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Financial Sector Development in Sub-Saharan African Countries

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Financial Sector Development in Sub-Saharan African Countries OCCASIONAL PAPER 169 Financial Sector Development in Sub-Saharan African Countries Hassanali Mehran, Piero Ugolini, Jean Philippe Briffaux, George lden,Tonny Lybek, Stephen Swaray, and Peter Hayward INTERNATIONAL MONETARY FUND Washington DC 1998 ©International Monetary Fund. Not for Redistribution © 1998 International Monetary Fund Production: IMF Graphics Section Typesetting: Choon Lee and Ashok Kumar Figures: Sanaa Elaroussi Library of Congress Cataloging-in-Publication Data Financial sector development in Sub-Saharan African countries / by Hassanali Mehran ... [et al.]. —Washington DC : International Monetary Fund, [1998]. p. cm. — (Occasional paper, ISSN 0251-6365 ; no. 169) Includes bibliographical references (p.). ISBN 1-55775-758-5 1. Financial institutions—Africa, Sub-Saharan. I. Mehran, Hassanali. II. Series : Occasional Paper (International Monetary Fund) ; No. 169. HG187.5.A357F667 1998 332.1'0967—dc21 98-41340 CIP Price: US$18.00 (US$15.00 to full-time faculty members and students at universities and colleges) Please send orders to: International Monetary Fund, Publication Services 700 19th Street, N.W., Washington, D.C. 20431, U.S.A. Tel: (202) 623-7430 Telefax: (202) 623-7201 E-mail: [email protected] Internet: http://www.imf.org recycled paper ©International Monetary Fund. Not for Redistribution Contents Page Preface vii I Overview I Background 1 The Financial System Prior to Reforms 1 Implementation of Economic Reforms 2 Progress with Reforms 4 Problem Areas in Financial Sector Development 6 Areas for Further Reform 7 II Review of the Structure of the Financial Sector 9 Background 9 Characteristics of the Financial Sector 10 Size 10 Capital Structure 10 Financial Intermediation 10 III Status of Financial Sector Legislation and Banking System Supervision 12 The Supervisory System 12 Legal Framework 12 Human Resources 13 Political Will 13 Safety Net 14 Infrastructure 14 Assessment 14 Areas for Further Reform 15 IV Development of Monetary Instruments and Financial Markets 16 Group I Countries 16 Group II Countries 17 Group III Countries 19 Obstacles to Transition to Indirect Monetary Instruments and Market Development 19 Lack of Interbank Market 19 Lack of Securities Portfolio 19 Inefficient Payments System 20 Absence of an Automated Book-Entry System 20 Reserve Requirement and Liquid Asset Ratios 20 Absence of a Primary Dealer System 20 iii ©International Monetary Fund. Not for Redistribution CONTENTS Large Interest Rate Spreads 21 Lack of Communication and Information 22 Areas for Further Reform 22 V Exchange Arrangements and Liberalization of the External Sector 23 Group I Countries 23 External Current Account Convertibility 23 Capital Account Convertibility 24 Group II Countries 24 External Current Account Convertibility 24 Capital Account Convertibility 25 Group III Countries 26 External Current Account Convertibility 26 Capital Account and Full Convertibility 26 Areas for Further Reform 27 VI Legal Infrastructure: Central Bank Autonomy 28 Objective 29 Political Autonomy 30 Coordination and Conflict Resolution 30 Governing Bodies 30 Economic Autonomy 31 Credit to the Government 31 Exchange Rate Policy 32 Financial Conditions 32 Monetary Instruments 33 Accountability 33 Areas for Further Reform 35 VII Payments System 36 Weaknesses in the Payments System 36 Improvements to Noncash Payments System 37 Areas for Further Reform 39 VIII Central Bank Accounting, Internal Auditing, and Information Technology 41 Typical Problems 42 Information Technology 43 Infrastructures 43 Uses 43 Reasons for Slow Development 44 The Year 2000 Problem 45 Areas for Further Reform 45 IX Overall Assessment 46 Appendices I Statistical Tables 49 II MAE Technical Assistance to Sub-Saharan African Countries 102 References 105 iv ©International Monetary Fund. Not for Redistribution Contents Boxes Section III 1. Main Recommendations on Supervision 15 IV 2. Main Recommendations on Development of Monetary Operations and Financial Markets 21 V 3. Main Recommendations on Development of External Sector Liberalization 26 VI 4. Main Recommendations on Central Bank Autonomy and Accountability 34 VII 5. Lamfalussy Standards: Minimum Standards for the Design and Operation of Cross-Border and Multicurrency Netting and Settlement Schemes 37 6. Main Recommendations on Payments Systems 39 VIM 7. Main Recommendations on Central Bank Accounting and Auditing 44 IX 8. MAE Technical Assistance to Sub-Saharan African Countries 47 Appendix II Al. MAE Technical Assistance in Central Banking and Related Matters 104 Tables Section I 1. Sub-Saharan Africa: Key Economic Indicators 5 III 2. Selected Sub-Saharan African Countries Classified on the Basis of Status of Banking System Supervision 14 IV 3. Selected Sub-Saharan African Countries Classified by Development of Monetary Instruments and Financial Markets, 1997 16 V 4. Status of External Convertibility in Selected Sub-Saharan African Countries, 1997 24 VI 5. Degrees of Central Bank Autonomy for Selected Sub-Saharan African Countries, 1997 29 Appendix I Al. Indicators of De Jure Central Bank Autonomy and Accountability in Selected Sub-Saharan African Countries, May 1998 50 A2. Structure of the Banking System in Selected Sub-Saharan African Countries, 1997 54 A3. Selected Indicators for Financial Intermediation in Selected Sub-Saharan African Countries 56 A4. Banking Supervision Issues in Selected Sub-Saharan African Countries, 1997 57 A5. Monetary Operations and Financial Market Development in Selected Sub-Saharan African Countries, 1997 64 A6. Monetary Policy Instruments in Use in Selected Sub-Saharan African Countries, 1997 72 A7. Development of Securities Market in Selected Sub-Saharan African Countries, 1997 73 A8. Developments in the Foreign Exchange Area in Selected Sub-Saharan African Countries, 1997 74 A9. Framework for Monetary Policy Formulation and Implementation in Selected Sub-Saharan African Countries, 1997 99 v ©International Monetary Fund. Not for Redistribution CONTENTS II A10. Schedule of Past Intensive Technical Assistance Provided by MAE to Sub-Saharan African Countries, 1964/97 103 Figures Section I 1. Evolution of Exchange Rate Regimes of Selected Sub-Saharan African Countries 6 Appendix II Al. MAE Technical Assistance to Sub-Saharan Africa in Selected Years 103 The following symbols have been used throughout this paper: ... to indicate that data are not available; — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist; - between years or months (e.g., 1994-95 or January-June) to indicate the years or months covered, including the beginning and ending years or months; / between years (e.g., 1994/95) to indicate a crop or fiscal (financial) year. "Billion" means a thousand million. Minor discrepancies between constituent figures and totals are due to rounding. The term "country," as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided interna- tionally on a separate and independent basis. vi ©International Monetary Fund. Not for Redistribution Preface At its meeting in Lyon, France, in June 1996, the seven major industrial countries announced the Initiative on Global Partnership for Growth in Sub-Saharan Africa (the Africa Initiative). The initiative establishes a partnership between the international community and sub-Saharan African countries geared toward assisting these coun- tries to participate fully in the expansion of global prosperity and to spread the bene- fits of globalization throughout their societies. The overall strategy underlying the initiative emphasizes trade and investment, the mobilization of global private capital flows, and the buildup of human resources. One element of the strategy is to build a healthy and competitive financial sector capable of mobilizing substantially higher levels of savings and improving banking and financial supervision standards to en- sure stability. Within the context of the partnership, the IMF's Monetary and Exchange Affairs Department (MAE) has undertaken this study to determine the status of the financial sector in 32 sub-Saharan African countries and to make recommendations to assist them to sustain and accelerate the modernization of the sector that is currently under way in many of them. Following the work that has already been undertaken on vari- ous elements of financial sector reform in Africa by the IMF and the World Bank, in particular, this report presents a broad picture of trends in financial sector reform in sub-Saharan Africa as a whole and provides comprehensive information that will en- able the IMF in collaboration with the World Bank and other international institutions to better support these countries in their reform programs. Since the study involved many cross-country comparisons, for purposes of data consistency, a cut-off date of end-December 1997 has been applied. The bulk of the information in the tables, therefore, covers up to that period, although in a few cases, particularly when more up-to-date information is not available, the data have been provided for periods earlier than end-1997. These are, however, appropriately indi- cated in footnotes. The authors would like to acknowledge the contributions of staff of the African and Policy Development and Review Departments toward the completion of this project, in particular, John Boorman, Evangelos
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