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Commercial Bank Privatization in Africa. Some Preliminary Results. The Starting Point (late 1980s). Most banks state-owned Substantial market share Entry into the financial system was restricted Interest rates were controlled Credit was allocated by fiat Exchange rates were fixed

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the starting point late 1980s
The Starting Point (late 1980s)
  • Most banks state-owned
    • Substantial market share
  • Entry into the financial system was restricted
  • Interest rates were controlled
  • Credit was allocated by fiat
  • Exchange rates were fixed
  • Exchange controls were the norm
the reforms
The Reforms
  • Stronger prudential regulations
  • Financial market liberalization
  • Bank liquidation/privatization
privatization rationale
Privatization Rationale
  • Banks as public utilities
    • Subsidize SOEs and agriculture
    • Weak regulators
  • New capital needed to restore soundness
privatization approaches
Privatization Approaches
  • Restructure
  • Seek private investors
restructuring
Restructuring
  • Recognize losses
  • Write off un-reconciled balances
  • Retrench or retrain
  • Reorganize (ie spin-off or close branches)
  • NPL “agency”
  • Place bank under new management (?)
  • Make new investments in bank (?)
restructuring a good option
Restructuring – a good option?
  • YES if one of the following is true:
    • Sale price will increase (net of restructuring costs)
    • Likelihood of a quality buyer
    • Likelihood of reducing time required to privatize
methods of sale
Methods of Sale
  • Strategic Investor – mixed but generally positive results
  • Public offerings – negative
socio political developments
Socio/political developments
  • Emergence of multi-party systems
  • Vocal Parliaments
  • Increased emphasis on good governance
  • Devastation of HIV/AIDS
  • per capita output (in real terms) is lower than at the end of the 1960s
  • fiscal resources per capita are also lower
  • share of world trade is also lower
banking sector today
Banking sector today
  • Profitable (see next slides)
  • Reduced public ownership (see Table 2)
  • Low risk activities
  • Very liquid
  • Operate independently in a positive interest rate environment
  • Profitable (see next slides)
however
However
  • Financial depth remains low
  • Spreads are high
  • Credit to private sector lower
  • Substantial increase in foreign assets as percentage of total bank assets
  • Ditto credit to public sector
  • Dominance of foreign banks
  • Large stock of non-performing loans
however ctd
However (ctd)
  • proliferation of undercapitalized banks; market segmentation
  • Limited development of money and capital markets
    • due to easy access to central bank discount facilities and/or availability of high yielding t-bill
privatization lesson 1
Privatization Lesson 1
  • “IT’S QUALITY STUPID”
privatization lesson 2
Privatization lesson 2
  • Transparency, transparency, transparency
privatization lesson 3
Privatization Lesson 3
  • Privatization and Reforms have left a gap
    • Potential role for state
    • Let’s not be dogmatic