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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