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8/7/2019 fiance presentation
1/20
Financial Systems and EconomicFinancial Systems and Economic
Development:Critical Issues andDevelopment:Critical Issues and
Policy Implications for AfricanPolicy Implications for African
CountriesCountries
Presented byPresented by
Charles Amo YarteyCharles Amo YarteyFaculty of Economics and PoliticsFaculty of Economics and Politics
University of CambridgeUniversity of Cambridge
UKUK
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Presentation OutlinePresentation Outline
1. Introduction
2. Financial development and economic growth3. Financial systems and economic growth
4. Financial development in Africa
5. Financial liberalisation in Africa6. Policy implications for African countries.
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1. Introduction1. Introduction
1. The services provided by the banking system arecritical for economic growth (Schumpeter)
VersusWhere enterprise leads finance follow (Robinson)
2. Stock market development is a natural progression inthe growth process. (The World Bank)
Versus
When the capital development of a country becomes theby product of the activities of a casino the job islikely to be ill done. (Keynes)
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Contribution of the paperContribution of the paperWe provide two main contributions to the
literature:
1. A non technical survey and synthesisof the finance and growth literature.
2. We analyse important policy
implication of the literature for
Africa.
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2. Financial development and2. Financial development and
economic growtheconomic growtha. Mechanisms through which finance works
The traditional growth theories saw no role for finance in the
growth process According to the new growth theory finance can influence
growth in three ways;
Increasing the efficiency of the intermediation process
Increase the productivity of capital
Increasing the savings rate.
Promoting entrepreneurship (Rajan and Zingales 1998)
Encourage new entry of firms which breeds competition
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b. Financial development versusb. Financial development versus
Financial structureFinancial structureFinancial structure can be defined as the institutions,
financial technology, and the rules of the game thatdefine how financial activities are organised at a
particular time period.
Financial development refers to the development of
well functioning financial markets and intermediaries.
Financial development depends on the financialstructure of the economy.
Indicators of financial development include M2/GDP;
stock market capitalisation/GDP; bank asset/GDP
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3. Financial systems and3. Financial systems and
economic growtheconomic growth
3a. The stock market and economic growth
The stock market can promote economic growththrough:
Raising the savings rate.
Increasing the level of investment. Ensuring that past investments are
efficiently used (the takeover mechanism).
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3c. Bank3c. Bank--based systems andbased systems and
economic growtheconomic growthPromoting effective corporate governance
Providing stable and efficient long term finance
Permitting a higher investment than would be possible
under stock market based system.
Promoting long term perspective by preventing a free
market for corporate control.Encouraging more rapid sectoral mobility.
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3d.The other side of bank3d.The other side of bank
based systemsbased systems
Banks may hinder the ability of new innovative
firms to obtain external financing.
The market power of the banks reduces the
incentive of firms to undertake profitable
investments.
Banks might also continue to finance unprofitablecompanies.
Banks may collude with managers against creditors
and minority shareholders.
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3e. Convergence3e. Convergence
The availability and quality of financial services are
important, not so much who provides them (the
financial services view).It is not financial structure but overall financial
development that promotes growth
It is the overall quality of the financial system as
determined by the efficiency of the legal system thatpromotes growth (the legal based view).
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4. Financial development in Africa4. Financial development in Africa
Indicators of financial development have stagnated or
witnessed slow growth in SSA since 1980.M2/GDP and credit/GDP were lower in the 1990s than
1980s.
Credit to the private sector/GDP in 2002 was 131.7 in
South Africa, 11.8 in Benin , and 4.1 in Chad.
The low credit to GDP is a source of concern.
Empirical evidence in Africa show a positive effect of
financial development on growth.
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Stock Market Development in Selected African Countries
02040
60
80
100120
140160
180200
Bots
wana
Egypt,A
rabRep
.Gh
ana
Kenya
Mauri
tius
Morocco
Namibia
Nigeria
South
Africa
Tunisia
Zamb
ia
Zimb
abwe
Country
Market
Capitalization/GDP(%
)
1995 2001
Small size: Average capitalisation ratio is 27 percent excluding South Africa and
Zimbabwe.
South Africa has about 90 percent of the combined market capitalisation.
Low liquidity: turnover ratio is about 2.7 in Ghana and 37.4 in South Africa
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Reasons for the Underdevelopment ofReasons for the Underdevelopment of
the financial system in Africathe financial system in Africa
Historical financial repression Most African government adopted financial
repression policies after independence
Public sectors demand for low cost finance led to
pressures to hold down interest rates.
Income distributional goals led to directed credits. The effect of financial repression is bank insolvency,
low savings, and inefficient allocation of resources.
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5. Financial liberalisation in5. Financial liberalisation in
AfricaAfrica
A typical programme of financial liberalisation has three
main aspects:Removal of interest rate ceiling
Reducing quantitative controls
Removal of capital controls
Other aspects of financial liberalisation include:
Improving supervision and regulation
Increasing competition
Removal of entry barriers.
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Why financial liberalisation has notWhy financial liberalisation has not
achieved the expected resultsachieved the expected resultsFinancial liberalisation led to the expected positive real
interest rates.
The expected results of increased investments and savingshave not been plentiful.
The thesis assumes that savings determine investment and
that resources are fully used.
Financial liberalisation may lead to financial fragility.Financial liberalisation should be accompanied by good
prudential regulation.
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Policy ImplicationsPolicy Implications
How do we promote financial development?Countries with well developed legal and regulatory
infrastructure tend have well developed financial
markets.
For external finance to develop investors need to be
protected by laws and regulation.
Resolution of political risk can be important in stock
market development.Macroeconomic stability is necessary .
Encourage savings and investment by appropriate
policies.
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Bank based or market basedBank based or market based
financial system?financial system?Stock market often lead to short termism which may
adversely affect competitiveness and growth.
Evidence show that over the long run bank based systemsoutperformed market based systems in terms of savings
investment and growth.
The economic development of Italy and Japan occurred
without any help from the stock market
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Bank based systems areBank based systems are
better.better.Because they are better able to deal with problems of
informational asymmetries.
There is no necessary progression from bank based system
to a stock market economy.African countries should contend with the development of
the banking system through appropriate prudential
regulation.
If the banking system is weak and unreliable a stockmarket is likely to add to the fragility.
Regulation and supervision are key for financial stability
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THANK YOUTHANK YOU