Download Finance and Growth - Central Bank of Nigeria

Financial System Strategy
2020
FSS 2020 International Conference
Financial Sector Reform and the Economy
1
FINANCE AND GROWTH:
CAN THE ENGINE WORK FOR NIGERIA?
Patrick Honohan
FSS 2020
Trinity College Dublin
Prepared for the FSS2020 International Conference,
Abuja
June 18, 2007
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The two strands of the presentation

Financial sector helps growth and lowers poverty

Nigeria (as other African financial systems) has much to gain
from energetic financial policy development
combining
FSS 2020
modernism with activism
Illustrated with data charts
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Finance, growth & poverty: Surprising research findings
Financial development is an important cause of growth
General financial development (as measured by depth) widens
opportunities and reduces poverty
i.e. Finance-rich growth is pro-poor
Even conditional on mean income
FSS 2020
But data gaps make it difficult to establish how much direct
access to finance by the poor reduces poverty
[Banking crises do not always hit the poor disproportionately
(but did in Nigeria)]
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Countries with deeper financial systems in 1960
grew more rapidly
Deep (>0.5)
0.25 to 0.5
Ratio of liquid
liabilities to GDP in
1960
FSS 2020
0.15 to 0.25
Shallow (<0.15)
0.00
Updated from Levine
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Average per capita GDP growth 1960-2000
5
Growth and financial development
Naïve and model-based relations
Average GDP growth 1960-95
FSS 2020
8
6
4
Actual
2
Model
Naive
0
-2
-4
0
2
4
6
Private credit as % GDP (log)
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Source: Beck et al. 2000; Caprio and Honohan, 2001
Nigerian banking system is second largest in Africa
but is still small -- absolutely
FSS 2020
Log of Liquid Liabilities (mil. 2000 US $)
15.0
10.0
5.0
Sub-Saharan Africa
Rest of the World
Sample size: 118 countries
Time period: 2004
Source: Financial Structure Database, 2006 (The World Bank)
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…and (even more so): relatively:
Liquid Liabilities (M3+) as % GDP
4.0
Liquid Liabilities / GDP
3.0
2.0
FSS 2020
1.0
0.0
Sub-Saharan Africa
Rest of the World
Sample size: 127 countries
Time period: Latest available year: 2004-05
Source: Financial Structure Database, rev. 2006 (The World Bank)
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…and (even more so): relatively:
Liquid Liabilities (M3+) as % GDP
4.0
Liquid Liabilities / GDP
3.0
2.0
FSS 2020
1.0
0.0
Sub-Saharan Africa
Rest of the World
Sample size: 127 countries
Time period: Latest available year: 2004-05
Source: Financial Structure Database, rev. 2006 (The World Bank)
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Still…Nigeria does a little better than average
given income and inflation levels
2
FSS 2020
(Private Credit/Inflation) residual
ZAF
1
NAM
KEN
BDI
0
ETH
-1
-2
GHA
NGA
MWI
CPV
GMB LSO
SEN
MLITGO MDG CIV
BFARWABEN
MOZ
CMR
TZA
ZAR
UGA
NER CAF
TCD
COG
GNB
SDN
SLE
MRT
MUS
AGO
ZMB
SWZ
SYC
BWA
GAB
-3
-4
-2
0
(GDP per capita/Inflation) residual
2
4
Sub-Saharan Africa
All Other Regions
Sample size: 151 countries
Time period: 2000-2005
Source: Financial Structure Database, 2006; World Development Indicators, 2005 (The World Bank)
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One reason for low depth: Offshore Deposits
Regional Distributions
1. High Income
2. East Asia & Pacific
3. Europe & Central Asia
4. Latin America & Caribbean
5. Middle East & North Africa
FSS 2020
6. South Asia
7. Sub-Saharan Africa
0.00
0.50
1.00
Offshore Deposits / Bank Deposits
Sample size: 90 countries
Time period: 2005
Source: Financial Structure Database, 2006; BIS, 2006
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1.50
But there is a deepening in progress
across Africa
Median % GDP; Sub-Saharan African countries
FSS 2020
26%
Private Credit
24%
Bank Deposits
22%
Wide Money (LL)
20%
18%
16%
14%
12%
10%
8%
1990
1995
2000
12
2005
FSS 2020
Many other dimensions to finance

Payments (new technologies)

Insurance (including microinsurance)

Pension

Deposit services

Legal and regulatory infrastructure

Provision of financial information

Etc etc.
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Banking is expensive: Net Interest Margins
Regional Distributions
1. High Income
2. East Asia & Pacific
3. Europe & Central Asia
4. Latin America & Caribbean
FSS 2020
5. Middle East & North Africa
6. South Asia
7. Sub-Saharan Africa
0
.05
.1
Net Interest Margin
Sample size: 142 countries
Time period: 2004
16
Source: Financial Structure Database, 2006 (The World Bank)
.15
And African banks are reluctant to lend
1
SYC
0.9
0.8
ZAF
0.7
MUS
M2/GDP
0.6
0.5
0.4
KEN
FSS 2020
0.3
ETH
CIV
BWA
SWZ
0.2
0.1
CAR TCD
0
0
0.2
LSO
TZA
UGA
SDN
BEN
CGO
NIG
0.4
LIB
GNB
AGO
0.6
Liquidity ratio for DMBs
17
DRC
0.8
1
More and more foreign-owned banking systems:
Africa and ROW
Bank ownership (Rest of Developing World)
Bank ownership (Africa)
Mainly local
21%
Equally
shared
19%
Mainly govt
7%
Mainly local
25%
Mainly govt
12%
Mainly
foreign
29%
Mainly
foreign
46%
Equally
shared
25%
FSS 2020
Foreign+Govt
7%
18
Foreign+Govt
9%
Firms demand better financing: Africa and Rest of World
% of firms reporting as barrier
0
10
20
30
40
50
60
Cost of financing
Access to financing
Tax rates
Electricity
Macroeconomic instability
Corruption
Tax administration
Economic and regulatory policy uncertainty
Anti-competitive practices
FSS 2020
Customs and trade regulations
Crime, theft and disorder
Access to land
Skills and education of workers
Africa
Rest of World
Telecom
Transportation
Legal system
Labor regulations
Business licensing and permits
19
70
Access to Finance:
FSS 2020
% of households
20
Financial access vs. financial depth
140
FSS 2020
Private credit % of GDP
120
100
80
60
40
20
0
0
20
40
60
Access % of adult population
21
80
100
Approaches (1): Modernism (vs. Activism)
Transplant “best practice” from advanced economies, e.g.:
Better legal protection for creditors including
– procedures for collecting on collateral
– judicial efficiency and probity
(including leasing)
Clarify land ownership (good for collateral)
Improve information
FSS 2020
– credit bureaux
– accounting (and auditing)
Better protections for investors in stock exchange
Strengthen prudential supervision of banks; AML/CFT
Liberalize entry
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Excesses of Modernism
Land issues: not just a question of better land registration
Unrealistic stock exchange rules prevent SMEs from listing
AIM-type model might work better
Basel 2 bank regulation would be counterproductive
FSS 2020
Excessive AML/CFT procedures a barrier
to access of the poor
Etc: see Making Finance Work for Africa
Beck & Honohan, World Bank (2007)
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Approaches (2): Activism (vs. Modernism)
African environment (sparse population, low incomes, poor
infrastructure) makes access problematic
Mainstream banks etc have not delivered long term, risk
finance; or any services for the majority (market
failure)
FSS 2020
So new (or re-engineered) entrants with dedicated mission
needed
– To be patient, take risks, experiment with new technology
including enhanced use of soft information/relationship lending
– To take up the “fight for an inclusive financial system”
(example: South Africa financial sector charter, 2003)
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Activism presupposes governance (1)
Activists are not restrained by immediate market pressures;
they have chosen to plough money and effort into
endeavours that the market has turned down.
Willie Sutton effect
FSS 2020
To be even reasonably confident that these efforts and
resources will not be wasted or subverted, the
sponsoring agency must have good governance.
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Governance issues
FSS 2020
Composite Governance Indicator
2.0
1.0
0.0
-1.0
-2.0
Sub-Saharan Africa
Rest of the World
Sample size: 209 countries
Time period: 2004
Source: D. Kaufmann, A. Kraay, and M. Mastruzzi (2005). Governance Matters IV
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Governance issues
KKZ Data Africa & ROW, quartiles
1.0
0.5
0.0
FSS 2020
-0.5
-1.0
-1.5
2005
2005
2004
2004
2003
2003
2002
2002
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2000
2000
1998
1998
1996
1996
Governance issues
Africa: Change in ratings
median 1998-2005
Control of Corruption
Rule of Law
FSS 2020
Regulatory Quality
Government Effectiveness
Political Stability
Voice and Accountability
-0.4
28
-0.2
0.0
0.2
0.4
0.6
Governance issues
Nigeria: Change in ratings
1998-2005
Control of Corruption
Rule of Law
FSS 2020
Regulatory Quality
Government Effectiveness
Political Stability
Voice and Accountability
-1.0 29
-0.5
0.0
0.5
1.0
Concluding remarks
 Financial sector development can be a powerful
agent for growth and transformation
 Nigeria has plenty of headroom here
 “Open access” should be the watchword
FSS 2020
helped by technology and
by nimble regulation
 Achieving this requires a champion who will fight
for access when necessary against the vested
interests of incumbents
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