Financial Inclusion, Accessibility, and Development1
Author: International Monetary Fund. African Dept.
Publication Date:
11 Mar 2015
eISBN:
9781498323789
Language:
English
Keywords:
ISCR; CR; Niger; food; reducing income inequality; investment; food crisis; banking financing; Brazil economy; A. economic growth; GDP ratio; Public investment spending; Natural resources; Agricultural commodities; Food security; West Africa; Sub-Saharan Africa; Global; North Africa; Africa; information index; credit information; reference bureau; interest margin; registry coverage; Credit; Commercial banks; Financial sector development; Countercyclical capital buffers; Financial sector
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This paper attempts to identify factors hindering the development of the financial sector in Niger. The analysis shows that key constraints are lack of credible collateral, as the widespread customary land tenure system impedes land titling; very high overheads, largely reflecting structural constraints; institutional weaknesses, including inadequate protection of creditor rights and the absence of a commercial court; and limited credit information as there are no established credit reference bureaus. Empirical estimates from a panel regression confirm that weaknesses in the institutional and information environment hinder financial sector development in the WAEMU region, which includes Niger.

Abstract

This paper attempts to identify factors hindering the development of the financial sector in Niger. The analysis shows that key constraints are lack of credible collateral, as the widespread customary land tenure system impedes land titling; very high overheads, largely reflecting structural constraints; institutional weaknesses, including inadequate protection of creditor rights and the absence of a commercial court; and limited credit information as there are no established credit reference bureaus. Empirical estimates from a panel regression confirm that weaknesses in the institutional and information environment hinder financial sector development in the WAEMU region, which includes Niger.

This paper attempts to identify factors hindering the development of the financial sector in Niger. The analysis shows that key constraints are lack of credible collateral, as the widespread customary land tenure system impedes land titling; very high overheads, largely reflecting structural constraints; institutional weaknesses, including inadequate protection of creditor rights and the absence of a commercial court; and limited credit information as there are no established credit reference bureaus. Empirical estimates from a panel regression confirm that weaknesses in the institutional and information environment hinder financial sector development in the WAEMU region, which includes Niger.

A. Theoretical Framework

1. A robust financial sector is crucial for inclusive growth and poverty reduction. Countries with better functioning and developed banks and financial markets grow faster than countries without [Levine (1997) and Levine (2004)]. Better developed financial systems provide external financing to firms and enable them to expand. The nexus between financial development and economic growth is summarized in Greenwood and Jovanovich (1990): “…in the early stages of development in which exchange is largely unorganized, growth is slow. As income levels rise, financial structure becomes more extensive, economic growth becomes more rapid, and income inequality across the rich and poor widens. In maturity, an economy has a fully developed financial structure, attains a stable distribution of income across people, and has a higher growth rate than in its infancy…” Thus, a country’s level of financial deepening and access to finance for the poor is important for inclusive growth.

B. Stylized Facts

2. Niger’s level of financial development is among the lowest in the West African Economic and Monetary Union (WAEMU). Although prudential indicators point to relative stability of the banking sector2, financial deepening indicators, such as the ratio of broad money (M2) and private sector credit to GDP are low, standing at 24.2 percent and 14 percent in 2013 against the WAEMU average of 37 percent and 20 percent, respectively (Figure 1). Although bank credit to the private sector increased between 2007 and 2012 relative to 2006, it remains at the lowest in the WAEMU. In the recent past, credit growth decelerated markedly and has remained modest since August 2013.

Figure 1.
Figure 1.

Niger: Financial Intermediation and Development, 1988-2014

Citation: IMF Staff Country Reports 2015, 064; 10.5089/9781498323789.002.A009

Sources: World Bank, World Development Indicators database; Nigerien authorities; and IMF staff estimates.

3. Underdevelopment of financial products is pronounced and there is limited access of the population to the financial sector. Financial inclusion indicators place the country below most sub-Saharan African countries; in 2011 for instance, only 1.5 percent of the population aged 15 years and above had accounts at a formal financial institution compared to 21 percent for sub-Saharan Africa, and 1.3 percent of the population aged 15 plus years had loans from a financial institution in the past year compared to the sub-Saharan average of 5.2 percent (Figure 2).

Figure 2.
Figure 2.

SSA vs. Niger: Financial Inclusion Indicators, 2011

Citation: IMF Staff Country Reports 2015, 064; 10.5089/9781498323789.002.A009

Source: World Bank, World Development Indicators database.

4. The financial sector is dominated by commercial banks3. This dominance implies that banks are very crucial in Niger for catalyzing growth, but the economy suffers from limited long-term financing. Almost all banks are associated with foreign, but Pan African Bank (PAB) groups. The development of network banks within the WAEMU region is an important and welcomed phenomenon, as it facilitates economies of scale and is also conducive for sub-regional economic integration. However, these networks could pose risks to the Nigerien banking sector, particularly if regulation and supervision are not harmonized and coordinated.

5. Banks’ net interest margins and overheads are very high relative to other countries in the region. The high bank net intermediation margin (Figure 3) reflects high lending rates and degree of inefficiency, and limited competition in the banking sector. The high bank net interest margin also reflects heightened risks and vulnerabilities that the financial sector faces. The economy’s export of primary commodities exposes the financial sector to large terms of trade shocks and volatile food and petroleum prices. The banking sector is also characterized by high overheads, which reflects investment in networks and structural rigidities related to inefficient basic infrastructure and energy.

Figure 3.
Figure 3.

Niger: Bank Net Interest Margin and Overhead Costs, 2004-11

Citation: IMF Staff Country Reports 2015, 064; 10.5089/9781498323789.002.A009

Source: World Bank, World Development Indicators database.

6.The institutional and information environment remains weak. The ease of doing business indicators show that the institutional and information environment is lagging behind the sub-Saharan African average (Table 1). Enforcement of contracts, inadequate public registries and a weak judicial system represent some of the main constraints to credit growth in Niger. The combination of these factors reduces the efficiency of creditor rights and predictability of debt recovery in case of defaults, which adversely impact the willingness of banks to extend credit. These problems are complicated by the lack of credible collateral owing to inefficient land ownership systems, which have held back land titling.

Table 1.

Niger: Cross-Country Comparison of Selected Doing Business Indicators, 2012

article image
Source: World Bank.Note: The legal rights index ranges from 0-10, with higher scores indicating that laws are better designed to expand access to credit. The credit information index ranges from 0-6, with higher values indicating that more credit information is available from a public registry or private bureau. The Investor Protection Index is an average of three dimensions: transparency of transactions (extent of disclosure index), liability for self dealing (extent of director liability index) and shareholders’ ability to sue officers and directors for misconduct (ease of shareholder suits index); each of these indexes varies between 0-10, with higher scores indicating better investor protection. Cost is recorded as a percentage of the claim, assumed to be equivalent to 200% of income per capita. Only official costs required by law are recorded, including court and enforcement costs and average attorney fees where the use of attorneys is mandatory or common.

7. Empirical estimates from a panel regression confirm that weaknesses in the institutional and information environment hinder financial sector development. We augment the financial structure database developed by Beck, Demirgüç-Kunt and Levine (2000), Beck, Demirgüç-Kunt and Levine (2009) and Čihák et al (2012), using a select set of the World Bank’s doing business indices to empirically assess the determinants of financial sector development in the WAEMU (eight countries4) relative to countries in the East African Community (EAC) (Kenya, Tanzania and Uganda) and Nigeria, Ghana and South Africa. The paper posits that the impact of these factors varies across regions. The findings (table 2) confirm that in addition to the high bank net intermediation margin, weaknesses in the institutional and information environment hinder financial sector development in all countries in the sample. Using the differential impact assessment5, the findings show that the impact of institutional and information weaknesses is more pronounced in the WAEMU countries than in the EAC, Nigeria, Ghana and South Africa combined. Also, the impact of high bank net intermediation margin in the WAEMU is more prominent but becomes irrelevant in the EAC countries, Nigeria, Ghana and South Africa combined.

Table 2.

Niger: Dependent Variable – Ratio of Private Credit by Deposit Money Banks to GDP

article image
Note: Credit depth of information index (0=low to 6=high); strength of legal rights index (0=weak to 10=strong); procedures to enforce a contract (number); public credit registry coverage (% of adults). Standard errors are in parentheses; data range is 1997-2011 and the number of cross section identifiers is 14.

C. Policy Recommendations

8. Banks should hold more capital buffers. Although all banks have met the new WAEMU minimum capital requirement of CFAF 5 billion, the large exposure to unanticipated risks remains a concern. The expected booms in the mining and oil sectors in the medium to long-term will provide banks with enormous opportunity to increase credit extension. Combined with prudential management of asset quality, the expected increase in credit calls for proactive regulation, including consideration for the introduction of a countercyclical capital buffer. The countercyclical capital buffer is to achieve a broader macro-prudential goal of protecting the banking sector during periods of excessive credit growth, which often is followed by a build-up of system-wide risks. The countercyclical capital buffer can play the function of protecting the banking sector from losses that often follow protracted credit booms; helping ensure that credit remains available during periods of stress; and during the buildup phase, as credit is being extended at a rapid pace, countercyclical capital buffers may cause the cost of credit to increase, thereby acting as a check on unrestrained credit growth.

9. The authorities should address the weaknesses in the business environment. The authorities should prioritize establishing a commercial court to resolve commercial disputes to increase the predictability of debt recovery in case of defaults. The regulator should urgently consider establishing a credit reference bureau to facilitate credit information sharing among banks and other financial institutions.

10. The authorities should tackle the constraints hindering land titling to provide credible collateral. Customary land tenure systems hinder land transactions and investment. Since land titling requires expensive undertakings of surveying all land, it is a costly undertaking to title all the land in the country at the same time. However, the authorities can nonetheless begin by surveying and titling land that are in or adjacent to major urban centers.

11. Banks should embrace mobile banking as a way of rapidly enhancing financial access. In Niger, there is an emergence of the use of mobile money services in recent years; currently three telecom companies provide mobile money services6. The rise in mobile banking is a welcome gesture as it is a way of increasing financial access. However, more widespread use could increase the potential for increased risks to customers and the financial institutions. The authorities should therefore put in place regulatory and supervisory frameworks to not only ensure safety for end-users, but facilitate innovation, efficient competition and the development of the sub-sector.

References

  • Beck, T., Demirgüç-Kunt, A., and Levine R, (2000), A New Database on Financial Development and Structure, World Bank Economic Review 14, 597–605.

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  • Beck, T., Demirgüç-Kunt, A., and Levine R., (2009), Financial Institutions and Markets Across Countries and over Time: Data and Analysis, World Bank Policy Research Working Paper 4943, May 2009.

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    • Export Citation

  • Čihák, M., Demirgüç-Kunt, A., Feyen, E., and Levine, R., (2012), Benchmarking Financial Development Around the World, Policy Research Working Paper 6175, World Bank, Washington, DC, August 2012.

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    • Export Citation

  • Greenwood J., and Jovanovic, B., (1990), Financial Development, Growth, and the Distribution of Income, The Journal of Political Economy, Vol. 98, No. 5, Part 1. (October 1990), pp. 1076–1107.

    • Search Google Scholar
    • Export Citation

  • Levine, R., (2004), Finance and Growth: Theory and Evidence, NBER Working Paper Series.

  • Levine, R., (1997), Financial Development and Economic Growth: Views and Agenda, Journal of Economic Literature, Vol. XXXV (June 1997), pp. 688–726.

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1

This note was prepared by Jimmy Apaa-Okello.

2

Problem banks are currently being restructured: the authorities have invested equity in these banks as they consider their survival vital to the economy. The authorities are seeking private investors to acquire the government’s shares in one of the three banks undergoing restructuring. Another bank, which had been placed under temporary administration, was undergoing restructuring with a new board of directors already appointed. The third bank was merged with a subsidiary based in Cote d’Ivoire, joining a network in seven other countries in the WAEMU region.

3

There are currently 11 banks, 40 registered microfinance institutions, several postal offices providing financial services, four insurance companies, the national social security fund (Caisse Nationale de Sécurité Sociale-CNSS), one brokerage firm, and one branch of the WAEMU regional stock exchange.

4

Member countries of the WAEMU are: Senegal, Niger, Benin, Burkina Faso, Cote d’Ivoire, Mali, Guinea Bissau and Togo.

5

This is done by interacting the dummy variable with bank net intermediation and doing business indicators (dummy = 1 for countries outside the WAEMU and 0, otherwise).

6

The BCEAO reported that, as at end June 2014, there were 3 bank intermediaries involved in mobile banking; the number of mobile banking service outlets countrywide was 15,234 compared to 655 in 2011; and the number of holders of electronic purse was 958,010 compared to 538,378 in 2011.

Same Series

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Other Publishers

Cover IMF Staff Country Reports
Niger: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2015: Issue 064
Publisher:
International Monetary Fund
ISBN:
9781498323789
ISSN:
1934-7685
Pages:
72
DOI:
https://doi.org/10.5089/9781498323789.002

Niger: Financial Intermediation and Development, 1988-2014

SSA vs. Niger: Financial Inclusion Indicators, 2011

Niger: Bank Net Interest Margin and Overhead Costs, 2004-11