The role and place of capital markets in economic development have received increased attention in recent times. Consequently, establishment of capital markets has become part of the prescription offered to developing countries in order to realise economic growth. However the precise legal and institutional framework that would induce rapid and sustainable growth of the newly established capital markets in developing countries appears to continue eluding policy makers and their advisers. As a result, most capital markets currently existing in most developing countries remain undeveloped and sluggish. This study seeks to explore optimal legal and institutional framework that can support and sustain capital market growth in developing countries. It is believed that once policy makers become aware of such a framework, they will be able to forge targeted legal and policy reforms that will help ignite emergence of vibrant capital markets in developing countries. The point of departure of this study is an observation that capital markets in most developing countries were established and continue to be operated on inappropriate legal and institutional underpinnings. This study looks at a number of theories and approaches that have formed and informed the legal and institutional framework for capital markets in developing countries, including law and economics, law and development and the Washington Consensus approaches and explains how they have contributed to weak capital markets in developing countries. This study then proceeds to explore a possible development theory that can be used in designing and implementing legal and institutional reforms to promote development of capital markets in developing countries, in general and Southern African Development Community (SADC) region, in particular. In this regard this study uses Douglass North’s framework of economic development as articulated in his work, Understanding the Process of Economic Change and his other prior works as a guiding light. North’s framework is part of the New Institutional Economics (NIE) theory that faults neo-classic economics, which has been used as a tool of economic analysis in the previous economic theories, for its assumption of human rationality. Instead North’s framework recognises that formal rules (statutes, regulations and policy statements) will only be effective if they are compatible with existing informal rules (local practices, protocols and beliefs), which are determined by societal belief system. This study therefore argues that legal and institutional framework for capital markets in developing countries should be tailored to the unique informal rules prevalent in each country rather than being transplanted from developed countries. The study then proceeds to look at some specific formal and informal rules that are relevant to capital market growth. As part of this exercise we look at the ‘preconditions’ for strong capital markets as set out by Professor Bernard Black and set them out on the formal-informal rule continuum as informed by North’s framework. In order to show how informal rules affect the formal rules, a comparative study of regulatory frameworks in United Kingdom, South Africa and Malawi is undertaken. The study concludes with some suggestions on how the legal and institutional reform for capital market development can be undertaken within the tenets of North’s framework in developing countries including countries in the SADC region.