ArticlePDF Available

Financial sector development in Africa – An overview

  • University of Maryland, College Park; Robert H Smith School of Business
Available online at
Review of Development Finance 7 (2017) 1–5
Financial sector development in Africa – An overview
It is now generally accepted that financial sector development
is central to economic development (Levine, 1997), and that
inclusive financial systems are important for inclusive develop-
ment (Levine, 2004; Park and Mercado, 2015). The positive
impact of financial sector development on economic perfor-
mance is also supported by evidence from Africa, although
the results are not as strong mainly due to the weak quality
of available data (Senbet and Otchere, 2010).
It should be recognized that the channels for the linkage
between financial development and economic development are
multiple functions that financial systems perform, including
liquidity provision, information production, price discovery, risk
management, and governance, etc. (Levine, 1997). In the bank-
ing sector, for instance, mere savings mobilization is insufficient
unless these savings are intermediated for efficient resource allo-
cation through private credit provision. By the same token, the
mere existence of stock exchanges is immaterial unless they
are active in the production of information and liquidity through
well-functioning trading systems (see Senbet and Otchere, 2010,
for details). Therefore, in designing financial sector reforms,
policies should be guided by a functional perspective of financial
systems – and not just savings and capital mobilizations.
To enhance the developmental potential of finance, most
African countries liberalized their financial sectors between the
late 1980s and the late 1990s, mostly as part and parcel of the
structural adjustment programmes promoted by the IMF and the
World Bank. The reforms included removal of credit ceilings,
liberalization of interest rates, restructuring and privatization of
state-owned banks, introduction of a variety of measures to pro-
mote the development of private banking systems and financial
markets. Accompanying these measures were bank supervisory
and regulatory schemes, including the introduction of deposit
insurance in certain countries (Cull et al., 2005).
At a broader level, a more liberalized financial environment
has emerged in Africa because of financial sector reforms. These
Peer review under responsibility of Africagrowth Institute.
1879-9337 © 2017 Africagrowth Institute. Production and hosting by Elsevier
B.V. All rights reserved.
reforms have also been stimulated by rapid improvements in
global conditions and global technology connecting Africa with
the outside world. Therefore, it is not accidental that Africa
began to experience good performance both in the real and finan-
cial sectors. Until recently, Africa experienced uninterrupted
growth for about two decades, and was for many years one of the
highest growth regions of the world (IMF, 2013). It is also inter-
esting that even stock markets began performing impressively.
During the pre-crisis period, African stock markets performed
surprisingly well in terms of both absolute stock return and on
a risk-adjusted basis (Senbet and Otchere, 2010; Allen et al.,
2011), despite the challenges they had faced in terms of low
capitalization and liquidity.
Moreover, there are currently encouraging forces in play for
the prospect of Africa to integrate into the global financial econ-
omy. There is growing integration of world capital markets,
including those in emerging economies, with increasing capi-
tal mobility. Barriers to international capital flows have been
reduced. Also, there are rapid advances in information technol-
ogy connecting Africa with the outside world, allowing outside
investors seeking the benefits of global diversification to be
better able to access African financial systems.
Despite this impressive performance both in terms of finan-
cial sector reforms and economic growth, financial markets in
Africa are considerably less well-developed than those else-
where in the world on virtually all measures of financial
development (Green, 2013). In fact, the financial sectors of
most African countries remain quite underdeveloped even by the
standards of other peer low income countries, and the African
financial development gap is huge; so is the financial inclusion
gap (Allen et al., 2016). The development gap pertains to both
banking and non-bank systems. In the non-bank finance area,
for instance, based on the standard measures of trading activ-
ity and capitalization, most African stock markets are quite thin
with low level of liquidity provision. This issue is being increas-
ingly recognized, and there are now ongoing initiatives to build
regionally integrated stock markets.
Notwithstanding its less developed status, the African finan-
cial sector weathered the crisis remarkably well, especially when
compared to other developing regions. There are several reasons
for this outcome: first, the generally weak integration with the
rest of the global financial sectors meant the potential for direct
contagion was minimal. Second, even in countries such as South
Africa where the financial sector is well integrated with the rest
2Editorial / Review of Development Finance 7 (2017) 1–5
of the world, contagion effects were minimal, especially in the
banking sector, largely due to robust regulation of the banking
sectors in Africa (Kose and Prasad, 2010). Third, weak financial
deepening may also have worked to enhance resilience of the
African financial sector through reduced exposure (low share of
private sector credit relative to GDP).
The global financial crisis was a rude awakening around the
world, including for Africa. It revealed severe regulatory gaps
and distorted incentives in the banking and the overall financial
system, which lead to a build-up of risk exposures not only by
banks but “shadow” banks. This has spurred renewed efforts to
enhance the resilience of the financial sector by reducing the
frequency and severity of future crises through among, other
things, the introduction of the Basel III accord. Moreover, apart
from capital standards, there are now standards for supervision
and monitoring of bank liquidity, which typically arises from a
mismatch between short term bank liability and long term assets.
A major feature of the 2008 global crisis was a sudden dry up of
liquidity in the system, which lead to a shutdown of the credit
markets in the US and beyond.
Financial sector regulators in Africa have also embraced
some elements of Basel III to strengthen their financial sectors
through beefing-up regulatory capital, improving risk manage-
ment and governance, etc. However, the other challenges faced
by African policy makers include the need to enhance finan-
cial broadening through financial inclusion, as well as financial
deepening (Beck and Maimbo, 2013).
A lot, however, remains to be uncovered regardingthe African
financial sectors. This special issue is informed by several con-
siderations. First, much of what is known about development
finance in breadth and in detail tends to be based on, to a
large extent, the experiences of the more intensively researched
Asian and Latin American economies, and less on the African
experience. Second, the sub-Saharan African experience itself
is diverse, with South Africa and to some extent Nigeria and
Kenya increasing in maturity in financial market development,
while the rest of countries lead small, relatively underdeveloped
and fragmented financial markets (Green, 2013). This raises the
question of how one could rationalise these varied experiences
and whether the “successful” experiences with financial sec-
tor development are replicable in the hitherto less successful
Even among the relatively more successful countries, the
paths followed appear very different. In Kenya, for example,
financial broadening appears to be at the centre of financial
sector development, while the South African case can be con-
sidered as rooted in financial deepening. There is thus a need
for more country focused studies to unmask the peculiarities of
the different African economies (see for instance, Allen et al.,
2016). Finally, the global financial crisis, and earlier crises have
introduced new uncertainties for all emerging markets and pre-
emerging countries, such as sub Saharan Africa (SSA). This calls
for more research to inform how SSA can and ought to adapt
its financial sectors to this new environment, and thus enhance
resilience to shocks, whether they emanate from the domestic
or international environments.
To shed light on these many issues pertaining to developments
in the sub-Saharan African financial sector, and its linkages
to economic performance, AERC commissioned collaborative
research on the theme: Financial Sector Reform and Develop-
ment in Africa. The project is broad in scope, covering issues
such as financial regionalisation and globalisation; financial lib-
eralisation and how it impacts growth; financial inclusion and
finance for SMEs; financial sector innovations, including mobile
money; banking sector and stock markets developments in sub-
Saharan Africa, and financial sector regulation and competition.
This special issue is based on selected papers from the collab-
orative research. For this review, we categorize the contributions
into four parts, namely access to finance and SME financing,
financial services and inclusion, banking systems and stability,
and markets and developments. In the following section, we
provide an overview of the papers.
1. Part 1: Access to finance and SME financing
Financing constraint severely affects developing countries,
particularly African countries and this problem can inhibit firm
growth and exacerbate poverty. Using enterprise-level dataset
from the World Bank’s Enterprise Survey, Babajide Fowowe
investigates the effects of financing constraints on growth of
firms in Africa using both objective and subjective measures
of access to finance. Preliminary analysis reveals that African
financial systems are characterized by small banking systems.
Banks in Africa are poor in channeling deposits to the most
efficient uses, signaling low intermediation efficiency. This
constraint leads to situations where banks prefer to invest in
government securities rather than lend to the private sector. In
addition, African banks have low outreach, with banks enjoying
high interest rate spreads and targeting short-term finance, to the
detriment of long-term finance for investments.
A key feature of the dataset used in this study is that it pro-
vides a set of subjective measures of access to finance which
reflect firms’ perception of the business environment, as well
as objective measures of the business environment (such as
whether firms have an overdraft facility), which help overcome
the potential shortcomings of subjective measures. The subjec-
tive measures suggest that financial constraint exerts a significant
negative effect on firm growth. Also, Fowowe finds significant
positive relationships between the objective measures of finance
and firm growth; specifically, the objective measures show that
firms that are not credit constrained experience faster growth
than those that are credit constrained, thus prompting the author
to conclude that participation in financial markets promotes firm
The constraints have led to several outcomes. First, African
firms have limited access to external finance; only about 23
percent of African firms have loans, while about 46 percent
of non-African firms have loans or lines of credit. The author
attributes this state of affair to high interest rates, complex
application procedures, and high collateral requirements, among
others. Second, African firms rely extensively on banks for exter-
nal finance, with firms obtaining over 75 percent of external
Editorial / Review of Development Finance 7 (2017) 1–5 3
finance from banks. Third, African firms face high account fees,
high minimum balances, and restrictive documentation require-
ments. All these factors inhibit firms’ ability to obtain credit. The
policy implication emanating from the results is that firms that
wish to grow must overcome credit constraints and obtain more
external finance. The authors also recommend the development
of credit rating agencies and better risk assessment departments
in banks to ensure effective risk assessment of borrowers which
can reduce loan default rate and consequently, bank margins.
One area where access to finance has been a challenge for
Africa is SMEs. In most African countries, SMEs are perceived
as the engine of growth and transformation. However, access
to finance continues to plague this sector. In the second paper,
Peter Quartey,Ebo Turkson, Joshua Abor and Abdul Iddrisu
examine SME access to finance in the West African sub-region
where the problem of access is very acute and has contributed to
the slow growth of SMEs. The authors examine, among others
whether there are similarities and/or differences in the determi-
nants of SMEs’ access to finance across countries in SSA. They
observe that long-term financing in terms of equity capital is
virtually non-existent for the SME sector. The SME sector in
most countries within the ECOWAS sub-region faces serious
constraints in accessing formal finance. Factors such as lack of
collateral, difficulties in providing creditworthiness, small cash
flows, inadequate credit history, high risk premiums, underde-
veloped bank-borrower relationships and high transaction costs
account for this state of affair. Various SME finance programmes
adopted by governments, such as interest rate subsidies, directed
lending, guarantee funds have not succeeded in alleviating the
financing problems facing the SME sector partly because of lack
of efficiency and transparency in the operation of such programs.
Using subjective measures derived from the survey responses
of the firms in the WBES and objective measure of a firm’s
access to finance which they derived from the share of internal
and external financial resources of working capital, the authors
conduct the analyses first at the sub-regional level by examining
the determinants of access to finance. The sub-regional level
analysis has the tendency to obscure some important differences
in terms of the influence of the various explanatory variables on
access to finance; consequently, to unmask important differences
across countries, the authors also conduct country level analysis
that delineates the differential effects.
At the sub-regional level, the authors find that firm size,
ownership, strength of legal rights, depth of credit information,
firm’s export orientation and the experience of the top manager
strongly influence firms’ access to finance. At the country level,
they find that the determinants of access to finance varies across
countries. One striking result is that in Mali, where govern-
ment support for SMEs is directed more towards women-owned
businesses to meet the Government’s Millennium Development
Goals (MDGs), the gender of top manager significantly deter-
mines firm’s access to finance. Also, women in Mali mostly
engage in small businesses that do not require huge investments,
and this provides little incentive for them to seek financing from
banks and other financial institution. The Malian case is unique
and does seem to contradict the conventional notion that women
disproportionately face barriers to financial access compared to
their male counterparts. It nonetheless shows how government
policy can be used to address access issues if the political will
to do so is strong.
2. Part II: Financial services and inclusion
There is widespread recognition in the developing world that
financial inclusion can reduce poverty, enhance growth, and
promote sustainable development. Development agencies such
as the World Bank realize that inclusive financial systems not
only enable poor people to save and borrow, and thus allow
them to invest in entrepreneurial ventures, but they also help
insure themselves against socio-economic vulnerabilities. Tech-
nological advances, especially the use of mobile phones, have
facilitated the provision of financial services to the poor in a
relatively cheap and reliable manner. African countries have
experienced a boom in the use of mobile phones, which have
helped solve both problems of distance or access and transaction
costs that have hindered traditional financial services providers
in the past from extending services to the hitherto unbanked. In
the third paper, Alfred Shem, Maureen Odongo and Maureen
Were examine whether the pervasive use of mobile telephony
to provide financial services has enhanced savings mobiliza-
tion in Africa. In sub-Saharan African region, the East African
countries have recorded significant improvement in the use of
mobile money, thus motivating the authors to focus on Kenya,
Uganda, Malawi and Zambia. However, Kenya has been the
leader in the use of mobile telephone financial services. There-
fore, the authors conduct a more in-depth empirical analysis
using data from Kenya.
Using both descriptive statistics and regression analyses, the
authors test the hypothesizes that mobile phone money usage
encourages savings. They find that mobile financial services pos-
itively impact savings and that those who utilize or have access
to mobile financial services are far more likely to save than those
who do not. Higher levels of education or financial literacy and
income have positive effect on savings, but family size has neg-
ative effects on savings, as high dependency ratio constrains the
ability to save. While women are more likely to save than men,
the latter save more money than women. A policy implication
that emanates from the results is that expanding and deepening
the scope of mobile financial services is an important avenue
for promoting and mobilizing savings particularly for the poor
and low income earners who have limited access to the formal
financial system.
The paper by Andreas Freytag and Susanne Fricke assesses
the overall economic effects stemming from the sectoral link-
ages of the financial services sector in Nigeria and Kenya, -
countries that have relatively developed financial sectors in sub-
Saharan Africa.1Inter-sectoral linkages, comprising backward
and forward linkages, reflect the interconnectedness between the
sectors of an economy, with mutual interdependencies between
1South Africa is excluded from the study as there are similar studies on this
country already.
4Editorial / Review of Development Finance 7 (2017) 1–5
the sectors influencing the extent to which the growth in one sec-
tor contributes to the growth of other sectors as well as overall
growth. The financial sector is crucial for a country’s econ-
omy and business environment, as it provides opportunities for
employment and income generation, savings and investment,
wealth accumulation and loan provision; hence its development
can have positive spillovers effects on other sectors.
The effect of inter-sectoral connectedness of financial ser-
vices in emerging countries, especially in Africa has not been
analyzed in detail. Using input-output analysis comprising
assessments of backward and forward linkages of the financial
sector to the other sectors of the economy and the assess-
ment of overall economic (multiplier) effects coming from the
financial sector, the authors find evidence of sectoral intercon-
nectedness of the financial services sector in the Nigerian and
Kenyan economies. The Nigerian economy shows relatively low
direct backward and direct forward linkages for the financial ser-
vices sector, and the values for total backward and total forward
linkages rank highest during the study period (2007, 2009 and
2011). The high total backward linkages indicate that the finan-
cial services sector creates additional demand for the output
of upstream sectors, leading to increased upstream investment,
capacity utilization and upstream technological upgrading. For
Kenya,direct and total backward linkages as well as direct and
total forward linkages rank relatively low. As the authors argue,
the relatively low values do not allow for a distinct assignment of
growth-inducing or growth-enabling functions of the financial
services sector in the country. The results show that the financial
sector plays a significant role in the Nigerian economy than the
Kenyan economy. However, controlling for the role of technol-
ogy or the communication sector within both economies results
in low linkages of the financial sector in both countries.
3. Part III: Banking systems and stability
Jacob Oduor, Kethi Ngoka and Maureen Odongo investi-
gate the impact of regulatory capital beef-up on banking sector
stability and banking sector competition. Their study is moti-
vated by the flurry of actions by financial sector regulatory
authorities, particularly central banks, in the aftermath of the
global financial crises. Many African countries have, or are in
the process of increasing regulatory capital, in line with Basel III
pronouncements, to strengthen the resilience of local banks to
shocks. The questions they address are: (1) whether increasing
regulatory capital increases stability of the banking system, and
(2) how increasing regulatory capital affects banking sector com-
petition, given that raising the capital adequacy requirements
tends to increase concentration of the banking sector.
The authors use the panel study approach to investigate
the impacts of capital requirements on financial sector stabil-
ity and on competition in the financial sector. Using data on
162 commercial banks in 37 African countries over the period
2000–2011, and measuring financial sector stability by nonper-
forming loans and competition by the Lerner Index, the authors
find no significant impact of regulatory capital on competition
in the banking sector. However, they find evidence of positive
impacts on competition among foreign banks. The authors sur-
mise that this could be due to the fact that foreign banks may
obtain additional capital at concessional rates from their parent
companies and thus do not bear the full brunt of the costs aris-
ing from higher regulatory capital requirements, unlike domestic
banks that have to source the additional capital on the open mar-
ket. The higher costs faced by domestic banks are passed on
to consumers, resulting in reduced competitiveness of domestic
Regarding the impact of increasing regulatory capital on
financial sector stability, the authors find that raising the reg-
ulatory capital requirement increases instability in the African
banking sector. However, the big banks do not experience insta-
bility. They conclude that increasing regulatory capital ratios
could be encouraging banks to hold more risky assets by under-
stating their risks. They do so through the use of complex
in-house risk assessment models. Consequently, banks in effect
hold less regulatory capital than they are supposed to given their
risk profiles. This explains the instability. The authors conclude
that raising regulatory capital may not be sufficient to mitigate
financial sector instability in the African banking sector and that
additional measures may be needed. They also conclude that the
nature of ownership of banks and bank size matter for the impact
of regulatory capital on competition in the banking sector.
Relatedly, Eftychia Nikolaidou and Sofoklis Vogiazas also
explore the issue of financial sector stability, but from a slightly
different vantage point. The authors examine the credit risk
determinants in five sub-Saharan African countries and attempt
to relate these to the experiences of the Central East and South
East European countries. The paper is motivated by the dearth
of studies on credit risk determinants in sub-Saharan African
countries. The authors argue that there are not many studies that
address this issue, and given the importance of banking sector
stability for sound economic performance, and the impact of
credit risk on stability of the banking sector, it is imperative
that more light is shed on the drivers of credit risk in SSA. The
five study countries are South Africa, Namibia, Kenya, Zambia
and Uganda. Data considerations and the need to sample across
countries at different stages of development inform the choice
of countries.
The authors use the Autoregressive Distributed Lag (ARDL)
methodology, and a ‘case study’ approach for each country. They
find that in the long run, Non-Performing Loans (NPLs) are
primarily driven by macroeconomic factors – especially money
supply. This is explained by the fact that the banking sectors in
the five SSA countries are generally stable and well capitalized,
with low loan to deposit ratios. Thus, the risks tend to emanate
from outside the banking sector. The results suggest that easing
(expansionary) monetary policy is associated with lower NPLs.
They also find that, apart from monetary policy variables, NPLs
are driven by different factors in different countries. In other
words, country-specific factors are important drivers of NPLs in
the five sub-Saharan African countries. Parallels and lessons are
drawn from CESEE countries’ experiences.
Editorial / Review of Development Finance 7 (2017) 1–5 5
4. Part IV: Markets and development
Extant literature shows that African stock markets are small
and are characterized by poor liquidity, high concentration
and insufficiently developed market infrastructure. The inte-
gration of national stock exchanges has been proposed as a
solution to some of these impediments. Establishing regional
stock exchanges also offers other benefits including harnessing
much needed capital to the African countries. Despite these ben-
efits, progress towards stock market integration for African stock
exchanges has been slow. Sunil Bundoo analyses the extent
of stock market integration in the Southern African Develop-
ment Community (SADC) region. The SADC members have
established national stock exchanges in Botswana, Malawi,
Mauritius, Mozambique, Namibia, South Africa, Swaziland,
Tanzania, Zambia, and Zimbabwe. The author assesses the
degree of beta and sigma convergence and identifies the exist-
ence of long-run equilibrium relationships in the stock market
A Committee of SADC Stock Exchanges has been set up to
promote a transparent regulatory environment that protects mar-
ket participants and attracts investors, improving the exchanges’
operational capacity and technical underpinnings, promoting
cooperation, harmonization of trading, clearance, and settle-
ment procedures among the exchanges and providing a forum
for information exchange and discussion of development of the
region’s stock markets. Using price-based approach to measure
stock market integration, the author does not find any evidence
of cointegration relationship of the SADC markets when using
the US market as benchmark, except during the financial crisis
when the markets were cointegrated. The SADC stock markets,
however, offer good diversification benefits to foreign investors.
The stock exchanges in the region are therefore urged to work
towards greater integration so that they can attract more sus-
tained portfolio flows.
Ousmanuo Njikam investigates the role of policy comple-
mentarities in the financial liberalization-growth nexus. The
study is motivated by the fact that while nearly all African
countries have liberalized their financial sectors, the growth
impact of financial liberalization in the region remains weak
at best. This seemingly contradicts the literature (e.g., Stiglitz,
1998) which touts financial liberalization as a key driver of
economic growth. The question then is: why not in Africa?
The author hypothesizes that complementary reforms, or their
absence, could be the reason for the non-significance of financial
liberalization in growth regressions.
Thus, the author examines the relationship between economic
growth and financial liberalization across sub-Saharan African
countries, and in addition, consider how inclusion of policy com-
plementarities affect this relationship. The sample consists of
45 sub-Saharan African countries. Data is collected over the
period 1970–2010, but averaged into 5 year non-overlapping
intervals. In the absence of interaction terms (policy comple-
mentarities), the author finds that per capita GDP growth in the
post liberalization era is not statistically different from that of the
pre- liberalization period. The author however finds that finan-
cial liberalization positively affects growth if accompanied by
improvements in schooling, governance, macroeconomic stabil-
ity, etc. Inflation is found to negatively and significantly reduce
the impact of financial liberalization on economic growth.
The implication is that sub-Saharan African countries could
potentially realize substantial GDP per capita growth if greater
attention is paid to policy reform complementarities (involving
human capital, macroeconomic stability, governance, etc.). In
essence, these areas can be considered as the binding constraints
to growth in sub-Saharan Africa.
Allen, F., Carletti, E., Cull, R., Qian, Q.J., Senbet, L.W., Valenzuela, P., 2016.
Resolving the African financial development gap: cross-country compar-
isons and a within-country study of Kenya. In: Edwards, S., Johnson, S.,
Weil,D. (Eds.), African Successes: Modernization and Development. NBER
Volume; University of Chicago Press.
Allen, F., Otchere, I., Senbet, L.W., 2011. African financial systems: a review.
Rev. Dev. Finance 1 (2).
Beck, T., Maimbo, S.M. (Eds.), 2013. Financial Sector Development in Africa,
Opportunities and Challenges. World Bank, Washington DC.
Cull, R., Senbet, L., Sorge, M., 2005. Deposit insurance and financial develop-
ment. J. Money Credit Bank. 37, 43–82.
Green, C.J., 2013. “Financial Reform and Financial Development in Africa”,
Commissioned Proposal prepared for AERC.
IMF, 2013.
Kose, A.M., Prasad, E.S., 2010. Emerging markets come of age. Finance Dev.
47 (4.).
Levine, R., 1997. Financial development and economic growth: views and
agenda. J. Econ. Lit. 35, 688–726.
Levine, R., 2004. “Finance and Growth: Theory and Evidence”. NBER Working
Paper Series, Working Paper 10766.
Senbet, L.W.,Otchere, I., 2010. African Stock Markets. In: Quintyn, M., Verdier,
G. (Eds.), African Finance in the 21st Century, IMF volume (Palgrav).
Park, C., Mercado Jr., R.V., 2015. Financial Inclusion, Poverty, and Income
Inequality in Developing Asia”. ADB Economics Working Paper Series,
No. 426.
Stiglitz, J., 1998. The role of the financial system in development. In: Pre-
sentation at the Fourth Annual Bank Conference on Development in Latin
America and the Caribbean (LAC ABCDE), San Salvador, El Salvador, June
29, 1998.
Isaac Otchere
Sprott School of Business, Carleton University
Lemma Senbet
African Economic Research Consortium (AERC)
Witness Simbanegavi
African Economic Research Consortium (AERC)
... Scholars acknowledge that financial systems play major roles in terms of provisions of credits and liquidity, financial risk management and governance among others in the economy (Levine, 1997;Otchere et al., 2017). However, for the financial systems to have a desired effect in an economy, it must have the means of enhancing development of entrepreneurial venturing. ...
... Apart from this, the overall financial sector development in Africa was poor during the period of study. This result reflects the position Otchere et al. (2017). The authors stated that the African financial system performance is poor by all standards and that the financial development gaps are wider compared to other developing regions. ...
Previous studies on the nexus between remittances and financial system development are less informative due to their failure to investigate how remittance inflows affect different aspects of the financial sector in Africa. In the study, we re-investigate the impact of the remittances on the African financial system in twenty-seven (27) countries for 1980-2017 using the Augmented Mean Group (AGM) estimating technique. The results show that remittance does not have any significant impact on different dimensions of financial development in Africa. This finding is robust to alternative estimating techniques. This implies that remittance inflow is not a major driver of financial development in African countries. The outcomes of this study show that it is important to go beyond the use of conventional measures of financial development and focus more on multidimensional aspects of the sector such as access and efficiency of both the financial institutions and financial markets. It is also worth noting that remittance inflows in African regions are under-documented due to the high level of the shadow economy. The study suggests that the African government should formulate policies encouraging African migrants to pass through formal channels when remitting for the benefits of the financial sector and the economy in general. The policy should also encourage remittance savings and their utilisation in the African productive sector.
... Scholars acknowledge that financial systems play major roles in terms of provisions of credits and liquidity, financial risk management and governance among others in the economy (Levine, 1997;Otchere et al., 2017). However, for the financial systems to have a desired effect in an economy, it must have the means of enhancing development of entrepreneurial venturing. ...
... Apart from this, the overall financial sector development in Africa was poor during the period of study. This result reflects the position Otchere et al. (2017). The authors stated that the African financial system performance is poor by all standards and that the financial development gaps are wider compared to other developing regions. ...
One of the main obstacles to the flourishment of African entrepreneurship is financial constraint. The existing studies on the nexus between entrepreneurship and financial development are inconclusive while the position of African economies remain unknown. In this paper, we empirically investigate the impact of financial development on entrepreneurship in Africa. This study utilizes data of 20 selected countries in Africa over a period of 2006-2017. We combine IMF data on broad based financial development with World Bank Entrepreneurship database. The study employs system generalized methods of moments (system GMM) technique and the recently developed dynamic panel threshold. The following findings emerged. (1) Financial development does not spur entrepreneurship in Africa. (2) There is a threshold at which financial development improves the level of African entrepreneurship. (3) The results also show that financial development improves the level of entrepreneurship; conditioned on conducive business start-up regulation and strong institutional quality at a specific threshold value. This is one of the few studies that examine the impact of financial development on entrepreneurship in Africa. This study shows that the financial development relies on the effectiveness of regulatory environment in order to extend loan and other financial services to new firm entrants. In addition, it reveals that the assumption of linearity in the nexus between finance and entrepreneurship is not tenable for the case of Africa. Therefore, policymakers should keep on developing African financial system in order to accelerate the pace of entrepreneurship development.
... This impressive improvement notwithstanding, financial markets in Africa are markedly less well-developed than markets elsewhere in the world on nearly all indicators of financial development (Green, 2013). Notably, financial sector of most African economies remains quite under developed when considered by the standards that obtains in low income countries (Otchere et al., 2017). ...
Purpose This study aims to investigate in a country-specific comparative and panel form, the impact of energy use on financial development in Organisation of Petroleum Exporting Countries (OPEC)-African countries of Algeria, Gabon, Libya and Nigeria. Design/methodology/approach With data sets covering the period 1980 to 2020, this study used a combination of country-specific autoregressive distributed lag model (ARDL) and panel-ARDL as well geo-maps to show the spatiotemporal nuances of the investigated countries. Findings It was discovered across the investigated countries and in the panel framework that energy consumption significantly impacts both bank development and institutional development, which are subsets of financial development. In addition, evidence in favor of adjustment of financial development to the shocks and dynamics of energy consumption was found. Practical implications Integrative developmental drive for the two sectors can enhance growth and value-chain interactions for the imperatives of the overall growth and development of the OPEC-African countries. Originality/value This study adds to the literature on finance and energy development by the introduction of the spatiotemporal analysis.
... Over recent years, derivatives trading has increasingly been offered as a self-sufficient solution to Africa's shallow capital and banking markets. Derivatives markets are perceived to be promoting deeper market-based banking structures, boost intermediation capacity, improve business lending, a productive and creative private sector, and a well-diversified economy-resulting in more integrated development prospects (Beck & Cull, 2014;Clancy, 2014;Ifeanyichukwu, 2013;Nguema Bekale, Botha, & Vermeulen, 2015;Otchere, Senbet, & Simbanegavi, 2017). A fledged derivatives market already exists in South Africa; Morocco, Egypt, and Tunisia have small but growing derivatives operations. ...
Sparked by the ongoing advocacy for Africa’s derivatives initiatives, this work seeks to uncover the linkage between derivatives use and the business lending efficiency of banks in selected African economies. We studied a panel of 147 banks from 14 African countries between 2011 and 2017, using two competing non-parametric and parametric approaches for efficiency analysis. Respectively, Simar and Wilson’s (2007 Simar, L., & Wilson, P. W. (2007). Estimation and inference in two-stage, semi-parametric models of production processes. Journal of Econometrics, 136(1), 31–64. doi:10.1016/j.jeconom.2005.07.009[Crossref], [Web of Science ®] , [Google Scholar]) two-stage double-bootstrap techniques (non-parametric) and an ML-based Bayesian SFA model (parametric) reflect the desired dynamic (instead of static) efficiency representations for panel analyses. Despite conflicting bank efficiency interpretations, both investigations corroborate the existence of widespread inefficiency of markets in Africa, which is likely strengthened by harmful fragmentation in the continent’s financial/capital markets, market illiquidity, a lack of transparency, and informational inefficiency, among others.
... It is hypothesized that, following the world financial crisis in late 1980s and early 1990s, most governments in sub-Saharan Africa (SSA) has implemented key structural measures and policies as stipulated by IMF and the World Bank to ensure financial deepening. Some of these measures were interest rate liberalization, money and stock markets integration, removal of credit ceiling, and privatization and restructuring of state-owned banks (Ofori-Abebresse, 2016; Otchere et al., 2017;Tahari et al., 2007). It is reported that the aforementioned measures in SSA were viewed to ensure a common trading platform which was intended to bring about a greater efficiency, attract foreign capital flows and enhance risk sharing and portfolio diversification (Adelegan, 2008;Yartey, 2010). ...
Full-text available
Recently, sub-Saharan Africa (SSA) stock markets have received an exceptional attention as a market of hope and future. Hence, policy-makers, investors and financial analysts have been striving to ameliorate the factors that are detrimental to stock market development in SSA. Given this, the primary focus in literature has been based on the role that institutions play in influencing stock market development in SSA. Hence, this study employed fixed and random effect estimations technique on a balanced panel data of six (6) selected SSA countries to explore the impact of public sector management and institutions on stock market development in SSA for the period 2005-2018. This study found that, on average, countries with quality public sector management and institutions have been able to improve on their stock market development compared with countries without quality public sector management and institutions. In disaggregating the impact of public sector management and institutions into West and East countries in SSA, the study further demonstrated that public sector management and institutions enhance stock market development in these countries in SSA. However, we found that the effect of public sector management and institutions is insignificant in the ABOUT THE AUTHORS Gideon Mensah holds
... Existing empirical studies have considered the effect of financial inclusion (Abor et al., 2018;Corrado & Corrado, 2017;Demirguc-Kunt et al., 2017), FDI (Pradhan et al., 2017;Rajapaksa et al., 2017), inflation (Kodongo & Ojah, 2016;Mireku et al., 2017;Wieland et al., 2016), and financial development (Khan et al., 2016;Otchere et al., 2017: Rewilak, 2017 on inclusive growth. ...
Full-text available
This study assesses the moderating role of institutions in the trade openness and inclusive growth nexus in Sub-Saharan Africa (SSA). Based on the System General Method of Moment estimation technique applied to data from 39 SSA countries from 1996 to 2017, the results offer support for the assertion that institutions strengthen the positive relationship between trade openness and inclusive growth in SSA. Economies in SSA should put in policies to strengthen their institutions to improve the positive link between trade openness and inclusive growth.
... Because of the lagged dependent variable, estimating our equation using a fixed effects model would lead our results to suffer from Nickell bias (Nickell, [61]). We rather perform system Generalized Method of Moment GMM estimation (Blundell & Bond, [19]) with Windmeijer [70] finite sample correction of standard errors. ...
... This crisis in the financial sector and some of its accomplices have brought new skepticisms for all developing countries like African economies. This paves the way for other researches to provide insights on how these countries can and must prepare their financial sectors to this new world, and also enhance its ability to withstand shocks, coming locally or internationally (Otchere et al., 2017). ...
... • Access to secondary and derivative markets Second, they enable access to secondary (Table 6.1) and derivative markets, thus complementing traditional bank services, increasing the availability of financing mechanisms and potentially underpinning the (green) bond markets. This can be useful when conventional funding dries up, which is an important concern across the continent as African firms rely extensively on banks for external financing (Otchere et al., 2017). Moreover, it allows the use of new risk management mechanisms like hedging instruments as well as facilitates the sterilisation of large capital inflows and long-term investing. ...
Full-text available
After having presented various financial instruments and mechanisms available for financing clean energy access projects and companies, this chapter focuses on a key element enabling an efficient use of some of the schemes exposed in the previous section. Indeed, well-functioning capital markets not only increase the trust of potential capital providers, but also enhance financial flows among countries and actors.
... • Access to secondary and derivative markets Second, they enable access to secondary (Table 6.1) and derivative markets, thus complementing traditional bank services, increasing the availability of financing mechanisms and potentially underpinning the (green) bond markets. This can be useful when conventional funding dries up, which is an important concern across the continent as African firms rely extensively on banks for external financing (Otchere et al., 2017). Moreover, it allows the use of new risk management mechanisms like hedging instruments as well as facilitates the sterilisation of large capital inflows and long-term investing. ...
Full-text available
This open access book analyses barriers and challenges associated with the financing of clean energy access in sub-Saharan Africa. By considering various economic, financial, political, environmental and social factors, it explores the consequences of energy poverty across the region and maps the real and perceived investment risks for potential capital providers, both domestic and international. Furthermore, it analyses risk mitigation strategies and innovative financing structures available to the public and private sectors, which are aimed at leveraging capital in the clean energy sector at scale and fostering the creation of an enabling business and investment environment. More specifically, the present book analyses how to (i) enhance capital allocation in projects and organisations that foster clean energy access in the region, (ii) mobilize private capital at scale and (iii) decrease the cost of financing through risk mitigation strategies. Going beyond traditional approaches, the book also considers socioeconomic and cultural aspects associated with investment barriers across the subcontinent. Moreover, it urges the public and private spheres to become more actively involved in tackling this pressing development issue, and provides policy recommendations for the public sector, including proposals for business model evolution at multilateral agencies and development institutions. It will appeal to a wide readership of both academics and professionals working in the energy industry, the financial sector and the political sphere, as well as to general readers interested in the ongoing debate about energy, sustainable development and finance.
Full-text available
This paper extends the existing literature on financial inclusion by analyzing the factors affecting financial inclusion and assessing the impact of financial inclusion on poverty and income inequality in the world and Asia. We construct a new financial inclusion indicator to assess various macroeconomic and country-specific factors affecting the degree of financial inclusion for 177 economies, including 37 of which from developing Asia. We test the impact of financial inclusion, along with other control variables, on poverty and income inequality. We do so for full sample of countries and then for developing Asia sample to access which factors are relevant for full sample and for developing Asia specifically. The estimation results show that per capita income, rule of law, and demographic characteristics significantly affects financial inclusion for both world and Asia samples. However, primary education completion and literacy significantly increases financial inclusion only in the full sample, not for the Asian sample. The findings also indicate that financial inclusion is significantly correlated with lower poverty and income inequality levels for the full sample. For developing Asia, however, there appears to be no link between financial inclusion and income inequality.
Full-text available
With extensive country- and firm-level data sets we first document that the financial sectors of most sub-Saharan African countries remain significantly underdeveloped by the standards of other developing countries. We also find that population density appears to be considerably more important for banking sector development in Africa than elsewhere. To better understand how countries can overcome the high costs of developing viable banking sectors outside large metropolitan areas, we focus on Kenya, which has made significant strides in financial inclusion and development in recent years. We find a positive and significant impact of Equity Bank, a leading private commercial bank on financial access, especially for under-privileged households. Equity Bank’s business model—providing financial services to population segments typically ignored by traditional commercial banks and generating sustainable profits in the process—can be a potential solution to the financial access problem that has hindered the development of inclusive financial sectors in many other African countries.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at
Full-text available
diverse, with different regional economic blocs. The financial systems in these countries are as diverse as the countries. Reviewing the financial systems of such a heterogeneous group of countries presents a challenge. Therefore, to make the review more concise, we categorize the countries along geographic lines into four groups, namely, Arab North Africa, West Africa, East and Central Africa, and Southern Africa.1 This review covers, among other things, a brief review of the economies, central banks, deposit-taking banks, non-bank institutions, such as the stock markets, fixed income markets, and microfinance institutions in Africa. In this section, we present an executive summary of the African financial systems, highlighting some of the investment opportunities that exist, and then proceed with an in-depth review of the current state of the financial systems of the various sub-groups in Africa. In section II, we review the financial systems in North Africa. The financial systems in West Africa are reviewed in Section III, while those in Central and East Africa are reviewed in Section IV. In Section V, we examine the financial systems in Southern Africa. We conclude with a brief discussion of the risks that potential investors should be concerned about in Section VI.
Full-text available
This article provides a brief assessment of the resilience of emerging market countries in the face of the global financial crisis. It shows that emerging markets, as a group, weathered the crisis much better than the advanced countries and most of these economies have bounced back rapidly from the global recession. It tracks down the reasons for the resilience of EMEs and explains why some countries in this group have done better than others. It also draws out lessons for the durability and sustainability of these economies’ long-term growth.
Full-text available
Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
Full-text available
This paper provides empirical evidence on the impact of deposit insurance on financial development and stability, broadly defined to include the level of banking activity and the stability of the banking sector. We use a unique dataset capturing a variety of deposit insurance features across countries, such as coverage, premium structure, etc., and synthesize available information by means of principal component indices. This paper specifically addresses sample selection concerns by estimating a generalized Tobit model both via maximum likelihood and the Heckman two-step method. The empirical construct is guided by recent theories of banking regulation that employ an agency framework. The basic moral hazard problem is the incentive for depository institutions to engage in excessively high-risk activities, relative to socially optimal outcomes, in order to increase the option value of their deposit insurance guarantee. The overall empirical evidence is consistent with the likelihood that generous government-funded deposit insurance might have a negative impact on financial development and growth in the long run, except in countries where the rule of law is well established and bank supervisors are granted sufficient discretion and independence from legal reprisals. Insurance premium requirements on member banks, even when risk-adjusted, are instead found to have little effect in restraining banks' risk-taking behavior.
Full-text available
This critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive, first-order relationship between financial development and economic growth. The body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow, responding passively to economic growth. Many gaps remain, however, and the paper highlights areas in acute need of additional research.
IMF, 2013.