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Why are CFA countries’ financial sectors so shallow?

Raju Jan Singh's picture

During the 1980s and early 1990s, many African countries undertook reforms to deepen their financial sectors. Nevertheless, financial sectors in African countries remain among the shallowest in the world.  Within Africa, financial depth in the CFA franc zone is even more limited.  Why? Dhaneshwar Ghura, Kangni Kpodar and I examine this question.

Financial institutions operate with incomplete information. Entrepreneurs seeking financing have more information about their projects than their banks. Projects that differ in their probability of success are indistinguishable from the viewpoint of a financial institution. Banks have to gather information, or require collateral, to grant loans only to the most promising projects.  In this setting, governance, property rights, or creditor information could play a major role.

Looking at a sample of 40 countries between  1992 and 2006, we find that the gap in financial development between the CFA franc zone countries and the rest of Africa can be explained by differences in institutional quality (e.g., availability of credit information, and strength and enforcement of property rights), variables that policy makers can influence.

While financial liberalization and macroeconomic stability are necessary conditions for financial deepening, they are not sufficient.

What can CFA countries do?

They can expand creditor information and strengthen creditor rights. These, however, involve complex processes. The coverage of existing credit bureaus should be extended and include as much information as possible on the repayment profile of customers.

This must be achieved while preserving an appropriate degree of privacy and safeguarding sensitive information.

Strengthening creditor rights would require changes in legislation governing debt collection and collateral. Legislation on debt recovery would depend in turn on efficient property registration and land surveying in both cities and countryside. Finally, reform of the courts is vital for improving enforcement.

Comments

Submitted by Ali Zafar on
Thanks for the interesting post and paper. I would add one element that is peculiar to the CFA franc zone for explaining the shallowness of the financial sector. Essentially, the franc zone has had a fixed exchange rate peg in which countries have surrendered their monetary policy in the interest of stability. The operations accounts of these zones in the French treasury have been important elements. France has guaranteed the convertibility. For example, even when oil prices have been very high, the regional central bank in CEMAC has deposited money far beyond what was required into the Operations Account. While only 65 percent of reserves need to be there in Paris by statute, frequently more than 90 percent have been pooled, getting little interest (in both senses of the word). So the institutional features of the franc zone have in some way acted as agents of financial disintermediation along with the elements well described in your analysis. Overly conservative monetary policy can have its costs...

Submitted by Pianki on
This policy should come to an end. why does france conjtinue to stranglehold these black African Nations. It is deplorable the stories that are told of the relationship with black African Countries and this Pact.

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