Africa in focus

Four Instruments to Strengthen Financial Integration in Sub-Saharan Africa

Amadou Sy

Last month, I participated in a conference on “Promoting Financial Integration in Africa” organized by the Banque de France and the French foundation for international development (Fondation pour les Etudes et Recherches sur le Développement International, or FERDI). The conference’s main objective was to elicit practical recommendations to strengthen financial integration in the continent through discussions among academics, policymakers and practitioners.

Over the past 10 years, sub-Saharan Africa grew 5 percent per year and, at this rate, the region’s economy should double in size before 2030. Economic growth is projected to rise by at least 6 percent in 2014 and seven of the world’s fastest 10 economies in 2011-2015 will be from the region.

This “Africa rising” narrative should not mask the remaining challenges facing the continent. Indeed, rapid economic growth has not resulted in sufficient gains in terms of job creation and reduced inequality. Moreover, average continental growth rates mask uneven progress across countries.

Without a doubt, financial integration can play an important role in helping achieve sustainable and inclusive growth in sub-Saharan Africa. But how should we go about it?

At the conference, academics Ronald McKinnon and Pierre-Richard Agénor set the stage by reviewing the pros and cons of developing countries’ integration with global financial markets. The next sessions answered the question of why we should promote financial integration in Africa as well as the best ways of doing so. I joined the following panel on instruments to foster integration.  The final session focused  on regulatory and supervisory policies needed to maintain the benefits of integration.

During my presentation, I argued that there are four tools vital to strengthening financial integration in sub-Saharan Africa.

  • The first tool, “political commitment devices” can ensure steady progress on the road to an economic community. For instance, stronger regional institutions can monitor progress towards integration and encourage policymakers to respect their regional commitments.
  • Second, the economic benefits from financial integration are better secured when countries achieve a number of “threshold conditions,” including minimum levels of financial development and governance.
  • Third, full financial integration requires the “trinity” of equality of access, rules and treatment. Policymakers have to eliminate entry barriers, and, once foreign institutions enter domestic markets, refrain from discriminating against them. In addition, policymakers must harmonize regulations further and build capacity, especially in banking supervision.
  • Fourth, improving the “plumbing” of financial integration—financial infrastructure—by reducing transaction costs, can provide quick gains. Innovation in mobile payments can help reduce such costs, and regulators need to balance the associated benefits and risks.

There is no doubt that much work lies ahead when it comes to accelerating financial integration in Africa but I hope that the ideas discussed above are useful.

Read Amadou Sy’s related presentation on financial integration in Africa from the conference.