Journal of Financial Economics

REF 116 The changing African finance

Deep and efficient financial sectors are important in supporting growth. Against this general finding of the literature we take stock of changes in financial development in Sub-Saharan Africa since the late 1990s by looking at different measures of the extent of progress. The analysis confirms that gains in macroeconomic stability and a commodity resource boom since the late 1990s have been accompanied by financial deepening and improved financial policies in the region. However, progress has varied across countries, with some achieving diversification of financial products and gaining access to international financial markets while others are lagging behind. Furthermore, in most countries the range of institutions and the level of financial inclusion remain narrow, limiting prospects for sustained and inclusive growth in the region. We conclude with policy implications related to these challenges.

This paper discusses recent progress in financial deepening across Sub-Saharan Africa. Using an array of different data, we document that African banking systems are shallow but stable. African banks are well capitalized and over-liquid, but lend less to the private sector than banks in non-African developing countries. African enterprises and households are less likely to use financial services than their peers in other developing countries. However, there has also been a broad-based process of financial deepening over the past decade, which has benefited African private sectors.

As a main component of financial development, financial inclusion fosters economic growth in developing countries by delivering at an affordable cost a wide array of financial services to a growing share of households and small and medium-sized corporations. Financial inclusion is limited in Sub-Saharan Africa (SSA), and in particular in the Franc zone, both in terms of bank accounts (access and intensity of use) and credit. Widespread bank account access differentials according to education, age, gender, income and location are observed.

The prevalence of financial exclusion in SSA reflects structural factors affecting both: the supply of financial services (cost, management of information asymmetries), demand (income and education level, possible self-exclusion) or weak regulatory environment and business climates. Like any other forms of financial development, financial inclusion implies new risks for financial stability and therefore, a strengthening of banking regulations and supervision so that public trust in the banking sector and increasing access to financial services goes hand in hand with sustainable and stable economic development.

Sub-Saharan African financial systems are neither deep nor developed. Their banking sectors, concentrated and not mature, offer mainly short-term financing. Financial markets have a feeble liquidity, bond markets rely mostly on sovereign debts and equity markets on big companies. Governments and the International Community must play a major role to develop and deepen these financial systems and promote development through domestic private resources. Governments must limit uncertainties arising from regulation, build reliable institutions and infrastructures in order to establish confidence and market efficiency whereas the international community can support these reforms by providing the financial sector with technical assistance and counsels to firms.

The treaty establishing the Arab Maghreb Union was signed on February 17, 1989 by the five Maghreb heads of State in Marrakech. Yet Maghreb financial integration has not been enforced because of political tensions between member states and internal resistance to trade liberalization. This article focuses on financial liberalization and integration in North Africa, particularly in the area AMU.

This paper analyzes the cost of financing in Africa and identifies policies to reduce this cost and enhance financial inclusion in the region. After a brief overview of financial inclusion in Africa, it describes the trends of interest rate spreads in the region and analyzes its components. To tackle the underlying causes of these high interest spreads and improve financial inclusion, we presents a wide set of policy reforms. Policy makers should prioritize the reforms that can have the biggest impact based on country circumstances. Nevertheless, enhancing financial inclusion requires a broader set of reforms as cost is not the only obstacle limiting financial inclusion in Africa and other financial products are also relevant to reduce poverty and increase shared prosperity.

Before 2006, only South Africa had issued a foreign-currency denominated sovereign bond in Sub-Saharan Africa. From 2006 to 2014, twelve other countries have issued a total of $15 billion in international sovereign bonds. This sudden surge in borrowing in a region that contains some of the world’s poorest countries is due to a variety of factors, including rapid growth and better economic policies in the region, high commodity prices, and low global interest rates. Increased global liquidity as well as investors’ diversification needs have also helped increase the attractiveness of the so-called “frontier” markets, include those in sub-Saharan Africa. Whether the rash of borrowing by sub-Saharan governments (as well as a handful of corporate entities in the region) is sustainable over the medium-to-long term, however, is open to question. In the medium-term heady economic growth may not continue if debt proceeds are only mostly used for current spending and debt is not adequately managed. Accelerating and sustaining the pace of fiscal reform and appropriate debt management policies should be a policy priority. In addition, “unconventional” measures such as developing a domestic regional bond market should be considered.

Africa’s infrastructure needs are huge and it is essential to meet for sustainable economic growth across the continent. Investment in infrastructure plays a fundamental role in almost all aspects of an economy. The capital needed to finance the infrastructure exceeds the financial resources of governments, donors or other funding source individually. Meeting this challenge requires to mobilize new sources of capital to fill a gap that threatens to undermine economic development efforts underway in Africa. This article attempts to analyze how the domestic capital markets can help to finance most of the major infrastructure projects in Africa, and thus help bridge the funding gap. It highlights the opportunities available for infrastructure project bonds ; then elaborates on the conditions for efficient capital markets. Finally, it explains the crucial role of constructive government policies to deepen capital markets and structure infrastructure finance in Africa.

Given the crucial role of banking and financial sectors in promoting economic activity in Africa, donors support the emergence of solid and perennial financial systems. To this extent, they rely on a wide range of instruments. Activities of the group Agence Française de Développement to support financial development is structured along four main objectives: it supports the development and strengthening of the banking sector, promotes financial inclusion, encourages the diversification of financial instruments well-adapted to the needs and induces a shift in the allocation of financing towards public policies’ objectives.

This article assesses the economic and financial footprint of China in Africa. Bilateral trade relations have been a win-win relations for oil and mining African producers which have benefitted from the rise in prices and the diversification of their markets; in the years to come, other countries may benefit from Chinese demand. As investors, Chinese focus on mining and oil and their venture into manufacturing is still limited. Chinese firms are well established on the African construction market where they benefit from Chinese credit backing. In less than ten years, China rose to be the largest financier of Africa however its financial footprint remains “offshore” as its credit do not transit by African banks. One assist at the increasing use of the Yuan in bilateral transaction. In its conclusion, the article designs a synthetic indicator of Chinese economic foot print which is related to African economic growth.

Considering the huge investment opportunities offered by these demographic, urban and economic changes, the African continent has become a key destination for private equity funds. This growing interest of investors shows that the image of the region is improving.

With the development of fast growing private equity on a continent whose macroeconomic size is reduced, there are risks of “overheating”. The private equity players have to adapt to the specificities of the African continent, characterized by small operations in contexts of family entrepreneurs who do not wish to sell the majority of their company.

Overall, private equity funds bring several benefits to African economies : mobilize long term savings and invest it in good projects, provide capital needed in high-growth companies and reduce the gap between the industry in developed countries and the emerging countries.

Africa has become increasingly integrated to the global financial and economic system in recent years. This article considers the role of credit ratings in that trend. Ratings facilitate the issuance of debt by rated entities, but they serve other purposes too, such as providing a risk benchmark for economies and overcoming information asymmetries between investors and debt issuers. Although Africa can boast some of the world’s fastest growth rates, the recently strong investor demand for African debt is more likely a consequence of historically low interest rates in more developed markets. Moreover, despite encouraging progress, the continent’s financial systems remain comparatively underdeveloped.

Africa’s future partially relies on its capacity to develop a more inclusive economic and financial sector. The African microfinance ecosystem is very different today than it was in the beginning, despite a less dynamic development in comparison to other world regions, but maintains significant potential for growth and innovation. Reflecting the experience of microfinance worldwide, the future of microfinance in Africa will refocus on the client, be driven by innovative partnerships delivering a more diverse range of services adapted to the base of the pyramid with a focus on mitigating systemic risks and improving client protection. In addition, technology will continue to impact the sector by revolutionizing the design and access to inclusive financial services.

This article presents a progress report on the integration of the insurance market in the states member of CIMA, its achievements and the new challenges ahead. With the setting of a clear legal framework and the introduction of professional management and organization principles CIMA has imposed sound practices in the insurance market of its members. Nevertheless, these insurance markets are still facing weaknesses that deter a large part of the population from using insurance. New reforms should be implemented as regards governance, enforcement of international standards and the achievement of a real single insurance market.

This paper investigates empirically the impact of bank regulation on the risk of default of WAEMU banks over the period 2000-2010. Our results suggest that banks which have relatively high capital ratios, those focusing on loans as well as large banks have a lower risk of default. However, WAEMU banks seem to finance riskier and more profitable assets to offset the extra cost of subordinated debt. Favorable macroeconomic conditions are factors reducing the risk of default while a high share of the financial sector in GDP increases this risk.

This article begins with a brief overview of the growth of cross border banking in Africa. Then, after highlighting some aspects of the context in which these banks operate, the article discusses some of the challenges that cross border banking poses to African financial regulatory authorities and how they are being addressed.

Has credit rationing increased in France over the last ten years? This article looks for an answer by comparing the results of the same survey carried out in 2000 and 2012 on two different but comparable samples of bankers specialized in firms’ financing. Our results confirm that strong credit rationing (total refusal) is limited to potential customers although weak credit rationing (restrictive quantity) is used to regulate the credit market when relationships between banks and firms has been established. Our results indicate too that both total refusals and quantitative restrictions are less often used by bankers in 2012 than in 2000 and that bankers more frequently introduce collaterals and covenants in debt contracts. Despite the amendment of usury ceilings for firms, the role of interest rates remains low. We observe that this decrease in credit rationing comes with the rationalization of the system for taking decisions on the basis of financial criteria.

The SRISK measures the need for recapitalization of a financial institution conditional to a market shock of great importance. Widely disseminated in the academic community, in professional circles (financial analysts, economic research services, regulators, etc.) and in some mainstream media, the SRISK is posted for a large number of financial institutions with regular updates on web sites. In this paper, we present some weaknesses that are strong limits of the SRISK model. They concern in particular the lack of definition of the “k” ratio, applying the same approach to fundamentally different financial institutions and taking into account the market value of equity in a prudential framework. At the confluence of macroeconomics, finance and regulation, the measurement of systemic risk cannot be based on a single criterion uniformly imposed to all financial institutions. At this stage of its development, SRISK cannot be used to define normatively capital requirements of financial institutions.