Financial market fragmentation and reforms in sub-Saharan Africa

Abstract

What explains the existence of fragmentation in African financial markets and its persistence despite reforms to liberalize those markets? This paper reports findings from surveys of formal and informal institutions and their clients in Ghana, Malawi, Nigeria and Tanzania to test hypotheses explaining different aspects of fragmentation, which occurs when different market segments are poorly linked and interest rate differentials cannot be fully explained by differences in costs and risks. A central hypothesis was that reforming financially repressive policies would not be sufficient to overcome fragmentation of financial markets because of structural and institutional barriers to interactions across different market segments. Substantial fragmentation of financial markets was observed. The findings show little short-term impact of financial liberalization on financial deepening, liability structures, product innovation and outreach of formal banking systems, despite some strengthening of portfolios, competition and supervision. The findings imply that financial liberalization and bank restructuring in the African context should be accompanied by complementary measures to address institutional and structural problems such as contract enforcement and information availability. � 2004 Elsevier Science B.V., Amsterdam. All rights reserved.