Financial Economics

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Access to Credit for the Small and Medium-Sized Enterprises in Senegal
(African Economic Research Consortium, 2021-10-27) Mouhamed, Abdoulaye Seck
While they represent more than 80% of Senegal’s industrial fabric, and against a backdrop of excess bank liquidity, only less than 18% of small- and medium-sized enterprises (SMEs) in the country have access to credit. This study sets out to identify the causes of their difficulty in accessing credit. The study is based on data from the World Bank’s Enterprise Survey for Senegal, and it uses a methodological approach based on logistic regression to identify the determinants of access to credit for SMEs. It found that having annual financial statements audited, being an innovating SME, being an exporting SME, having a high sales turnover, having fixed assets, and having a manager with long experience were the most important factors. The study also found that enterprises in the formal sector and those owned by women were more likely to have access to credit
African Economic and Monetary Union (WAEMU)
(AERC, 2009-12-07) Sandrine Kablan
This paper measures the efficiency of WAEMU banks and its determining factors, after the banking system reforms from 1993 to 1996. Data envelopment analysis (DEA) was used for assessing technical efficiency and a stochastic frontier analysis (SFA) for cost efficiency. Results suggest similar evolutions for the two types of efficiency for all WAEMU countries except Côte d’Ivoire and Burkina Faso. A detailed analysis per banking shareholder’s equity group reveals that local private banks are the most efficient ones, followed by foreign and then state-owned banks. Despite the technological changes that occurred in the banking system, the Malmquist index shows that the increase of technical efficiency is much more a factor of scale efficiency change than of the incorporation of technological innovations. Lastly, WAEMU banks’ efficiency is sensitive to variables like financial soundness, the ratio of bad loans per country, the banking concentration and the GDP per capita.
Analysis of Bank Distress and Failure Predictability in Nigeria
(African Economic Research Consortium, 2021-08-01) Enebeli, Uzor Emeka Sunday; Ifelunini, Abanum Innocent
Analysis of Capital Flight from Burundi
(African Economic Research consortium, 2017-10-05) Ndoricimpa, Arcade
Burundi has reportedly lost resources amounting to 10.2% of gross domestic product to capital flight, on average, over the period 1985–2013. Given the episodes of political instability and poor governance that have characterized Burundi’s landscape in the past decades, an institutional analysis of capital flight is undertaken and some instances of embezzlement of public funds reviewed in this study. Data analysis of the main trends of capital flight is also undertaken. In addition, this study examines the drivers of capital flight from Burundi. The estimation results seem to be sensitive to the capital flight measurement used, but in general they suggest that external debt, political instability and wars, as well as exports, are the main drivers of capital flight from Burundi. To discourage capital flight, the findings of this study suggest that Burundi should promote peace and political stability. In addition, more responsibility, transparency and accountability are required from the Government of Burundi in managing external debt. Moreover, some actions are needed to reduce trade misinvoicing, which is a major channel of capital flight from Burundi.
Analysis of factors affecting the development of an emerging capital market: The case of the Ghana stock market
(The African Economic Research Consortium, 1998-03) Osei, Kofi A
The study looks at the institutional factors affecting the development of the Ghana stock market. Additionally, the study analyses the impact of the listing of Ashanti Goldfields corporation on the development of the Ghana stock market. The study establishes that the institutional factors particularly the legal and regulatory framework that ensure the protection and security of investors are in place, and that the call-over system of transactions is very transparent. The study also finds that the delivery and settlement of transactions are performed satisfactorily by brokers, however the introduction of a centralized clearing system would significantly improve upon the clearing and settlement procedures. The study further establishes that the entry into and exit from the GSE are without any significant restrictions. Analysis of the structure of the GSE shows among others that many of the local investors can be described as low income investors. A sizeable percentage has no formal education and the knowledge of local investors about the capital market is quite poor. Foreign investors have come from Europe, America, the Far East etc. With the exception of Nigeria, no foreign investors on the GSE have come from sub-Saharan Africa. Using the law of one price and the random walk test, the study establishes that the GSE is "weak-form" inefficient. Additionally, the study finds that the listing of AGC has had tremendous impact on the GSE in many ways including improving market liquidity and market turnover. The study recommends a campaign to educate the Ghanaian public about the activities of the GSE and to promote investment in general. There is need for the government to give fiscal incentives in the form of taxation in favour of listed companies, and to pursue prudent macroeconomic policies, particularly in the area of inflation management. A regular review of the legal and regulatory framework within which the investment laws operate is necessary to boost the confidence of investors.
An Analysis of Factors that Determine firm Survival during Economic Crises: The Case of Zimbabwe Manufacturing Firms
(African Economic Research consortium, 2017-03-05) Makochekanwa, Albert
The study analysed the various factors which contributed to the survival of manufacturing firms in Zimbabwe during the country’s crisis of the 1990s and the one between 2000 and 2008. The study employed both descriptive statistics using firm level data from World Bank Enterprise Survey, and a logistic econometric model. The findings from descriptive analysis indicate that survival of manufacturing firms in the 1990s was, among others, determined by such factors as access to finance (whether from bank loans, informal sources, or a company’s retained profits) to fund its operations including input procurement. Secondly, exportation was an important determinant which positively enhanced a given firm’s survival. Third, availability of electricity power to support manufacturing activities was a positive enhancement for firm survival. Findings from the 2011survey shows that the problem of foreign currency shortages were so severe that some firms were forced to exit the manufacturing business as they could not be able to source some of their vital inputs from the international market. Secondly, given that by 2011 corruption was a major problem for manufacturing firms, this implies that these gifts (bribes) increased the operational costs of these firms, and as such reduced their profit margins, thus negatively affecting their manufacturing business. Third, a number of firms interviewed said that they had been incurring losses on an annual basis due to electricity outages. At national level, firms lost around 6.9% of their total annual sales due to electricity power blackouts. Lastly, access to finance, especially from formal sources like banks, was also a major challenge as most banks were not providing loans to companies due to severe liquidity constraints. Turning to the exit (survival) logistic model which was estimated using the survey from 2011, the results showed availability of credit was an important factor affecting survival of manufacturing firms in the Zimbabwean context given that most firms’ balance sheets and net profits were rendered valueless, and as such firms found themselves looking for loans to finance working capital or make new investments that would ensure continuity and growth. The study also found that competition from both formal and informal competitors increased the probability of firms exiting the manufacturing sector. With regards to foreign ownership (or the extent to which a firm is a subsidiary of a multinational corporation), results indicate that foreign firms’ subsidiaries in Zimbabwe were more likely to stay in the economy comparable to domestic firms during economic crisis. The square of firm size (size2) was found to be negative and significant, implying that very large firms were assumed to be more established and expected to weather the common problems that bedevil small firms, and as such, they (very large firms) are less likely to exit. The impact of older firm (age2) on the probability of exit was negative and significant. As such, very old firms were assumed to be established and have more years of experience in conducting their line of business, thus less likely to exit from manufacturing activities.
An Analysis of Stock Market Anomalies and Momentum Strategies on the Stock Exchange of Mauritius
(AERC, 2011-01) Bundoo, S.K
The Stock Exchange of Mauritius started operations in July 1989 and as at December 2006 there were 41 listed companies with a market capitalization of US$3,540.60 million. The market index is the Semdex. This study investigates whether the stock market anomalies such as day-of-the-week effect and the January effect are present on the Stock Exchange of Mauritius over the period January 2004 to December 2006. We find negative Tuesday returns but positive returns for other days of the week. However, when we control for the size effect and the value premium as per the Fama and French (1993) three-factor model, only the Friday effect remains significant. The possible profit opportunities on the SEM in terms of both economic and statistical significance are also investigated. Finally, the study investigated investment strategies based on momentum in returns on the Stock Exchange of Mauritius and how robust these strategies are after controlling for size and value. The mean excess returns are statistically significant at the 1% level for momentum portfolios. We also find strong support for the Carhart’s (1997) model where the momentum factor is priced. The explanatory power of the momentum factor in fact dominates that of size and value.
Analysis of the Competitiveness and Sophistication of Exports in ECOWAS Countries: The Case of Measuring Trade in Value Added Products
(African Economic Research Consortium, 2021-11-11) Fofana, Abdul-Fahd
The objective of this study was first to analyse the participation of Economic Community of West African States (ECOWAS) countries in the global value chain. Then, an analysis was done of the export performance of these countries in value added trade through export competitiveness and sophistication. The results show that the participation of these countries in the global value chain is strongly driven by downstream integration, that is, exports of primary products. With regard to export performance in value added trade, the results suggest that the export basket of these countries is uncompetitive. The results also highlight the low sophistication of the export basket with a very high degree of heterogeneity between countries.
Analysis of the Determinants of Foreign Direct Investment Flows to the West African Economic and Monetary Union Countries
(AERC, 2011-08) Batana, Yélé Maweki
One of the problems facing sub-Saharan African countries is the low level of domestic investment. And yet the growth theory teaches us that it is impossible to envision development without a considerable accumulation of capital. An important channel through which these countries can solve the problem is to resort to foreign direct investment (FDI), especially since we know the significant role FDI played in the economies of several Asian countries. To date, countries in sub-Saharan Africa have not benefited enough from this type of capital. Several reasons for this exist, and they vary with countries and regions. This study, using dynamic panel data, is an attempt to identify the main determinants of the flows of private foreign investment into countries of the West African Economic and Monetary Union (WAEMU). After a review of the general framework of the study, three estimations were carried out: a “within” estimation, a random effect (RE) estimation, and an estimation using the Arellano and Bond (1991) Generalized Moments Method (GMM). This enables one to get a more effective estimator in cases of dynamic panels. It transpires from the main findings of the research that the rate of domestic investment, literacy, the level of economic openness, and delayed foreign investment are relevant factors that account for foreign investment flows to the WAEMU countries.
Assessment of Nigeria’s Financial Services Sector Stability and Diversity
(African Economic Research Consortium, 2021-07-19) Sunday, Enebeli-Uzor Emeka; Innocent, Ifelunini Abanum
A key lesson from the global financial crisis of 2007-2009 and the ensuing widespread economic dislocations is the reminder of the nexus between financial system stability and resilience, and macroeconomic stability. Also, emerging research efforts at exploring financial system stability, resilience and economic welfare have underscored the importance of diversity in the financial system. This study assessed Nigeria’s financial system stability and diversity. Specifically, the study sought to develop an Aggregate Financial Stability Index that is reflective of the intrinsic structure of the Nigerian financial services sector; develop an Aggregate Financial Diversity Index for the Nigerian financial services sector; investigate the determinants of aggregate financial stability index; and also investigate the relationship between the aggregate financial stability index and aggregate financial diversity index. Using annual and quarterly banking sector data for the period 2006-2015 and employing Principal Component Analysis, Hirschman-Herfindahl (HH) Index, Simpson Index, Simple Regression and Granger Causality, the study establishes that the Nigerian financial system shows a cyclical movement, and yet to achieve diversity. The study also found that, financial diversity positively influences financial stability and that there exists a bidirectional causal relationship between financial diversity and financial stability running from diversity to stability and vice versa. The study recommends that regulatory and supervisory authorities in Nigeria should include the diversity of financial services in their policy design as this will enhance, not only the stability of financial system, but also the economy as a whole. The Central Bank of Nigeria can also regularly monitor banks’ funding models to ensure that banks set up diverse funding plans to preempt a systemic crisis.
Bank Competition and Financial Inclusion: Evidence from Ghana
(African Economic Research Consortium, 2021-10-04) Dako, Agyapomaa Gyeke-; Fiador, Vera; Agbloyor, Elikplimi Komla; Abor, Joshua Yindenaba
This paper investigates how banking sector competition, measured from the consumer’s perspective as well as from financial intermediary pricing behaviour, affects financial inclusion in a developing country like Ghana. Financial inclusion in Ghana has remained low, leading us to examine if competition within banks (who happen to be the largest financial institutions) promotes financial inclusion. This paper measures competition using two indicators: the consumer-level measure of competition relating to the proliferation of bank branches, and a measure for banking sector competition using the funding-adjusted Lerner index at the financial intermediary level. Using data from the 2013 Ghana Living Standards Survey, district level data on bank branches and bank-level financials from 23 banks spanning the period 2008–2015, we found in almost all cases that competition, whether measured by bank branch proliferation or at the financial intermediary level, improves financial inclusion. These findings suggest that policies aimed at improving competition in the banking sector can yield larger societal benefits by increasing the proportion of the population included in the financial sector. We recommend that the Bank of Ghana, in consultation with the Ghana Association of Bankers, should draft a competition policy for banks in Ghana. Key areas to examine include the trend towards “open banking”, and the integration of mobile money and technology into the financial sector.
Bank Competition in Africa: Do Institutional Quality and Cross-border Banking Matter?
(African Economic Research Consortium, 2021-09-01) Mohammed Amidu
This study analyses the implications of cross-border banking (CBB) and institutional quality (IQ) for bank competition in Africa. We apply a two-step estimation procedure using bank-level panel data for 29 African countries. In step one, the Boone indicator and the Lerner index are used to gauge bank competition in a given country in Africa. In the second step, we analyse the sources of bank competition, placing emphasis on the impact of CBB and IQ. The results suggest that competition increased in the period 2002-2005, before decreasing somewhat between 2006 and 2007 and increasing again thereafter. The results also show that cross-border banking enhances bank competition in African countries with stronger governance structures and institutional quality. Our results are robust to an array of controls, including an alternative methodology, variable specifications, and the regulatory environments that banks operate in.
Bank performance and supervision in Nigeria: Analysing the transition to a deregulated economy
(AERC, 2020-04-27) Sobodu, Olatunji olugbenga; Akiode, philip Olakunle
Banking Industry Competition and Stability in Zimbabwe
(African Economic Research Consortium, 2021-11-12) Makena, Philton
The study investigates the impact of changes in banking industry competition on the industry’s stability in Zimbabwe using a sample of 18 banks for the period 2009-2017. The period of study coincides with an era when the country experienced growth and stability (under full dollarization) after a decade of an economic crisis (prior to full dollarization). First, the study employs a modified version of the Boone (2008) Indicator to establish the evolution of competition. Second, the -score is employed to investigate the nexus between banking industry competition and stability in the country. The study establishes that banking industry competition in Zimbabwe registered a pronounced increase for the period 2009-2012. This was, to some extent, attributed to the banks’ aggressive business models that sought to increase client bases by offering loans in order to increase asset bases and profitability. This trend was, however, reversed post-2012, as competition consistently fell between 2013 and 2017, mainly due to falling demand for both personal and business loans and a measured approach by banks in issuing new loans following a rise in non-performing loans (NPLs). The relationship between banking industry competition and stability is strong and competition appears to be good for the country’s banking industry. Our findings have potentially important policy implications regarding the design and enforcement of regulations that create the right incentives to safeguard stability, while at the same time conscious of the link between competition and stability. Understanding the dynamics of competition and stability is crucial, not only to banks, bank regulators and policy makers in Zimbabwe, but also to other developing countries, as they have the leverage to shape bank competition to levels that produce desired levels of stability. To banks, competition has implications on their access to finance and stability of the industry
Board ndependence and F rm F nanc a Performance Ev dence from N ger a
(African Economic Research consortium, 2011-01-04) Sanda, Ahmadu U
CAPITAL FLIGHT AND EXTERNAL DEBT IN NIGERIA
(AERC, 1995-10) AJAYI, S. IBI
Abstract not available
Capital Flight and its Determinants in the Franc Zone
(AERC, 2011-01) Ndiaye, Ameth Saloum
The phenomenon of capital flight appeared in the Franc Zone (FZ) before the debt crisis of the early 1980s, and is today of greater importance because of its increasing magnitude. This report examines the determinants of this phenomenon in the period 1970 to 2005. The econometric analysis indicated that in the context of poor governance and bad institutional quality, external debt, aid and natural resources, revenues are used in part to finance capital flight. The results also revealed that capital flight arises in the presence of macroeconomic instability that occurs in the forms of an increase in inflation, an exchange rate overvaluation, a decline in terms of trade, uncertainties in government consumption, real interest rates and budget deficits. Furthermore, capital flight episodes arise in the context of less developed financial systems, resulting in reduced deposits and in credit to the private sector. Exploring the effects of other factors, this study found that past capital flight, foreign direct investment and remittances are important in explaining current capital flight, while rate of return differentials and armed conflict have insignificant effects. The policy implications of these results are analysed to determine how to induce capital flight reversal.
Capital Flight from the Franc Zone: Exploring the Impact on Economic Growth
(AERC, 2014-05) Ndiaye, Ameth Saloum
This paper examines the effect of capital flight on economic growth in the Franc Zone (FZ). For the period 1970 to 2010, real capital flight from these countries is found to be positive and massive with a magnitude of roughly US$86.8 billion or US$80.1 billion, representing 122.1% or 112.6% of GDP, and 5.3 times or 4.9 times domestic investment. At the same time, the FZ countries experienced low and very volatile investment and growth rates. The econometric analysis shows that capital flight significantly reduces economic growth in the FZ. Capital flight thus poses a huge threat to high and sustainable economic growth in the FZ. The results also reveal that domestic investment, credit to the private sector, the quality of institutions, and domestic savings play an important role in explaining the influence of capital flight on economic growth in the FZ, and are therefore important channels that affect the growth effect of capital flight in this zone. The key implication of these results is that capital flight repatriation helps to raise significantly the volume of investment in the FZ, credit to the private sector, the quality of institutions, and domestic savings, implying that this can help FZ countries sustainablyincrease their economic growth.
Central Bank Intervention and Exchange Rate Volatility in Zambia
(AERC, 2014-04) Chipili, Jonathan Mpundu
The study analyses the impact of central bank intervention on the volatility of the exchange rate in Zambia over the period 1996-2010. The empirical findings reveal a statistically weak negative impact of intervention on exchange rate volatility. Further, there is little empirical support for a central bank decision to intervene in the foreign exchange market on account of volatility in the exchange rate. The results seem to suggest that the Bank of Zambia should not rely entirely on intervention to dampen volatility in the exchange rate; domestic policy changes are required to reinforce intervention. Triggers for intervention should also be re-examined within the context of the exchange rate policy objective.
Commodities Price Cycles and their Interdependence with Equity Market
(African Economic Research Consortium, 2021-08-27) Boako, Gideon; Alagidede, Imhotep Paul
This study examines time-scale connectedness between returns on African stock markets and commodities across the energy, agriculture, metals, and beverage markets with wavelet-based coherency, wavelet multiple cross-correlation, and wavelet-based Sharpe ratio and generalized Sharpe ratio diversification analysis. We find evidence of increased performance of risk-minimizing portfolios during crisis that are broadly narrowed to long-run fluctuations (shorter scales). Such higher performances at shorter scales suggest that, during crises, investors show some levels of risk-aversion towards African equity investments over long term horizons. This explains why some African markets experienced first-round effect of the global financial crisis despite the theoretical view that African economies could potentially be decoupled from global economic shocks during crisis. Thus, although the decoupling phenomenon may hold for African markets during global financial crisis, if investors decide to balance their portfolios only for the short term, the portfolio reversals may cause serious effects to the continent. Further, of all the nine stock markets, it is only the Ivory Coast regional bourse that maximizes the multiple correlations against the linear combinations of the aggregate commodity indices. Lastly, the results confirm that having a combined portfolio of commodities and equities improves performance for different investment horizons.

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