Financial sector development - Sida

A positive effect of liberalisation efforts is improved competition among banks and other
financial institutions, and thus a more efficient intermediation and a lowering of transaction
costs. Experience from other countries shows that, in the longer run, market
oriented financial policies will impose a stricter discipline on government finances and a
more efficient allocation of national savings. The latter effect is of great importance in
promoting economic growth.
After nearly a decade of experience, there is a growing consensus that financial reforms
in Sub-Saharan Africa require long periods of adjustment, particularly in the form of
learning and institution building. The transfer of technical competence is, on the whole,
more important than the transfer of funds for on-lending.
7.2.3 Capital markets and international capital flows
Capital markets, i.e. markets dealing in longer-term financial contracts, are emerging in
most countries in Sub-Saharan Africa. This is a natural process as financial markets
"deepen". The demand for longer-term finance by the private sectors, and the willingness
on the part of governments to provide the legal and regulatory frameworks are fostering
institutions and instruments in the capital markets. One impediment, common to most
African countries, has been macro-economic instability, with large fiscal deficits and high
rates of inflation. This often results in a crowding out of resources for private investment
and creates uncertainty about long-term financial contracts.
Some forms of long-term finance have existed in most African countries for a number of
years. Development Finance Institutions (DFIs) were established (with public funds) in
almost all the countries in the 1960’s in order for governments to provide finance for longterm
development. As referred to in Section 5.2, these experiments were generally illfated,
in many cases even detrimental to the development efforts. Lending was often
based on other than commercial terms, the banks were underfunded etc. The DFIs are
now being either reformed or closed. Other capital market institutions with a history in
African economies include housing finance companies, insurance companies and
pension funds (often state run). Many of these institutions have, like the DFIs, been
insufficiently capitalised and subject to political interference. The financial reform
programmes mentioned above usually involve also these institutions in the capital
markets. Examples can be found for instance in Tanzania, Zambia, and Uganda, where
capital markets are weak.
Most African countries have had some form of statutory pension arrangements. However,
such funds have often been mismanaged and need to be brought under stricter
legislation and control.
Recent years have seen the development in many African countries of securities markets
and the establishment of stock exchanges. These developments are closely connected
with the privatisation programmes which require large amounts of risk capital and efficient
secondary markets in corporate assets (shares). Zimbabwe has a long tradition of stock
exchange trading, and recent years have seen a rapid expansion of trading on the
Zimbabwe Stock Exchange. The Ghana Stock Exchange, although quite recent in origin,
has also grown rapidly in recent years. Zambia, Tanzania and Uganda are now also
moving to establish stock exchanges.
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