Transcript Should Countries Promote Bank 0r Market Based

Should Countries Promote Bank 0r
Market Based Financial Systems?
Why, When and How?
Michael Fuchs, Adviser, Finance & Private Sector
Development, Africa Region, The World Bank
Is Optimal Financial Structure a Useful Concept?
Bank-based versus market-based a dubious dichotomy –
more multidimensional approach required
• Economies of scale: Most smaller developing economy
financial systems can’t achieve economies of scale required
for sustainable market-based finance (high regulatory &
infrastructure costs, high ‘entry’ costs, weak pricing
information)
• Narrow view of financial services: In LICs demand for
payments and savings products overshadows demand for
credit: Key question becomes ‘optimal financial
infrastructure’
• No uniform ‘bank-based model’: foreign vs local; small vs big
banks; diversification vs concentration; banks vs telcos etc.
What are impediments to achieving optimal (or
at least better) financial structures in LDCs?
• Serious information asymmetries – lack of reliable enterprise (and bank)
accounting and disclosure, weak credit histories and property registration,
weak legal/judicial enforcement, expensive market infrastructure,
reluctance to take on maturity risk etc.
• In Africa: Lack of scalable banking relationships; 50% of African population
has neither formal nor informal access
• Banks are prime movers in addressing these asymmetries, but very varied
appetite depending on market structure:
– Size matters – oligopolistic competition versus grass-routes banking
(SA versus Kenya)
– Ownership (foreign/domestic) and familiarity with tailored bank
products/techniques may matter
– Access to term-funding
• Market-based systems have great difficulty in adjusting to go ‘down
market’, e.g. in providing SMEs with access to finance – more so in the
absence of a ‘big brother’ market
What are impediments to achieving optimal (or
at least better) financial structures in LDCs?
• Industrial organization challenges:
– Lack of willingness by authorities to tackle crucial public
policy issues, such as redundancy in provision of parallel
infrastructures to service the financials sector: Switches,
ATMs, POSs
– Unwillingness to encourage competition between the
“established sector” and new entrants be they specialized
providers (MFIs, NBFIs etc.) or telcos
• Crowding out by governments – government debt is
still the ‘lazy cushion’ for bank earnings
• Weak incentive to innovate by banks in the provision of
SME and rural finance – risk aversion coupled with
unfamiliarity with this market place
What do current financial structures look like in
Africa and how will they evolve?
• Current structures:
– Predominantly bank-based with increasing foreign
ownership (regional South-South investment)
– Constrained efficiency: high cost, highly capitalized
and high returns
– Pockets of innovation
• Capturing informal payments (M-Pesa)
• Tailored banking products (Equity Bank)
• Innovative finance for formal SMEs (SA)
The financial sector has achieved significant growth over the
past decade, led by growth in bank assets and loans
16
2009
2008
14
2007
12
2006
2002
2000 1992
1991
2003
1993
2001
10
2005
1999
2004
1994
19981995
1997
8
1996
8
10
12
14
Private Credit / GDP (year t-1)
16
50
Stock market development has followed an uneven trajectory,
with the post-crisis growth mainly driven by short term
foreign capital; absence of long term domestic investors
remains a significant constraint
30
40
2007
2009
2008
1994
20
2006
10
1997
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20032005
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1999
2002
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2001
1995
0
1992
1993
1991
0
10
20
30
Stock Market Cap / GDP (year t-1)
40
50
What do current financial structures look
like in Africa and how will they evolve?
• Future trajectory:
– Greater (sub) regional integration achieving some
economies of scale, but also resource reallocation
(and resistance)
– Stronger competition from technology, but resistance
from banks if not under their auspices – this applies to
m-money, credit information (incl. supplier credit),
identifiers, (movable) property registries etc.
– Response to pressures to improve credit services for
SMEs and rural economy, but may need
encouragement (infant industry argument)