1 THE FINANCIAL INDUSTRY AS A CATALYST FOR ECONOMIC GROWTH Louis Kasekende Chief Economist African Development Bank At the Nigeria International Conference on Financial Sector Strategy, June 2007, Abuja L. Kasekende June 2007

2 OUTLINE I.INTRODUCTION II.FINANCIAL SYSTEM AND ECONOMIC GROWTH III.FINANCIAL SECTOR DEVELOPMENT IN SSA: SOME STYLIZED FACTS IV.THE SANE AS AFRICA’S GROWTH POLES: THE ROLE OF THE FINANCE SECTOR V.CONCLUSIONS L. Kasekende June 2007

3 II. Financial system and economic growth The finance-growth nexus theory indicates that financial development might: –Reduce the intermediation margins and search costs –Mobilise savings –Raise capital productivity

4 II. Financial system and economic growth  Efficient and Deep Financial System Mobilises savings and changes the term structure of the savings Channels savings into productive investments Improves the efficiency and productivity of investments Promotes the integration of the domestic economy into the global financial system Enhances smooth implementation of macroeconomic policies L. Kasekende June 2007

5 The important conclusions from the empirical evidence are: –Countries with better-developed financial systems tend to grow faster –The levels of banking development and stock market liquidity each exerts a positive influence on economic growth –Better-functioning financial systems ease the external financing constraints that impede firm and industrial expansion II. Financial system and economic growth

6 III. FINANCIAL SECTOR DEVELOPMENT IN SSA: SOME STYLIZED FACTS Since late 1980s, African countries began to implement financial sector reforms as part of broader market oriented reforms The objective of the reforms was to build more efficient, robust and deeper financial markets The financial sector has improved since the implementation of reforms

7 In spite of the reforms, the depth and breadth of financial markets in Africa are still inadequate … …….. 5 countries, namely South Africa, Botswana, Egypt, Morocco and Tunisia have relatively developed financial systems. In 34 countries, the sector is characterised by a low level of development

8 Financial integration still very low: African capital markets are the smallest in the world. Africa Share: Stock Market 0.34%; Debt 0.15%; and Banks 0.69%

9 Table 1: Indicators of financial development by income group (SSA)  Financial sectors significantly deeper in few middle income countries; sounder and more diversified than in the rest of SSA.  S.A overwhelms the other Middle Income countries Source: IMF, International Financial Statistics (2005). Note: The Average Weight of South Africa among middle-income countries over the period is 84.5 percent. III. FINANCIAL SECTOR DEVELOPMENT IN SSA: SOME STYLIZED FACTS

10 III. FINANCIAL SECTOR DEVELOPMENT IN SSA; SOME STYLIZED FACTS CHARACTERISTICS OF SSA FINANCIAL SECTOR Table 2: Access, soundness, and efficiency indicators by income group (SSA)  Far greater access in middle income countries  Branch density is 10 times higher in middle income countries  Banking sectors have lower costs and are more efficient in middle income countries Sources: Beck, Demirguç-Kunt, and Peria (2005); IMF Financial Sector Prifiles; Claessens (2005); and calculations from IADB bank-level data. Note: The efficiency indicators are the averages for

11 IV. THE SANE AS AFRICA’S GROWTH POLES: THE ROLE OF THE FINANCE SECTOR.  SANE (S. Africa, Algeria, Nigeria & Egypt) have unique advantages to be economic growth poles :  Size (market size) Geography Account for half of Africa’s exports, trade & FDI Have foreign reserves of $175 billion Algeria and Nigeria have reserves of $130 billion, equivalent to half of their GDP 4 largest Net FDI recipients from DAC donors.

12  SANE has potential to contribute to capital for the development of the rest of Africa;  Positive spillover effects from SANE capital markets to the rest of Africa;  Strong benefits to the rest of the continent to have strong SANE financial markets to prevent negative contagion effects. IV. THE SANE AS AFRICA’S FINANCIAL POLES L. Kasekende June 2007

13 V. CONCLUSIONS – STRENGTHENING THE AFRICAN FINANCIAL SECTOR FOR ECONOMIC GROWTH Proper sequencing financial sector reforms: should be guided by national characteristics and initial conditions Strengthen rural access to financial services and develop long-term financing options Improve financial services technology and infrastructure –Promotes efficiency through real time funds transfer –Improves monetary policy management and bank supervision

14 V. CONCLUSIONS – STRENGTHENING THE AFRICAN FINANCIAL SECTOR FOR ECONOMIC GROWTH Increase domestic savings mobilisation to support investment –Restructure and reform pension system –Promote long-term financing –Develop capital markets Strengthen corporate governance in financial institutions Strengthen institutions that support financial reforms –Land and company registries –Credit reference bureaus, –Commercial courts

15 V. CONCLUSIONS – STRENGTHENING THE AFRICAN FINANCIAL SECTOR FOR ECONOMIC GROWTH Continue to improve the conduct of monetary policy –Strengthen liquidity management and forecasting –Deepen financial markets –Develop comprehensive public debt management strategies