The Economics of Banking and Finance in Africa: Developments in Africa’s Financial Systems

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This book evaluates the characteristics and developments in Africa’s financial systems, including monetary policy, structured finance, sustainable finance and banking, FinTech, RegTech, SupTech, inclusive finance, the role of regulation in dealing with banking crises, the impact of the COVID-19 pandemic on Africa’s financial systems and how to reform the post-COVID-19 financial systems. It is made up of contributions from scholars in finance and economics as well as financial market practitioners.

Banking and the financial markets play a significant role in the growth of various economies. Although a number of handbooks on banking and finance exist, they mainly focus on Europe, America and Asia. Banks and financial markets in Africa are confronted with different challenges and therefore present a unique case to understand Africa’s financial systems. A number of African countries have experienced banking crises and it is important to examine these issues as well as the regulatory regimes required to address them. This edited book contributes to the limited texts in the area by providing a comprehensive resource on banking and finance for students, scholars, researchers, policymakers, and financial market practitioners. It contains various theoretical and empirical chapters on banking and finance in Africa.

Author(s): Joshua Yindenaba Abor, Charles Komla Delali Adjasi
Series: Palgrave Macmillan Studies in Banking and Financial Institutions
Publisher: Palgrave Macmillan
Year: 2022

Language: English
Pages: 1092
City: Cham

Acknowledgements
Praise for The Economics of Banking and Finance in Africa
Contents
Notes on Contributors
List of Figures
List of Tables
Part I Overview of Banking and Finance
1 Introduction: An Overview of Africa’s Financial Systems
1.1 Introduction
1.2 Purpose of This Book
1.3 An Overview of the Chapters
1.4 Concluding Remarks
References
Part II FinTech, Financial Inclusion and Banking Sector Development
2 Inflation, Interest Rates, and Exchange Rates in Africa
2.1 Introduction
2.2 Inflation
Stylized Facts
Theories of Inflation
Empirical Evidence
2.3 Interest Rates
Theories of Interest Rates
Evidence
2.4 Exchange Rates
Stylized Facts
Theory
2.5 Relationship Between Inflation, Interest Rates, and Exchange Rate
2.6 Conclusion
Appendix
References
3 Bank Market Structure and Competition in Africa
3.1 Introduction
3.2 Bank Market Structure and Competition in Africa: Stylised Facts
Banking Sector Depth: Africa Versus Comparator Regions
Banking Sector Intermediation Efficiency & Concentration: Africa Versus Comparator Regions
Banking Sector Profitability and Stability: SSA and Comparator Regions
3.3 Literature Review
Measuring Competition in Banking: The Traditional and Non-traditional Approaches
3.4 Methodology
Analytical Framework: The Panzar and Rosse (1987) Methodology
The Bresnahan Framework
3.5 Empirical Implementation of the Panzar and Rosse (1987) Model
3.6 Empirical Results
Descriptive and Correlation Analysis
Market Structure (Panzar–Rosse [H-statistic])
3.7 Conclusion and Implications
Appendix
References
4 Financial Inclusion, Banking Sector Development, and Financial Stability in Africa
4.1 Introduction
4.2 Financial Inclusion, Banking Sector Development, and Financial Stability in Africa: Stylized Facts
Stylized Facts on Financial Inclusion in Africa
Stylized Facts on Banking Sector Development and Financial Stability in Africa
4.3 Literature Review
4.4 Methodology
Variables Description
Indices Computations and Corresponding Weights
4.5 Discussion of Results
Summary Statistics
Unit Root Test Results
Lag Order Estimation and Selection
Granger Causality Test
Regression Results
Forecast-Error Variance Decomposition of FINDEX, BSD, and FINSTA
Impulse Response Functions (IRF)
4.6 Conclusion and Policy Implications
References
5 FinTech and the Future of Banks and Financial Services in Africa
5.1 Introduction
5.2 FinTech: The New Model for Banking and Financial Services
The Typology of FinTech in the Financial Services Industry
Finance and Investments
Operations and Risk Management
Payments and Infrastructure
Data Security and Monetisation
Consumer Interface
Role of FinTech in the Provision of Banking and Financial Services
Mobile Money
Mobile Money in Africa
Mobile Banking Services
Crowdfunding Services
Crowdfunding Markets in Africa
Cryptocurrency
Cryptocurrency Markets in Africa
5.3 Role of FinTech in Promoting Financial Inclusion
5.4 FinTech and Africa’s Financial Systems
FinTech in Africa: A Comparative Analysis
5.5 Constraints and Challenges to FinTech Adoption in Africa
COVID-19 Pandemic and FinTech Development in Africa
5.6 Concerns and Regulatory Issues of FinTech in Africa
5.7 Conclusion and the Way Forward
References
Part III Central Bank and Monetary Policy
6 Central Bank Independence, Exchange Rate Regime, Monetary Policy and Inflation in Africa
6.1 Introduction
6.2 Overview of Central Bank Independence, Monetary Policy, Exchange Rate Regime and Inflation in Africa
Central Bank Independence
Inflation
Inflation in Africa
Inflation, Monetary Policy and Exchange Rate Regimes
6.3 Literature Review
Time Inconsistency Problem
Central Bank Independence and Inflation
CBI, Exchange Rate Regime and Inflation
Central Bank Independence and Monetary Policy Effectiveness
6.4 Methodology
Data and Sample
Model and Estimation Technique
6.5 Estimation Technique
6.6 Empirical Results
6.7 Conclusion
Appendix
References
7 Monetary Policy, Central Banks’ Independence, and Financial Development in Africa
7.1 Introduction
7.2 Stylised Facts on Monetary Policy, Central Banks’ Independence, and Financial Development in Africa
7.3 Literature Review
Theoretical Foundation
Empirical Literature on Monetary Policy and Financial Development
Empirical Literature on CBI and Financial Development
Interactive Effect of Monetary Policy and CBI on Financial Development
7.4 Methodology
Data and Sample
Model and Estimation Technique
Estimation Technique
Model
Definition of Variables
Dependent Variable
Explanatory Variables
Empirical Results
Effects of Monetary Policy and CBI on Financial Development
Interactive Effect of Monetary Policy and CBI on Financial Development
7.5 Conclusion and Implications
Appendix: Descriptive Statistics
References
8 Bank Market Power and Monetary Policy Transmission in Africa in the Wake of Information Sharing Institutional Arrangements
8.1 Introduction
8.2 Monetary Policy in Africa
8.3 Literature Review
8.4 Methodology
Measures of Monetary Policy
Measurement of Bank Market Power
Control Variables
8.5 Empirical Results
8.6 Conclusion
Appendix
References
9 Monetary Policy and Bank Risk-Taking Behaviour in Africa
9.1 Introduction
9.2 Monetary Policy and Risk-Taking Behaviour of Banks in Africa: Stylised Facts
9.3 Monetary Policy and Risk-Taking: Evidence
9.4 Data and Methodology
Data
Model Specification
Measuring Monetary Policy Stance
Bank-Specific Variables
Macroeconomic Variables
Econometric Technique
9.5 Empirical Results and Discussions
Summary Statistics
Correlation Analysis
Empirical Relationship Between Monetary Policy and Risk-Taking of Banks
9.6 Conclusion and Policy Recommendations
References
10 Bank Pricing Behaviour, Monetary Policy and Inclusive Finance in Africa
10.1 Introduction
10.2 Literature Review
Theoretical Overview
Empirical Literature Review
10.3 Evaluating Methodology
Data Sources
Variable Measurements
Model and Estimation Strategy
10.4 Empirical Results
Summary Statistics
Effects of Monetary Policy on Bank Pricing Behaviour
Effects of Bank Pricing Behaviour on Financial Inclusion
Financial Inclusion and Bank Pricing Behaviour: The Role of Monetary Policy
10.5 Conclusion and Policy Implications
References
Part IV Structured Finance, Sustainable Finance and Islamic Banking
11 Structured Finance in Africa
11.1 Introduction
11.2 Conventional Financing
11.3 What Is Structured Finance?
Securing Specific Liabilities with Specific Assets
Asset Securitization
Ring-Fencing Assets
Reducing Agency Cost and Meeting Specific Investor Demand
11.4 The Structuring Process
Project Finance
Structured Trade Finance
11.5 Structured Finance Markets in Africa
Project Finance Market in Africa
South Africa
Nigeria
Egypt
Securitization Market in Africa
11.6 Requisite Conditions to Support the Development of Structured Finance Market in Africa
Macroeconomic and Political Stability
Development of the Financial Sector
Legal Framework to Ensure Investor Rights
Tax Incentives
Local Rating Agencies and Service Providers
11.7 Concluding Remarks
References
12 Sustainable Finance and Banking in Africa
12.1 Introduction
12.2 Sustainable Development Goals and Sustainable Finance
12.3 Financial Institutions and the “Triple Bottom Line”
12.4 Sustainable Finance and Banking in Africa
Explaining the Concepts
Sustainable Finance and Banking in Africa—Policies and Practices
12.5 Green Growth Financing Mechanisms in Africa
Green Bonds
Green Climate Fund
Green Deposits and Loans
12.6 Conclusion
Questions
References
13 Islamic Banking and Finance in Africa
13.1 Introduction
Islamic Banking and Finance
Islamic Banking and Agency Problem
Sharia-Compliance Financing Products
Debt-Based Financing
Lease-Based Financing
Profit-Loss Sharing Financing (PLS)
13.2 Principles and Models of Islamic Banking and Finance
13.3 An Overview of Islamic Banking and Finance in Africa
13.4 Challenges and Opportunities
13.5 Conclusion
References
Part V Banking Crises and Global Banking
14 Explaining Banking Failures in Africa
14.1 Introduction
14.2 Why Do Banks Fail?
Unfavorable Economic Conditions
Regulatory Failures
Poor Corporate Governance Practices
Non-performing Loans
Mismanagement
Fraudulent and Corrupt Dealings
Poor Risk Management Procedures
14.3 Consequences of Banking Failures in Africa
Lack of Confidence
Loss of Employment
Downgrading of Financial and Economic Systems
Increased Cost of Finance
Slowdown in Economic Activities
Undue Pressure on Fiscal Policies
Undue Pressure on Monetary Policies
14.4 Banking Failures and Banking Crises in Africa
14.5 Remedies for Banking Failures in Africa
Supervision and Monitoring
Regulations and Reforms
Central Bank Liquidity Support
Bailouts
Takeovers, Acquisitions, and Mergers
14.6 Conclusion and Policy Implications
References
15 Cross-Border Banking and Banking Crisis in Africa
15.1 Introduction
15.2 Literature Review
The Link Between Cross-Border Banking and Banking Crisis/Banking Stability
Determinants of Banking Crisis
15.3 Methodology
Empirical Model Specification and Empirical Strategy
15.4 Empirical Results
15.5 Conclusion and Policy Recommendations
References
16 Cross-Border Banking, Bank Pricing and Financial Inclusion in Africa
16.1 Introduction
16.2 Stylized Facts on Cross-Border Banking and Financial Inclusion
16.3 Literature Review
Theoretical Overview
Monopoly Model
Dealership Model
Behaviour Model
Empirical Literature
16.4 Evaluating Methodology
Data Sources
Measurement Variable
Model and Estimation Strategy
16.5 Empirical Results
Summary Descriptive Statistics
Effect of Cross-Border Banking on Bank Pricing Behaviour
Effect of Bank Pricing Behaviour on Financial Inclusion
The Sensitivity of Financial Inclusion to Cross-Border Banking and Bank Pricing Behaviour
Conclusion and Policy Implications
References
17 Current Issues in Global Banking and Implications for African Banks
17.1 Introduction
17.2 Recent Developments in Global Banking
17.3 Challenges and Opportunities in Global Banking
17.4 The Future of Global Banking and Implications for African Banks
17.5 Conclusion and the Way Forward
Appendix A: Top 100 Banks by Total Assets
References
Part VI Banking Regulation and Supervision
18 Risk Management and Compliance in Banking in Africa
18.1 Introduction
18.2 Risk Management and Compliance in Banking
Compliance in Banking
18.3 Managing Bank Risks Through Corporate Governance
Traditional and Modern Approaches to Risk Management
Corporate Governance
Corporate Governance Theories
Impact of Corporate Governance on Bank Risks
Risk Governance
18.4 The Role of Risk Management and Compliance in Micro-Prudential Oversight
18.5 An Overview of Stability of Banks in Africa
18.6 Conclusion and Recommendations
References
19 Corporate Governance, Regulations and Banking Stability in Africa
19.1 Introduction
19.2 Overview of Corporate Governance, Financial Sector Transparency Regulation and Banking Stability in Africa
19.3 Literature Review: Theory, Empirics and Hypothesis Development
19.4 Methodology and Data
Variable Selection and Justification
19.5 Empirical Results and Discussions
19.6 Conclusions and Recommendations
Appendix 19.1: Breusch and Pagan Lagrangian Multiplier Test for Random Effects
Appendix 19.2: Hausman (1978) Specification Test
Appendix 19.3: Modified Wald Test for Groupwise Heteroskedasticity in Fixed Effect Regression Model
Appendix 19.4: Wooldridge Test for Autocorrelation in Panel Data
Appendix 19.5: Summary of Variables Employed
Appendix 19.6: Descriptive Statistics
Appendix 19.7: Pairwise Correlations
References
20 Macro-Prudential Regulation, Monetary Policy and Systemic Banking Crises in Africa
20.1 Introduction
20.2 Stylized Facts on Macro-prudential Regulation, Monetary Policy and Banking Crises in Africa
20.3 Literature Review
20.4 Methodology
Model Specification
Effects of Macro-prudential Regulation and Monetary Policy on Systemic Banking Crisis
Interaction Effect of Macro-Prudential Regulation and Monetary Policy on Systemic Banking Crisis
Estimation Technique
20.5 Empirical Results
Summary Descriptive Statistics
Correlation Matrix
Regression Results
Effect of Macro-Prudential Regulation and Monetary Policy on Systemic Banking Crisis
Interaction Effect of Macro-prudential Regulation and Monetary Policy Systemic Banking Crisis
20.6 Conclusion and Policy Implications
Appendix A
Appendix B: Robust Results
References
21 Recent Developments in Banking Regulation and Supervision in Africa
21.1 Introduction
21.2 The Regulation and Supervision of Banks in Africa
Why and How to Regulate
The State of Regulation and Supervision in Africa
Licensing and Supervision
21.3 The Roles of the Central Bank and Regulatory Strategy
The Regulatory Roles of the Central Bank
Issuance of the Charter/License for New Banks
Reserve Requirements
Control Over Monetary Policy/Rate
Deposit Insurance
Sole Issuer of Currency
Monitoring and Measurement of Risk Taken by the Banks
Enforcing Anti-Discrimination Laws
Conflicts of Interest
Payment Mechanism
Management of Foreign Exchange
Government’s Bank
Lender of Last Resort
Regulatory Strategy: Scope, Intensity, and Cost
21.4 Global Banking Regulations
21.5 Basel’s Principles and Africa’s Banking System
21.6 Recent Challenges in Regulation and Supervision
21.7 Conclusion
References
22 Playing-Catch Up: SupTech and RegTech Developments in Africa
22.1 Introduction
22.2 SupTech and RegTech: A Conceptual Overview
22.3 An Overview of Fin Tech in Developing Economies: The Case of Africa
22.4 The Demand Factors for the Adoption of SupTech and RegTech by Regulators of FinTech
Automated Report Submission and Data Quality Management
Collection of Granular Data
Easy and Quick Access to New Flows of Information for Decision-Making
Enhanced Prediction and Effective Supervision
Simplification of Regulations for Easy Understanding by Market Participants
Integration of Regulators’ Internal Processes
22.5 Regulatory Mechanisms of FinTech in Africa
Adoption of SupTech and RegTech in Regulating FinTech in Africa
Market Participants and the Use of SupTech and RegTech by Regulators
Financial Institutions
Digital Financial Service Providers
22.6 SupTech and RegTech Development and Implementation in Africa
Needs Assessment
Development Strategy
Development of Capacity for Assessment, Execution and Operationalization
22.7 Challenges of SupTech and RegTech in Africa
Cost Factor
Capacity of Regulators and Market Participants
Weak Cybersecurity
Sustainability Issues
Over-Reliance on Outmoded Technology by Regulators and Financial Institutions
22.8 Factors to Consider in Promoting SupTech and RegTech Effectiveness and Efficiency in Africa
Collaboration Among Industry, Market Participants and Regulators
Cross-Border and Regional Integration
Effective and Robust Legal Framework and Regulatory Institutions
Building a Relevant and Sustainable Human Resource Capital Base Across the Continent
Investment in Digital Infrastructure Across Africa
22.9 Conclusions, Policy Implications and Way Forward
References
Part VII Non-Bank Financial Markets
23 Sustainability, Growth and Impact of Microfinance Institutions in Africa
23.1 Introduction
23.2 Sustainability of Microfinance Institutions in Africa
Measures of MFI Sustainability
Financial Self-Sufficiency (FSS)
Subsidy Dependence Index (SDI)
Outreach Indicators (OI)
Computation of FSS
Computation of SDI
Portfolio at Risk (PaR)
23.3 Stylized Facts on MFI Sustainability in Africa
Financial Self-Sufficiency
Subsidy Dependence Index
Number of Active Borrowers
Average Loan Balance Per Borrower/GNI Per Capita
Percentage of Female Borrowers
Percentage of Rural Borrowers
Portfolio at Risk
23.4 Growth of MFIs in Africa
The Growth of MFIs in Africa
The Drivers of MFIs’ Growth in Africa
23.5 The Impact of MFIs in Africa
23.6 Conclusion
References
24 Insurance Markets in Africa
24.1 Introduction
24.2 Insurance Business Overview
The Role of the Insurance Markets
24.3 Developments in the Insurance Markets in Africa
Insurance and Financial Market Trends
The African Insurance Market Characteristics
The Market Characteristics of the Highly Industrialised Nations
24.4 Challenges and Opportunities in the African Insurance Markets
24.5 Regulatory Implications of the Insurance Markets
24.6 Conclusion and Market Recommendations
References
25 Pension Markets in Africa
25.1 Introduction
25.2 The Role of Pension Markets
Establishing Attractive Pension Schemes for Staff
Mobilising and Pooling of National Savings
Facilitating Financial Market Development
Ensuring Corporate Governance and Monitoring of Firms
Supporting Infrastructure Development
Supporting the Housing Finance Market
Financing Green Growth Initiatives
25.3 Pension Reforms in Africa
25.4 Overview of Pension Systems in Africa
Ghana
Nigeria
Senegal
Botswana
South Africa
Zambia
Mauritius
Egypt
Niger
Uganda
Kenya
Rwanda
25.5 Pension Funds and Capital Market Development
25.6 Challenges Affecting Pension Markets in Africa
25.7 Conclusion and Policy Recommendations
References
26 On the Determinants of Stock Market Development in Africa
26.1 Introduction
26.2 Overview of Stock Market Development in Africa
26.3 Theoretical Literature
Macroeconomic Determinants of Stock Market Development
Institutional Determinants of Stock Market Development
Natural Resource Rents Determinants of Stock Market Development
Empirical Literature on Determinants of Stock Market Development
26.4 Methodology
Data Source
Estimation Strategy
Dependent Variable: Stock Market Development
Independent Variables
Stock Market Liquidity
Banking Sector Development
Macroeconomic Stability
Institutional Quality
Natural Resources
Estimation Technique
26.5 Results and Discussion
Descriptive Statistics
Determinants of Stock Market Development
Macroeconomics
Institutional Quality
Natural Resource Rent
26.6 Summary and Policy Implications
Appendix Results Without South Africa
References
27 Bond Market Development in Africa: A Review
27.1 Introduction
27.2 Bond Markets: Features and Types
Country-Specific Examples of Bond Markets
South African Bond Market
Nigerian Bond Market
Kenyan Bond Market
Other Bond Market Hot Spots in Africa
Why the Need for a Developed Bond Markets?
27.3 Bond Market Development and Financing in Africa
27.4 The Current Situation and Performance of the Bond Market in Africa: An Overview
27.5 Constraints to Bond Market Development in Africa
27.6 Determinants of Bond Market Development: An Empirical Review
Macroeconomic Factors
Financial Factors
Institutional Factors
27.7 Conclusion and Policy Implication
References
28 Private Capital Flows, Domestic Financial Markets and Energy Use in Africa
28.1 Introduction
28.2 Literature Review
28.3 Methodology
The Model
Empirical Model Estimation
Data Source
28.4 Empirical Results and Discussion
28.5 Conclusion
References
29 Foreign Direct Investment, Stock Market Development, and Inclusive Growth in Selected Sub-Saharan African Countries
29.1 Introduction
29.2 Theoretical and Empirical Review
Theoretical Review
Empirical Review
29.3 Methodology
29.4 Data Description
29.5 Empirical Analysis and Discussion
Empirical Analysis
Discussion of Results
29.6 Conclusions and Recommendations
Appendix: Results from Panel Models
References
30 The COVID-19 Pandemic and Africa’s Financial Systems: How Do We Reform Post-COVID-19 Financial Systems?
30.1 Introduction
30.2 Overview of COVID-19 and Previous Pandemics
30.3 African Governments’ Policy Responses to the COVID-19 Pandemic
30.4 Implications of COVID-19 Pandemic for Africa’s Financial Markets
Impact of COVID-19 Pandemic on Banking and MFIs
Impact of COVID-19 Pandemic on Non-Bank Financial Institutions
Impact of COVID-19 Pandemic on Capital Markets
Investment Firms
Impact of COVID-19 Pandemic on FinTech
30.5 How to Reform Africa’s Post-COVID-19 Financial Systems
30.6 Conclusion
References
Index