Financial sector development in sub-Saharan Africa continues to lag behind the rest of the world, despite some recent positive achievements. There is a growing consensus that financial development fosters economic growth, so why has more not been done to spur financial advancement in Africa? This book is one of the few that tackles the debate of financial development in Africa head on. It stems from the proceedings of a high-level conference organized by the IMF Institute with contributions by experts from official agencies in Africa, international financial institutions, the private sector, and academia. The book begins by presenting the reader with compelling theoretical perspectives on the determinants of financial growth, empirical analyses of the impediments to financial growth and overviews of developments in individual sectors. It discusses policy issues related to financial sector stability, regulation and supervision. The final part investigates how specific measures can create room for financial growth, even when the broader institutional framework remains weak. Case studies demonstrate how individual countries have tried to stimulate financial development, or how specific measures, such as the establishment of credit reporting systems, can generate a positive impact on financial growth. Everyone interested or involved in deepening finance in Africa will find information and inspiration in this insightfull collection of papers.

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© International Monetary Fund 2010

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  • List of Figures

  • List of Tables

  • List of Boxes

  • Foreword

  • Leslie Lipschitz

  • Notes on Contributors

  • Introduction and Overview

  • Marc Quintyn and Geneviève Verdier

  • Part I Finance in Africa—Developments, Diagnosis and Determinants

    • 1 The Finance-Growth Nexus: Theory, Evidence, and Implications for Africa

    • Stephen Haber

    • 2 Finance in Africa: A Diagnosis

    • Patrick Honohan

    • 3 Financial Deepening in the CFA Franc Zone: The Role of Institutions

    • Raju Jan Singh, Kangni Kpodar and Dhaneshwar Ghura

    • 4 Developing a Sound Banking System in Sub-Saharan African Countries

    • Louis Kasekende

    • 5 From Informal Finance to Formal Finance—Lessons from Linkage Efforts

    • Ernest Aryeetey and Ama Pokuaa Fenny

    • 6 African Stock Markets—Opportunities and Issues

    • Lemma W. Senbet and Isaac Otchere

  • Part II Finance in Africa—Policy Issues and Case Studies

    • 7 Regulatory Frameworks in Sub-Saharan Africa: Ensuring Efficiency and Soundness

    • Inutu Lukonga

    • 8 Building Supervisory Structures in Africa—An Analytical Framework

    • Marc Quintyn and Michael Taylor

    • 9 Regional Financial Integration as a Potential Engine for Financial Development in sub-Saharan Africa

    • John Wakeman-Linn and Smita Wagh

    • 10 Access to Finance in Africa—Consolidating the Positive Trends

    • Jennifer Isern, Estelle Lahaye, and Audrey Linthorst

    • 11 Developing Credit Reporting in Africa: Opportunities and Challenges

    • Nataliya Mylenko

    • 12 Case Study on Microfinance Institutions and Policies in Madagascar: Promoting a Viable Sector

    • Emma Andrianasolo

    • 13 Financial Sector Development Program (FSDP): The Case of Rwanda

    • Consolate Rusagara

  • Index


  • 2.1 Financial depth (Liquid liabilities as % GDP): African countries shaded

  • 2.2 Financial depth (Private credit as % GDP) versus GDP per capita

  • 2.3 Offshore bank deposits divided by domestic bank deposits in different regions

  • 2.4 Composition of bank assets in different regions

  • 2.5 African banks: Financial depth and liquidity

  • 3.1 Private sector credit in SSA and other developing countries, 1990-2006 (in percent of GDP)

  • 3.2 Private sector credit in CFA and non-CFA countries, 1990-2006 (in percent of GDP)

  • 3.3 Financial liberalization index, 1987-2004

  • 3.4 Credit registries, 1990-2000 (percentage of countries with credit registries)

  • 3.5 Credit information, 2008 (Number of individuals and firms in percent of adults)

  • 3.6 Property rights index, 1995-2008

  • 3.7 Bureaucratic quality index, 1990-2005

  • 3.8 Coefficient on CFA variable (5 year rolling regression)

  • 4.1 Flow and transformation of money

  • 4.2 Map of the level of financial development

  • 4.3 Liquidity ratios (liquid assets as a percentage of total deposits)

  • 5.1 Conditions for banks to enter the microfinance market successfully

  • 6.1 Cumulative monthly return volatility for selected African stock markets

  • 6.2 Cumulative returns in selected stock markets during the 2007-08 financial crisis

  • 6.3 Cumulative returns in selected stock markets during the 2008 financial crisis

  • 7.1a Sub-saharan Africa stock market listings, end 2008

  • 7.1b Sub-saharan Africa stock market Capitalization, end 2008

  • 7.2 Intermediation indicators, 2008

  • 7.3 Sub-Saharan Africa: Stock price indices, 1990-2007

  • 7.4 Sub-Saharan Africa: Stock market performance, 2008-2009

  • 7.5 Selected countries foreign exchange and TB yields

  • 7.6 South Africa: Corporate debt outstanding by issuer class

  • 8.1 African stock exchanges: Capitalization and value traded (percentage of GDP)

  • 9.1 Sub-Saharan Africa: Financial indicators, 2006

  • 9.2 Interest rates, 2006

  • 9.3 Access to financial services (percent of adult population)

  • 9.4 Broad money, private credit and per capita GDP

  • 9.5 Real cost of borrowing

  • 9A.1 Spaghetti bowl of regional trade arrangements in Africa

  • 10.1 Subregional breakout

  • 10.2 Loan balance trends, by subregion

  • 10.3 Microfinance regulation, by country

  • 10.4 Proportionate regulation, by country

  • 10.5 AML/CFT regulation, by country

  • 10.6 Interest ceiling, by country

  • 10.7 Financial intermediation trend data

  • 10.8 Funding amount per country (in USD)

  • 10.9 Projects, by activity level (percent based on the number of projects)

  • 10.10 Funding instruments (percent based on the number of projects)

  • 10.11 Funding structure trends, by subregion and charter type

  • 10.12 Funding structure trends, by subregion

  • 10.13 Deconstruction of return on assets, by subregion and charter type

  • 10.14 Portfolio quality trend, by subregion

  • 11.1 Credit information index by region

  • 11.2 Registry coverage and private credit

  • 11.3 Credit registry information and potential reduction in defaults

  • 11.4 Fraction of loans late as of last payment

  • 11.5 Access to finance is easier in countries with credit bureaus

  • 11.6 Percent of applicants who obtain a loan

  • 12.1 Evolutions of members and funds

  • 12.2 Trends in deposit and loan balances of mutualist MFIs

  • 13.1 Some indicators of financial sector depth

  • 13.2 Indicators of efficiency of the financial sector

  • 13.3 Access to financial services in Rwanda in comparison with EAC countries

  • 13.4 Relative market share of deposit taking banks as at 31/12/2004


  • 1.1 OLS regressions of private credit as a percent of GDP (Robust T statistics in parentheses)

  • 3.1 Test of mean differences between CFA and non-CFA Franc countries, 1992-2006

  • 3.2 Institutions and financial development in SSA countries, 1992-2006

  • 3.3 Institutions and financial development in SSA countries: Instrumental variable approach, 1992-2006

  • 3A.1 Descriptive statistics, 1992-2006

  • 3A.2 Correlation matrix

  • 3A.3 Variable definitions and sources

  • 4.1 Indicators of financial development by income group in sub-Saharan Africa

  • 4.2 Financial deepening in Uganda

  • 4.3 Uganda’s financial system

  • 4.4 Key commercial bank financial ratios and indicators, 2000-2007

  • 4.5 Outreach of the banking system

  • 4.6 Pre and post reform era in Nigeria

  • 6.1 Listing and market capitalizations

  • 6.2 Stock market development and economic performance

  • 6.3 Stock market development and economic growth (Africa)

  • 6.4 Liquidity of African stock markets

  • 6.5 Infrastructural indicators of African stock exchanges

  • 6.6 Stock exchange demutualization around the world

  • 6.7 Institutional investor credit ratings of African countries

  • 6.8 Risk-adjusted performance of African stock markets

  • 6.9 Stock market performance of selected markets during the recent financial crisis

  • 6A.1 List of privatized firms (Top 5% ranked by size (transaction value)

  • 7.1 Financial system structure

  • 7.2 Sub-urban Africa: Countries with concentrated foreign banking assets, 2008

  • 7.3 Bank regulatory capital to risk - Weighted assets (in Percent)

  • 7.4 Bank nonperforming loan to total loans (in Percent)

  • 7.5 Bank return on assets, 2002-08 (in percent)

  • 7.6 Africa: Stock market performance

  • 8.1 SSA: Indicators of financial development by income group

  • 8.2 Sub-Saharan Africa: Relative importance of segments in the financial systems of selected countries (in percent of total assets of the system, latest available data)

  • 8.3 Sub-Saharan Africa: Compliance with Basel Core Principles (BCP) in comparison with rest of the world (percentage of compliant and largely compliant)

  • 8.4 Sub-Saharan countries: Financial sector supervisory structures in selected countries

  • 8.5 Supervisory models in SSA—Overview

  • 8.6 Overview of advantages and disadvantages of selected supervisory structures

  • 9.1 Sub-Saharan Africa: Stock market development indicators

  • 9.2 EAC Countries: Bilateral trade flows (Averages for 1995-1999 and 2000-2006)

  • 10.1 Volume figure trend data, by subregion

  • 10.2 Top 10 Countries in borrowers and depositors, by penetration rates

  • 10.3 Consumer protection regulation, by country

  • 10.4 Funding structure trend data, by subregion (USD mil)

  • 12.1 Selected indicators on Madagascar

  • 12.2 Trend of the number of funds and members of mutualist MFIs

  • 12.3 Trends in deposit and loan balances among mutualist MFIs

  • 12A.1 MFI regulation


  • 5.1 Barclays Bank “Aba Pa Account” in Ghana

  • 7.1 Structure of the financial system in SSA countries

  • 7.2 Transmission channels of macroeconomic risks in selected countries

  • 7.3 Regulatory structures (Selected SSA countries)

  • 10.1 Start up growth


Through its High-Level Seminars, the IMF Institute constantly aims at deepening the dialog among key policymakers and academia on topical issues in economic policy. In early 2006, such a High-Level Seminar focused on the conditions needed to realize the potential for profitable private investment in Africa. The seminar’s objective was to go beyond prescribing macroeconomic stability, largely achieved at the time, and to focus on the continent’s constant underlying challenge, achieving long-term private-sector-driven growth. What barriers needed to be removed to establish conditions conducive to investment and growth? Were these in the areas of governance, technology, infrastructure, finance, or human capital? The conclusion was “all of the above”—albeit to different degrees.

Two years later, in March 2008, a follow-up High-Level Seminar zoomed in on one specific component from the above list: the potential contribution of financial development to economic growth and development. Starting from the premise that financial development could make a decisive contribution to economic growth, the seminar brought African policymakers together with a select group of experts from all over the world. Together they diagnosed the challenges faced by financial systems in Africa and discussed a number of implementable and context-specific solutions to advance their development.

This volume is based not only on insights from the March 2008 seminar but also on some recent work on financial sector issues in Africa. It should be of great interest to any professional involved at the technical, academic, and policy level with macroeconomic and growth issues in general, but more particularly to those interested in financial sector issues in Africa. Its publication does follow in the steps of many other contributions on this topic in academic as well as policy circles. However, despite the consensus on the importance of financial development in lower-income countries, the literature has not produced an abundance of work focused on finance in Africa. In addition, the approach taken in this volume is to present both expert academic analyses and recent country-specific case studies and examples by field professionals.

In my view, the contribution of this volume to the current debate in Africa is twofold. First, it combines theoretical insights with empirical work that reinforces them. The overwhelming conclusion of the chapters in this volume is that pervasive weaknesses in the African institutional frameworks are a major barrier to financial development. The second contribution is the recognition that, while institutional change is slow and the creation of an environment conducive to financial development difficult, small-scale, incremental or sector-specific changes can be implemented relatively quickly by targeting specific populations or types of financial institutions, or by improving existing laws. The book presents and reviews a number of practical and country-specific solutions which indeed support the view that small steps can make a difference. These examples also indicate that initiatives in the financial system can have virtuous-circle-type positive effects on the institutional environment more generally.

I hope not only that this volume will be of practical use to African policymakers but also that it will inspire many readers and scholars in Africa and elsewhere to continue the exchange of ideas from which, over time, will come the best solutions.

Leslie Lipschitz

Director, IMF Institute


Emma Andrianasolo is Director, Microfinance at the Commission for Banking and Financial Supervision and member of the Pilot Committee for the National Microfinance Strategy in Madagscar.

Ernest Aryeetey is Senior Fellow and Director of the Africa Growth Initiative in the Global Economy and Development program of The Brookings Institution in Washington, D.C. He is also Director of the Institute of Statistical, Social and Economic Research (ISSER) of the University of Ghana, Legon, where he has been on the research faculty since 1986.

Ama Pokuaa Fenny is a principal research assistant at ISSER, University of Ghana. Her primary focus in ISSER has been on developmental issues in health economics, regulatory governance, competition, and microfinance.

Dhaneshwar Ghura is a Division Chief in the African Department of the IMF. Before joining the IMF, Mr. Ghura taught at the State University of New York. He was also a consultant at the World Bank.

Stephen Haber is A.A. and Jeanne Welch Milligan Professor in the School of Humanities and Sciences, and the Peter and Helen Bing Senior Fellow at the Hoover Institution at Stanford University. He is also Professor of Political Science, Professor of History, Professor of Economics (by Courtesy), and a Senior Fellow of the Stanford Institute for Economic Policy Research.

Patrick Honohan is Governor of the Central Bank of Ireland. Previously he was Professor of International Financial Economics and Development at Trinity College Dublin and before then a Senior Advisor at the World Bank. His career has also included periods on the staffs of the IMF, and the Economic and Social Research Institute, Dublin and as Economic Advisor to the Taoiseach (Irish Prime Minister).

Jennifer Isern is the South Asia Business Line Leader for Financial Sector Advisory for the International Finance Corporation (IFC). From 1996 to 2009, she worked as Lead Microfinance Specialist at the Consultative Group to Assist the Poor (CGAP), a global resource center on access to finance issues, as member of the senior management team and managing CGAP’s work in Africa and China. Prior to joining CGAP, Dr. Isern worked with CARE International in West and Central Africa, USAID in Costa Rica and Senegal, UNDP, AT&T, and other public and private sector consulting assignments. She received her master’s degree from Princeton University and her doctorate in both finance and international business from Nova Southeastern University; she is a CFA charterholder.

Louis Kasekende is Chief Economist of the African Development Bank (ADB). Prior to joining the ADB, Louis Kasekende was Deputy Governor, Bank of Uganda. He has also served as an Executive Director on the Executive Board of the World Bank and as a lecturer in Economics in Makerere University, Uganda.

Kangni Kpodar is an Economist in the African Department of the International Monetary Fund. He holds a Ph.D. from the Centre for Studies and Research in International Development (CERDI).

Estelle Lahaye is Microfinance Analyst at the Consultative Group to Assist the Poor (CGAP), a global resource center on access to finance issues. Before joining CGAP, Ms. Lahaye worked in the banking sector with several organizations including Banco Itaú Europa and Merrill Lynch. She holds a master’s degree in Business Administration from San Francisco State University.

Audrey Linthorst is the sub-Saharan Africa Analyst at the Microfinance Information exchange, Inc. (MIX), the leading provider of comprehensive business information and data services for the microfinance industry. Ms. Linthorst has worked with a variety of organizations promoting African economic development including The Hunger Project and Réseau Africain pour le Développement Integré and has her B.A. in International Economic Development from Emory University.

Leslie Lipschitz has been Director of the IMF Institute since 2003. He joined the IMF in 1974 and has held increasingly senior positions in four area departments and the Policy Development and Review Department. He received his Ph.D. in economics from the University of London. Lipschitz has been a guest scholar at the Brookings Institution and has taught at Johns Hopkins University’s School of Advanced International Studies. His publications are primarily in open economy macroeconomics and exchange rate policy.

Inutu Lukonga is a Senior Economist at the IMF in MCM/R1. Prior to joining the IMF in 1993, she was the Deputy Director of Research in Bank of Zambia where she worked for 12 years. She is trained as a macroeconomist and as a regulator for banks, securities, and pensions. She studied for a Ph.D. in Development Economics at the University of Sussex and also holds a master’s degree in International Economics and Finance. She also worked at the FSA/UK as a supervisor.

Nataliya Mylenko is Financial Specialist at the IFC and is the Program Manager for the Global Credit Bureau Program and a Credit Bureau Advisor for Africa. Prior to joining the IFC, Ms. Mylenko worked as Economist at the International Monetary Fund and the World Bank.

Isaac Otchere is an Associate Professor of Finance at the Sprott School of Business, Carleton University in Canada. Prior to joining Carleton University, Isaac Otchere held similar positions at the University of New Brunswick (Canada) and the University of Melbourne (Australia).

Marc Quintyn is the Division Chief of the African Division at the IMF Institute. Before joining the IMF, Mr. Quintyn taught at the University of Ghent and the University of Limburg, Belgium. He also worked as an economist in the Research Department of the National Bank of Belgium.

Consolate Rusagara is the Director of the Financial Systems Department at the World Bank. Prior to joining the World Bank, she was the Deputy Governor of the National Bank of Rwanda.

Lemma Senbet is the William E. Mayer Chair Professor of Finance at the Smith School of the University of Maryland, College Park. He was also Chairperson of the Finance Department at the Smith School for eight years (1998-2006).

Raju Jan Singh is a Senior Economist in the African Department of the International Monetary Fund. Prior to joining the IMF, Mr. Singh held positions at the Swiss Ministry of Finance in Bern and at Lombard Odier & Cie (private banking) in Geneva. He was also a consultant for the Swiss Agency for Development and Cooperation, working with the central banks of Rwanda and Tanzania, and taught at the Graduate Institute of International Studies in Geneva.

Michael Taylor is currently Advisor to the governor of the Central Bank of Bahrain. He has extensive experience of central banking, financial stability, and regulatory issues gained senior positions with a number of central banks and at the International Monetary Fund. He has published widely on these issues, and his most recent book is Towards a New Framework for Financial Stability (London, 2009) edited jointly with Professor David Mayes and Robert Pringle.

Geneviève Verdier is an Economist in the African Department of the International Monetary Fund. Before joining the Fund, Ms. Verdier was an Assistant Professor at Texas A&M University. She has also worked as an economist at the Bank of Canada.

Smita Wagh works on issues of financial sector development in Africa at the World Bank, which she recently joined as a consultant. Prior to this, she spent over four years working at the International Monetary Fund in the Research and Africa Departments. She has also taught economics at the undergraduate level for several years, both in India and the United States. Ms. Wagh received her Ph.D. in Economics from American University, Washington DC, and a M. A. in Economics from Bombay University.

John Wakeman-Linn is an Advisor in the African Department of the IMF. He has also worked for the Harvard Institute for International Development and has worked as a consultant advising the Zambian Ministry of Finance and Central Bank.