Download Making Finance Work for Africa

Finance for Growth in
Africa
Patrick Honohan
Trinity College Dublin
and
The World Bank
African banking systems are small -- absolutely
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)
…and relatively:
Liquid Liabilities (M3+) as % GDP
4.0
3.0
2.0
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)
Private Credit/ GDP vs. GDP per capita
2
ZAF
1
NAM
KEN
BDI
MUS
GHA
AGO
NGA
SYC
MWI
CPV ZMB
SWZ
BWA
GMB LSO
SEN
MLITGO MDG CIV
BEN
BFARWA
MOZ
GAB
CMR
TZA
ZAR
UGA
NER CAF
TCD
COG
GNB
SDN
SLE
0
MRT
ETH
-1
-2
-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)
One reason: Offshore Deposits
Regional Distributions
1. High Income
2. East Asia & Pacific
3. Europe & Central Asia
4. Latin America & Caribbean
5. Middle East & North Africa
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
1.50
But there is a deepening in progress
Median % GDP; Sub-Saharan African countries
26%
Private Credit
24%
Bank Deposits
22%
Wide Money (LL)
20%
18%
16%
14%
12%
10%
8%
1990
1995
2000
2005
Real Interest Rates – No Trend
25
Lending
20
Treasury Bills
Deposits
% per cennt
15
10
5
0
1990
-5
-10
-15
1995
2000
2005
Banking is expensive: Net Interest Margins
Regional Distributions
1. High Income
2. East Asia & Pacific
3. Europe & Central Asia
4. Latin America & Caribbean
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
Source: Financial Structure Database, 2006 (The World Bank)
.15
Stock Markets Picking Up
25%
5%
Mkt cap (LHS)
20%
4%
Value traded (RHS)
15%
3%
10%
2%
5%
1%
0%
0%
1994
1996
1998
2000
2002
2004
Stock Markets:
Main Deficiency Is Inefficiency
Access
Developing countries
Sub-Saharan Africa
SSA excluding South
Africa
Stability
Efficiency
Size
Four pervasive challenges
Scale
Informality
Governance
Shocks
Getting banks lending more (1)
It’s not a shortage of liquidity
There are some regulatory issues
Excessive zeal
(BTW: don’t misread history on African bank failures)
But mainly it’s a (mostly well-founded) lack of banking nerve
The usual fixes:
Better information and better contract enforcement
(if you have to choose: go for information)
Banks stay liquid (don’t lend much)
Bank liquidity ratios in SSA quartiles by country
0.6
0.5
0.4
0.3
0.2
0.1
0
1980
1985
1990
1995
2000
2005
Where do banks invest their resources?
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
East Asia & Europe &
Pacific
Central Asia
Claims on Private Sector
High
Income
Claims on Govt.
Latin
Middle East South Asia
America &
& North
Caribbean
Africa
Claims on SOEs
Foreign Assets
SubSaharan
Africa
Liquid Assets
African banks: financial depth and liquidiity 2004
1
SYC
0.9
0.8
ZAF
M2/GDP
0.7
MUS
0.6
0.5
0.4
KEN
0.3
ETH
CIV
BWA
SWZ
0.2
0.1
TZA
CAR TCD
UGA
0
0
0.2
SDN
BEN
NIG CGO
0.4
LSO
LIB
GNB
AGO
0.6
Liquidity ratio for DMBs
DRC
0.8
1
African banks: financial depth and liquidiity 2004
0.35
KEN
0.3
ETH
0.25
M2/GDP
CIV
LSO
0.2
TZA
BWA
0.15
LIB
SWZ
BEN
GHA
0.1
SLE
CAF
0.05
MWI
TCD
UGA
NIG
SDN
CGO
GNB
AGO
0
0
0.2
0.4
0.6
Liquidity ratio for DMBs
DRC
0.8
1
Getting more banks to lend
The arrival of regional and international banks
In only 3 countries are most of the banking systems in the
hands of governments. (You know why)
Scale: good for efficiency and maybe OK for client focus too
with modern lending technologies
Ensuring enough competition remains a challenge
Bank ownership: Africa and ROW
Bank ownership (Rest of Developing World)
Bank ownership (Africa)
Mainly local
21%
Equally
shared
19%
Foreign+Govt
7%
Mainly govt
7%
Mainly local
25%
Mainly govt
12%
Mainly
foreign
29%
Mainly
foreign
46%
Equally
shared
25%
Foreign+Govt
9%
Term finance and risk finance – beyond
commercial banking
Pension funds etc are the natural providers of longterm financing
Ensuring governance is key
Securities markets can help (transparency of pricing
etc.)
Simpler regulation could help increase listings
As could leveraging regional links
Mortgage finance…infrastructural project finance…
Finance Can Help Growth – in Africa Also!
5
BWA
4
3
2
MUS
UGA
SDN
SWZ
1
MOZ
GMB
LSO ZAF ZWE
MRT
SEN
CMR
MLI
TGO
BEN
GHA
0
-1
RWA
COG
GNB
MWI
SLE
-2
KEN
ZMB
NER
BDI
CAF
-3
-2
-1
0
1
Private Credit/GDP 1980-2003 (log residual)
All Other Regions
Residual Trendline
Sample size: 99 countries
2
Sub-Saharan Africa
Approaches (1): Modernism (vs. Activism)
Transplant “best practice” from the advanced economies,
e.g.:
Better legal protection for creditors including
– procedures for collecting on collateral (including leasing)
– judicial efficiency and probity
Clarify land ownership (good for collateral)
Improve information
– credit bureaux
– accounting (and auditing)
Better protections for investors in stock exchange
Strengthen prudential supervision of banks; AML/CFT
Liberalized entry (charts)
Excesses of Modernism
Land issues are not just a question of improving land
registration
Unrealistic stock exchange rules prevent medium firms
from listing
AIM-type model might work better
Basel 2 bank regulation would be counterproductive
Excessive AML/CFT procedures a barrier to access of the
poor
Can capital controls be removed safely?
Finance for Growth (1) – summary
Making banks more comfortable with lending:
•
Work on information infrastructures (and legal/judicial
ones)
•
Prune unnecessary regulations (also for securities
markets)
Long-term and risk finance:
•
Government-run DFIs are not the solution (if you must
have state-owned financial firms: ensure level-paying
field, governance procedures; limit downside risk)
•
Build on the investable funds of pension/social security
funds…supported with transparent governance
•
Infrastructure and mortgage finance deserve attention
Finance for Growth (2)
Stabilize the macro/monetary environment:
•
Work on predictable debt management
•
Make sure inflows not choked-off
Regional arrangements:
•
Concentrate on high yield, feasible dimensions first
•
E.g. shared banking supervision…
…or hub-and-spoke securities markets
•
Common currencies may be harder to deliver –
requiring more macro and political prerequisites
The three-line take-away
on finance for growth in Africa
A need to have improved contract enforcement and
transparency of information
Governments are not the best source of long-term funds
But they do need to provide a stable macroeconomic
background