Download The Financial Industry as a Catalyst for

THE FINANCIAL INDUSTRY AS
A CATALYST FOR ECONOMIC
GROWTH
Louis Kasekende
Chief Economist
African Development Bank
At the Nigeria International Conference on Financial Sector Strategy, June 2007, Abuja
L. Kasekende
June 2007
1
OUTLINE
I.
INTRODUCTION
II.
FINANCIAL SYSTEM AND ECONOMIC
GROWTH
III.
FINANCIAL SECTOR DEVELOPMENT IN
SSA: SOME STYLIZED FACTS
IV.
THE SANE AS AFRICA’S GROWTH POLES:
THE ROLE OF THE FINANCE SECTOR
V.
CONCLUSIONS
L. Kasekende
June 2007
2
II. Financial system and economic growth
• The finance-growth nexus theory
indicates that financial development
might:
– Reduce the intermediation margins and
search costs
– Mobilise savings
– Raise capital productivity
3
II. Financial system and economic
growth

Efficient and Deep Financial System

Mobilises savings and changes the term
structure of the savings
Channels savings into productive
investments
Improves the efficiency and productivity of
investments
Promotes the integration of the domestic
economy into the global financial system




Enhances smooth implementation of
macroeconomic policies
L. Kasekende
June 2007
4
II. Financial system and economic growth
• The important conclusions from the empirical
evidence are:
– Countries with better-developed financial systems
tend to grow faster
– The levels of banking development and stock
market liquidity each exerts a positive influence on
economic growth
– Better-functioning financial systems ease the
external financing constraints that impede firm and
industrial expansion
5
III. FINANCIAL SECTOR DEVELOPMENT
IN SSA: SOME STYLIZED FACTS
• Since late 1980s, African countries began to implement
financial sector reforms as part of broader market
oriented reforms
• The objective of the reforms was to build more efficient,
robust and deeper financial markets
• The financial sector has improved since the
implementation of reforms
6
In spite of the reforms, the depth and breadth of financial
markets in Africa are still inadequate… ……..
5 countries,
namely South
Africa, Botswana,
Egypt, Morocco
and Tunisia have
relatively
developed financial
systems.

In 34 countries,
the sector is
characterised by a
low level of
development

7
Financial integration still very low:
African capital markets are the smallest in the
world. Africa Share: Stock Market 0.34%; Debt 0.15%; and
Banks 0.69%
Financial and Capital Markets 2002
100%
80%
60%
40%
20%
0%
Stock Market
Capitalisation
Africa
Asia
Debt
Securities
Latin America
Bank Assets
EU-15
Japan
USA
8
III. FINANCIAL SECTOR DEVELOPMENT
IN SSA: SOME STYLIZED FACTS
Table 1: Indicators of financial development by income group (SSA)
Sub-Saharan Africa
low-income countries
Bank deposit to GDP
Private sector credit to GDP
M2 to GDP
Liquid Liabilities to GDP
1990-99
13.6
12.3
21.9
19.1
2000-04
18
13.3
26.9
23.8
Middle-income
countries
1990-99
44.5
52.1
49.8
47.9
2000-04
50.7
64
55.6
53.4
Other
Middle- income countries
Middle-income countries
without south Africa
1990-99
29.7
21.5
35
34.5
2000-04
29.2
21
32.1
32.5
1990-99
31.7
39.4
77.3
36.6
2000-04
39.4
40.3
94.2
41.2
Source: IMF, International Financial Statistics (2005).
Note: The Average Weight of South Africa among middle-income countries over the 2000-04 period is 84.5 percent.


Financial sectors significantly deeper in few middle income
countries; sounder and more diversified than in the rest of SSA.
S.A overwhelms the other Middle Income countries
9
III. FINANCIAL SECTOR DEVELOPMENT
IN SSA; SOME STYLIZED FACTS
CHARACTERISTICS OF SSA FINANCIAL SECTOR
Table 2: Access, soundness, and efficiency indicators by income group (SSA)
Access
Sub-Saharan Africa
Low -incom e countries
Middle-incom e countries
Without South Africa
Soundness
Population
w ith form al
bank account
Branch
netw ork per
100,000
inhabitants
Branch
netw ork
per 1.000
sq. Km .
12.6
7
25.3
21.9
2.6
1.2
5.6
5.6
4.3
1.1
11.4
12.4
Capital
adequacy
ratio
(percent of
riskWeighted
assets)
15.5
15.7
16.5
16.9
Efficiency
NonInterest
perform ing
Overhead
Profits
m argin
loans
(percent
(percent
(percent of
(percent of
of assets) of assets)
assets)
total loans)
14.7
17.5
6.8
7.5
8.2
8.5
6.7
6.6
7.4
7.7
6.4
5.2
3
3.2
2.3
3.5
Sources: Beck, Demirguç-Kunt, and Peria (2005); IMF Financial Sector Prifiles; Claessens (2005); and calculations from IADB bank-level data.
Note: The efficiency indicators are the averages for 2000-03



Far greater access in middle income countries
Branch density is 10 times higher in middle income countries
Banking sectors have lower costs and are more efficient in
middle income countries
10


IV. THE SANE AS AFRICA’S GROWTH
POLES: THE ROLE OF THE FINANCE
SECTOR
SANE (S. Africa, Algeria, Nigeria & Egypt)
have unique advantages to be economic
growth poles :
Size (market size)

Geography
 . Account for half of Africa’s exports, trade & FDI

Have foreign reserves of $175 billion

Algeria and Nigeria have reserves of $130
billion, equivalent to half of their GDP

4 largest Net FDI recipients from DAC donors.
11
IV. THE SANE AS AFRICA’S
FINANCIAL POLES
•

SANE has potential to contribute to capital
for the development of the rest of Africa;

Positive spillover effects from SANE capital
markets to the rest of Africa;

Strong benefits to the rest of the continent
to have strong SANE financial markets to
prevent negative contagion effects.
L. Kasekende
June 2007
12
V. CONCLUSIONS – STRENGTHENING THE
AFRICAN FINANCIAL SECTOR FOR ECONOMIC
GROWTH
• Proper sequencing financial sector reforms: should be
guided by national characteristics and initial conditions
• Strengthen rural access to financial services and
develop long-term financing options
• Improve financial services technology and infrastructure
– Promotes efficiency through real time funds transfer
– Improves monetary policy management and bank
supervision
13
V. CONCLUSIONS – STRENGTHENING THE
AFRICAN FINANCIAL SECTOR FOR ECONOMIC
GROWTH
• Increase domestic savings mobilisation to support
investment
– Restructure and reform pension system
– Promote long-term financing
– Develop capital markets
• Strengthen corporate governance in financial
institutions
• Strengthen institutions that support financial reforms
– Land and company registries
– Credit reference bureaus,
– Commercial courts
14
V. CONCLUSIONS – STRENGTHENING THE
AFRICAN FINANCIAL SECTOR FOR ECONOMIC
GROWTH
• Continue to improve the conduct of
monetary policy
– Strengthen liquidity management and
forecasting
– Deepen financial markets
– Develop comprehensive public debt
management strategies
15