Accelerating Financial Sector Development to Boost Growth in Sub-Saharan Africa

IMF Blog, July 13, 2016

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Canonical URL: Accelerating Financial Sector Development to Boost Growth in Sub-Saharan Africa

Author: Anne-Marie Gulde-Wolf
Date: July 13, 2016
Deeper financial development—measured by increases in deposits and loans, their accessibility, and improved financial sector efficiency—supports sustainable growth by mobilizing savings and directing funds into productive uses, facilitating a more efficient allocation of resources and increasing overall productivity.
Financial development also:
- Supports a larger variety of products and services.
- Improves risk management.
- Makes payments easier.
- Helps lenders monitor clients.
- Provides instruments (for example, insurance packages) and information that help households and firms cope with negative events, stabilizing consumption and investment.

Notable advances:
- Innovative mobile-based financial services have spread rapidly, especially in East Africa (examples cited: M-Pesa, M-Shwari, and M-Kesho in Kenya), reducing transaction costs and facilitating transactions in the absence of traditional financial infrastructure.
- Rapid growth of microfinance, expanding services to lower-income customers.
- Expansion of Pan-African banks (locally-owned banks operating across several countries) that:
- Filled service gaps left by European and U.S. banks.
- Promoted greater economic integration.
- Increased competition in the sector.
- The region’s median ratio of private sector credit to GDP has doubled from its 1995 level.
Remaining challenges:
- Financial inclusion still lags behind other developing regions.
- Financial market depth and institutional development remain much lower than in other regions, except for the region’s middle-income countries.
- Pan-African banks create supervisory and transparency challenges, including the need to strengthen consolidated and cross-border oversight, internal controls, and transparency.
- Regulations in many countries are not fully in line with global best practices and their implementation remains weak.

Measured potential:
- There is a substantial gap between current financial development levels in many sub-Saharan African countries and what could be reached by comparison with regions of similar structural characteristics.
- Closing this financial development gap could yield about 1½ percentage points additional annual growth for the median sub-Saharan African country, with variations across country groups.
Volatility effects:
- Higher financial development can reduce the volatility of growth, especially when initial financial development is relatively low.
- Mechanism: more financial development relaxes credit constraints and provides instruments to withstand adverse shocks.
- Caveat: as financial depth increases, its contribution to reducing volatility declines because greater depth can increase the propagation and amplification of shocks.

Strengthen macroeconomic fundamentals and institutions:
- Provide strong legal and institutional frameworks, with particular emphasis on corporate governance, to create an environment conducive to financial sector development.
Improve regulation and supervision:
- Upgrade regulatory frameworks toward global best practices.
- Strengthen supervisory capacity and enforcement powers.
- Harmonize regulations and supervisory procedures to avoid regulatory arbitrage.
- Establish appropriate mechanisms for resolving nonviable financial institutions.
Monitor and manage risks from innovation:
- Financial supervisors should closely monitor risks related to mobile money transactions as they spread in the low-income segment.
- Ensure households’ funds are safe while preserving the benefits of easier transactions, savings opportunities, and access to small loans for entrepreneurship.

Source: IMF blog post “Accelerating Financial Sector Development to Boost Growth in Sub-Saharan Africa,” Anne-Marie Gulde-Wolf, July 13, 2016.

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