Finance for Growth in Africa Patrick Honohan Trinity College Dublin and The World Bank

African banking systems are small -- absolutely

…and relatively: Liquid Liabilities (M3+) as % GDP

Private Credit/ GDP vs. GDP per capita

One reason: Offshore Deposits

But there is a deepening in progress

Real Interest Rates – No Trend

Banking is expensive: Net Interest Margins

Stock Markets Picking Up

Stock Markets: Main Deficiency Is Inefficiency Access Efficiency Size Stability Developing countries Sub-Saharan Africa SSA excluding South Africa

Four pervasive challenges Scale Informality Governance Shocks

Getting banks lending more (1) It’s not a shortage of liquidity There are some regulatory issues Excessive zeal (BTW: don’t misread history on African bank failures) But mainly it’s a (mostly well-founded) lack of banking nerve The usual fixes: Better information and better contract enforcement (if you have to choose: go for information)

Banks stay liquid (don’t lend much) Bank liquidity ratios in SSA quartiles by country

Where do banks invest their resources?

Getting more banks to lend The arrival of regional and international banks In only 3 countries are most of the banking systems in the hands of governments. (You know why) Scale: good for efficiency and maybe OK for client focus too with modern lending technologies Ensuring enough competition remains a challenge

Bank ownership: Africa and ROW

Term finance and risk finance – beyond commercial banking Pension funds etc are the natural providers of long- term financing Ensuring governance is key Securities markets can help (transparency of pricing etc.) Simpler regulation could help increase listings As could leveraging regional links Mortgage finance…infrastructural project finance…

Finance Can Help Growth – in Africa Also!

Approaches (1): Modernism (vs. Activism) Transplant “best practice” from the advanced economies, e.g.: Better legal protection for creditors including – procedures for collecting on collateral (including leasing) – judicial efficiency and probity Clarify land ownership (good for collateral) Improve information – credit bureaux – accounting (and auditing) Better protections for investors in stock exchange Strengthen prudential supervision of banks; AML/CFT Liberalized entry (charts)

Excesses of Modernism Land issues are not just a question of improving land registration Unrealistic stock exchange rules prevent medium firms from listing AIM-type model might work better Basel 2 bank regulation would be counterproductive Excessive AML/CFT procedures a barrier to access of the poor Can capital controls be removed safely?

Finance for Growth (1) – summary Making banks more comfortable with lending: Work on information infrastructures (and legal/judicial ones) Prune unnecessary regulations (also for securities markets) Long-term and risk finance: Government-run DFIs are not the solution (if you must have state-owned financial firms: ensure level-paying field, governance procedures; limit downside risk) Build on the investable funds of pension/social security funds…supported with transparent governance Infrastructure and mortgage finance deserve attention

Finance for Growth (2) Stabilize the macro/monetary environment: Work on predictable debt management Make sure inflows not choked-off Regional arrangements: Concentrate on high yield, feasible dimensions first E.g. shared banking supervision… …or hub-and-spoke securities markets Common currencies may be harder to deliver – requiring more macro and political prerequisites

The three-line take-away on finance for growth in Africa A need to have improved contract enforcement and transparency of information Governments are not the best source of long-term funds But they do need to provide a stable macroeconomic background