1 THE FINANCIAL INDUSTRY AS A CATALYST FOR ECONOMIC GROWTH Louis Kasekende Chief Economist African...

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THE FINANCIAL INDUSTRY AS A CATALYST FOR ECONOMIC

GROWTH

Louis Kasekende

Chief EconomistAfrican Development Bank

At the Nigeria International Conference on Financial Sector Strategy, June 2007, Abuja

L. Kasekende June 2007

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OUTLINEI. 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


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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

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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


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• 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


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• 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

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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

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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%

0%

20%

40%

60%

80%

100%

Stock MarketCapitalisation

DebtSecurities

Bank Assets

Financial and Capital Markets 2002

Africa Asia Latin America EU-15 Japan USA

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Table 1: Indicators of financial development by income group (SSA)

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

1990-99 2000-04 1990-99 2000-04 1990-99 2000-04 1990-99 2000-04Bank deposit to GDP 13.6 18 44.5 50.7 29.7 29.2 31.7 39.4Private sector credit to GDP 12.3 13.3 52.1 64 21.5 21 39.4 40.3M2 to GDP 21.9 26.9 49.8 55.6 35 32.1 77.3 94.2Liquid Liabilities to GDP 19.1 23.8 47.9 53.4 34.5 32.5 36.6 41.2

Sub-Saharan Africa Other

low-income countries Middle-income

countriesMiddle- income countries

without south AfricaMiddle-income countries

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.


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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)

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

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

Population with formal

bank account

Branch network per

100,000 inhabitants

Branch network per 1.000 sq. Km.

Capital adequacy

ratio (percent of

risk- Weighted assets)

Non- performing

loans (percent of total loans)

Interest margin

(percent of assets)

Overhead (percent

of assets)

Profits (percent

of assets)

Sub-Saharan Africa 12.6 2.6 4.3 15.5 14.7 8.2 7.4 3Low-income countries 7 1.2 1.1 15.7 17.5 8.5 7.7 3.2Middle-income countries 25.3 5.6 11.4 16.5 6.8 6.7 6.4 2.3Without South Africa 21.9 5.6 12.4 16.9 7.5 6.6 5.2 3.5

Access Soundness Efficiency

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IV. THE SANE AS AFRICA’S GROWTH POLES: THE ROLE OF THE

FINANCE SECTOR

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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.

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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.

IV. THE SANE AS AFRICA’S FINANCIAL POLES

• L. Kasekende June 2007

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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

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• 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

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• Continue to improve the conduct of monetary policy– Strengthen liquidity management and

forecasting– Deepen financial markets– Develop comprehensive public debt

management strategies

1 THE FINANCIAL INDUSTRY AS A CATALYST FOR ECONOMIC GROWTH Louis Kasekende Chief Economist African...

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