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Commercial Bank Privatization in Africa

Commercial Bank Privatization in Africa. Some Preliminary Results. The Starting Point (late 1980s). Most banks state-owned Substantial market share Entry into the financial system was restricted Interest rates were controlled Credit was allocated by fiat Exchange rates were fixed

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Commercial Bank Privatization in Africa

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  1. Commercial Bank Privatization in Africa Some Preliminary Results

  2. The Starting Point (late 1980s) • Most banks state-owned • Substantial market share • Entry into the financial system was restricted • Interest rates were controlled • Credit was allocated by fiat • Exchange rates were fixed • Exchange controls were the norm

  3. The Reforms • Stronger prudential regulations • Financial market liberalization • Bank liquidation/privatization

  4. Privatization Rationale • Banks as public utilities • Subsidize SOEs and agriculture • Weak regulators • New capital needed to restore soundness

  5. Privatization Approaches • Restructure • Seek private investors

  6. Restructuring • Recognize losses • Write off un-reconciled balances • Retrench or retrain • Reorganize (ie spin-off or close branches) • NPL “agency” • Place bank under new management (?) • Make new investments in bank (?)

  7. Restructuring – a good option? • YES if one of the following is true: • Sale price will increase (net of restructuring costs) • Likelihood of a quality buyer • Likelihood of reducing time required to privatize

  8. Methods of Sale • Strategic Investor – mixed but generally positive results • Public offerings – negative

  9. Socio/political developments • Emergence of multi-party systems • Vocal Parliaments • Increased emphasis on good governance • Devastation of HIV/AIDS • per capita output (in real terms) is lower than at the end of the 1960s • fiscal resources per capita are also lower • share of world trade is also lower

  10. Banking sector today • Profitable (see next slides) • Reduced public ownership (see Table 2) • Low risk activities • Very liquid • Operate independently in a positive interest rate environment • Profitable (see next slides)

  11. Summary Ratio Comparisons

  12. However • Financial depth remains low • Spreads are high • Credit to private sector lower • Substantial increase in foreign assets as percentage of total bank assets • Ditto credit to public sector • Dominance of foreign banks • Large stock of non-performing loans

  13. However (ctd) • proliferation of undercapitalized banks; market segmentation • Limited development of money and capital markets • due to easy access to central bank discount facilities and/or availability of high yielding t-bill

  14. Privatization Lesson 1 • “IT’S QUALITY STUPID”

  15. Privatization lesson 2 • Transparency, transparency, transparency

  16. Privatization Lesson 3 • Privatization and Reforms have left a gap • Potential role for state • Let’s not be dogmatic

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