Financial sector development - Sida

One reason behind this unfavorable development is the drop in world market prices for
African export commodities. Another factor is that most of the sub-continent, after gaining
independence from colonial powers in the 1960s, experienced a protracted period of
devastating political turmoil. However, the overshadowing element was probably the
unsuccessful macro-economic policies pursued in most countries. Existing growthpromoting
structures were replaced by regulatory vacuums and/or economic systems
which proved incapable to sustain efficient production. The unfavourable development
was underpinned by interventionist government policies in industry and trade. In this
respect, the focus on investment in publicly owned large-scale industry contributed to an
inefficient allocation of resources and a bias against agricultural production. Mounting
fiscal deficits, caused by lax expenditure control, limited tax revenues and generous
government lending to the public sector, spurred inflation. Increasing poverty in turn
reduced the scope for savings, while people lost confidence in existing formal institutions,
notably the financial systems. The value of financial assets deteriorated when real
interest rates were negative, while the banks' lack of competition discouraged their
incentive to provide efficient financial services.
Many of the African economies are today struggling to recover and to restructure their
economies. This process is demanding since a first requirement is to maintain tight fiscal
discipline for the purpose of monetary stability. The restructuring programmes include
liberalisation of trade and prices, and reform of the financial systems. However, it takes
time to establish the suitable institutional framework, and to gain confidence in the
process. Meanwhile, savers and investors hesitate to make use of the formal financial
intermediaries. Informal financial solutions are yet important in many African countries
and are likely to continue playing an important role.
These issues are explicitly brought forward in a study of the conditions for domestic
resource mobilisation in four selected Sub-Saharan countries (Tanzania, Uganda,
Zambia and Ghana). This study indicates that the domestic resource mobilisation still
suffers from deficiencies in the institutional structure; deficiencies which are yet largely a
reflection of the interventionist policies pursued in the 1970s and 1980s.
In order to assess the scope for assistance in the area of financial sector development, it
is vital to have a notion of why the savings rates in these countries remain so low. Part of
the explanation may be found in the macro-economic development. However, microeconomic
factors need also be studied in order to achieve a better understanding of the
driving forces behind savings behaviour of individuals.
As outlined in Section 3.3, several factors appear to be important when determining the
savings behaviour of individuals, such as level of wealth, current and expected income,
age, health situation, family structure, cultural and sociological factors. Against this
background, it is likely that donors could help to improve the mobilisation of domestic
savings through a large range of general measures, such as improving the educational
systems. However, in order to give more clear-cut guidance, it appears more appropriate
to confine the discussion to assistance geared at improving the institutional structure of
the financial sector. In this respect, there seem to be mainly three areas where donors
can usefully contribute to financial sector development: 1) assistance in the development
of the general legal framework; 2) assistance in establishing an adequate tax system;
and 3) assistance in the promotion of a functional financial system. Focusing on the
latter, some general guidance can be given on the basis of donors’ previous experience
of assistance in this field.
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