The challenge of globalization

Integration into international financial markets has been a second important and controversial aspect of financialsector policy over the past decades. Although capital account restrictions are still in place in many countries, these are often more de-jure than de-facto. And while capital account liberalization has many benefits, it has to be managed carefully on the macroeconomic level and accompanied with appropriate regulatory policies. The benefits of increased capital inflows will be reaped only in the presence of well-developed local financial institutions and markets, but capital inflows can in turn accelerate financial and institutional deepening.22 As in the case of government interventions, a context-specific and pragmatic approach is therefore called for.23

While there has been a focus on opening capital accounts toward developed countries, the potential of regional financial integration has been much less exploited, although there are large economies of scale to be reaped by cooperation in technical areas such as harmonizing approaches to bank regulation or payment systems.24 Reducing if not eliminating intra-regional capital account restrictions can help deepen and broaden financial systems within the region. It allows more efficient risk diversification for financial and non-financial corporations alike. It can help overcome the scale problem for financing large projects, such as those in infrastructure. While reducing dependence on international capital markets to a certain degree, such intra-regional capital account liberalization seems less risky than complete capital account liberalization vis-à-vis international investors.

of independence, most sub-Saharan African countries started with foreign bank–dominated banking systems but subsequently nationalized them. After the disappointment with government-owned banks, many countries started privatizing again. In many countries, privatization was to foreign banks, since there were no domestic resources and skills. While in the mid 1990s less than a quarter of banking systems were dominated by foreign-owned banks and many countries still had predominantly government-owned banking systems, by 2005, more than half of the region’s countries had a banking market with either a dominant or a significant share of foreign-owned financial institutions (Figure 12).

Foreign bank entry has several advantages that are specific to Africa: international banks can help foster governance, they can bring in much-needed technology and experience from other parts of the region (in the case of South African or Nigerian banks), and they can help exploit scale economies in their small host economies (Box 3). Where increasing the role of foreign banks is part of a broader reform strategy to build and deepen the necessary institutional infrastructure for financial deepening and broadening, as discussed above, foreign bank entry can be a catalyst for improvement. Foreign bank entry can help, but is not sufficient to improve the efficiency of intermediation and the availability of credit. There are many factors that can prevent countries from reaping the potential benefits of foreign bank ownership. The presence of dominant government-owned banks can reduce competitive pressures and allow other banks—domestic or foreign-owned—to earn rents from the inefficiency of government-owned banks, as the example of Kenya shows. The absence of a sound contractual and informational framework reduces the feasibility of small business lending, as seen in Zambia where lending to the private sector as a percentage of GDP remains low despite two decades of financial liberalization. The small size of many financial markets in sub-Saharan African markets might make foreign banks reluctant to incur the fixed costs of introducing new products and technologies. The small size of many markets also does not allow for the necessary competitive pressure. The result in many sub-Saharan African countries has been a concentration of both domestic and foreign banks’ portfolios on government papers and international assets and a shying away from private-sector lending. Nevertheless, the recent new generation of foreign banks in Africa has been more beneficial for outreach. The new wave of foreign bank entry after liberalization in the 1980s and 1990s has seen not only the return of old colonial banks but also some new important players, such as several South African banks; banks from nonAfrican regions other than Europe; and several regional banks, such as the Bank of Africa and Ecobank. Several banks have established a franchise in supporting the development of financial access, such as the Dutch Rabobank with (controlling minority) stakes in banks in Tanzania, Zambia, and Mozambique; and more recently the Nigerian Access Bank, with a focus on improving.

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