financial system strategy 2020 1 fss 2020 international conference financial sector reform and the...
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Financial System Strategy2020
FSS 2020 International Conference
Financial Sector Reform and the Economy
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FINANCE AND GROWTH:
CAN THE ENGINE WORK FOR NIGERIA?
Patrick Honohan
Trinity College Dublin
Prepared for the FSS2020 International Conference,Abuja
June 18, 2007
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The two strands of the presentation
Financial sector helps growth and lowers poverty
Nigeria (as other African financial systems) has much to gain
from energetic financial policy development
combining
modernism with activism
Illustrated with data charts
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Financial development is an important cause of growth
General financial development (as measured by depth) widens opportunities and reduces poverty
i.e. Finance-rich growth is pro-poorEven conditional on mean income
But data gaps make it difficult to establish how much direct access to finance by the poor reduces poverty
[Banking crises do not always hit the poor disproportionately (but did in Nigeria)]
Finance, growth & poverty: Surprising research findings
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Updated from Levine
Countries with deeper financial systems in 1960 grew more rapidly
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50
Shallow (<0.15)
0.15 to 0.25
0.25 to 0.5
Deep (>0.5)
Ratio of liquid liabilities to GDP in
1960
Average per capita GDP growth 1960-2000
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Source: Beck et al. 2000; Caprio and Honohan, 2001
-4
-2
0
2
4
6
8
0 2 4 6
Private credit as % GDP (log)
Ave
rage
GD
P g
row
th 1
960-
95
Actual
Model
Naive
Growth and financial developmentNaïve and model-based relations
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Nigerian banking system is second largest in Africa but is still small -- absolutely
5.0
10.0
15.0
Log
of L
iqui
d Li
abili
ties
(mil.
200
0 U
S $
)
Sub-Saharan Africa
Rest of the World
Sample size: 118 countriesTime period: 2004Source: Financial Structure Database, 2006 (The World Bank)
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…and (even more so): relatively: Liquid Liabilities (M3+) as % GDP
0.0
1.0
2.0
3.0
4.0
Liqu
id L
iabi
litie
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)
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…and (even more so): relatively: Liquid Liabilities (M3+) as % GDP
0.0
1.0
2.0
3.0
4.0
Liqu
id L
iabi
litie
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)
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Still…Nigeria does a little better than average given income and inflation levels
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
(Priv
ate
Cre
dit/I
nfla
tion)
res
idua
l
-4 -2 0 2 4
(GDP per capita/Inflation) residual
Sub-Saharan Africa
All Other Regions
Sample size: 151 countriesTime period: 2000-2005
Source: Financial Structure Database, 2006; World Development Indicators, 2005 (The World Bank)
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One reason for low depth: Offshore Deposits
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
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But there is a deepening in progress across Africa
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
1990 1995 2000 2005
Media
n %
GD
P; S
ub-S
ahara
n A
fric
an c
ountr
ies
Private Credit
Bank Deposits
Wide Money (LL)
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Many other dimensions to finance
Payments (new technologies)
Insurance (including microinsurance)
Pension
Deposit services
Legal and regulatory infrastructure
Provision of financial information
Etc etc.
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Banking is expensive: Net Interest Margins
0 .05 .1 .15Net Interest Margin
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: 142 countriesTime period: 2004
Source: Financial Structure Database, 2006 (The World Bank)
Regional Distributions
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UGATCD
SDN
NIG
MUS
ZAF
SYC
TZA
ETH
BEN
CGO
LSO
LIB
AGO DRCGNB
CIVBWASWZ
KEN
CAR
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 0.2 0.4 0.6 0.8 1
Liquidity ratio for DMBs
M2/
GD
P
And African banks are reluctant to lend
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More and more foreign-owned banking systems: Africa and ROW
Bank ownership (Africa)
Equally shared
19%
Mainly local21%
Mainly govt7%
Mainly foreign
46%
Foreign+Govt7%
Bank ownership (Rest of Developing World)
Foreign+Govt9%
Mainly foreign
29%
Mainly govt12%
Mainly local25%
Equally shared
25%
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0 10 20 30 40 50 60 70
Cost of financing
Access to financing
Tax rates
Electricity
Macroeconomic instability
Corruption
Tax administration
Economic and regulatory policy uncertainty
Anti-competitive practices
Customs and trade regulations
Crime, theft and disorder
Access to land
Skills and education of workers
Telecom
Transportation
Legal system
Labor regulations
Business licensing and permits
% of firms reporting as barrier
AfricaRest of World
Firms demand better financing: Africa and Rest of World
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0
20
40
60
80
100
120
140
0 20 40 60 80 100
Access % of adult population
Priv
ate
cred
it %
of G
DP
Financial access vs. financial depth
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Approaches (1): Modernism (vs. Activism)
Transplant “best practice” from 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
Liberalize entry
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Excesses of Modernism
Land issues: not just a question of better land registration
Unrealistic stock exchange rules prevent SMEs from listingAIM-type model might work better
Basel 2 bank regulation would be counterproductive
Excessive AML/CFT procedures a barrier to access of the poor
Etc: see Making Finance Work for Africa Beck & Honohan, World Bank (2007)
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Approaches (2): Activism (vs. Modernism)
African environment (sparse population, low incomes, poor infrastructure) makes access problematic
Mainstream banks etc have not delivered long term, risk finance; or any services for the majority (market failure)
So new (or re-engineered) entrants with dedicated mission needed
– To be patient, take risks, experiment with new technologyincluding enhanced use of soft information/relationship lending
– To take up the “fight for an inclusive financial system”(example: South Africa financial sector charter, 2003)
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Activism presupposes governance (1)
Activists are not restrained by immediate market pressures; they have chosen to plough money and effort into endeavours that the market has turned down.
Willie Sutton effect
To be even reasonably confident that these efforts and resources will not be wasted or subverted, the sponsoring agency must have good governance.
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Governance issues
-2.0
-1.0
0.0
1.0
2.0C
ompo
site
Gov
erna
nce
Indi
cato
r
Sub-Saharan Africa
Rest of the World
Sample size: 209 countriesTime period: 2004
Source: D. Kaufmann, A. Kraay, and M. Mastruzzi (2005). Governance Matters IV
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Governance issues
-1.5
-1.0
-0.5
0.0
0.5
1.0
2005 2004 2003 2002 2000 1998 1996
KKZ Data Africa & ROW, quartiles
2005 2004 2003 2002 2000 1998 1996
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Governance issues
Africa: Change in ratingsmedian 1998-2005
-0.4 -0.2 0.0 0.2 0.4 0.6
Voice and Accountability
Political Stability
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
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Governance issues
Nigeria: Change in ratings1998-2005
-1.0 -0.5 0.0 0.5 1.0
Voice and Accountability
Political Stability
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
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Concluding remarks
Financial sector development can be a powerful agent for growth and transformation
Nigeria has plenty of headroom here
“Open access” should be the watchword
helped by technology and by nimble regulation
Achieving this requires a champion who will fight for access when necessary against the vested interests of incumbents