Ebook Global Financial Crisis: Implications for Africa’s Financial System
Perhaps, the dictum from Adam Smith is rather belated; perhaps not! The regulation and supervision of banking is still a hot issue, especially with respect to financial innovations such as derivative instruments. Moreover, banks constitute the integral element of Africa's financial system.
There is already a plethora of good papers on the possible causes and trend dynamics of the current global financial crisis. There is also much heated debate among academics, policy makers and the general public about the size and possible efficacy of the bail out packages that the US and UK governments, among other OECD governments, have put in place to abate the velocity and longevity of the crisis. This paper departs from the aforementioned stream of work and debate. It seeks to invoke a flow of funds approach to analyze the complexity of the financial crisis and its implications for Africa's financial system in order to chart the way forward for the continent.
It is useful to note that at the outbreak of the financial crisis last year, there was great optimism among leading African economists that because Africa's banks and capital markets are not strongly integrated with the global markets, the impact of the crisis on Africa will be minimal, or at least secondary. As we show later, the impact of the crisis on the capital markets of the large economies in Africa has been quite adverse and substantial, almost to the same degree as the perverse effects on the markets OECD economies. This is quite unfortunate because these large economies, namely South Africa, Algeria, Nigeria and Egypt (the SANE), are arguably the dynamo that is propelling growth in the banks, capital markets and company sector in the rest of the continent. Also, the SANE economies are exemplars of good financial sector reforms.
Hence, the rest of this paper takes into account the above considerations and is structured into four sections. Section 2 briefly explains the novelty of the flow of funds framework in the context of the financial crisis. In the context of the framework, Section 3 highlights the salient features of the current financial crisis, against the experience of the recent crises and then spells outs the implications of the crisis for banks, companies, investors and governments. The African context is emphasized in Section 4, by evaluating the progress of financial reforms in African economies, focussing on banks and capital markets. It is argued that a fundamental goal of these financial reforms is to enhance the competitive conditions in financial services in African economies, including some important implications, especially in terms of enhancing productive efficiency, with possible positive spillover effects to the rest of the continent, and effective regulation and supervision to enhance financial stability in the face of the global financial crisis.
However, it is also argued that even the reformers among African economies cannot afford to be complacent because although banks in some selected African economies are competitive, but both the banks and capital markets in the large SANE economies are still way behind other emerging economies such as Brazil, Russia, India and China. Finally, Section 5 brings together the key aspects of the paper by proposing some corrective actions and lessons for Africa's financial system now and towards recovery from the financial crisis.
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