Partnership for Making Finance Work for Africa

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Partnership for Making Finance Work for Africa

African Economic Conference 2007
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What will we talk about?

• Ralf Schroeder
• Fostering private investment and sustainable
  economic growth
• Finance as a constraint for growth and employment
  generation in Africa
• Marilou Uy
• Making Finance Work for Africa Findings of the
  MFW4A study
• Key policy approaches
• Gabriel Negatu
• The Partnership for Making Finance Work for
  Africa What are the objectives?
• What can you contribute to the Partnership? What
  can you gain from it?

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Fostering private investment and sustainable
economic growthRalf SchroederGerman Ministry
for Economic Cooperation and DevelopmentG8
Presidency
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G8 Declaration Growth and Responsibility

• Africas growth of almost 6 driven by
• governance
• business climate
• macroeconomic stability
• strong global demand for Africa's natural
  resources.
• Challenge for African countries, policy makers
  and business Deepen, broaden, and sustain shared
  growth in order to achieve the MDGs

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Leveraging Africas opportunities

• More countries are emerging from conflict, with
  several long-standing conflicts resolved.
• Resource rich countries are showing a greater
  drive for diversification and good governance.
• Technological leap-frogging ICT and mobile
  phone technology provide new possibilities for
  increasing access to markets and the provision of
  financial services.
• A new generation of African innovators and
  entrepreneurs are changing the landscape of
  African business and finance
• New momentum for regional integration will build
  markets with adequate economies of scale.

Annual average growth in mobile subscribers,
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Going beyond ODA

• Increasing private sector credit from 14 to 25
  of GDP would represent an additional US 70
  billion of resources available for African
  households and firms equal to almost 3x the G8
  ODA target for 2010 (MFW4A)
• If, through more efficient financial sectors,
  interest rate margins are brought down from
  current 8 to world average 4.8, African
  borrowers would save US 3.2 billion in interest
  every year (MFW4A)
• If Africa were to increase its share of global
  trade by just one percentage point to 3 it
  would generate additional export revenues of 70
  billion (USTR Data)
• Sustaining reform, creating investment
  opportunities and sound debt management will
  provide Africa with unprecedented access to
  capital Ghanas benchmark bond attracted US
  3.25 billion in commitments (IFR)

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Scaling-up and sustaining growth in Africa

• Private investment and productivity in Africa
  remain insufficient to achieve and sustain higher
  growth
• Private investment / GDP around 14 in Africa,
  compared to 25 in East Asia, including high
  growth countries like China (26) and Thailand
  (22)
• Total factor productivity of only 4 out of 26
  African countries within range of top performing
  economies ( reaches 75 of South Africa levels)
• But Macroeconomic reforms, fewer conflicts and
  improving governance have laid the ground for new
  development priorities
• Employment generation
• Economic diversification
• and a new focus on private and financial sector
  development

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Growth Challenge Investment Productivity

• Low levels of investment are a constraint - but
  increasing productivity even more important
• Increasing productivity through
• Investment Climate Reform African enterprises
  can compete with Indian and Chinese firms in
  terms of factor floor costs. They become less
  competitive, however, due to higher indirect
  business costs, lack of market access.
• Financial Sector Development Efficient financial
  sectors enhance productivity by funding
  productive investments and withdrawing funding
  from inefficient firms

Firm productivity and access to finance
Percent of Productive Firms
Access to finance
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Meeting the Growth Challenge

• Improving the business environment and investment
  climate
• Strengthening competitiveness, fostering market
  access and learning
• Developing the domestic private sector
• Developing deeper, broader and more efficient
  financial sectors
• Making Finance Work for Africa

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Demand by Firms Finance is a greater priority in
Africa than in any other region
Access to Finance
East Asia Pacific
East Asia Pacific
Europe Central Asia
Europe Central Asia
Latin America Caribbean
Latin America Caribbean
Middle East North Africa
Middle East North Africa
South Asia
South Asia
Sub-Saharan Africa
Cost of Finance
Sub-Saharan Africa
(Average rating by surveyed firms of each item as
an obstacle to business operation and growth)
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Less than 20 of African households have access
to finance
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Making Finance Work for Africa How?Marilou
UyWorld Bank
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Private Credit/GDP vs. GDP per capita
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African banking systems are small - absolutely
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and relatively liquid liabilities (M3) as GDP
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Also, substantial funds held offshore

• Africa has the highest share of offshore deposits
• Total remittances to Africa are higher than
  official development aid

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But there is a deepening in progress
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Where do African banks invest their resources?
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African banking is expensive Net interest margins
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African opportunities and challenges

• Liquidity in African financial systems provides
  potential for significant levels of local
  finance.
• New financial operators and strong regional banks
  is changing landscape of African banking
• ICT and mobile phone technology provide new
  possibilities for the wider provision of
  financial services
• Enabling environment for high impact innovative
  products
• Regionally integrating financial markets
  facilitate economies of scale and risk-sharing
  across the region
• But major challenges in scale, informality,
  governance and shocks.

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Making banks more comfortable with lending

• Financial information infrastructure
• Credit information bureaus
• Accounting/auditing
• Collateral registries
• Legal and judicial framework
• Modernized laws
• Efficient judiciary / contract enforcement
• Effective legal protection for creditors
• Effective system to register collateral

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Access to capital and global finance
Stock market Size and Efficiency

• Stock markets picking up
• Although driven by a few countries (Nigeria, SA,
  Kenya)
• Main deficiency is inefficiency
• Sovereign bond markets developing
• Large interest from foreign portfolio investors
• Some solutions to get scale
• Regional Integration (cross-listings, shared
  platforms, regional stock exchanges)
• Integration into global capital markets but be
  aware of the risks!

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Long-term and risk finance Beyond commercial
banking

• Build on pension reforms and growing life
  insurance market as natural providers of long
  term finance. Good governance is key.
• Securities markets help, but simpler regulations
  can help increase listings as could leveraging
  regional links.
• Infrastructure finance could provide additional
  investment funds and improve service delivery
• Framework for private participation in
  infrastructure (PPI)
• Public-private risk sharing mechanisms?
• Housing finance is a priority for many African
  policy makers
• Deal land and property markets and enforceable
  creditor rights
• Develop mortgage markets.

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Potential for regional financial sector
integration

• Regional arrangements can build necessary
  economies of scale
• shared banking supervision
• hub-and-spoke securities markets
• Regional payment systems
• Common currencies may be harder to deliver
• Need to develop and agree on regional integration
  strategies to guide policy decisions at the
  country level
• Integration progress is often a function of the
  level of development of national institutions and
  infrastructure

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Leverage remittances

• Remittance flows to Africa are increasing (total
  in 2006 US 24.5 million)
• Remittances provide an entry point to the
  financial system
• E.g., mortgages, consumer credit,
• through securitization of remittance flows
• Developed financial sectors reduce the cost of
  remittance transfers
• Improve domestic retail payment system
• Develop adequate AML/CFT regulation
• Consumer information and competition

Remittance flows to Africa, 2006 (in US mln)
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Finance can help growth in Africa
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Finance for growth and access a summary

• Make banks more comfortable with lending
• -improve contract enforcement and transparency
  of information
• Develop long term and risk finance instruments
• -build on pensions and social security systems,
  supported with good governance
• -attention to housing and infrastructure finance
• Explore potential regional solutions
• Provide a stable macroeconomic framework.
• And, pay attention to access to finance of the
  poor and micro-entrepreneurs to build an
  inclusive financial system
• -technology and diversity of providers produce
  opportunities

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The Partnership for Making Finance Work for
AfricaGabriel NegatuAfrican Development Bank
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Partnership for Making Finance Work for Africa

• Previous slides affirmed the following
• - financial sector performance in Africa is
  sub-optimal
• - that Making Finance Work is an African
  priority
• - the imperative of working together and more
  efficiently to strengthen financial sector
  development
• - Urgency of cooperation among Governments,
  private sector, dev. partners, academia/policy
  makers and others to leverage/add value to
  individual contribution
• Hence, the rational for an all stakeholders
  cooperation platform to strengthen financial
  sector development.

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Partnership Objectives (1)Expanding Access to
Financial Services
by all sectors of the economy as measured by
the number of firms, individuals and households
with access to quality and sustainable financial
services
Access to Finance by Firms
East Asia Pacific
Europe Central Asia
Latin America Caribbean
Middle East North Africa
South Asia
Sub-Saharan Africa
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Partnership Objectives (2)Increasing Financial
Depth, Diversity and Efficiency
as indicated by the ratio of credit to the
private sector as a percentage of GDP,
competitive interest margins and indicators of
capital market and other non-bank financial
sector services
Private Credit / GDP
Interest Margins
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Partnership Objectives (3)Strengthening
institutional and regulatory capacity
as measured by business environment and other
institutional development indicators
Business Environment
Institutions
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Partnership Activity I Coordination

• Constraint Country leadership and effectiveness
  of Financial Sector Development is often
  undermined by lack of coherent strategy for
  coordination with the private sector and other
  stakeholders fragmented delivery of
  international support.
• Partnership approach
• Put the Paris Declaration on HA into practice by
  building joint institutional framework for
  coordination, communication and alignment with
  country development strategies.
• Secretariat hosted by African Development Bank,
  will act as a moderator, facilitating better
  communication, coordination and supporting
  integrated support to the financial sector.

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Partnership Activity II Knowledge Generation

• Constraint Knowledge gaps in key areas,
  inappropriate application of global best
  practices to African contexts and contradictory
  policy advice.
• Partnership approach
• Facilitate joint knowledge development in
  priority areas
• Bring together expertise and experience of
  participating partners, academics, policy makers,
  private sector and other stakeholders.
• Adapt international lessons and best practice to
  Regional requirements, and tailor policy advice
  to the specific needs of individual policy makers
  and country situations.
• Foster knowledge sharing and dissemination.

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Partnership Activity III Diagnostics Sector
Strategies

• Constraint Many countries lack country-owned
  comprehensive financial sector development
  strategies and/or the analytical and diagnostic
  work necessary to create them.
• Partnership approach
• Catalyze scaled-up of support for joint country
  sub-regional level diagnostic work.
• Where diagnostics exist, facilitate adoption of
  country-led financial sector Development
  Strategies and Action Plans.
• Develop a monitoring systems for KPIs and
  outcomes, and a shared results framework for
  financial sector activities.

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Partnership Activity IV Advocacy

• Constraint Financial sector agenda omitted from
  national and regional development plans due to
  lack of information and appreciation of key
  financial sector constraints to development.
• Partnership approach
• Inform and empower policy makers/stakeholders and
  financial sector champions through menu of
  products and services .
• Foster policy dialogue, advocacy and outreach
  with a broad range of stakeholders, including
  government, the private sector and academia to
  better reflect importance of financial sector.

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How will the Partnership work?

• A Partnership Secretariat hosted by the African
  Development Bank - will facilitate, moderate and
  coordinate partner activities.
• Partnership is based on an open architecture
  open to all financial sector stakeholders,
  permitting partners to participate in a variety
  of ways. Partners will implement financed
  activities on a case-by-case basis.
• A Partnership FORUM including an Annual FORUM
  meeting and a virtual platform - will act as
  market place of ideas bringing together all
  partners.
• Shared principles The partners will
• Work together in the spirit of the Paris
  Declaration
• Share the responsibility for achieving the MFW4A
  objectives
• Actively engage with each other and the
  Partnership Secretariat to share views and
  exchange information on their respective work
• Collaborate in advocacy and the dissemination and
  sharing of knowledge, experiences and best
  practices
• Jointly implement activities under the MFW4A
  framework that are driven by country and regional
  demand, impact oriented, relevant, sustainable
  and based on shared policy approaches

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Early activities of the Partnership

• Secretariat
• Mapping of ongoing development partner activities
• Hosting the Partnership FORUM in March 2008
• Country / Regional programs
• Rwanda, Ghana, Madagascar, Ethiopia, WAMU
  countries and others
• Knowledge Development
• Key Indicators/Score Card
• Rural finance and value chains (Issue paper)
• Structured Finance (Issue paper)
• Financial Information Infrastructure (Policy
  note)
• Financial literacy (Summary of issues arising
  from FINSCOPE financial diaries)
• Innovation Funds (Issue paper)
• Regional Financial Sector Integration (Issue
  paper)
• Bond Market Development (Mapping of current
  activities/ToR for study)

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Join the Partnership

• Extending an invitation to you as policy makers,
  researchers and practitioners to join the
  Partnership to generate contribute ideas gain
  from the knowledge work and share experiences to
  initiate and be lead champions of country level
  MFW4A teams.
• Contacts
• Interim Secretariat
• Karen Losse Email karen.losse_at_bmz.bund.de
• BMZ Telephone [phone]
• Partnership Secretariat (from March 2008)
• Gabriel Negatu Email g.negatu_at_afdb.org
• African Development Bank Telephone [phone]
  20 77
• www.afdb.org/mfw4a

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Thank you!