I N T E R N A T I O N A L M O N E T A R Y F U N D

A f r i c a n De p a r t m e n t

Financial Development in

Sub-Saharan Africa

Promoting Inclusive and Sustainable Growth

Prepared by a team led by Montfort Mlachila

and composed of Larry Cui, Ahmat Jidoud,

Monique Newiak, Bozena Radzewicz-Bak,

Misa Takebe, Yanmin Ye, and Jiayi Zhang

Author Author Author Author

Copyright 2016

International Monetary Fund

Cataloging-in-Publication Data

Joint Bank-Fund Library

Names: A team lead by Montfort Mlachila and composed of Larry Cui, Ahmat

Jidoud, Monique Newiak, Bozena Radzewicz-Bak, Misa Takebe,

Yanmin Ye, and Jiayi Zhang

Title: Financial Development in Sub-Saharan Africa Promoting Inclusive and

Sustainable Growth

Identifiers: ISBN

Subjects: Financial Development, Financial Inclusion, Sustainable Growth, Income

Inequality

Classification: G1, G2, G17, O1, O15

ISBN: 978-1-47553-240-1

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The Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest.

The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, its

Executive Board, or IMF management.

INTERNATIONAL MONETARY FUND iii

Contents

Preface ........................................................................................................................... v

Executive Summary ..................................................................................................... ix

Chapter 1. Tracking Financial Development ............................................................. 1

Improving Financial Sector Depth .............................................................................................. 1

Multifaceted Financial Development ......................................................................................... 3

Homegrown Banks ........................................................................................................................... 7

State-Owned Banks .......................................................................................................................... 8

How Much Room Is There to Catch Up? .................................................................................. 9

Chapter 2. Financial Development, Growth, and Volatility ................................... 11

More Vigilance against Macro-financial Risks ...................................................................... 16

Chapter 3. Boosting Financial Sector Development............................................... 17

A Summary Review of the Literature ....................................................................................... 17

Macroeconomic Fundamentals Driving Financial Development ................................... 18

Weak Institutional Quality Inhibiting Financial Development ........................................ 20

Some Institutions Seem to Matter More Than Others ...................................................... 20

Increasing the Potential of Islamic Finance ........................................................................... 22

Chapter 4. Promoting Financial Inclusion ............................................................... 25

Overview ............................................................................................................................................. 25

The Cost of Unequal Financial Access ..................................................................................... 27

Supporting Financial Development and Inclusion through Mobile Payments and

Banking Services ......................................................................................................................... 31

The Roles of Microfinance in Promoting Financial Inclusion .......................................... 34

Chapter 5. Ensuring Continued Financial Stability ................................................. 39

Commodity Price Shocks and Financial Sector Fragility ................................................... 42

iv INTERNATIONAL MONETARY FUND

Chapter 6. Policies for Supporting Financial Development and Stability ........... 47

Annex 1. Financial Development, Growth and Economic Volatility ..................... 51

Annex 2. Drivers and Impediments of Financial Sector ......................................... 53

Annex 3. Gender Gaps in Financial Inclusion and Income Inequality .................. 55

References ................................................................................................................... 57

Figures

1. Sub-Saharan Africa: Distribution of Financial Sector Assets ......................................... 2

2. Sub-Saharan Africa: Standard Measures of Financial Depth ........................................ 3

3. Sub-Saharan Africa: Financial Development Index, 19802013 .................................. 5

4. Sub-Saharan Africa: Dimensions of Financial Development ........................................ 6

5. Sub-Saharan Africa: Actual and Predicted Financial Development, 2013 ............. 10

6. Long-Term Impact on GDP of Relaxing Financial Constraints ................................... 14

7. Sub-Saharan Africa: Impact of Financial Development on Growth Volatility ....... 14

8. Sub-Saharan Africa: Financial Development and Institutional Quality in 2013 ... 20

9. Sub-Saharan Africa: The Distance to the Benchmark and Institutional Quality .. 21

10. Sub-Saharan Africa: Breakdown of Islamic Finance Assets ...................................... 23

11. Access to Financial Services ................................................................................................. 23

12. Sub-Saharan Africa: Indicators of Financial Inclusion ................................................. 26

13. Sub-Saharan African Countries: Financial Inclusion .................................................... 27

14. Sub-Saharan Africa: Indicators of Financial Inclusion by Gender, 2014 ............... 28

15. Gender Equality in Financial Inclusion and Macroeconomic Outcomes.............. 29

16. Mobile Payments ..................................................................................................................... 34

17. Key Features of Microfinance Institutions in Developing Countries ..................... 36

18. Systemic Banking Crises, 19762010 ................................................................................ 40

19. Sub-Saharan Africa: Financial Soundness Indicators, 200614 ............................... 40

20. Commodity Price Shocks and Selected Indicators of Financial Sector Fragility 43

Tables

1. Sub-Saharan Africa: GMM Estimation Results of Impact of Financial Development

on Growth .......................................................................................................................................... 13

INTERNATIONAL MONETARY FUND v

2. Sub-Saharan Africa: Estimation Results of Impact of Financial Development on

Growth Volatility .............................................................................................................................. 15

3. Sub-Saharan Africa: Drivers of Financial Development ................................................ 19

4. Sub-Saharan Africa: Top Ranking of Coefficients between the Distance to the

Benchmark and Detailed Institutional Quality...................................................................... 22

5. Explaining Income Inequality ................................................................................................. 30

6. Determinants of Female Labor Force Participation ....................................................... 31

7. Sub-Saharan Africa: Financial Sector Supervisory Standards ..................................... 41

8. Impact of Declines in Commodity Prices and Financial Sector Fragility ................ 45

A.1.1 Financial Sector Development, Growth, and Volatility: Key Variables and

Sources ............................................................................................................................................... 52

A.2.1 Drivers and Impediments of Financial Development: Data Sources and

Description ........................................................................................................................................ 54

A.3.1. Data Sources and Description ........................................................................................ 55

Box

1. Measuring Financial Development and Inclusion ............................................................ 4

INTERNATIONAL MONETARY FUND vii

Preface

This paper provides a comprehensive review of financial development in sub-Saharan Africa

and discusses how financial development can boost economic growth and make it more

inclusive and less volatile. Building on a chapter in the April 2016 Regional Economic Outlook

for sub-Saharan Africa, this paper provides an