Financial Systems and Monetary Policy in Africa

1
Financial Systems and Monetary Policy in Africa

• Mthuli Ncube
• Selwyn Capital
• October 2004

2
Evolution of Monetary Policy in Africa

• Currency Board
• Printing Press
• Rationing Regime
• Credit Ceiling Regime
• Market Clearing Regime
• Refer to Honohan and OConnell(1996)

3
Table A Historical Evolution of Monetary Policy
Regimes in Africa 
4
Indirect Monetary Policy
Indirect Monetary Policy Instruments Reserve
Requirements Discount Window Treasury Bill /
Central Bank Paper Auctions Open Market
Operations Operating Target Reserves Short-ter
m Interest Rates Intermediate Targets Money
or Credit Aggregates Interest Rates Investment
Residential Housing Consumer Durable
Expenditure Net Exports Policy
Goals Inflation Unemployment Real GNP Growth
5
Financial Systems and Indirect Monetary Policy

• Monetary instruments, indicators and targets
• Money supply
• Money demand
• Monetary transmission Mechanism

6
Features of a Financial System that Affect
Conduct of Monetary Policy

• Balance sheet structure of financial institutions
• Characteristics of financial contracts
• Degree of competition within Financial Sector
• Ownership pattern of banking sector
• Availability of financial instruments and
  substitutability
• Degree of development of financal markets
• A well-functioning payment system
• An adequate regulatory environment

7
Financial Sector Reforms Objectives

• Reduce financial repression of interest rates and
  credit allocations
• Transition from direct to indirect monetary
  policy
• Restructure bank balance sheets and restore
  solvency
• Develop financial markets esp T-bills
• Improve financial infrastructure, supervision,
  auditing, accounting, corporate governance

8
State of Financial Sector Reforms

• Reforms and indirect monetary policy
• Financial market development
• Balance sheet structure of Commercial Banks
• Degree of Banking Sector Competition
• Ownership Structure
• Market fragmentation and informal financial
  system
• Clearing and payment system
• Regulatory environment

9
Financial Systems in Sub-Saharan Africa
 
10
Financial Institutional Structure and Regulation

• Well-functioning Financial System enhances
  efficienct allocation of resources and their
  mobilization
• Agency conflicts and Economic Distortions
• Private Agency
• Public Agency
• Social Agency
• Solutions 1. Self-enforcing Contracts 2.
  Financial Liberalization and Political Agency
  3.Market-Based Regulation (Depositor Insurance vs
  TBTF)

11
Way Forward

• Strengthen bank balance sheets and capital ratios
• Introduce innovative financial instruments
• Improve competition in banking sector
• Privatise banks and encourage foreign ownership
• Develop primary and secondary markets for T-bills
  and govt stock interbank market for domestic and
  foreign currency
• Develop capital markets
• Introduce real time-based payment system
• Improve regulatory capacity