THE FINANCIAL INDUSTRY AS A CATALYST FOR ECONOMIC GROWTH

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. INTRODUCTION • FINANCIAL SYSTEM AND ECONOMIC GROWTH • FINANCIAL SECTOR DEVELOPMENT IN SSA: SOME STYLIZED FACTS • THE SANE AS AFRICA’S GROWTH POLES: THE ROLE OF THE FINANCE SECTOR • CONCLUSIONS OUTLINE 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. 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 II. Financial system and economic growth L. Kasekende June 2007

5. II. Financial system and economic growth • 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

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.AfricaShare: Stock Market 0.34%; Debt 0.15%; and Banks 0.69%

9. III. FINANCIAL SECTOR DEVELOPMENT IN SSA: SOME STYLIZED FACTS 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 2000-04 period is 84.5 percent.

10. 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 III. FINANCIAL SECTOR DEVELOPMENT IN SSA; SOME STYLIZED FACTS 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 2000-03

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. IV. THE SANE AS AFRICA’S FINANCIAL POLES • 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. • 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