Financial sector development - Sida

From the early 1990s, measures to tackle the macro-economic imbalances and financial
system reform became integral parts of the Structural Adjustment Programmes
implemented in most of the countries receiving Swedish aid funds. As a consequence, the
experience of financial sector aid projects carried out by SIDA, BITS and SwedeCorp in the
1990s appears to be more encouraging than in the previous decades.
Nevertheless, in most countries in Sub-Saharan Africa the deficiencies of domestic
financial systems yet constitute major obstacles to economic development and poverty
reduction. With the exception of South Africa and Zimbabwe, the financial systems are
shallow, narrow and undiversified. There are various factors contributing to this
unsatisfactory situation:
• the low income of households and the low profitability of most economic undertakings
• the history of financial repression and governmental interference in the financial system
• the instability of of the macro-financial environment and lack of steadiness of macroeconomic
policies
• the lack of appropriate legal, regulatory and prudential frameworks
• the highly fragmented markets and the low degree of interaction between the formal
and the informal market segments
• the scarcity of technical and managerial financial skills
Moreover, the mismanagement of the public finances has also contributed. The large
budget defecits absorbed a substantial part of the limited financial resources in the
economies. As a result, credit to the private sector was “crowded out”. In many East Asian
economies, by contrast, governments have been net savers during certain periods. Publicly
owned banks in Africa have often been instructed to finance primarily the public sector,
including loss-making parastatals. Their East Asian counterparts have financed primarily
the export industry. Furthermore the Sub-Saharan countries have been much less
successful than the countries of East Asia to increase savings through the growth of
pension funds, insurance companies and other non-bank financial institutions.
Private capital now accounts for more than 80 per cent of net long-term flows to
developing countries, totalling USD 285 billion in 1996. These flows are spreading also to
low-income countries. For example, private capital flows to Sub-Saharan Africa, while still
only around 10 USD billion, are now several times greater than they were at the beginning
of the 1990s. In addition to recorded capital inflows, there have been substantial private
transfers by individuals to countries in this region. A large portion of these flows are
believed to be related to returning flight capital. It can be argued that the increase in
foreign direct investments and other private foreign capital flows to Sub-Saharan Africa is
important in relation to the limited private domestic investments taking place. Moreover,
even small capital inflows may have important demonstration effects on domestic and
other foreign investors. These private flows could be crucial for the future growth potential
of the region, especially when official development assistance is on the decline, both in
absolute and relative terms.
Political instability, debt overhang, inadequate institutional framework, deficient financial
systems, low levels of education and skills, small markets and low reliance on privatisation
are some of the factors that are holding back foreign private capital flows to this region.
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