Financial Liberalization in Sub‐saharan Africa: What Do We Know?

Abstract

Beginning from the early 1980s countries in Sub-Saharan Africa embarked on financial liberalization policies with a view to reversing the ill-effects of financial repression. This paper provides a survey of financial liberalization in Sub-Saharan African countries over the period 1980 to 2004. Our review of empirical studies showed that financial liberalization has had diverse and contrasting effects on savings, investment and economic growth. Most studies found a significant positive effect of financial liberalization on investment whereas its effect on savings has been largely insignificant. The evidence on the effect on economic growth is inconclusive as different studies find contrasting results. It is found that financial liberalization policies have not had the desired and expected results as both financial and macroeconomic variables have not improved following financial liberalization in these countries. This calls for a rethinking of financial liberalization in Sub-Saharan African countries. It is important that financial liberalization is carried out in a stable macroeconomic environment. In addition to this, there should be a building and reform of institutions and the strengthening of prudential regulation. Following this, financial liberalization can be embarked upon but it must be properly sequenced and not rushed.

Growth and Welfare Effects of Macroprudential Regulation

“…2 These adverse growth effects are consistent with the evidence showing that financial liberalization, to the extent that it is accompanied by greater financial volatility, may not contribute much to promoting growth; see for instance Misati and Nyamongo (2012) and the overview by Fowowe (2013). The latter study, in particular, highlights the need to strengthen prudential regulation to enhance the benefits of financial liberalization.…”

Examining the relationship between finance, institutions and economic growth: evidence from the ASEAN economies

“…This suggests that the loose regional integration policies implemented by the ASEAN economies may be effective in the region. Thus, it is suggested that there are important prerequisites that must be in place before financial reforms and integration can be successful, which includes institutional reform, stable macroeconomic environment, policy credibility and effective and adequate monetary supervision (Fowowe 2013). Similarly, recent research has emphasised the role of institutional quality in promoting economic growth in the ASEAN economies (Masron 2017).…”

The impact of financial liberalization on economic growth in sub-Saharan Africa

“…This section highlights and reviews various financial sector reforms in SSA and the role these reforms have played in augmenting economic growth and boosting investment in the real sector. Fowowe (2013) asserts that most financial systems in SSA countries are still marked by inefficient resource mobilization, high-transaction costs and information asymmetry. For example, credits are disproportionately directed to specific sectors by governments at low-interest rates.…”

“…These challenges include, amongst others: banking crises, shallow and unstable exchange rates, a widening spread between lending and deposit rates and a drastic decline or stagnation of the domestic credit to financial depth. A number of studies (Brownbridge, 1998;Daumont, Le Gall, & Leroux, 2004;Fowowe, 2013;Ikhide, 2015;Misati & Nyamongo, 2012) show that systemic banking crises occurred in many SSA countries [for example, Cameroon (1988[for example, Cameroon ( -1991, Nigeria (1991Nigeria ( -1995, Ghana (1982Ghana ( -1989 and Kenya (1993Kenya ( -1995] immediately after they had implemented financial liberalization policies. Misati and Nyamongo (2012) believe that financial liberalization policies are still one of the most controversial policies because of its negative impact on the relationship between financial development and economic growth.…”