From the surveys by Mehran et al (1998) and Gelbard and Leite (1999), we can draw the following stylized facts about the development of financial markets in African countries over the past two decades.
Overall development: The structural and institutional indicators illustrate the crosscountry diversity in financial development pointed out earlier using aggregate measures. The structural and institutional indicators paint a much better picture (than aggregate indicators) for the overall financial development in the continent. Based on Gelbard and Leite’s overall financial development index, the number of countries in their sample that were classified as somewhat or largely developed financially grew from two (Mauritius and South Africa) in 1987 to 27 in 1997 (see Table A2).16 According to Gelbard and Leite, the countries with the most developed financial system in 1997 were Ghana, Kenya, Mauritius, Namibia, South Africa, and Zambia. However, measures of credit supply have deteriorated in some countries that are classified as largely developed or somewhat developed. This is the case for Zambia (largely developed), Nigeria, Malawi, and others (see Figure 1). It is important to notice that the rankings in Gelbard and Leite (1999) are relative to other African countries; so they should not be interpreted as indicators of financial development from a worldwide perspective. Only Egypt, Morocco, and South Africa, which are classified among “emerging markets,” can be considered as relatively developed from an international standard.
Market structure: Ownership in the banking industry has evolved significantly from a predominantly state-controlled to a more privately owned system. In 1997, 13 out of the 38 countries in Gelbard and Leite’s sample had almost complete private ownership of banks. Banks were predominantly state-owned in 10 countries in the sample, where the state accounted for at least 30 percent of bank loans and deposits. The banking system is still highly concentrated in the majority of sub-Saharan 16 The sample in Table A2 does not match the sample in Gelbard-Leite’s survey. 16 African countries as indicated by the conventional Herfindahl index and the interest rate spread in the Gelbard-Leite (1999) study.
The performance of the banking system has improved in some countries, but it is still low in the majority of countries. High proportions of non-performing loans illustrate the inefficiencies in the credit allocation process and in loan repayment enforcement mechanisms. The average share of non-performing loans for the 38 countries in Gelbard-Leite’s sample was over 20 percent in 1997. Low loan repayment rates (high default rates) constitute an important handicap for the stability of the banking system and it has adverse effects on the real sector. In particular, high default rates discourage lending, thereby reducing the overall supply of credit, which depresses private investment.
With the exception of South Africa, African financial systems offer a limited range of financial products. Gelbard and Leite (1999) find that bank lending is predominantly short term, government securities tend have short maturities (less than a year in 23 countries in 1997), banks in many countries still don’t issue credit cards (issued in only 15 countries in 1997), and inter-bank lending is still underdeveloped (inexistent in 8 countries in the sample in 1997).
The institutional environment is still deficient in many countries. Table 7 presents some indicators of the institutional environment from the Mehran et al (1998) study, namely the supervisory framework (banking law and central bank autonomy), prudential regulation (bank capital ratios), the safety net (availability of deposit insurance), and the legal infrastructure. The table shows that some of the basic requirements for effective banking regulation and supervision are still inexistent in 17 many countries. For example, many countries have no provisions for deposit insurance and the legal infrastructure for the protection of bank performance is weak or inexistent in many countries. The Gelbard-Leite (1999) study paints a brighter picture. According to the Gelbard-Leite indexes, in 1997 the institutional environment could be considered as reasonably supportive for financial intermediation in 23 countries, up from just 8 countries in 1987. The institutional environment index includes indicators of specific features of the legal system and the regulatory framework that facilitate financial intermediation. These features include the existence of property and creditors’ rights and the ability of the judicial system to enforce such rights. Empirical studies have established a positive connection between financial development and the quality of the legal environment (La Porta, Lopez-de-Silanes, Shleifer, and Vishny 1998, 1997; Levine 1998). The two aspects of the legal system that are most critical for financial intermediation are the quality of laws and the effectiveness of enforcement of these laws. These two aspects must exist simultaneously. The quality of a legal system determines the rights of creditors pertaining especially to the respect for the security of loans and the ability to repossess the assets of defaulting borrowers. To encourage lending, these legal rights must be both clearly defined and effectively enforced. Enforcement of the rights of creditors requires a judiciary that maintains the rule of law, low corruption, and low risk of expropriation or contract repudiation. While visible progress was achieved over the past years, there are important institutional constraints to financial intermediation that African countries need to address. For example, the Gelbard-Leite survey reports that in 1997 the loan recovery process was 18 difficult in as many as 28 sub-Saharan countries, commercial legislation was inadequate in 14 countries, and there was no legislation of the use of checks in as many as 11 countries in the sample.