stock issuers and investors by relying information pertaining to corporate actions such as dividends, annual general meeting notice, share splits and rights issues; the level of adoption of custody services by the securities market players was very low.; and factors that affect the performance of custodians in Zimbabwe are; easy flow of capital; investor registration and account set up; market regulations; and market infrastructure. The survey revealed that the risks faced by custodians mainly were operational, credit and legal.

The researcher concluded that there is a positive correlation between the level of growth of custodial services and stage of development of capital markets. Custodians are providing a platform for efficient trading, settlement and information dissemination.

The researcher recommends that SECZ introduce a regulation that deals with custodians, more compliance checks, and constant interaction with the custody players through the Custody Association of Zimbabwe. The government of Zimbabwe should invest in financial infrastructure to facilitate efficient and effective trading and settlement of transactions in capital markets. Custodians should continue to enhance their risk management strategies. Recommended areas of future study include the evaluation of risk and control mechanisms in the custody industry, role of investor protection fund in developing the capital markets, and effectiveness of SECZ regulations in dealing with financial deepening/engineering products.