1

IMf/WB Annual Meetings Seminars

From Banking Stability to Banking Performance :

An Analysis of the Banking Sector in sub-Saharan Africa

François Leroux

Oct. 1. 2004

francois.leroux@hec.ca

2

Outline

• Preliminary remarks• The Structures-Conduct-Performance paradigm• Analysis of the banking sector• General assessment• Remarks and policy implications• Contribution of cooperative institutions• Performance of banking regulation and supervision • Banks as partners of institutional development• Conclusion

3

1.Preliminary Remarks

• Stability a priority• Financial stability progresses• There is not a single model for a financial

system• Present assessment and

recommendations are limited to sub-Saharan Africa

4

2.The Structures-Conduct- Performance Paradigm

• A classical framework• Adaptations for the banking sector• Adaptations for developing economies

5

Analysis of the Banking sector

Economic and Institutional Environment

Structures

Conduct

Financial Performance

Economic Performance

Regulations

and

Government

Intervention

International

Codes

and

Standards

6

3. Analysis of the Banking Sector

• Selecting the main components for analysis

7

Analysis of the Banking SectorEconomic and Institutional environment

• Macroeconomic environment

• Degree of diversification of the economy

• The cyclical aspect of the economy

• Size of the informal sector

• Degree of confidence in the financial institutions

• Financial market completeness

• Legal environment• Judicial

environment• Credit culture

8

Analysis of the Banking SectorStructures

• Banking concentration

• Type of Bank ownership

• Presence of state-owned banks

• Place of sectorial banks

• Place of foreign banks

• Interaction with NBFIs and cooperatives

9

Analysis of the Banking SectorConduct

• Degree of effective competition

• Credit policy

• Credit concentration

• General liquidity of the banking system

• Banking density and marketing strategies

• Specific practices of foreign banks

10

Analysis of the Banking SectorFinancial performance

• Financial performance of the banking sector is adequately monitored by the Financial Soundness Indicator (FSI) and the Financial Sector Assessment Program (FSAP)

• cf IMF occasional paper 212

11

Analysis of the Banking SectorEconomic performance

• Performance is a qualitative concept

• Performance is a relative concept

• The traditional meaning of economic performance in I.O.

• Allocative efficiency• Progress• Employment• Equity (« Fairness »)

12

Analysis of the Banking SectorEconomic performance

• Security of transactions

• Durability of the banks

• Allocative efficiency

• Technical efficiency

• Contribution to modernization of the economy

• Role in savings mobilization

13

Analysis of the Banking SectorEconomic performance

(cont’d)

• Fairness in geographical coverage

• Potential depositors’access to the banking system

• Contribution to reduction of the informal sector

• Contribution to development of the financial sector

• Contribution to financial education

14

4 General Assessment

15

Economic and Institutional environment

• High sensitivity to external shocks

• Poor diversification of the economy

• Substantial needs for seasonal financing

• Large informal sector

• Lack of confidence in the institutions

• Incompleteness of the financial markets

• Reform of the legal environment

• Problematic judicial environment

• Embryonic credit culture

16

Structures

• Limited number of banks

• Tight control of bank ownership

• State-owned banks: toward a reduced role

• Shrinking or disappearance of the sectorial banks

• Over-presence of foreign banks

• Segmentation of banking and non-banking activities (a dilemma)

17

Conduct

• Partial competition (conscious parallelism)• Credit rationing• Credit concentration• Over-liquidity of the banking system• Insufficient number of branches• Niche marketing and low banking density• Skimming practices by foreign banks• Limited effort of financial innovation

18

Economic performance

• Improved but still questionable security of transactions• Relatively short banking history• Allocative efficiency : SME financing problem• Technical efficiency• Insufficient contribution to savings mobilization• Geographical discrimination• Restricted depositors’ access to the banking system• Limited contribution to the reduction of the informal

sector• Banks as vectors of financial sector development• Limited contribution to financial education

19

5. Remarks and Policy Implications

20

Remarks• Sub performance in terms of structures or conduct

is a traditional problem of small economies and not specific to developing economies.

• In absolute or relative terms, numerous African countries could be classified as small economies

• Allocative inefficiencies are not restricted to or typical of developing economies

• Formulating regulations etc. easier than ensuring their implementation

• Resistance to change• Real challenge is behavior modification

21

Policy Implications Economic and institutional environment

• Regional definition of banking space is the logical result of the small size of African economies

• Authorities must contribute to confidence in the banking system

– By implementing an adequate scheme of deposit insurance

– By respecting banking confidentiality at all times– By making banking protection a priority in times of

social unrest

22

• Complete and implement the reform of legal practices where necessary

• Promote the role of professional associations and the mobility of banking personnel

• Ensure that civil servants at all levels understand banking practices

• Promote institutional investors

Policy Implications Economic and institutional environment(cont’d)

23

Policy Implications Structures

• Encourage the shrinking of development banks , where necessary

• Limit market share of state-owned banks• Determine, beforehand, maximum market share

allocated to foreign banks• Promote cooperative and mutualist-type institutions• Maintain the segmentation between banks and

NBFIs • Envisage NBFi access to the payment system• Regularly determine whether conditions for entry are

not too restrictive

24

Policy implicationsConduct

• Conscious parallelism is not collusion• Competition laws are a luxury of developed

countries• Incitative tax treatment for opening of new

branches• Professional banking associations must file

annual reports on the financing of SMEs• Banking-sector practices must not harm the

development of the cooperative sector

25

6.Contribution of Cooperative Institutions

• Given the under-banking situation in Africa, cooperative structures must be encouraged

• Their strentghs:– They collect widely dispersed savings– They represent an effective competitor to the informal

sector– They promote development of local economic elites– They promote development of the mortgage market

26

6.Contribution of Cooperative Institutions (cont’d)

– They familiarize clients with responsible consumer credit

– They play a major role in building financial awarness

27

But…

• Cooperative institutions face major problems of internal governance when they embark on credit for commerce and industry

• Savings cooperatives can only marginally participate in the development of financial markets

28

Moreover

• Organization of the cooperative sector must be confederal, to ensure support of institutions in difficulty

• Regulation of cooperative institutions can be harmonized on a regional basis, but supervision must be strictly national

29

7. Performance of Banking Regulation and Supervision

• Significant modernization of regulation and supervision

• General acceptance of international codes and standards

• Harmonization and cooperation on a regional basis

30

Regulation and Supervision (cont’d)

• Avantages of segmentation

• Specialized or integrated supervision ?

• Preference for institutional regulation and supervision

• Transparency or limited opacity ?

• Inapplicability of the market discipline concept

• Seeking an optimal level of regulation

31

8.Banks as Partners of Institutional Development

• A positive attitude towards banks

• The conservative nature of banks is a factor of stability

• Tax treatment should be adequate

• Promote, where possible, bank listings on local stock exchanges

32

9. Conclusion

• Banking sector performance assesment as a complementary exercise to financial stability assessment

• A need for economic performance indicators of the banking sector– Performance is essentially a qualitative concept– Performance is a relative concept – Indicators should be specific to Africa to facilitate

useful comparisons within the region