Finance for Growth in Africa

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Finance for Growth in Africa

• Patrick Honohan
• Trinity College Dublin
• and
• The World Bank

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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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Private Credit/ GDP vs. GDP per capita
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One reason Offshore Deposits
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But there is a deepening in progress
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Real Interest Rates No Trend
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Banking is expensive Net Interest Margins
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Stock Markets Picking Up
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Stock Markets Main Deficiency Is Inefficiency
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Four pervasive challenges

• Scale
• Informality
• Governance
• Shocks

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Getting banks lending more (1)

• Its not a shortage of liquidity
• There are some regulatory issues
• Excessive zeal
• (BTW dont misread history on African bank
  failures)
• But mainly its 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)

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Banks stay liquid (dont 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
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Where do banks invest their resources?
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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

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Bank ownership Africa and ROW
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Term finance and risk finance beyond commercial
banking

• Pension funds etc are the natural providers of
  long-term 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 financeinfrastructural project finance

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Finance Can Help Growth in Africa Also!
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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)

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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?

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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 fundssupported with transparent
  governance
• Infrastructure and mortgage finance deserve
  attention

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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

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The three-line take-awayon 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