Financial regulation in low-income countries: balancing inclusive growth with financial stability
The workshop and debate that took place at the University of Ghana, Accra, on 10-11 September 2013, are part of the ongoing DFID-ESRC Growth Research Programme (DEGRP) project on financial regulation in African low-income countries (LICs). They aimed to address the questions: how can African LICs regulate and structure their financial systems to support stability, growth and equality? Given the specific African structures, and vulnerability to external shocks, what are the links between financial structure and growth, and the gaps and issues for financial regulation?
Project participants, senior policy-makers and academics from Africa and Asia, including the Governor of the Central Bank of Ghana, participated, both in the workshop and debate to address these questions, sharing preliminary research findings, experiences with financial regulation, and lessons from other regions for Africa.
A main challenge facing African LICs is to deepen their financial sectors in ways to support growth, stability and equality. But, as the project leader Professor Stephany Griffith-Jones pointed out at the start of the workshop, in a sense, African countries have the advantage to still have small financial sectors, since this gives them the opportunity to learn lessons, both positive and negative, from countries with more developed financial systems, that recently experienced costly financial crises.
The workshop, while stressing the current reality in Africa of limited access to credit, particularly to SMEs, as well as its extremely high cost, (particularly problematic in the case of Ghana) and lack of long-term financing to the economy as a whole, also noted that, today, financial systems in Africa are expanding very rapidly, on the back of rapid economic growth. While this is good as it facilitates financial deepening and increased access, it is important not to become complacent. In some African countries, credit to GDP ratio is growing very fast. In addition, the global context has changed. Africa is attracting private capital flows, thus becoming frontier markets, finding it easier to raise international capital from the bond markets. Though positive, these developments also can create areas of vulnerability and need to be carefully monitored. The workshop also discussed whether growth of the financial sector beyond a certain level might become counter-productive, especially if it happens too fast.
In exploring what African LICs need in order to have more long-term financing for development and how to broaden access to finance to make development more inclusive and sustainable, the issue of the structure of the financial system was extensively discussed. Questions included the role for public and in particular development banks, which - as workshop participants recalled - were critical during the global financial crisis in supporting quick recovery in a number of emerging economies. This was stresssed by a senior Asian ex-policy-maker and researcher, Professor Akio Hosono, as having previously played a critical role in supporting vigorous economic growth and diversification, thus contributing significantly to successful development experiences in Asia and elsewhere. The workshop also addressed what possible role there is for foreign banks, asking: can their expected benefits such as bringing management innovation and efficiency be realised and potential risks such as new vulnerabilities be kept under control, if properly regulated? Moving from actors to types of institutions, the workshop discussed whether a financial sector should focus on traditional banking, or whether it should also be tailored to give prominence to low-end institutions, and thus be more decentralied?.
Under challenges for financial regulation, there was discussion on what sort of regulatory approach might be most appropriate for LICs - unified, differentiated?What role for micro-prudential and macro-prudential regulation? What tools might be more appropriate - Basel II and III, not designed with LICs in mind, or regulation tailored to African needs? What about counter-cyclical regulation in Africa - should it be done at the aggregate level or in specific sectors? Should it focus on stability or, also, target lending to SMEs; how to use external regulation to best address issues relating to management of the capital account, such as timing, pro-cyclicality of capital flows and targeting the most volatile flows? Furthermore, the workshop discussed not just possible forms of regulation, but also what capacity for effective implementation and monitoring; and what capacity should one expect LICs to have or to build to deal with regulatory frameworks designed for developed countries, which are often quite complex or, proceed rather, with simpler frameworks more in line with their own needs? Furthermore, it was stressed that even in developed economies there has been an emphasis on the desirability of simplifying regulation.
The DEGRP public debate that followed the workshop covered similar ground, having as highlight a key note speech by the Governor of the Central Bank of Ghana. The public panel focused on issues that are of great current concern in Ghana, such as lack of competition in the banking system, high costs of credit (and high loan spreads) and lack of access to credit, particularly for the SMEs. Speakers included Usha Thorat, former Deputy Governor of the Reserve Bank of India, who drew detailed lessons from the Indian experience, which could be of relevance to Sub Saharan African countries. This event was widely attended by senior Ghanean policy-makers and academics, and had extensive coverage in the press.
The workshop was also closely linked to the financial debate: What does it take to build a stable and efficient financial sector for sustained growth and structural transformation in Africa.