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 Schroeder German Ministry for Economic Cooperation and Development G8 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 Africa Private 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 & Productivity Low 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 Firm productivity and access to finance Access to finance Percent of Productive Firms

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: Making Finance Work for Africa

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 & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle 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 Uy World Bank

Private Credit/GDP vs. GDP per capita

African banking systems are small - absolutely

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

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

Where do African banks invest their resources?

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

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

Finance can help growth in Africa

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 Negatu African Development Bank

Partnership for Making Finance Work for Africa Previous 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 & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Access to Finance by FirmsAccess 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 Interest Margins Private Credit / GDP

Partnership Objectives (3) Strengthening institutional and regulatory capacity …as measured by business environment and other institutional development indicators Institutions Business 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 Generation Constraint: Knowledge gaps in key areas, inappropriate application of global best practices to African contexts and contradictory policy advice. Partnership approach: 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 Strategies Constraint: Many countries lack country-owned comprehensive financial sector development strategies and/or the analytical and diagnostic work necessary to create them. Partnership approach: 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. Partnership approach: 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 Partnership Secretariat 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 BMZTelephone: Partnership Secretariat (from March 2008) Gabriel African Development BankTelephone:

Making Finance Work for Africa Thank you!