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

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