Making Finance Work for Africa Partnership for Making Finance Work for Africa African Economic...

Making Finance Work for Africa

Partnership for Making Finance Work for Africa

African Economic Conference 2007

What will we talk about?

Ralf Schroeder: – Fostering private investment and sustainable economic growth– Finance as a constraint for growth and employment generation in

Africa

Marilou Uy:– Making Finance Work for Africa: Findings of the MFW4A study– Key policy approaches

Gabriel Negatu:– The Partnership for Making Finance Work for Africa: What are the

objectives?– What can you contribute to the Partnership? What can you gain

from it?

Fostering private investment and sustainable economic growth

Ralf SchroederGerman Ministry for Economic Cooperation and DevelopmentG8 Presidency

G8 Declaration “Growth and Responsibility”

Africa’s growth of almost 6 % driven by:– governance– business climate– macroeconomic stability– strong global demand for Africa's natural resources.

Challenge for African countries, policy makers and business: Deepen, broaden, and sustain shared growth in order to achieve the MDGs:

More countries are emerging from conflict, with several long-standing conflicts resolved.

Resource rich countries are showing a greater drive for diversification and good governance.

Technological ‘leap-frogging’: ICT and mobile phone technology provide new possibilities for increasing access to markets and the provision of financial services.

A new generation of African innovators and entrepreneurs are changing the landscape of African business and finance

New momentum for regional integration will build markets with adequate economies of scale.

Leveraging Africa’s opportunities

Annual average growth in mobile subscribers, %

Increasing private sector credit from 14% to 25% of GDP would represent an additional US$ 70 billion of resources available for African households and firms – equal to almost 3x the G8 ODA target for 2010 (MFW4A)

If, through more efficient financial sectors, interest rate margins are brought down from current 8% to world average 4.8%, African borrowers would save US$ 3.2 billion in interest every year (MFW4A)

If Africa were to increase its share of global trade by just one percentage point – to 3% – it would generate additional export revenues of $70 billion (USTR Data)

Sustaining reform, creating investment opportunities and sound debt management will provide Africa with unprecedented access to capital: Ghana’s benchmark bond attracted US$ 3.25 billion in commitments (IFR)

Going beyond ODA

Scaling-up and sustaining growth in AfricaPrivate investment and productivity in Africa remain insufficient to achieve and sustain higher growth:

Private investment / GDP around 14% in Africa, compared to 25% in East Asia, including high growth countries like China (26%) and Thailand (22%)

Total factor productivity of only 4 out of 26 African countries within range of top performing economies (= reaches 75% of South Africa levels)

But: Macroeconomic reforms, fewer conflicts and improving governance have laid the ground for new development priorities:

Employment generation

Economic diversification

… and a new focus on private and financial sector development

Growth Challenge: Investment & ProductivityLow levels of investment are a constraint - but increasing productivity even more important

Increasing productivity through:

Investment Climate Reform: African enterprises can compete with Indian and Chinese firms in terms of factor floor costs. They become less competitive, however, due to higher indirect business costs, lack of market access.

Financial Sector Development: Efficient financial sectors enhance productivity by funding productive investments and withdrawing funding from inefficient firms

Good Poor Investment Climate Rank

To

tal F

ac

tor

Pro

du

cti

vit

y

High

Low

Relationship between Total Factor Productivity and Investment Climate Index

Firm productivity and access to finance

Access to finance

Per

cen

t o

f P

rod

uct

ive

Fir

ms

Meeting the Growth Challenge:• Improving the business environment and investment climate

• Strengthening competitiveness, fostering market access and learning

• Developing the domestic private sector

• Developing deeper, broader and more efficient financial sectors:


Demand by Firms: Finance is a greater priority in Africa than in any other region

(Average rating by surveyed firms of each item as an obstacle to business operation and growth)

Access to Finance

Cost of Finance

East Asia & Pacific

Europe & Central Asia

Latin America & CaribbeanMiddle East & North Africa

South Asia

Sub-Saharan Africa

East Asia & Pacific

Europe & Central AsiaLatin America & CaribbeanMiddle East & North Africa

South Asia

Sub-Saharan Africa

Less than 20% of African households have access to finance

Making Finance Work for Africa – How?

Marilou UyWorld Bank

AGOBDI

BENBFA

BWA

CAF

CIV

CMR

COG

CPVETH

GAB

GHA

GMB

GNB

KEN

LSO

MDGMLI

MOZ

MRT

MUS

MWI

NAM

NER

NGA

RWA

SDN

SEN

SLE

SWZSYC

TCD

TGO

TZAUGA

ZAF

ZAR

ZMB

-3

-2

-1

0

1

2

(Pri

vate

Cre

dit/Inflation

) re

sid

ua

l

-4 -2 0 2 4

(GDP per capita/Inflation) residual

Sub-Saharan Africa

All Other Regions

Sample size: 151 countriesTime period: 2000-2005Source: Financial Structure Database, 2006; World Development Indicators, 2005 (The World Bank)

Private Credit/GDP vs. GDP per capita

African banking systems are small - absolutely

5.0

10.0

15.0

Lo

g o

f Liq

uid

Lia

bili

ties

(mil.

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Sub-Saharan Africa

Rest of the World

Sample size: 118 countriesTime period: 2004Source: Financial Structure Database, 2006 (The World Bank)

…and relatively liquid liabilities (M3+) as % GDP

0.0

1.0

2.0

3.0

4.0

Liq

uid

Lia

bilitie

s /

GD

P

Sub-Saharan Africa

Rest of the World

Sample size: 127 countriesTime period: Latest available year: 2004-05Source: Financial Structure Database, rev. 2006 (The World Bank)

0.00 0.50 1.00 1.50Offshore Deposits / Bank Deposits

7. Sub-Saharan Africa

6. South Asia

5. Middle East & North Africa

4. Latin America & Caribbean

3. Europe & Central Asia

2. East Asia & Pacific

1. High Income

Sample size: 90 countriesTime period: 2005Source: Financial Structure Database, 2006; BIS, 2006

Regional Distributions

Also, substantial funds held offshore Africa has the highest share of offshore deposits

Total remittances to Africa are higher than official development aid

But there is a deepening in progress

8%

10%

12%

14%

16%

18%

20%

22%

24%

26%

1990 1995 2000 2005

Media

n %

GD

P; S

ub-S

ahara

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ies

Private Credit

Bank Deposits

Wide Money (LL)

Where do African banks invest their resources?

0 .05 .1 .15Net Interest Margin


6. South Asia





1. High Income



African banking is expensive: Net interest margins

African opportunities and challenges Liquidity in African financial systems provides potential for

significant levels of local finance.

New financial operators and strong regional banks is changing landscape of African banking

ICT and mobile phone technology provide new possibilities for the wider provision of financial services

Enabling environment for high impact innovative products

Regionally integrating financial markets facilitate economies of scale and risk-sharing across the region

But major challenges in scale, informality, governance and shocks.

Making banks more comfortable with lending

Financial information infrastructure:– Credit information bureaus

– Accounting/auditing

– Collateral registries

Legal and judicial framework:– Modernized laws

– Efficient judiciary / contract enforcement

– Effective legal protection for creditors

– Effective system to register collateral

Average Private Sector Credit

as %GDP

Doing Business - Credit Information Index

0%

5%

10%

15%

20%

25%

1994 1996 1998 2000 2002 2004

0%

1%

2%

3%

4%

5%

Mkt cap (LHS)

Value traded (RHS)

Access

Efficiency

Size

Stability

Developing countries

Sub-Saharan Africa

SSA excluding SouthAfrica

Stock market – Size and Efficiency

Stock markets picking up– Although driven by a few countries

(Nigeria, SA, Kenya)– Main deficiency is inefficiency– Sovereign bond markets developing

Large interest from foreign portfolio investors

Some solutions to get scale– Regional Integration (cross-listings, shared

platforms, regional stock exchanges)– Integration into global capital markets but

be aware of the risks!

Access to capital and global finance

Long-term and risk finance: Beyond commercial banking

Build on pension reforms and growing life insurance market as natural providers of long term finance. Good governance is key.

Securities markets help, but simpler regulations can help increase listings as could leveraging regional links.

Infrastructure finance could provide additional investment funds and improve service delivery– Framework for private participation in infrastructure (PPI)– Public-private risk sharing mechanisms?

Housing finance is a priority for many African policy makers – Deal land and property markets and enforceable creditor rights– Develop mortgage markets.

Potential for regional financial sector integration

Regional arrangements can build necessary economies of scale:

– shared banking supervision– hub-and-spoke securities markets– Regional payment systems– Common currencies may be harder to deliver

Need to develop and agree on regional integration strategies to guide policy decisions at the country level

Integration progress is often a function of the level of development of national institutions and infrastructure

Leverage remittances Remittance flows to Africa are

increasing (total in 2006: US$ 24.5 million)

Remittances provide an entry point to the financial system:– E.g., mortgages, consumer credit,

– through securitization of remittance flows

Developed financial sectors reduce the cost of remittance transfers:– Improve domestic retail payment system

– Develop adequate AML/CFT regulation

– Consumer information and competition

14.9

9.6

5.1

2.81.7

0

2

4

6

8

10

12

14

16

NorthAfrica

Sub-Saharan

Africa

WestAfrica

EastAfrica

SouthernAfrica

Remittance flows to Africa, 2006 (in US$ mln)

Finance can help growth in Africa

BDI

BEN

BWA

CAF

CMR

COG

GHAGMB

GNB KEN

LSO

MLI

MOZ

MRT

MUS

MWI

NER

RWA

SDN

SEN

SLE

SWZ

TGO

UGA

ZAF

ZMB

ZWE

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3

4

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Avera

ge

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th 1

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(lo

g r

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ual)

-2 -1 0 1 2

Private Credit/GDP 1980-2003 (log residual)

All Other Regions Sub-Saharan Africa

Residual Trendline

Sample size: 99 countries

Finance for growth and access – a summary

Make banks more comfortable with lending

-improve contract enforcement and transparency of information

Develop long term and risk finance instruments

-build on pensions and social security systems, supported with good governance

-attention to housing and infrastructure finance

Explore potential regional solutions

Provide a stable macroeconomic framework. And, pay attention to access to finance of the poor and micro-

entrepreneurs to build an inclusive financial system

-technology and diversity of providers produce opportunities

The Partnership for Making Finance Work for Africa

Gabriel NegatuAfrican Development Bank

Partnership for Making Finance Work for AfricaPrevious slides affirmed the following:

- financial sector performance in Africa is sub-optimal;

- that Making Finance Work is an African priority;

- the imperative of working together and more efficiently to strengthen financial sector development;

- Urgency of cooperation among Governments, private sector, dev. partners, academia/policy makers and others to leverage/add value to individual contribution;

Hence, the rational for an all stakeholders’ cooperation platform to strengthen financial sector development.

Partnership Objectives (1)Expanding Access to Financial Services

…by all sectors of the economy: as measured by the number of firms, individuals and households with access to quality and sustainable financial services

East Asia & Pacific

Europe & Central Asia

Latin America & CaribbeanMiddle East & North Africa

South Asia

Sub-Saharan Africa

Access to Finance by Firms Access to Finance by Households

Partnership Objectives (2)Increasing Financial Depth, Diversity and Efficiency

…as indicated by the ratio of credit to the private sector as a percentage of GDP, competitive interest margins and indicators of capital market and other non-bank financial sector services

0 .05 .1 .15Net Interest Margin


6. South Asia





1. High Income



Interest MarginsPrivate Credit / GDP

Partnership Objectives (3)Strengthening institutional and regulatory capacity

…as measured by business environment and other institutional development indicators

InstitutionsBusiness Environment

Partnership Activity I: Coordination

Constraint: Country leadership and effectiveness of Financial Sector Development is often undermined by lack of coherent strategy for coordination with the private sector and other stakeholders & fragmented delivery of international support.

Partnership approach:

Put the Paris Declaration on H&A into practice by building joint institutional framework for coordination, communication and alignment with country development strategies.

Secretariat hosted by African Development Bank, will act as a moderator, facilitating better communication, coordination and supporting integrated support to the financial sector.

Partnership Activity II: Knowledge GenerationConstraint: Knowledge gaps in key areas, inappropriate application of global best practices to African contexts and contradictory policy advice.


Facilitate joint knowledge development in priority areas– Bring together expertise and experience of participating partners,

academics, policy makers, private sector and other stakeholders.– Adapt international lessons and best practice to Regional

requirements, and tailor policy advice to the specific needs of individual policy makers and country situations.

Foster knowledge sharing and dissemination.

Partnership Activity III: Diagnostics & Sector StrategiesConstraint: Many countries lack country-owned comprehensive financial sector development strategies and/or the analytical and diagnostic work necessary to create them.


Catalyze scaled-up of support for joint country & sub-regional level diagnostic work.

Where diagnostics exist, facilitate adoption of country-led financial sector Development Strategies and Action Plans.

Develop a monitoring systems for KPIs and outcomes, and a shared results framework for financial sector activities.

Partnership Activity IV: Advocacy

Constraint: Financial sector agenda omitted from national and regional development plans due to lack of information and appreciation of key financial sector constraints to development.


Inform and empower policy makers/stakeholders and financial sector champions through menu of products and services .

Foster policy dialogue, advocacy and outreach with a broad range of stakeholders, including government, the private sector and academia to better reflect importance of financial sector.

How will the Partnership work? A Partnership Secretariat – hosted by the African Development Bank - will facilitate, moderate and

coordinate partner activities.

Partnership is based on an open architecture & open to all financial sector stakeholders, permitting partners to participate in a variety of ways. Partners will implement & financed activities on a case-by-case basis.

A Partnership FORUM – including an Annual FORUM meeting and a virtual platform - will act as “market place of ideas” bringing together all partners.

Shared principles: The partners will

– Work together in the spirit of the Paris Declaration– Share the responsibility for achieving the MFW4A objectives – Actively engage with each other and the Partnership Secretariat to share views and

exchange information on their respective work– Collaborate in advocacy and the dissemination and sharing of knowledge, experiences

and best practices– Jointly implement activities under the MFW4A framework that are driven by country and

regional demand, impact oriented, relevant, sustainable and based on shared policy approaches

Early activities of the PartnershipSecretariat

Mapping of ongoing development partner activities

Hosting the Partnership FORUM in March 2008

Country / Regional programs

Rwanda, Ghana, Madagascar, Ethiopia, WAMU countries and others

Knowledge Development

Key Indicators/Score Card

Rural finance and value chains (Issue paper)

Structured Finance (Issue paper)

Financial Information Infrastructure (Policy note)

Financial literacy (Summary of issues arising from FINSCOPE & financial diaries)

Innovation Funds (Issue paper)

Regional Financial Sector Integration (Issue paper)

Bond Market Development (Mapping of current activities/ToR for study)

Join the Partnership:-Extending an invitation to you as policy makers, researchers and practitioners to join the Partnership; to generate & contribute ideas; gain from the knowledge work and share experiences; to initiate and be lead champions of country level MFW4A teams.

Contacts: Interim Secretariat Karen Losse Email: [email protected] Telephone: +49 228 535 3457

Partnership Secretariat (from March 2008)Gabriel Negatu Email: [email protected] Development Bank Telephone: +216 71 10 20 77

www.afdb.org/mfw4a


Thank you!

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