Fi Financial Inclusion in Africa, i l I l i i Af i Monetary Policy and Financial y y Stability: Country Experiences Michael Atingi Ego Michael Atingi Ego Deputy Director, African Department
Outline of Presentation • Introduction • Conceptual Basis • Access Possibilities Frontier: Policy Space • Pushing the Frontier Outward: Trends – Uganda: credit ‐ led inclusion – Kenya: payment ‐ led inclusion • Implications for Monetary Policy li i f li • Pushing the Frontier: IMF Initiatives Pushing the Frontier: IMF Initiatives 2
Overview Overview • Definition : The extent to which individual households and firms can directly access financial services. • Relevance : Poses challenges for macro ‐ stability and sustained growth and poverty/inequality reduction. th d t /i lit d ti • Barriers : transaction costs (scale) and risks. • Measurement : (i) number of users of basic financial services; Measurement : (i) number of users of basic financial services; (ii) subjective assessments of the quality of the financial services that firms obtain; (iii) physical and cost barriers to access. 3
Financial Inclusion Stylized Facts Financial Inclusion – Stylized Facts Financial outreach varies across countries in Africa 10000 70 SYC SYC GNQ 8000 ZAF 60 6000 ZMB MUS SWZ RWA 50 NGA 4000 BWA GAB MOZ ZAF ZAR UGA MDG MDG GHA TUN NAM MAR 40 2000 DZA CMR CPV LBR EGY MAR TZA SWZ SDN COG BDI SDN CMR AGO NGA LSO TZA KEN UGA ZMB ETH GHA RWA MOZ TCD COM ZWE SLE LBR MDG EGY ZAR BDI 30 0 0 20 40 60 0 20 40 60 ATMs per 100,000 adults ATMs per 100,000 adults US$ GDP percapita (2000) Fitted values GINI index Fitted values Source: Staff calculations.
Financial Inclusion Stylized Facts Financial Inclusion – Stylized Facts Financial outreach varies across countries in Africa 10000 70 SYC SYC GNQ 8000 ZAF LBY 60 0 8 CAF 6000 MUS SWZ RWA 50 4000 BWA GAB MOZ ZAF ZAF 4 UGA UGA MDG GHA TUN NAM MAR MRT 40 2000 DZA CMR MAR TZA SWZ COG TGO CMR AGO MRT LSO TZA TGO KEN RWA UGA MOZ GHA TCD COM SLE CAF MDG ETH 30 0 3 0 10 20 30 40 0 10 20 30 40 Commercial bank branches per 100,000 adults Commercial bank branches per 100,000 adults US$ GDP percapita (2000) Fitted values GINI index Fitted values Source: Staff calculations.
Useful Conceptual Framework Useful Conceptual Framework • Access Possibilities Frontier (APF) : the maximum potential ( ) p clients base that can be served by financial institutions prudently. – Given the existing technological and the macroeconomic and Given the existing technological and the macroeconomic and institutional framework ( state variables ). • Financial Possibilities Frontier (FPF) : the maximum sustainable level of financial system depth. – Given the existing level of income, population size, density, age, other (state variables). 6
Financial Possibility Frontier • The access possibility frontier raises the issue of determining the level of deepening that can be realistically achieved. Depth determined by : Stylized Financial Possibility Frontier • Structural factors (SD) C C • Policies (position relative to Financial Possibility Frontier the SD line) ccnn l Depth Structural Depth (SD) Financia B Situating countries: • Low possibility frontiers A • Financial systems below the Fi i l t b l th frontier • Moving beyond the frontier St Structural Factors t l F t
Financial Possibility Frontier • The financial possibilities frontier can shift over time. • Technological advances can make it possible for countries to support higher levels of financial activity. • Institution building such as upgrading legal and contractual frameworks (e.g., defining property rights over land), and ( g , g p p y g ), improvements in information frameworks (e.g., credit registries) can also push out the frontier over time. 8
Policies to Push the Frontier Outward Policies to Push the Frontier Outward • Balance between market ‐ friendly actions, appropriate macro ‐ prudential oversight, and careful calibration of public policies. h d f l l b f bl l • Develop information and market infrastructure, address collateral issues, and limit excessively intrusive interventions and dominance. y • Interventions that support technological innovation, promote competition, and create infrastructures can help achieve economies of scale and reduce costs in financial services provision scale and reduce costs in financial services provision. • Require a concomitant widening of the regulatory and supervisory perimeter to minimize regulatory arbitrage and financial system risks. • Rapid expansion of non ‐ bank intermediary sector, which traditionally has been outside the regulatory remit, can pose challenges for financial stability. y 9
Trends Affecting Access and Financial P Possibilities Frontiers ibili i F i • Steady increase in financial inclusion in Africa over the past decade. • Banks still dominate landscape but new nonbank institutions cover more people. • Widespread use of informal financial services. • Two successive innovations: • Credit ‐ led inclusion – Microfinance (MFI) and cooperatives have become an important segment of the financial system. – Overcoming (idiosyncratic) risks. • Payment ‐ led inclusion – Mobile finance services (MFS) – Mobile finance services (MFS). – Overcoming scale barriers and transaction costs. 10
Limited household and firm access to finance
Cross ‐ country comparison in financial access Cross country comparison in financial access 12
The Case of Uganda The Case of Uganda • Enabling legislation for microfinance and savings and credit cooperatives (SACCOs), played a key role in spurring access to financial services. • Credit guarantee mechanisms allowed for risk sharing between banks and guarantors in agricultural loans leasing and innovative collateral helping guarantors in agricultural loans, leasing and innovative collateral, helping expand agricultural credit. • Number of SACCOs doubled in two years to reach 2,800 in 2011. y , • Greater access to be balanced with rapid proliferation of unregulated entities and distortions created by government support. • Potential for emerging new technologies to facilitate access further. 13
Microfinance Expansion Microfinance Expansion 14
The Case of Kenya The Case of Kenya • Kenya is at the cutting edge of the MFS revolution. • M ‐ Pesa, supported by flexible regulation, helped lower costs and promoted access to payments services to costs and promoted access to payments services to underserved segments of the population. • Formal institutions now able to offer new integrated mobile ‐ based payments services and banking products. • Better regulation rather than more regulation, encourage prudent market behavior. 15
Kenya: Mobile Transfers Revolution Kenya: Mobile Transfers Revolution Source: Central Bank of Kenya 16
Implications of Innovations for Monetary Policy Implications of Innovations for Monetary Policy • Move from frameworks centered on periodic quantitative targets for money aggregates towards more flexible operational targets and liquidity management. • • Velocity and money multipliers subject to fluctuations that complicate Velocity and money multipliers subject to fluctuations that complicate monetary policy analysis: – Unstable and/or unpredictable money demand. – Unstable relation between the intermediate target (broad money) and the operational Unstable relation between the intermediate target (broad money) and the operational target (reserve money) under a money targeting framework. • Relationship between inflation and broad money growth has weakened over time, in part, because of payment ‐ led inclusion revolution. ti i t b f t l d i l i l ti • Less cash outside the banking system could improve the transmission mechanism in IT ‐ like monetary policy regime. mechanism in IT like monetary policy regime. 17
The currency in circulation as a share reserve money is d declining in all three countries. li i i ll th t i Currency Outside the Banks (As a share of base money) 0.76 KEN UGA Beginningof significant increase in access to finance 0.69 0 62 0.62 0.55 MFS introduction Structural break (8 months later) 0.48 Sources: Countries authorities. 18
Money multipliers are broadly increasing y p y g Money Multiplier 7.00 4.00 KEN (LHS) UGA (RHS) 6 50 6.50 3.50 6.00 Uganda: Beginning of significant increase in access to finance (Dec. 5.50 3.00 5.00 Kenya: Introduction of MFS 4.50 2.50 Feb-02 Aug-03 Feb-05 Aug-06 Feb-08 Aug-09 Feb-11 Aug-12 Sources: Countries authorities. 19
Velocity of money is declining in the two countries ‐‐ indication of increasing financial depth. i di ti f i i fi i l d th Velocity y 7.00 3.10 Uganda (LHS) Kenya (RHS) 6.00 5.00 5 00 2.50 2 50 4.00 3.00 1.90 2000 2002 2004 2006 2008 2010 2012 Sources: Countries authorities. 20
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