IMfWB Annual Meetings Seminars From Banking Stability to Banking Performance : An Analysis of the Ba

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IMf/WB Annual Meetings SeminarsFrom Banking
Stability to Banking Performance An Analysis
of the Banking Sector in sub-Saharan Africa

• François Leroux
• Oct. 1. 2004
• francois.leroux_at_hec.ca

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Outline

• Preliminary remarks
• The Structures-Conduct-Performance paradigm
• Analysis of the banking sector
• General assessment
• Remarks and policy implications
• Contribution of cooperative institutions
• Performance of banking regulation and supervision
  
• Banks as partners of institutional development
• Conclusion

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1.Preliminary Remarks

• Stability a priority
• Financial stability progresses
• There is not a single model for a financial
  system
• Present assessment and recommendations are
  limited to sub-Saharan Africa

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2.The Structures-Conduct- Performance Paradigm

• A classical framework
• Adaptations for the banking sector
• Adaptations for developing economies

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3. Analysis of the Banking Sector

• Selecting the main components for analysis

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Analysis of the Banking SectorEconomic and
Institutional environment

• Macroeconomic environment
• Degree of diversification of the economy
• The cyclical aspect of the economy
• Size of the informal sector

• Degree of confidence in the financial
  institutions
• Financial market completeness
• Legal environment
• Judicial environment
• Credit culture

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Analysis of the Banking SectorStructures

• Banking concentration
• Type of Bank ownership
• Presence of state-owned banks
• Place of sectorial banks
• Place of foreign banks
• Interaction with NBFIs and cooperatives

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Analysis of the Banking SectorConduct

• Degree of effective competition
• Credit policy
• Credit concentration
• General liquidity of the banking system
• Banking density and marketing strategies
• Specific practices of foreign banks

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Analysis of the Banking SectorFinancial
performance

• Financial performance of the banking sector is
  adequately monitored by the Financial Soundness
  Indicator (FSI) and the Financial Sector
  Assessment Program (FSAP)
• cf IMF occasional paper 212

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Analysis of the Banking SectorEconomic
performance

• Performance is a qualitative concept
• Performance is a relative concept
• The traditional meaning of economic performance
  in I.O.
• Allocative efficiency
• Progress
• Employment
• Equity ( Fairness )

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Analysis of the Banking SectorEconomic
performance

• Security of transactions
• Durability of the banks
• Allocative efficiency
• Technical efficiency
• Contribution to modernization of the economy
• Role in savings mobilization

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Analysis of the Banking SectorEconomic
performance(contd)

• Fairness in geographical coverage
• Potential depositorsaccess to the banking system
• Contribution to reduction of the informal sector
• Contribution to development of the financial
  sector
• Contribution to financial education

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4 General Assessment
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Economic and Institutional environment

• High sensitivity to external shocks
• Poor diversification of the economy
• Substantial needs for seasonal financing
• Large informal sector

• Lack of confidence in the institutions
• Incompleteness of the financial markets
• Reform of the legal environment
• Problematic judicial environment
• Embryonic credit culture

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Structures

• Limited number of banks
• Tight control of bank ownership
• State-owned banks toward a reduced role
• Shrinking or disappearance of the sectorial
  banks
• Over-presence of foreign banks
• Segmentation of banking and non-banking
  activities (a dilemma)

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Conduct

• Partial competition (conscious parallelism)
• Credit rationing
• Credit concentration
• Over-liquidity of the banking system
• Insufficient number of branches
• Niche marketing and low banking density
• Skimming practices by foreign banks
• Limited effort of financial innovation

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Economic performance

• Improved but still questionable security of
  transactions
• Relatively short banking history
• Allocative efficiency SME financing problem
• Technical efficiency
• Insufficient contribution to savings mobilization
• Geographical discrimination
• Restricted depositors access to the banking
  system
• Limited contribution to the reduction of the
  informal sector
• Banks as vectors of financial sector development
• Limited contribution to financial education

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5. Remarks and Policy Implications
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Remarks

• Sub performance in terms of structures or conduct
  is a traditional problem of small economies and
  not specific to developing economies.
• In absolute or relative terms, numerous African
  countries could be classified as small economies
• Allocative inefficiencies are not restricted to
  or typical of developing economies
• Formulating regulations etc. easier than ensuring
  their implementation
• Resistance to change
• Real challenge is behavior modification

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Policy Implications Economic and institutional
environment

• Regional definition of banking space is the
  logical result of the small size of African
  economies
• Authorities must contribute to confidence in the
  banking system
• By implementing an adequate scheme of deposit
  insurance
• By respecting banking confidentiality at all
  times
• By making banking protection a priority in times
  of social unrest

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Policy Implications Economic and institutional
environment(contd)

• Complete and implement the reform of legal
  practices where necessary
• Promote the role of professional associations and
  the mobility of banking personnel
• Ensure that civil servants at all levels
  understand banking practices
• Promote institutional investors

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Policy Implications Structures

• Encourage the shrinking of development banks ,
  where necessary
• Limit market share of state-owned banks
• Determine, beforehand, maximum market share
  allocated to foreign banks
• Promote cooperative and mutualist-type
  institutions
• Maintain the segmentation between banks and NBFIs
  
• Envisage NBFi access to the payment system
• Regularly determine whether conditions for entry
  are not too restrictive

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Policy implicationsConduct

• Conscious parallelism is not collusion
• Competition laws are a luxury of developed
  countries
• Incitative tax treatment for opening of new
  branches
• Professional banking associations must file
  annual reports on the financing of SMEs
• Banking-sector practices must not harm the
  development of the cooperative sector

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6.Contribution of Cooperative Institutions

• Given the under-banking situation in Africa,
  cooperative structures must be encouraged
• Their strentghs
• They collect widely dispersed savings
• They represent an effective competitor to the
  informal sector
• They promote development of local economic elites
• They promote development of the mortgage market

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6.Contribution of Cooperative Institutions
(contd)

• They familiarize clients with responsible
  consumer credit
• They play a major role in building financial
  awarness

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But

• Cooperative institutions face major problems of
  internal governance when they embark on credit
  for commerce and industry
• Savings cooperatives can only marginally
  participate in the development of financial
  markets

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Moreover

• Organization of the cooperative sector must be
  confederal, to ensure support of institutions in
  difficulty
• Regulation of cooperative institutions can be
  harmonized on a regional basis, but supervision
  must be strictly national

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7. Performance of Banking Regulation and
Supervision

• Significant modernization of regulation and
  supervision
• General acceptance of international codes and
  standards
• Harmonization and cooperation on a regional basis

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Regulation and Supervision (contd)

• Avantages of segmentation
• Specialized or integrated supervision ?
• Preference for institutional regulation and
  supervision
• Transparency or limited opacity ?
• Inapplicability of the market discipline concept
• Seeking an optimal level of regulation

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8.Banks as Partners of Institutional Development

• A positive attitude towards banks
• The conservative nature of banks is a factor of
  stability
• Tax treatment should be adequate
• Promote, where possible, bank listings on local
  stock exchanges

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9. Conclusion

• Banking sector performance assesment as a
  complementary exercise to financial stability
  assessment
• A need for economic performance indicators of the
  banking sector
• Performance is essentially a qualitative concept
• Performance is a relative concept
• Indicators should be specific to Africa to
  facilitate useful comparisons within the region