overcoming financial sector constraints to private sector development in mozambique presentation to...
TRANSCRIPT
Overcoming Financial Sector Constraintsto Private Sector Development in Mozambique
Presentation to CTA, Maputo -- 22 February, 2007
Trade and Investment Project
Bruce Bolnick Alistair Tite
2
Overview and Trends
3
Central issues raised by the business community
• Access to credit and cost of credit as major constraints to private sector development
• Restrictive foreign exchange regulations as impediment to trade
• Absence of banking services in many regions
• Need to identify practical steps to address these problems. But no magic solutions!
4
Starting point : Principles of Finance
• Core purpose of the financial sector: Intermediate financial resources and manage risks
• Paramount importance of sound banking system
• But sound banks can also be innovative banks!
• Financial market imperfections Supporting role for government
5
Recent trends
• Progress in development of the financial system
• Rapid growth of lending and deposits
• Interest rates still very high
• High fees
• Financial sector reform programs
6
Credit to the economy (% GDP)
15.5
10.47.6
10.412.1
15.9
0
5
10
15
20
25
30
35
Mozambique Tanzania Zambia LIA Median LI Median
Per
cent
Expected value and margin of error
7
Forex/MT loans & deposits
Foreign Exchange Loans and Deposits
0%
10%
20%
30%
40%
50%
60%
70%
2002Q1
2002Q2
2002Q3
2002Q4
2003Q1
2003Q2
2003Q3
2003Q4
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
2006Q2
2006Q3
Per
cen
t
Ratio of foreign exchange loans to total loans Ratio of foreign exchange deposits to total deposits
8
Interest rate trends
Mozambique Nominal Interest Rates
0
5
10
15
20
25
30
Dec-04Mar-05
Jun-05Sep-05
Dec-05Mar-06
Jun-06Sep-06
Per
cen
t 180 day T-bill rate
180 day lending rate
180 day deposit rate
9
Real interest rates
Real Interest Rates
-10
-5
0
5
10
15
20
25
30
35
2002
Q1
2002
Q2
2002
Q3
2002
Q4
2003
Q1
2003
Q2
2003
Q3
2003
Q4
2004
Q1
2004
Q2
2004
Q3
2004
Q4
2005
Q1
2005
Q2
2005
Q3
2005
Q4
2006
Q1
2006
Q2
2006
Q3
2006
Q4
Per
cen
t
Real 180 day lending rate Real 180 day deposit rate
10
Access to Banking
Days to process SME loan applications(number of days)
25.8
4.5
12.0
4.1n/a
0
5
10
15
20
25
30
Mozambique Malawi Uganda Low-Income SSAMedian
South Africa
Days
Source: World Bank working paper, Banking for Everyone, December 2006
11
Access to Finance
12
View from the banks
• Rapid growth of loan books since 2005. • Banks actively seeking viable customers• Leading constraint: high interest rates
Also serious risk factor (“adverse selection”)
• Other major constraints – quality of loan applications Poorly prepared business plans Evidence of weak management Viability of repayment not demonstrated Lack of creditable financial information Need for equity contribution Finally, security for the loan
13
Enhancing creditworthiness
• Traditional route to creditworthiness• Commitment by businesses to improve
quality of financial information• Establish CTA credit mentoring system• Establish new credit bureau with more
comprehensive information• Use of insurance as credit enhancement
Examine African Trade Insurance network for export credit insurance
• Pressure government on payment arrears !
14
Creating a Development Bank
• Fundamental issue: access to development finance for viable productive investment
• Lessons from international experience Cases of success Cases of failure
• Implications for Mozambique Strengths of DFI proposal But serious structural weakness
• The critical test: Are investors willing to put their money at stake? Example: GAPI - Rabobank
15
Access to Term Finance (2)
• Alternative avenues of term financing Create regional DFI Promote asset based lending Establish “second-tier” bond market Provide TA for risk capital deals
• And on the supply side Fundamental pension reform
16
Outreach to new clients
• Old news: Lower interest rates Microfinance Suppliers’ credit networks, outgrower schemes Temporary, limited credit guarantees as catalyst
for outreach to new markets
• New news: mobile phone banking Technology to the rescue Low cost, broad outreach No new legislation needed
17
Legal/judicial foundations for finance
• Important recent reforms• Other reforms underway
Pensions, Bankruptcy, Forex Controls. Also Labor Law.
Need to lobby for appropriate outcomes• Other work to do, including:
Focus on enforcement of banking laws Management Assisted Judicial Execution to deal
with key bottleneck in foreclosing collateral Clarify role of “correspondentes” as agents Legal foundations for small claims court
18
Cost of financial services
19
Cost of financial services
Key problem: Why are MT interest rates so high?
• Usual explanations don’t explain gap between MT and USD interest rates
• Core issue: monetary policy
Why are T-bill rates?
• Market concentration also likely factor
20
Cost of financial services (2)
• Recommendations Expand access to the primary market for
T-bills Reduce reserve requirement, or allow
government securities as reserves Support government in maintaining fiscal
discipline! Let “crowding out” fade away
21
Other cost issues
• Extremely high interest rates on microfinance
• Excessive banking fees
• Need for consumer protection laws, transparency in lending and fees
22
Foreign exchange issues
23
Foreign exchange transactions
• General problem with excessive red tape
• New forex law in process, but no information yet on content
• Basic issue of exchange rate risk Central bank exchange rate management
24
Aviso 5/2005
• Justifications: Systemic risk from unhedged positions – nip it in
the bud! Monetary management Effect on exchange rate policy
• Effect• Recommendations:
50% appears to be too high as risk provision Broaden the definition of hedged position Use this to create incentives to develop forward
market
25
Aviso 2/2006 - Situation
• Justification: shaky! It won’t solve the problem!
“Fighting against an avalanche” Perverse incentive to hold money offshore –
A major lesson from international experience! Yet sand in the gears of international trade
costs, delays, contract restrictions And heavy administrative burden on banks
• In any case, banks are strictly monitored• And major banks appear to be complying
with current regulation
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Aviso 2/2006 - Implications
• Also process problem - no prior consultation• Recommendations
Scrap Aviso 2/2006 Strictly enforce the existing regime, with serious
penalties for non-compliant bank But ease “exceptional” condition for pre-
payments Streamline the role of banks in trade facilitation Consider further liberalization of cross-border
payments to reduce incentives for capital flight
27
Conclusions
• Need to identify concrete steps to get things done!
• Priorities = important problem + political feasibility + solid analysis
• Analysis points to recommendations for action in the short run
• And important issues for dialogue to seed deeper reforms in the longer run