CHALLENGES FOR FINANCIAL
SECTOR REFORM IN AFRICA:
DISCUSSION NOTES
Victor Murinde
University of Birmingham
Background: Making Finance
Work for Africa
 Very thorough and comprehensive study, which
covers the main financial institutions, markets and
instruments
 Highlights the challenges for financial sector
reform in Africa, including low financial depth,
limited access to finance and high cost of capital
 Timely, in view of current emphasis on the role of
finance in economic growth
 Policy relevant, especially by emphasizing the
policy choices for governments (indirectly, for the
private sector as well)
Low financial depth
 The problem of rudimentary capital markets;
also incomplete and missing markets (see
Figure 1)
 Market imperfections and asymmetric
information problems
 Policy issues and gaps: capital market
integration; cross-listing; regional capital
markets, etc…
Bank efficiency and the role of banks
in Africa
 Bank efficiency, branch network (access)
and the role of banks in Africa
 Kirkpatrick, Murinde and Tefula (2007) find
that the mean value for cost x-inefficiency
based on the DFA is 20.256 while a similar
measure based on the SFA method has a
mean value of 19.286, suggesting that on
average banks are 80 percent cost efficient.
Bank efficiency (continued)
 It is also found that the mean value of profit xinefficiency based on the DFA method is 33.465
while the corresponding mean value based on the
SFA method is 33.646, suggesting that banks are
on average 67 percent profit efficient.
 The pan-African scenario may be different
because these results are based on a sample of
89 banks altogether for 1992-1999, from
Botswana, Ghana, Kenya, Lesotho, Malawi,
Namibia, Nigeria, Swaziland, and Zambia.
Bank efficiency (continued)
 KMT (2007) also find that an increase in the
degree of foreign bank penetration,
representing an increase in foreign bank
ownership, is associated with a reduction in
profit and cost x-inefficiency.
 This finding is consistent with Murinde and
Ryan (1998) who argue that foreign bank
entry is good for Africa
Table 1: Empirical Measures of Cost and Profit Xinefficiency for a Panel of Commercial Banks in Africa
Mean
Median
Standard Deviation
Skewness
Kurtosis
Jarque-Bera
Probability

DFACOST
20.25582
20.47019
6.611879
0.213978
3.491629
5.133561
0.076782
CINEFFS
19.28643
19.22322
6.508377
0.214675
3.633730
7.080299
0.029009
DFAPROFIT
33.46510
34.29631
7.803044
-0.876920
6.558330
190.1635
0.000000
PINEFFS
33.64627
34.43725
7.701402
-0.903132
6.695169
204.4120
0.000000
Notes: DFACOST=Cost x-inefficiency based on the Distribution Free Approach; CINEFFS=Cost x-inefficiency based
on the Stochastic Frontier Approach; DFAPROFIT=Profit x-inefficiency based on the Distribution Free Approach;
PINEFFS=Profit x-inefficiency based on the Stochastic Frontier Approach.

Source: Kirkpatrick, Murinde and Tefula (2007, Table 2)
Limited Access to Finance
 Aspects of financial exclusion, especially in the
rural communities
 Links between informal financial sector and the
formal financial sector
 Arguably, financial exclusion and growth in
informal financial sector exacerbated by political
risk and civil conflict in Africa
 Finance for small enterprise growth and poverty
reduction (Green, Kirkpatrick and Murinde, 2006)
Microfinance: Outreach and
sustainability issues in Africa
 Makame and Murinde (2007) empirically study
microfinance commercialization factors to probe
the cognitive dissonance surrounding
microfinance outreach and sustainability in
African economies.
 We analyze a balanced panel of 198
observations consisting of 33 MFIs over a period
of six years from 2000 to 2005 in Burundi,
Kenya, Rwanda, Tanzania and Uganda.
Microfinance: what determines
outreach?
 Specifically, we focus on the determinants
of depth and breadth of microfinance
outreach.
 We find that commercialization factors (or
mission drift indicators) do not significantly
explain the depth or breadth of outreach.
 We also find that efficient MFIs have
greater potential of reaching the poorest.
Portfolio behaviour of households in
Africa
 Making finance work for Africa: what do we learn from the
portfolio behaviour of households in Africa?
 Al-Zoubi and Murinde (2007) study the portfolio behaviour
of households in African economies.
 Households hold five assets, namely currency (notes and
coin), demand deposit, time deposit, government debt and
company securities.
 In a flow-of-funds framework, we estimate asset demand
equations for the household sector in Cote d’Ivoire, Kenya,
Malawi, Nigeria, Rwanda, South Africa and Uganda over
1981 – 2004.
Portfolio behaviour of households in Africa: the evidence
 We find weak substitution and complementary effects
amongst the financial assets, perhaps due to the initial
setbacks of the adjustment and reform programmes in
most African countries in the 1980s.
 We also find that asset allocations explain a major part of
the variability in portfolio returns. Implications for interest
rate policy and financial sector reforms?
 In addition, macroeconomic factors have a strong impact
on fund allocation decisions; residents seem to reflect a
‘wait-and-see’ stance in the face of uncertainties
surrounding the economic prospects of the region.
High Cost of Capital
 The dimension I would like to explore here is
the cost of capital for firms or investment
projects
 Capital market determined prices and yields
provide a benchmark against which the cost
of capital for and returns on investment
projects can be judged, even if such projects
are not in fact financed through the stock
markets.
High COC: Information problems?
 High COC for firms is related to low financial depth:
functioning capital markets are forward looking
and provide a unique record of the shifts in
investors’ views about the future prospects of
companies and the economy.
 In many respects, therefore, a capital market is a
vast information exchange, which efficiently
reduces transaction costs (Green, Maggioni and
Murinde, 2000).
High COC: Information problems in African
Markets
 To play the above roles, a capital market must be
effectively organised and operated, with a continuous
flow of orders around equilibrium prices.
 Few of the frontier markets in Africa live up to this ideal.
 Many are characterised by intermittent trading of
relatively few stocks, often held by a relatively small
group of investors.
 Thin markets are characterised by imperfections and
asymmetric information; they cannot adequately perform
their information processing and signalling functions.
 They may be excessively volatile; and vulnerable to
price manipulation by a small group of insiders.
 Indeed, there is abundant evidence that African capital
markets are inefficient in certain key respects and may
be subject to “excess volatility” & speculative “bubbles”.
Evidence on Cost of Capital in Africa
 Table 2 reports different measures of the
cost of capital for firms in a sample of 11
African countries (see also Murinde, 1997).
 Cost of capital: high cost of equity capital,
irrespective of measure /model used
 Likely consistent with scenario for a
weighted cost of capital (WACC) metric as
the cost of debt is also high.
Table 3: Cost of Equity Comparisons in African
Capital Markets
CED
CE
CE
CE
CESkew
CEVaR
10.78
8.88
14.95
14.45
39.13
17.46
Egypt
7.01
4.77
13.27
14.26
9.10
15.15
Zimbabwe
4.18
4.02
21.77
21.26
25.56
26.15
Morocco
3.95
3.51
7.94
8.86
22.70
8.46
Mauritius
4.60
3.50
7.62
8.09
7.56
8.60
Tunisia
4.81
3.02
11.46
11.76
13.27
13.85
Nigeria
5.57
3.67
10.81
11.93
17.39
12.38
Botswana
5.02
3.90
8.98
9.99
16.53
9.35
Kenya
4.64
3.31
10.92
10.54
47.56
11.62
Ghana
4.21
3.32
11.42
12.55
24.13
13.80
Namibia
4.81
4.84
13.77
15.01
23.27
17.14
Market
S. Africa
Source: Collins (2007), Table 7.
Concluding Remarks
 Low financial depth: policy reforms and incentives
for an increasing role of the private sector in
financial institutions, markets and instruments in
Africa
 Limited access to finance: (a) finance for small
enterprise growth and poverty reduction in Africa;
(b) microfinance outreach versus sustainability
 High cost of capital: (a) research issues; (b)
identify policy gaps and address key issues such
as ‘missing markets’ and market failure in Africa.
 Political risk: the role of finance in post-war
recovery and conflict resolution in Africa
References
Al-Zoubi, B. and Murinde, V. (2007), “Portfolio Behaviour in A
Flow of Funds Model for The Household Sector in SubSahara African Countries”, Finance Working Papers,
Birmingham Business School.
Green, C.J., Kirkpatrick, C. H. and Murinde, V. (2005), “How
does finance contribute to the development process and
poverty reduction?”, in C. J. Green, C. H. Kirkpatrick and V.
Murinde (eds.), Finance and Development: Surveys of
Theory, Evidence and Policy, Cheltenham: Edward Elgar,
Chapter 1, pp. 1-26.
Green, C.J., Kirkpatrick, C. H. and Murinde, V. (2006),
“Finance for small enterprise growth and poverty reduction
in developing countries”, Journal of International
Development, Vol. 18, pp. 1017-1030.
References (concluded)
Kirkpatrick, C.H., Murinde, V. and Tefula, M. (2007), “The
Measurement and Determinants of X-inefficiency in
Commercial Banks in Africa”, European Journal of Finance
(forthcoming).
Makame, A.H. and Murinde, V. (2007), “Empirical Findings on
Cognitive Dissonance Around Microfinance Outreach and
Sustainability in Africa”, Finance Working Papers,
Birmingham Business School.
Murinde, V. (2007), “Capital Markets in Africa: Roles and
Challenges”, paper presented at the Africa Economic
Conference, African Development Bank, Tunis, November
2006.
Murinde, V. and Ryan, C. (2003), “The implications of WTO
and GATS for the banking sector in Africa”, The World
Economy, Vol. 26, No. 2 (February), pp. 181-207.