- Catherine Pattillo, Anne Gulde, Kevin Carey, Smita Wagh, and Jakob Christensen
- Published Date:
- August 2006
1995, “Fiscal Adjustment, Financial Liberalization, and the Dynamics of Inflation: Some Evidence from Zambia,”World Development, Vol. 23 (May), pp. 735-50.
2004, “Aid and the Supply Side: Public Investment, Export Performance and Dutch Disease in Low Income Countries,”Department of Economics Discussion Paper Series (Oxford: University of Oxford).
2006, “Monetary Policy and Aid Management in Sub-Sa-haran Africa,”IMF Working Paper (Washington: International Monetary Fund, forthcoming).
2001, “Reforming Finance in a Low-Income Country: Uganda,” in Financial Liberalization: How Far, How Fast?ed. byGerardCaprio,PatrickHonohan, and Joseph E.Stiglitz (ed) (New York: Cambridge University Press).
2000, “Financial Intermediation and Economic Growth in Southern Africa,”Journal of African Economies, Vol. 9, No. 2 (June), pp. 132-60
2003, “Central Bank Operations and Macroeconomic Stabilization in Angola,”in Angola: Selected Issues and Statistical Appendix, IMF Country Report No. 03/292 (Washington: International Monetary Fund).
2004, “Bank Regulation and Supervision: What Works Best?”Journal of Financial Intermediation, Vol. 13 (April), pp. 205-48.
2006, Rethinking Bank Regulation: Till Angels Govern (New York: Cambridge University Press).
2004, “Bank Competition and Access to Finance: International Evidence,”Journal of Money, Credit and Banking, Vol. 36 (June), pp. 627-48.
2005, “Financial and Legal Constraints to Growth: Does Firm Size Matter?”Journal of Finance, Vol. 60 (February), pp. 137-77.
2005, “Reaching Out: Access to and Use of Banking Services Across Countries” (unpublished; Washington: World Bank, April).
2002, “Policy for Small Financial Systems,” in Financial Sector Policy for Developing Countries: A Reader, ed. byG.Caprio,P.Honohan, andD.Vittas (ed) (New York: Oxford University Press, for the World Bank).
1998, Banking in Africa: The Impact of Financial Sector Reform since Independence (Trenton, New Jersey: Africa World Press).eds.,
2004, “Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa,”IMF Staff Papers, Vol. 51 (Special Issue), pp. 126-60.
2003, “Foreign Exchange Intervention in Developing and Transition Economies: Results of a Survey,”IMF Working Paper 03/95 (Washington: International Monetary Fund).
2005, “Starting over Safely: Rebuilding Banking Systems,”Chapter 7 inFinancial Crises: Lessons from the Past, Preparation for the Future, ed. byG.Caprio,J.Hanson, and R.Litan (ed) (Washington: Brookings Institution).
Central Bank of West African States (BCEAO), and Consultative Group to Assist the Poor (CGAP), 2005, “Determining the Outreach of Senegalese MFIs” (unpublished).
2004, “Domestic Debt Markets in Sub-Saharan Africa,”IMF Working Paper 04/46 (Washington: International Monetary Fund).
2005, “Access to Financial Services: A Review of the Issues and Public Policy Objectives,”Policy Research Working Paper No. 3589 (Washington: World Bank).
1999, “Explaining African Performance,”Journal of Economic Literature, Vol. 37 (March), pp. 64-111.
Consultative Group to Assist the Poor (CGAP), 2004, “Financial Institutions with a ‘Double Bottom Line’: Implications for the Future of Microfinance,” Occasional Paper No. 8 (Washington, July).
2004, “Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation,”Journal of Money, Credit and Banking, Vol. 36 (June), pp. 593-622.
Department for International Development (DFID), 2005, “Banking the Underserved: New Opportunities for Commercial Banks—Exploring the Business Case,”Policy Division Working Paper (London).
2005, “Finance in Lower-Income Countries: An Empirical Exploration,”IMF Working Paper 05/167 (Washington: International Monetary Fund).
FinScope, 2003, “Botswana, Namibia, Lesotho, and Swaziland Pilot Surveys.”Available via the Internet: http://www.finscope.co.za/documents/2003/BNLSfin2003.pdf.
2005, “Nonperforming Loans in Sub-Saharan Africa: Causal Analysis and Macroeco-nomic Implications,”Policy Research Working Paper No. 3769 (Washington: World Bank).
1993, “Income Distribution and Macroeconomics,”Review of Economic Studies, Vol. 60 (January), pp. 35-52.
1999, “Macroeconomic Determinants of Stock Market Development,”Journal of Applied Economics, Vol. 2, No. 1, pp. 29-59.
1999, “Measuring Financial Development in Sub-Saharan Africa,”IMF Working Paper 99/105 (Washington: International Monetary Fund).
2004, “Measures to Enhance Financial Intermediation in Lesotho,”in Lesotho: Selected Issues and Statistical Appendix, IMF Country Report No. 04/23 (Washington: International Monetary Fund).
2005, “Financial Sector Conditionality: Is Tougher Better?”IMF Working Paper 05/230 (Washington: International Monetary Fund).
2003, “Conduct of Monetary Policy in Nigeria,”in Nigeria: Selected Issues and Statistical Appendix, IMF Country Report No. 03/60 (Washington: International Monetary Fund).
1995, “Liquid Asset Ratios—An Effective Policy Tool?” MAE Operational Paper 95/04 (Washington: International Monetary Fund, Monetary and Exchange Affairs Department).
2004, “On the Conduct of Monetary Policy in the Gambia,”in The Gambia: Selected Issues and Statistical Appendix, IMF Country Report No. 04/142 (Washington: International Monetary Fund).
2005, “Bank Efficiency and Competition in Low-Income Countries: The Case of Uganda,”IMF Working Paper 05/240 (Washington: International Monetary Fund).
2004, “Financial Sector Policy and the Poor: Selected Findings and Issues,”Working Paper No. 43 (Washington: World Bank).
Inter-American Development Bank (IDB), 2002, “Beyond Borders: The New Regionalism in Latin America” (Washington).
International Finance Corporation, 2000, “World Business Survey.”Available via the Internet: http://www.ifc.org/ifcext/economics.nsf/Content/ic-wbes.
International Monetary Fund, 1996, “The Use of Reserve Requirements in Monetary Control: Operational Features and Country Practices,” MAE Operational Paper 96/01 (Washington, Monetary and Exchange Affairs Department).
International Monetary Fund, 2004, “Monetary Policy Implementation at Different Stages of Market Development” (unpublished; Washington). Available via the Internet: http:// www.imf.org/external/np/mfd/2004/eng/102604.pdf.
International Monetary Fund, 2005a, Annual Report on Exchange Arrangements and Exchange Restrictions (Washington).
International Monetary Fund, 2005b, Central African Economic and Monetary Community: Selected Issues,IMF Country Report No. 05/390 (Washington).
International Monetary Fund, 2005c, “Monetary and Fiscal Policy Design Issues in Low-Income Countries” (Washington). Available via the Internet: http://www.imf.org/external/np/pp/eng/2005/080805m.htm.
International Monetary Fund, 2006, Senegal: Third and Fourth Reviews Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria, IMF Country Report No. 06/127 (Washington).
International Monetary Fund, African Department, 2005, Financial Sector Profiles (unpublished; Washington).
2004, “Financial Sector Development and Reform,”in Botswana: Selected Issues and Statistical Appendix, IMF Country Report No. 04/212 (Washington: International Monetary Fund).
2005, “Government Debt: A Key Role in Financial Intermediation,”IMF Working Paper 05/57 (Washington: International Monetary Fund).
2005, “Overview of the Outreach and Financial Performance of Microfinance Institutions in Africa” (Washington: MIX Market). Available via the Internet: http:// www.mixmarket.org/medialibrary/mixmarket/Africa_Data_study.pdf.
1997, “Financial Development and Economic Growth: Views and Agenda,”Journal of Economic Literature, Vol. 35 (June), pp. 688-726.
2004, “Finance and Growth: Theory and Evidence,”NBER Working Paper No. 10766 (Cambridge, Massachusetts: National Bureau of Economic Research).
2004, The Monetary Geography of Africa (Washington: Brookings Institution).
1998, Financial Sector Development in Sub-Saharan African Countries, IMF Occasional Paper No. 169 (Washington: International Monetary Fund).
2004, “Bank Ownership and Performance,”IDB Research Department Working Paper No. 518 (Washington: Inter-American Development Bank). Available via the Internet: http://www.iadb.org/res/files/data_app_mpy.xls.
2002, “Financial Reforms and Interest Rate Spreads in the Commercial Banking System in Malawi,”IMF Working Paper 02/06 (Washington: International Monetary Fund).
2003, Macroeconomics in Emerging Markets (New York: Cambridge University Press).
2003, “Prudential Issues in Less Diversified Economies,”IMF Working Paper 03/198 (Washington: International Monetary Fund).
2003, “Recent Issues in the Implementation of Monetary Policy,”in Tanzania: Selected Issues and Statistical Appendix, IMF Country Report No. 03/02 (Washington: International Monetary Fund).
1998, Financial Integration and Development: Liberalization and Reform in Sub-Saharan Africa (London and New York: Routledge).
2005, “Financial Sector Reforms in Uganda, 1994–2004,” in Uganda: Selected Issues and Statistical Appendix, IMF Country Report No. 05/172 (Washington: International Monetary Fund).
2006, “Competition and Microcredit Interest Rates,” CGAP Focus Note No. 33 (Washington: Consultative Group to Assist the Poor).
2003, “The Banking System and Interest Rate Spreads,”in Kenya: Selected Issues and Statistical Appendix, IMF Country Report No. 03/200 (Washington: International Monetary Fund).
2004, “The Modern History of Exchange Rate Arrangements: A Reinterpretation,”Quarterly Journal of Economics, Vol. 119 (February), pp. 1-48.
2003, “Financial Liberalisation: The African Experience,”Journal of African Economies, Vol. 12 (AERC Supplement 2), pp. ii53-ii88.
2006, “Excess Liquidity and the Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa,”IMF Working Paper 06/115 (Washington: International Monetary Fund).
2003, “Availability of Financial Soundness Indicators,”IMF Working Paper 03/58 (Washington: International Monetary Fund).
World Bank, 2006, Making Finance Work for Africa (Washington, May, preliminary draft).
World Bank, and International Monetary Fund, 2004, Global Monitoring Report 2004 (Washington: World Bank).
World Bank, and International Monetary Fund, 2005, Global Monitoring Report 2005 (Washington: World Bank).
2005, Stock Market Development, Corporate Finance and Long-Run Economic Growth in Africa (Ph.D. dissertation; Cambridge, United Kingdom: University of Cambridge).
Except for South Africa, Nigeria, and Kenya, the combined financial size of the the remaining countries is below $6 billion.
This section draws on a wide variety of data sources, including recent country-level Financial Sector Profiles prepared by the IMF’s African Department. Country-level studies of financial markets conducted in the IMF’s African Department were also used (Uganda: Peiris, 2005; Botswana: Kim, 2004; Lesotho: Gershenson, 2004; and Kenya: Powell, 2003).
Table 1 uses Bankscope country-level aggregate data, while the other banking sector tables are calculated from Bankscope bank-level data. The primary data source for Bankscope is the Fitch ratings database, which rates banks as actual or prospective borrowers from capital markets. Bankscope covers a sample of banks in each country. For SSA, 34 countries are covered, and within these countries, 381 banks compared with the 453 that were counted in the IMF African Department’s Financial Sector Profiles (2005). Because the unit of observation in the bank-level data is the bank, bank-level data are in effect weighted toward countries with more banks.
Data from the IMF’s Financial Sector Assessment Programs (FSAPs) in SSA indicate that life insurance penetration indicators, measured by premiums/GDP, are very low in SSA—at 1—2 percent of GDP (except in South Africa). This is based on data from 1997 to 2002.
Given differences in definition, NPLs may not be fully comparable across countries. The definition of NPLs is more stringent than “problem loans” (strictly based on the timing of overdue payments) reported in Table 2. These also take expected ability to repay into account.
Trends in NPLs can be difficult to interpret, since a rising NPL trend may reflect better reporting mechanisms or tighter supervisory requirements. Large client exposure can make NPLs volatile from year to year. In addition, provisioning mechanisms may differ across countries, and the underlying collateral (if any) for NPLs will be a major determinant of their final impact on bank balance sheets.
Based on Slack (2003), who surveys collection and dissemination of financial soundness indicators in 100 countries.
Banking entry or activity restrictions cannot fully account for highly concentrated banking systems in SSA. While there is no clear difference between SSA and comparator groups on most of these restriction measures, the share of entry applications denied is somewhat higher in SSA (Barth, Caprio, and Levine, 2006).
The interest margin measures the difference between interest earned on assets and interest paid on liabilities. More efficient banking systems will be able to have lower interest margins. Banks with high operating costs must earn high interest income to cover these costs, which is why it is used as a measure of inefficiency. However, the margin could also be high because of monopolistic profits or low because of risk aversion or interest rate controls, so it is not solely a measure of sectoral efficiency.
Other countries also are considering regional solutions—given economies of scale and cost sharing—but regulatory and supervisory problems outside of monetary unions are more difficult to resolve.
Public credit registries and private credit bureaus have low coverage across all groups, though coverage seems to be rising more rapidly for the non-SSA low-middle-income group (the low-middle-income countries comparator group includes low-and lower-middle-income countries). The World Bank country income categories based on gross national income (GNI) per capita in 2004 classify low-income countries as those having GNI of $825 or less, and lower-middle-income countries as those having GNI of $3,255 or less.
World Bank and IMF (2005) provides other examples using data from the Doing Business survey. For example, Nigeria has the most cumbersome regulations in the world for registering property (21 procedures, 27 percent of the property value in fees, and a registration period of 274 days). Such processes, similar to those in other SSA countries, help explain why adequate collateral is often a problem for borrowers.
While to date less than half of SSA countries have participated in the IMF’s FSAP, for those that were assessed, compliance with some Basel Core Principles has been largely in line with results in other countries. However, compliance with the principle of independence of supervisors, and several principles related to prudential regulations, is relatively low, according to IMF staff calculations based on Financial System Stability Assesments.
The effective reserve ratio is calculated as the ratio of statu-torily required reserves to the sum of demand and time savings and foreign currency deposits.
Studies generally find them both ineffective and distor-tionary as a monetary policy tool (Gulde, 1995) and a hindrance to secondary market development.
Transitioning to greater use of market-based instruments is constrained by the limited interbank market and weaknesses in central bank liquidity forecasting. Country studies conducted in the IMF’s African Department on these and related monetary policy issues include Angola (Alvesson and Torrez, 2003); The Gambia (Harjes, 2004); Nigeria (Gobat, 2003); and Tanzania (Nassar, 2003).
The size of a branch network may not accurately depict physical access to bank branches because banks in many countries concentrate their branches in urban areas. Data on the rural-urban distribution of bank branches are not available.
The limited geographical coverage in Africa could be a result of low population density, constraining bank incentives to serve sparsely populated areas. However, average population density is at par with the world average.
Non-oil per capita income was used in the case of oil-producing countries, given that a large proportion of the population does not benefit from oil revenues. Beck, Demirguc-Kunt, and Peria (2005) find similar evidence for African and non-African countries in a sample of 91 countries. Illiteracy levels, which are closely related to per capita income, are also correlated with access in SSA.
Based on World Bank Investment Climate Surveys in seven SSA countries: Eritrea, Ethiopia, Kenya, Senegal, Tanzania, Uganda, and Zambia.
The World Bank Investment Climate Surveys also found that banks require high collateral—on average more than 170 percent of loan value.
Real lending rates are highest in the WAEMU and CEMAC countries (based on maximum lending rates), averaging 17.5 and 15.5 percent, compared with 11 percent and 9 percent in low-income and middle-income non-CFA countries, respectively.
An increasing share of government claims in total claims can be consistent with the trend toward fiscal deficit reduction in SSA, to the extent that higher bank financing compensated for financing through arrears and the central bank, which has been declining in SSA.
Reserves and foreign assets also account for more asset growth in low-income SSA countries than claims on the private sector.
Christensen (2004) and Adam and Bevan (2004) find some evidence of crowding out in African countries; IMF (2005c) finds a mixed impact in a broader sample of LICs; and Detragiache, Gupta, and Tressel (2005) find the effects insignificant.
Banks may be unable to lend if regulation creates an artificial floor on deposit rates and ceiling on lending rates, and limits the ability of commercial banks to reduce deposits or expand lending. Banks—particularly those with monopoly power in the loan market—may also be unwilling to lend when transaction costs are high and risk-adjusted returns low.
Precautionary reasons for liquidity might include volatility in the deposit base, unavoidably high lending risks, or poorly developed interbank markets and similar structural factors.
In the CEMAC region, the transmission mechanism was weak in both high and low (involuntary excess reserves) regimes, which was explained by the fact that involuntary excess liquidity (involuntary excess reserves) was relatively high across the whole sample period.
Interest rate liberalization was associated with sharp increases in real interest rates in many countries. For the 15 countries with outstanding debt in both periods, the median ex post real interest rate rose nearly 10 percentage points between 1985—89 and 1995—2000; in the full non-CFA sample, median interest payments on domestic debt amounted to 15 percent of fiscal revenues in 1995—2000 (see Christensen, 2004). In addition, in the late 1990s, high real interest rates and rapidly mounting interest burdens discouraged the use of bond sales for monetary control in Uganda and Tanzania (Buffie and others, 2004).
While these restrictions contain risks and prevent speculative activity, they should be balanced against the need for dealers to take open positions to provide liquidity to the market (Canales-Kriljenko, 2003).
For most SSA countries, calculations of the Reinhart and Rogoff (2005) measure of ex post exchange rate flexibility indicates substantial intervention even for countries notionally committed to a floating exchange rate (Masson and Pattillo, 2005).
IMF (2004) also points out that, to encourage banks to trade with each other in the interbank market, remuneration rates on reserves deposited with the central bank should be lower than the cost of borrowing from the central bank at the discount window.
A recent study of IMF-supported programs for 83 countries measured financial sector conditionalities in three ways: intensity (number of financial sector conditions per program per year), hardness (share of prior actions and performance criteria in total program measures), and compliance (proportion of program measures implemented as scheduled) (Giustiniani and Kronenberg, 2005). Intensity has not risen as sharply in SSA as elsewhere in the world because there are no programs driven by financial crises. Nevertheless in the 27 SSA countries for which programs initiated in the early and mid-1990s could be compared to those in the late 1990s to 2001, financial sector conditionality increased by 60 percent. In SSA, “harder” types of banking sector conditionality have been increasing: this measure was higher than the global average in 2000—03. As in the rest of the world, compliance declined over 1995—2003, and was lower than in other areas of structural reform (Appendix 5, Figures A7, A8, and A9).
The sector comprises NGOs, nonbank financial institutions, credit unions and cooperatives, rural banks, savings and postal financial institutions, and, in some cases, even commercial banks.
This section is mainly based on a database of 167 MFIs in 37 SSA countries, which was created in 1998 by the CGAP for reporting MFIs in developing countries. While the database coverage is generally good, it is not exhaustive. In some cases it underestimates the true size of the MFI sector. The database distinguishes between three different types of MFIs: (1) regulated (banks, regulated NBFIs, regulated NGOs); (2) cooperative (financial cooperatives and credit unions); and (3) unregulated (other NGOs, NBFIs, MFI projects, and others). However, detailed soundness indicators for these institutions were available for only 27 SSA countries. We have supplemented the database information with credit union data for 15 SSA countries from the World Council of Credit Unions and postal savings banks data from the World Savings Banks Institute.
For the 86 SSA MFIs that provided information continuously for 2001—03.
This relationship only holds when credit unions are excluded from the sample, which is sensible; these institutions are often linked to larger enterprises.
On average, these loans are somewhat bigger than in the Middle East and North Africa, East Asia, and South Asia, but significantly smaller than those offered in Eastern Europe, Latin America, and the Caribbean (Lafourcade and others, 2005).
This is explained in part by the fact that there are many new MFIs with recently extended loans. The share of NPLs tends to increase over the life of a loan.
These include general commercial law, corporate law and rules for joint ventures, laws on secured transactions (guarantees and collateral), debt enforcement law, bankruptcy law, arbitration law, accounting law, and contract laws for the carriage of goods by road. Harmonization is also under way for labor and consumer sales law.
Capital account restrictions in SSA are complex. An average of indicators for controls on 13 types of capital transactions (where a value of 1 indicated a control) was equal to 0.8 for SSA in 1995–99 and 0.75 in 2000–04, compared with 0.71 and 0.7 for low-middle-income countries outside SSA for the same periods. The global averages for these periods are 0.66 and 0.63, respectively (data from IMF, 2005a).
Mehran and others (1998) present a comprehensive assessment of the progress on financial sector reforms up to the 1990s.
For example, until recently Kenya had six development financial intermediaries—two development banks and four DFIs, with significant overlap of functions and all with NPL rates over 50 percent. Malawi had an Industrial Development Bank (IDB for industry and agriculture), the Malawi Development Corporation (a holding company), the Agricultural Development and Marketing Corporation (smallholder agriculture), and the Small Enterprise Development Organization, in addition to a funding subsidiary of the IDB. All of these institutions were heavily dependent on donor funding.
It has recently been privatized, though a minority government stake holding remains.
Brownbridge and Harvey (1998) argue that the presence of a development bank often acted as an unintended safeguard for commercial banks, as the most severe lending distortions were concentrated at the development bank, mitigating the need for direct government intervention in the operations of commercial banks.