## _afr1303

## Source details

**Canonical URL:** [_afr1303](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2013/_afr1303.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2013/_afr1303.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2013/_afr1303.pdf.json)

---

### Executive Summary
- Reviews macroeconomic performance of sub-Saharan Africa (SSA) in the last decade and examines factors supporting the region’s robust growth and challenges going forward.
- Assesses main features and performance of SSA banking systems and highlights new developments in SSA’s financial sector.
- Main findings:
  - SSA’s sustained strong growth since the mid-1990s represents a sharp break with previous years; contributory factors include improved macroeconomic policies, trade and regulatory reforms, favorable commodity price trends and new resource discoveries, debt relief, and reduced levels of armed conflict in the region.
  - Most SSA economies showed significant resilience during the global economic crisis, with annual growth of regional GDP now running at 5.4 percent per annum.
  - Adverse new developments in the global economy would slow the pace of SSA growth, but the impact, in most countries, should be modest rather than severe.
  - Banking systems in most of SSA remain underdeveloped as compared with other developing regions, but gradual financial deepening is under way in most countries. Impediments include small national markets, low income levels, and weak creditor rights and judicial enforcement mechanisms.
  - Recent developments, such as mobile phone–based banking and the spread of pan-African banking groups, have potential to significantly change the banking landscape in much of SSA, while introducing new regulatory challenges.

### Economic Growth in Sub-Saharan Africa
- Long-delayed growth spurt:
  - Pickup began in the mid-1990s and has been maintained during the extended global slowdown since 2008.
  - Growth acceleration accompanied by sharp reduction in consumer price inflation; most SSA economies now typically record single-digit annual inflation, though vulnerable to food and fuel price shocks.
- Key contributing factors:
  - Improved macroeconomic policies: strengthened fiscal positions, emphasis on containing inflation, liberalization of exchange controls and unification of exchange rates, and building of foreign reserves; facilitated by international debt relief initiatives.
  - Trade and regulatory reforms: scaling back direct state participation, increased domestic competition, privatization/commercialization of state enterprises.
  - Increased capital spending: higher domestic savings; infrastructure deficit remains wide but presents investment opportunities.
  - Improvements in institutional capacity: governance indicators still lag but some improvement, notably public voice and accountability.
  - Favorable commodity price trends and new resource discoveries; strong growth also in non–resource-rich countries (Burkina Faso, Ethiopia, Mozambique, Rwanda, Uganda).
  - Reduced armed conflict and social turmoil.
  - Improved financial sector performance: significant financial deepening and near halt of systemic banking crises since the mid-1990s.
- Regional diversity and growth averages:
  - SSA’s 45 countries vary markedly by population, income, resource endowments, access to transport, and sociopolitical stability.
  - South Africa has grown significantly slower than the region as a whole.
  - Fragile states (e.g., Côte d’Ivoire, Democratic Republic of the Congo) have experienced stagnant or falling living standards.
  - Growth averages: excluding oil exporters, low-income non-fragile countries averaged annual growth of 5.5 percent during 1995–2010; other non-oil SSA economies averaged 3.4 percent; fragile states averaged 1.8 percent.

### Recent Macroeconomic Developments and Near-Term Outlook
- Global context:
  - Global growth fell from about 5 percent per annum precrisis to below 3 percent per annum during 2009–12, with output decline in 2009.
  - Near-term outlook (as of the paper): marginal pickup in 2013 with global growth on the order of 3.3 percent and 1.2 percent in advanced economies, with significant downside risks.
- SSA performance during the crisis:
  - Most SSA economies showed resilience; growth slowed in 2009 but differences across country groups were marked.
  - Middle-income countries (notably South Africa) suffered sharper adverse shocks due to closer integration with international markets.
  - Non-oil, low-income countries experienced a quite modest slowdown.
  - Oil exporters hit by sharp drop in world prices in 2009; Nigeria sustained growth using sizable oil revenue savings accumulated in previous years.
  - Since 2009, growth has been strong across most of the region, with exceptions including South Africa and several politically fragile states.
- Factors explaining resilience:
  - Buildup of solid fiscal positions precrisis allowed many countries to maintain or increase public spending.
  - Key prices for SSA commodity exports, including oil, remained relatively high since 2010, helped by strong demand from Asia.
  - Favorable supply-side factors: natural resource discoveries, continued agricultural output growth, dynamism in selected service activities.
  - SSA financial systems were relatively insulated from global turmoil, limiting disruptions to credit availability.
- Inflation and fiscal developments:
  - Inflation volatility since 2008 mainly due to world food and fuel price movements and domestic food supply conditions; volatility most marked in low-income countries.
  - Weighted average inflation declined to below 8 percent as of end-2012, with further easing expected in 2013.
  - Fiscal positions weakened across most of SSA since 2008 as governments supported activity and financed public investment projects; oil exporters returned to fiscal surpluses since 2010.
  - South Africa public debt rose from 28 percent of GDP at end-2008 to 42 percent of GDP by end-2012.
  - Low-income countries’ debt burdens fell sharply in several cases following multilateral debt relief, but have drifted upward since 2008 in some post–debt relief cases (examples: Tanzania, Uganda).
- External accounts and reserves:
  - Weak external environment since 2008 adversely affected exports, weakening external current account positions in many countries; rising investment-related imports contributed.
  - Service exports and remittances remained generally strong; foreign reserves rose in absolute terms in most countries, but import coverage ratios typically fell due to fast-growing imports.
- Near-term outlook:
  - A moderate acceleration of growth at about 5.5 percent is expected for the whole SSA (see Growth outlook section).

### Growth outlook and short-term risks
- Regional projection:
  - "5.5 percent is expected for the whole SSA, with middle-income countries continuing to expand at a slower pace than other country groupings."
- Risks:
  - Main external risk: further weakening of the global economy would have an adverse effect on prospects for SSA, though "the experience since 2008 suggests that, absent some major destabilizing shock, the impact on regional growth should be moderate rather than dramatic."
  - Domestic risks: political and security risks pose specific threats in several countries (examples cited: Mali and the Central African Republic).
- External accounts:
  - Variation across country groups evident in External Current Account Balance, 2004–14 (percent of GDP) for "Sub-Saharan Africa", "Oil exporters", "Middle-income countries", and "Low-income and fragile countries".

### Longer-term challenges: structural transformation and diversification
- Structural weaknesses:
  - Modest progress in structural transformation and diversification of production and exports.
  - Limited productivity growth in agriculture in most countries.
  - Manufacturing dynamism present in very few cases.
  - Service sector growth includes both high-productivity sectors (e.g., telecommunications) and low-productivity informal activities.
- Demographics:
  - "Demographic trends point to a surge in the working-age population in the region in the coming years" — opportunity for growth if jobs are created, but a policymaking challenge.

### Opportunities and policy priorities to realize inclusive growth
- Opportunities:
  - Favorable price outlook for SSA’s main commodity exports given expectations of continued strong growth in China and other large emerging market economies.
  - Rising exports of nonrenewable natural resources due to new discoveries (examples: Angola, Mozambique, Tanzania).
  - Low crop yields provide scope to boost agricultural productivity via water management, fertilizers, and improved extension services.
  - Rising wage levels in China and other producers may shift labor-intensive manufacturing jobs offshore, potentially to competitive low-wage SSA economies.
- Policy and investment priorities:
  - Infrastructure: address deficits notably in electricity provision and transportation; finance via fiscal measures and judicious external borrowing (preferably concessional); strengthen government capacity in project appraisal and management.
  - Human capital: improve skill/productivity levels through better education and basic health services, requiring additional budgetary resources and improved service delivery quality.
  - Agricultural development: improve water management and access to fertilizers, new seeds, and knowledge; build capacity to deliver these services.
  - Private sector development: improve business climate through deregulation; strengthen judicial systems; professionalize tax administration; target measures to enhance sustainable access to finance for small to midsized enterprises.
  - Macroeconomic framework: maintain sound macroeconomic management, greater reliance on markets, and expanded integration with the international economy.
  - Fragile states: addressing special challenges in fragile states is essential for truly inclusive regional growth; development partners have an important supporting role.

### Stylized features of SSA banking systems
- General characterization:
  - Financial sectors are generally underdeveloped; banking systems account for the preponderance of financial sector assets and activities.
  - Depth and coverage have been gradually increasing (measured by ratios of M2 and private sector credit to GDP), but remain significantly lower than other developing regions.
  - Access to financial services is relatively low due to low income levels, small absolute size, and infrastructure weaknesses.
- Structural attributes:
  - Most banking systems are small in absolute and relative size.
  - Low loan-to-deposit ratios; large shares of assets held as government securities and liquid assets.
  - "Lending is mainly short-term in nature, with about 60 percent of loans having a maturity of less than one year."
  - Market structures are typically oligopolistic (high share of assets of the three largest banks).
  - High overhead costs and high interest rate spreads/service fees.
  - Foreign banks play a key role, having recovered market share after restructuring and privatization.
  - Large unbanked population; small and medium enterprises are tightly constrained in access to credit.
- Determinants:
  - Small bank size, low income, large informal sectors, low financial literacy, weak contractual frameworks (creditor rights, judicial enforcement), and political risk.

### Additional banking-sector observations
- Excess liquidity:
  - Many systems exhibit significant excess liquidity due to scarcity of borrowers deemed credit-worthy; this limits the effectiveness of monetary policy.
- Post-reform improvements:
  - Reforms in the 1980s and 1990s helped strengthen capital bases and risk management; reduced role of state-owned banks contributed to improved financial health.
- Systemic crises:
  - Incidence of systemic banking crises has declined markedly, with "only one major crisis recorded since 1995" in SSA.
- Funding base:
  - African banks largely rely on the domestic economy for funding; nonresident funding is a very minor source in almost all cases.
- Cross-country variation:
  - Significance of banking systems varies across countries even after controlling for income, reflecting public policies, economic size, population density, legal code, resource dependence, and history.

### Banking sector performance during the global financial crisis (2008–12)
- Overall resilience:
  - SSA banking systems were well positioned to handle the 2008 global financial turmoil due to low leverage, generally healthy capitalization, ample liquidity, little reliance on external funding, and little exposure to toxic assets.
- Country-specific stress:
  - Systemic financial stress recorded in Nigeria—Central Bank of Nigeria took control of 10 banks accounting for one-third of banking system assets after loan portfolio losses.
- Transmission channels:
  - Main pressure came indirectly via international trade linkages—reduced exports and slower domestic growth increased borrower stress and NPLs; exchange rate depreciations in 2008–09 created difficulties for clients with net open FX positions.
- Aggregate indicators:
  - Modest decline in reported capital adequacy ratios in 2010, rising NPLs affecting profitability; some recovery in capital adequacy in 2011 and reported drop in NPL ratio (may partly reflect loan write-offs and rapid loan portfolio expansion).
  - Returns on assets and on equity show a trend decline over the past several years, with 2009 being particularly weak.
- Forward-looking risk assessment:
  - Relatively sluggish global economy and European financial stresses should not, absent seismic shocks, pose major risks to SSA banking systems given the 2008–12 experience.
  - Homegrown risks—especially weak governance and slow supervisory response in rapidly expanding credit environments—can produce major banking crises (Nigeria 2009 cited).
  - "Intensified pressures on Portuguese-domiciled banks could have adverse spillover effects on banking systems in some Lusophone countries."

### New forces shaping SSA financial development
- Information and communication technologies (ICT):
  - Rapid diffusion of mobile phone technology has enabled "real-time" connectivity and provided infrastructure for new payment systems and basic banking services, widening access especially for rural populations.
  - Kenya's M-PESA (launched in 2007) enables customers to transfer money quickly and cheaply without needing a bank account; money can be uploaded and withdrawn via a network of agents and used for transfers, bill payments, and airtime purchase.
  - Emerging partnerships: example of a partnership between the leading telecommunications company and a commercial bank to extend services.
- Mobile phone–based deposit accounts and mobile money uptake:
  - Introduction of M-kesho: mobile phone–based deposit accounts providing a financial savings instrument with low transactions costs to customers who do not have physical access to a bank.
  - Mobile money adoption:
    - More than 80 percent of adult Kenyans have made use of mobile money services (Fengler, 2012).
    - Mobile money is gaining popularity in neighboring countries such as Uganda and Tanzania, albeit at a more gradual pace.
    - Development in some other subregions, such as Central Africa, has been less successful, highlighting the importance of “enabling” conditions in determining the impact of financial innovation.
  - Institutional engagement and regulatory facilitation:
    - The Central Bank of Kenya was involved from the outset in the development of M-PESA, enabling oversight and regulatory modification where warranted (for example, enabling third parties [agents] to conduct banking activities on behalf of financial institutions).
  - Opportunities and risks:
    - Cell phone–based banking expands banks’ operational reach and introduces telecommunications companies as new competitors.
    - Consumer benefits have been sizable.
    - Challenges include financial stability risks and consumer protection concerns.

### Pan-African banking groups: expansion and implications
- Rapid cross-border expansion concentrated among groups based in Nigeria and South Africa.
- Scope and presence:
  - At least nine SSA-domiciled financial groups operate banks in seven or more other SSA countries.
  - Ecobank (domiciled in Togo) has a presence in some 33 of the 45 countries and is featured as one of the five largest banks in 18 countries.
  - Bank of Africa group operates in 11 SSA countries.
  - Several South African and Nigerian groups expanding aggressively include Standard Bank/Stanbic (South Africa) and United Bank for Africa (Nigeria).
- Market share:
  - Collectively, these four banking groups are managing more than 30 percent of deposits in at least 13 SSA countries.
- Benefits and supervisory challenges:
  - Expansion has enhanced competition and facilitated diffusion of new technologies.
  - Regional groups may be better positioned to compete relative to non–African-domiciled banks.
  - Expansion raises supervisory challenges requiring expanded cooperation and information exchanges between home and host supervisors.
  - Analysts have noted important supervisory weaknesses in SSA in consolidated supervision and coordination between home and host supervisors.

### Regional financial integration and market size constraints
- Small economic size of national markets impedes development of SSA banking systems.
- Regional integration prospects:
  - Integration could help overcome disabilities of small domestic market size.
  - Pace of financial sector integration has been disappointing to date, even within common currency areas.
  - Example: the regional securities market of the West African Economic and Monetary Union became operational in 1999 and increased financial depth in some segments (e.g., government securities) but has not significantly affected domestic banking system operation.
  - Diffusion of South African banks across the four countries of the common monetary area in Southern Africa produced effective financial sector integration in the subregion, with limitations in reaching underbanked segments including small and medium-sized enterprises.
- Policy enablers:
  - Harmonizing bank regulatory frameworks in subregions, integrating payments systems, and promoting cross-border operations of subregional banks can help overcome small-market disabilities.
  - Achieving integration requires strong political will and overcoming vested interests benefiting from limited competition.
  - Country blocs sharing a common currency have a head start, but significant progress is possible in subregions lacking a common currency (such as the East African Community) with strong political commitment.

### Portfolio flows to frontier markets
- International investors have increased interest in investing in government bonds and equity markets in frontier markets, including SSA.
- Conditions and concentration:
  - Adequate market size and liquidity are preconditions for attracting most investors.
  - Bulk of such inflows likely to be concentrated in a small number of more advanced frontier markets in SSA (such as Nigeria and Kenya).
- Implications:
  - Deepening of capital markets in these countries will, over time, help reduce the dominant role of banks in national financial sectors, but the process is likely to be gradual.

### Policy challenges for regulatory authorities
- Balancing objectives:
  - Governments must balance promoting financial sector development, innovation, and inclusion; limiting risks to financial sector stability; and providing adequate protection to potentially ill-informed consumers.
  - Policymakers and regulators should be open to financial innovation, allowing experimentation and encouraging competition while not compromising financial sector stability.
- Areas needing action (based on IMF–World Bank assessments):
  - Supervisory capacity is weak in many countries due to underresourcing and deficient legislative arrangements.
  - Pressing reform priorities include increased resourcing of supervision and provision of adequate legal protections and corrective powers to supervisors.
  - Need for greater attention to consolidated supervision of financial conglomerates, covering both bank and nonbank operations.
  - Home country regulators must give full attention to foreign operations of pan-African banking groups and coordinate actions and share information with host country supervisors.

*International Monetary Fund. Banking in Sub-Saharan Africa: The Macroeconomic Context (excerpt).*

### 1. Banks and banking – Africa, Sub-Saharan.  2.  Economic development –

### Banking in Sub-Saharan Africa: The Macroeconomic Context

### Executive Summary
- Reviews macroeconomic performance of sub-Saharan Africa (SSA) in the last decade and examines factors supporting the region’s robust growth and challenges going forward.
- Assesses main features and performance of SSA banking systems and highlights new developments in SSA’s financial sector.
- Main findings:
  - SSA’s sustained strong growth since the mid-1990s represents a sharp break with previous years; contributory factors include improved macroeconomic policies, trade and regulatory reforms, favorable commodity price trends and new resource discoveries, debt relief, and reduced levels of armed conflict in the region.
  - Most SSA economies showed significant resilience during the global economic crisis, with annual growth of regional GDP now running at 5.4 percent per annum.
  - Adverse new developments in the global economy would slow the pace of SSA growth, but the impact, in most countries, should be modest rather than severe.
  - Banking systems in most of SSA remain underdeveloped as compared with other developing regions, but gradual financial deepening is under way in most countries. Impediments to development include the small size of national markets, low income levels, and weak creditor rights and judicial enforcement mechanisms.
  - Recent developments, such as the expansion of mobile phone–based banking and the spread of pan-African banking groups, have the potential to significantly change the landscape for banking in much of SSA, but they also introduce new challenges for financial regulators.

*This paper was originally prepared for a roundtable event hosted by the Economics Department of the European Investment Bank in Luxembourg on January 23, 2013.*

### Introduction
- Many SSA countries have seen accelerated growth since the mid-1990s, breaking with the long stagnant growth of the previous two decades.
- The region faces medium- to long-term challenges: reducing poverty, overcoming infrastructure bottlenecks, enhancing productivity and skill levels, and improving the business climate.
- The banking sector remains underdeveloped in SSA, reducing its contribution to growth, although limited integration with global financial markets helped countries weather the global financial crisis.
- It is imperative that the banking sector plays a more active role in SSA to achieve sustainable, private sector–led growth.
- Paper scope: discusses main features of SSA growth and macroeconomic performance, outlook, reviews SSA banking systems, effects of the global economic crisis, and factors likely to influence financial sector developments.

### Economic Growth in Sub-Saharan Africa
- Sub-Saharan Africa’s long-delayed growth spurt:
  - For the first time since the 1970s, a large number of SSA countries are enjoying an extended period of strong economic growth; the pickup began in the mid-1990s and has been maintained during the extended global slowdown since 2008.
  - Growth acceleration accompanied by sharp reduction in consumer price inflation; most SSA economies now typically record single-digit annual inflation, though vulnerable to food and fuel price shocks.
- Key factors contributing to the turnaround:
  - Improved macroeconomic policies: strengthened fiscal positions, emphasis on containing inflation, liberalization of exchange controls and unification of exchange rates, and building of foreign reserves; facilitated by international debt relief initiatives.
  - Trade and regulatory reforms: scaling back direct state participation, increased domestic competition, privatization/commercialization of state enterprises; intraregional trade remains modest.
  - Increased capital spending: in natural resource and other sectors, aided by higher domestic savings; infrastructure deficit remains wide but presents investment opportunities.
  - Improvements in institutional capacity: governance indicators still lag but some improvement, notably public voice and accountability; stronger governance in many fast-growing non–resource-rich economies.
  - Favorable commodity price trends and new resource discoveries; strong growth also observed in non–resource-rich countries (examples: Burkina Faso, Ethiopia, Mozambique, Rwanda, Uganda).
  - Reduced armed conflict and social turmoil.
  - Improved financial sector performance: significant financial deepening over time and near halt of systemic banking crises in SSA since the mid-1990s.
- Regional diversity:
  - SSA’s 45 countries vary markedly by population, income, resource endowments, access to transport, and sociopolitical stability.
  - South Africa has grown significantly slower than the region as a whole.
  - Fragile states (e.g., Côte d’Ivoire, Democratic Republic of the Congo) have experienced stagnant or falling living standards.
  - Growth averages: excluding oil exporters, low-income non-fragile countries averaged annual growth of 5.5 percent during 1995–2010; other non-oil SSA economies averaged 3.4 percent; fragile states averaged 1.8 percent.

### Recent Macroeconomic Developments and Near-Term Outlook
- Global context:
  - Global growth fell from about 5 percent per annum precrisis to below 3 percent per annum during 2009–12, with output decline in 2009.
  - Near-term outlook (as of the paper): marginal pickup in 2013 with global growth on the order of 3.3 percent and 1.2 percent in advanced economies, with significant downside risks (Table 1).
- SSA performance during the crisis:
  - Most SSA economies showed significant resilience; growth slowed in 2009 but differences across country groups were marked.
  - Middle-income countries (notably South Africa) suffered sharper adverse shocks due to closer integration with international markets.
  - Non-oil, low-income countries experienced a quite modest slowdown.
  - Oil exporters hit by sharp drop in world prices in 2009; Nigeria sustained growth using sizable oil revenue savings accumulated in previous years.
  - Since 2009, growth has been strong across most of the region, with exceptions including South Africa and several politically fragile states.
- Factors explaining resilience:
  - Buildup of solid fiscal positions precrisis allowed many countries to maintain or increase public spending; revenue declines were reflected in higher fiscal deficits.
  - Key prices for SSA commodity exports, including oil, remained relatively high since 2010, helped by strong demand from Asia.
  - Favorable supply-side factors: natural resource discoveries, continued agricultural output growth, dynamism in selected service activities; adverse climate shocks caused sharp fluctuations in food production in the Sahel and eastern Africa.
  - SSA financial systems were relatively insulated from global turmoil, limiting disruptions to credit availability.
- Inflation and fiscal developments:
  - Inflation volatility since 2008 mainly due to world food and fuel price movements and domestic food supply conditions; volatility most marked in low-income countries.
  - Weighted average inflation declined to below 8 percent as of end-2012, with further easing expected in 2013.
  - Fiscal positions weakened across most of SSA since 2008 as governments supported activity and financed public investment projects; oil exporters returned to fiscal surpluses since 2010.
  - Sluggish recovery constrains fiscal consolidation in South Africa; political resistance to scaling back energy subsidies and public investment needs constrain tightening elsewhere.
- Public debt and external positions:
  - Impact of larger fiscal deficits on public debt across the region has been limited overall, though country experience varied.
  - South Africa public debt rose from 28 percent of GDP at end-2008 to 42 percent of GDP by end-2012.
  - Low-income countries’ debt burdens fell sharply in several cases following multilateral debt relief, but have drifted upward since 2008 in some post–debt relief cases (examples: Tanzania, Uganda).
  - Weak external environment since 2008 adversely affected exports, weakening external current account positions in many countries; rising investment-related imports contributed.
  - Service exports and remittances remained generally strong; foreign reserves rose in absolute terms in most countries, but import coverage ratios typically fell due to fast-growing imports.
- Near-term outlook:
  - Looking ahead to 2013 and 2014, a moderate acceleration of growth at about (text truncated in source at this point).

*International Monetary Fund. Title page and chapter excerpts from the IMF staff paper on SSA macroeconomic context and banking systems.*

### 5.5 percent is expected for the whole SSA, with middle-income countries

### _afr1303 - 5.5 percent is expected for the whole SSA, with middle-income countries

### Growth outlook and short-term risks
- Regional projection: "5.5 percent is expected for the whole SSA, with middle-income countries continuing to expand at a slower pace than other country groupings."
- Main external risk: further weakening of the global economy would have an adverse effect on prospects for SSA, though "the experience since 2008 suggests that, absent some major destabilizing shock, the impact on regional growth should be moderate rather than dramatic."
- Domestic risks: political and security risks pose specific threats in several countries (examples cited: Mali and the Central African Republic).
- External accounts: figure referenced on External Current Account Balance, 2004–14, showing variation across "Sub-Saharan Africa", "Oil exporters", "Middle-income countries", and "Low-income and fragile countries" (percent of GDP presentation).

### Longer-term challenges: structural transformation and diversification
- Past growth drivers: reversal of past policy errors, conflict containment/recovery, expanded aid flows, and debt relief (described as "low-hanging fruit").
- Structural weaknesses:
  - Modest progress in structural transformation and diversification of production and exports.
  - Limited productivity growth in agriculture in most countries.
  - Manufacturing dynamism present in very few cases.
  - Service sector growth includes both high-productivity sectors (e.g., telecommunications) and low-productivity informal activities.
- Demographics: "Demographic trends point to a surge in the working-age population in the region in the coming years" — opportunity for growth if jobs are created, but a policymaking challenge.

### Opportunities and policy priorities to realize inclusive growth
- Opportunities cited:
  - Favorable price outlook for SSA’s main commodity exports, given expectations of continued strong growth in China and other large emerging market economies (noting risk from "rebalancing" affecting commodities like copper).
  - Rising exports of nonrenewable natural resources due to new discoveries (examples: Angola, Mozambique, Tanzania).
  - Low crop yields provide scope to boost agricultural productivity via water management, fertilizers, and improved extension services.
  - Rising wage levels in China and other producers may shift labor-intensive manufacturing jobs offshore, potentially to competitive low-wage SSA economies.
- Policy and investment priorities required:
  - Infrastructure: address deficits notably in electricity provision and transportation; finance via fiscal measures and judicious external borrowing (preferably concessional); strengthen government capacity in project appraisal and management.
  - Human capital: improve skill/productivity levels through better education and basic health services, requiring additional budgetary resources and improved service delivery quality.
  - Agricultural development: improve water management and access to fertilizers, new seeds, and knowledge; build capacity to deliver these services.
  - Private sector development: improve business climate through deregulation; strengthen judicial systems; professionalize tax administration; target measures to enhance sustainable access to finance for small to midsized enterprises.
- Macroeconomic framework: maintain sound macroeconomic management, greater reliance on markets, and expanded integration with the international economy.
- Fragile states: addressing special challenges in fragile states is essential for truly inclusive regional growth; development partners have an important supporting role.

### Stylized features of SSA banking systems
- General characterization:
  - Financial sectors are generally underdeveloped; banking systems account for the preponderance of financial sector assets and activities.
  - Depth and coverage of financial systems have been gradually increasing (measured by ratios of M2 and private sector credit to GDP), but remain significantly lower than other developing regions.
  - Access to financial services is relatively low (factors: low income levels, small absolute size, infrastructure weaknesses).
- Structural attributes:
  - Most banking systems are small in absolute and relative size.
  - Low loan-to-deposit ratios; large shares of assets held as government securities and liquid assets.
  - About 60 percent of loans have a maturity of less than one year ("Lending is mainly short-term in nature, with about 60 percent of loans having a maturity of less than one year.").
  - Market structures are typically oligopolistic (high share of assets of the three largest banks).
  - High overhead costs and high interest rate spreads/service fees.
  - Foreign banks play a key role, having recovered market share after restructuring and privatization.
  - Large unbanked population; small and medium enterprises are tightly constrained in access to credit.
- Determinants of these features: small bank size, low income, large informal sectors, low financial literacy, weak contractual frameworks (creditor rights, judicial enforcement), and political risk.

### Additional banking-sector observations
- Excess liquidity: many systems exhibit significant excess liquidity due to scarcity of borrowers deemed credit-worthy; this limits the effectiveness of monetary policy as a tool to influence lending and broader aggregates.
- Post-reform improvements: reforms in the 1980s and 1990s helped strengthen capital bases and risk management; reduced role of state-owned banks contributed to improved financial health.
- Systemic crises: incidence of systemic banking crises has declined markedly, with "only one major crisis recorded since 1995" in SSA (Figure reference).
- Funding base: African banks largely rely on the domestic economy for funding; nonresident funding is a very minor source in almost all cases.
- Cross-country variation: significance of banking systems varies across countries even after controlling for income, reflecting public policies, economic size, population density, legal code, resource dependence, and history.

### Banking sector performance during the global financial crisis (2008–12)
- Overall resilience: SSA banking systems were well positioned to handle the 2008 global financial turmoil due to low leverage, generally healthy capitalization, ample liquidity, little reliance on external funding, and little exposure to toxic assets.
- Country-specific stress: systemic financial stress recorded in Nigeria—Central Bank of Nigeria took control of 10 banks accounting for one-third of banking system assets after loan portfolio losses.
- Transmission channels: main pressure on banks came indirectly via international trade linkages—reduced exports and slower domestic growth increased borrower stress and NPLs; exchange rate depreciations in 2008–09 created difficulties for clients with net open FX positions.
- Aggregate soundness indicators: modest decline in reported capital adequacy ratios in 2010, rising NPLs affecting profitability; some recovery in capital adequacy in 2011 and reported drop in NPL ratio (caveat that the drop may partly reflect loan write-offs and rapid loan portfolio expansion).
- Profitability trend: returns on assets and on equity show a trend decline over the past several years, with 2009 being particularly weak.
- Forward-looking risk assessment: relatively sluggish global economy and European financial stresses should not, absent seismic shocks, pose major risks to SSA banking systems given the 2008–12 experience; homegrown risks—especially weak governance and slow supervisory response in rapidly expanding credit environments—can produce major banking crises (Nigeria 2009 cited as an example).
- Specific spillover note: "Intensified pressures on Portuguese-domiciled banks could have adverse spillover effects on banking systems in some Lusophone countries."

### New forces shaping SSA financial development
- Information and communication technologies (ICT):
  - Rapid diffusion of mobile phone technology has enabled "real-time" connectivity and provided infrastructure for new payment systems and basic banking services, widening access especially for rural populations.
  - Kenya's M-PESA (launched in 2007) highlighted as an example: enables customers to transfer money quickly and cheaply without needing a bank account; money can be uploaded and withdrawn via a network of agents and used for transfers, bill payments, and airtime purchase.
  - Emerging partnerships: example of a partnership between the leading telecommunications company and a commercial bank to extend services (as described in the text).

*Italicized source attribution: IMF chapter content as provided in the supplied PDF unit.*

### introduction of  M-kesho, mobile phone–based deposit accounts, providing

### _afr1303 - introduction of  M-kesho, mobile phone–based deposit accounts, providing

### Mobile phone–based deposit accounts and mobile money uptake
- Introduction of M-kesho: mobile phone–based deposit accounts providing a financial savings instrument with low transactions costs to customers who do not have physical access to a bank.
- Mobile money adoption:
  - More than 80 percent of adult Kenyans have made use of mobile money services (Fengler, 2012).
  - Mobile money is gaining popularity in neighboring countries such as Uganda and Tanzania, albeit at a more gradual pace.
  - Development in some other subregions, such as Central Africa, has been less successful, highlighting the importance of “enabling” conditions in determining the impact of financial innovation.
- Institutional engagement and regulatory facilitation:
  - The Central Bank of Kenya was involved from the outset in the development of M-PESA, giving it the capability and knowledge to oversee developments and, where warranted, facilitate system development via modification of preexisting regulations (for example, enabling third parties [agents] to conduct banking activities on behalf of financial institutions).
- Opportunities and risks:
  - Cell phone–based banking expands banks’ operational reach and introduces telecommunications companies as new competitors.
  - Consumer benefits have been sizable.
  - Challenges include financial stability risks and consumer protection concerns.

### Pan-African banking groups: expansion and implications
- Rapid cross-border expansion concentrated among groups based in Nigeria and South Africa.
- Scope and presence:
  - At least nine SSA-domiciled financial groups operate banks in seven or more other SSA countries.
  - Ecobank (domiciled in Togo) has a presence in some 33 of the 45 countries and is featured as one of the five largest banks in 18 countries.
  - Bank of Africa group operates in 11 SSA countries.
  - Several South African and Nigerian groups expanding aggressively include Standard Bank/Stanbic (South Africa) and United Bank for Africa (Nigeria).
- Market share:
  - Collectively, these four banking groups are managing more than 30 percent of deposits in at least 13 SSA countries.
- Benefits and supervisory challenges:
  - Expansion has enhanced competition in national banking systems and facilitated diffusion of new technologies.
  - Regional groups may be better positioned to compete in the general banking market relative to non–African-domiciled banks.
  - Expansion raises supervisory challenges requiring expanded cooperation and information exchanges between home and host supervisors.
  - Analysts have noted important supervisory weaknesses in SSA in consolidated supervision and coordination between home and host supervisors (Beck et al., 2011; Lukonga, 2010).

### Regional financial integration and market size constraints
- Small economic size of national markets impedes development of SSA banking systems.
- Regional integration prospects:
  - Integration could help overcome disabilities of small domestic market size.
  - Pace of financial sector integration has been disappointing to date, even within common currency areas.
  - Example: the regional securities market of the West African Economic and Monetary Union became operational in 1999 and increased financial depth in some segments (e.g., the market for government securities) but has not significantly affected domestic banking system operation.
  - Diffusion of South African banks across the four countries of the common monetary area in Southern Africa produced effective financial sector integration in the subregion, with limitations in reaching underbanked segments including small and medium-sized enterprises.
- Policy enablers:
  - Harmonizing bank regulatory frameworks in subregions, integrating payments systems, and promoting cross-border operations of subregional banks can help overcome small-market disabilities.
  - Achieving integration requires strong political will and overcoming vested interests benefiting from limited competition.
  - Country blocs sharing a common currency have a head start, but significant progress is possible in subregions lacking a common currency (such as the East African Community) with strong political commitment.

### Portfolio flows to frontier markets
- International investors have increased interest in investing in government bonds and equity markets in frontier markets, including SSA.
- Conditions and concentration:
  - Adequate market size and liquidity are preconditions for attracting most investors.
  - Bulk of such inflows likely to be concentrated in a small number of more advanced frontier markets in SSA (such as Nigeria and Kenya).
- Implications:
  - Deepening of capital markets in these countries will, over time, help reduce the dominant role of banks in national financial sectors, but the process is likely to be gradual.

### Policy challenges for regulatory authorities
- Balancing objectives:
  - SSA governments must balance promoting financial sector development, innovation, and inclusion; limiting risks to financial sector stability; and providing adequate protection to potentially ill-informed consumers.
  - Policymakers and regulators should be open to financial innovation, allowing experimentation and encouraging competition while not compromising financial sector stability.
- Areas needing action based on IMF–World Bank financial sector assessments:
  - Supervisory capacity is weak in many countries due to underresourcing of supervision activities and deficient legislative arrangements.
  - Pressing reform priorities include increased resourcing of supervision and provision of adequate legal protections and corrective powers to supervisors.
  - Need for greater attention to consolidated supervision of financial conglomerates, covering both bank and nonbank operations.
  - Home country regulators must give full attention to foreign operations of pan-African banking groups and coordinate actions and share information with host country supervisors.

*Italic: Source — IMF, Banking in Sub-Saharan Africa: The Macroeconomic Context (excerpt)._*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2013/_afr1303.pdf_