Tweet

6.3 Financial sector links between investment and diversification: Economic Report on Africa 2007

Guest post by: United Nations Economic Commission for Africa

Article Overview: With regard to financial sector policies, the starting point is the clear link between investment and diversification. The contribution of private investment to desirable diversification outcomes cannot be gainsaid.

6.3 Financial sector links between investment and diversification: Economic Report on Africa 2007

With regard to financial sector policies, the starting point is the clear link between
investment and diversification. The contribution of private investment to desirable
diversification outcomes cannot be gainsaid. In that respect, the financial sector and
its role in financing private sector contribution to diversification is very critical.
Hitherto, the African experience with financial sector reforms has been almost similar
to the trade liberalization results. However, the failure of financial sector liberalization
to achieve the results expected can be explained from two angles. On the
one hand is the failure of liberalization in achieving an efficient financial sector able
to play its expected intermediation role for both short-and long-term credit, in an
optimal way. On the other hand, comes the failure to achieve reductions in interest
rates as was expected, given that interest costs are a major cost of doing business for
many private sector firms. These two points are elaborated here in order to point to
the need for a rethink of the financial sector architecture, in terms of both policy and
institutional frameworks so that proactive financial sector policies can contribute to
the deepening of diversification efforts.

With regard to the institutional structure of the sector, financial liberalization in
Africa failed to achieve the desired outcomes as a catalyst for financial sector deepening.
The key reason noted is that in the same way that trade policies were never seen
as part of an integrated financial sector, financial sector liberalization tended to treat
the sector in a compartmentalized manner. This was done to the extent that there
was unbalanced focus on some components such as commercial banking, neglecting
the significance of other dimensions such as development finance institutions and/or
other components that are key to capital markets deepening. The results were that
the financial sectors were not integrated, and focused on short-term credit issues
rather than on development finance and capital markets development, which would
be more relevant to diversification efforts. In this respect, given the importance of
the financial sector in diversification, it is important that African countries seek a
proactive financial sector policy that aims at integrated development of the whole
sector that can effectively and efficiently mobilize the sustainable, long-term capital
necessary for financing diversification programmes, and by extension, long-term
development.

The significance of proactive financial sector policies compared to what has been the
practice can be found in the results that were achieved in the past with interest rate
regimes. In many African countries, financial sector liberalization became characterized
by wide interest rate spreads. Thus, instead of liberalization resulting in more
efficient financial sectors, the results were interest rate regimes where the lending
rates rose and remained high over long periods of time, while the deposit rates fell,
and, in many cases, were negative in real terms. This discouraged the private sector
from undertaking productive investments, such as those required for deepening
diversification.

Additionally, the inability of the private sector in Africa to access cheap credit meant
that it was not possible to undertake initiatives that would lead to both horizontal
and vertical diversification. The high interest rates after liberalization also had the
negative effect of raising the interest costs of servicing existing debt. This resulted
in reduced profitability for most firms. Given that retained earnings also form a significant
component of financing diversification efforts in the private sector in most
African economies, financial sector liberalization had the indirect effect of limiting
these diversification efforts.

Related Articles
  4.0 Diversification trends in Africa: Economic Report on Africa 2007
  5.0 Diversification and Growth: Economic Report on Africa 2007
  4.4 References: Economic Report on Africa 2007
  Overview IX: Economic Report on Africa 2007
  5.2 Growth, productivity and diversification: Economic Report on Africa 2007

Article Tags: african experience, angles, capital markets, catalyst, development finance, diversification efforts, doing business, finance institutions, financial liberalization, financial sector reforms, financial sectors, institutional frameworks, institutional structure, interest costs, intermediation, private investment, private sector firms, rethink, trade liberalization, trade policies



Related Forum Posts
Re: need advice - Africa is a pretty big place I think it is a question of where in Africa you would like to open a call centre. South Africa for example actually has plenty of call centres already operating, so it would very much depend on what part of Africa you are considering. MichelleJ
New site promotion - how to begin? - I have some promoted sites in Russian sector of internet and have succes but in English sector have some problems. Very interesting to know few first step how to start promote site. Usually I submit my yang sites in search engines like Google and Yandex - becouse they give about 70-80% of traffic. Onther step - I add interesting content and optimize search tags. After that change by links with other sites or banners It is usually working. But in English internet it is not work well. May be exist other ways or steps?
Re: Need USD 3.3 M to win ROI 120% - Hello, My name is Muhammed Al Arajhi,Board member- Alrajhi Bank Saudi Arabia,head of operations Al-rajhi investment corporation United Kingdom and also a business investor based in London, United Kingdom,with a capital base of over $1.1b.I am seeking to expand my business interest and investment to your country in the following sector : Real estate, Banking, Oil and Gas,Insurance, Manufacturing, Aviation, Hotel , Communication, Entertainment, Education ,alternative energy , telecoms , media , humanitarian , mining , logistics , shipping , recycling projects and film industry projects.etc. With the recent hope of economic recovery in the United States and the world at large, one is poised to invest so as to reap the benefit of the future. Please contact me with your business summaries and complete documentation, if interested in a partnership deal,business loan or investment in new business . Regards, Muhammed Al Rajhi. contact me: alrajhi@gmx.com[/b]
Multiple phase capitalization model - Thank you for responding, Evan. What I’m really looking for is a model – ideally a spreadsheet model – that links the various capitalization phases and identifies and perhaps even quanitifies the appropriate variables. You asked about investment amount – let me give you two numbers, $ 5 million and $ 10 million (although presumably the model is identical for both). The business is already established and requires this initial investment for growth. Best regards and thank you, Terry
Looking for business partners and mentors. - Hello entrepreneurs, I'm new to this forum. I'm looking for partners and mentors for my new business venture. I just started the business plan. The business is related to the Securities sector. Anyone who has management skills, entrepreneurship skills or who has experience in the securities sector, feel free to contact me. I am open to any discussion/suggestion about my plan. Let’s get this business started Thank you!!!! Richard


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Common Sense Stress Management

Angel Investors Where Are You?

Sales Flubs

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.