Financial Sector Development in Africa: Opportunities ... - World Bank

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162 Fuchs, Losse-Mueller, and Witte capital adequacy ratio of 8 percent, but supervisors were encouraged to set higher ratios, as was the case in most African jurisdictions. In 2004, the Basel II reforms introduced additional risk-sensitive options in the calculation of capital requirements based on the greater use of risk assessments provided by banks’ internal credit and market risk systems. Most important, the intention of the reforms under Basel II—to allow banks to use capital more efficiently and broaden the framework’s scope by including operational risks—resulted in lower capital requirements for most credit risk classes, which are the predominant form of risk for African banks. Against the background of the strategic development dilemma of the need to maintain high capital as a stability anchor versus the need to leverage capital to mobilize funding resources, it is important to note that Basel II did not lower capital requirements per se, but instead increased the risk sensitivity of capital requirements. This provided for a more efficient use of capital, assuming, of course, that banks have the necessary capacity to manage risk according to the more sophisticated approaches of Basel II and also that supervisors are able to monitor banks’ risk management capacity. According to the Results of the Fifth Quantitative Impact Study (BCBS 2006), banks that used the new option of the advanced internal ratingsbased approach (IRB) reduced their minimum required capital by up to 30 percent more than banks using Basel I. IRB-based capital reductions were especially strong for retail mortgages (82 percent), small and medium retail loans (72 percent), and corporate loans (27 percent). Basel II predicates these reduced capital requirements on a significant increase in supervisory requirements—and therefore demands on supervisory capacity—including the need for supervisors to assess individual bank risk management systems. It requires supervisors to exercise considerable judgment in reviewing and evaluating a bank’s internal risk management practices, its exposure to risks, its funding structure, and its overall risk profile. Figure 5.4 illustrates the relation between overall regulatory capacity and capital adequacy under the three different frameworks. Today most African countries operate under Basel I, which—in comparison with the more recent revisions—is characterized by higher capital and less-defined demands on supervisory capacity. Most African frameworks are characterized by an even higher reliance on capital and lower levels of supervisory capacity than implied by the full observance of the BCPs, which complemented Basel I. A potential move to Basel II is a formidable challenge for any regulator. It requires a significant step-change in supervisory capacity,
The Reform Agenda for Financial Regulation and Supervision in Africa 163 Figure 5.4 Relation between Capital Requirements and Supervisory Capacity Basel I Basel II Basel III High Africa today: Higher capitalization Required supervisory capacity Low Africa today: Lower supervisory capacity Standardized approach Internal ratings–based approach Quality Leverage ratio Capital buffers Too-big-to-fail Required regulatory capital a Source: Authors. a Required regulatory capital for the same amount of corporate credit risk under Basel I, Basel II, and Basel III. The gray dots connected by the dotted line indicate the level under all three frameworks. which is even more daunting when starting from a low base. At the same time, Basel II allows banks, especially those adopting the advanced IRB approaches, to considerably reduce regulatory capital. There is a fundamental difference, though, between a move from Basel I to Basel II and the adoption of the 2010 Basel III reforms: Basel III does not include a trade-off between the two stability anchors—capital and capacity—but it does contain elements that increase demands on capital and supervisory capacity at the same time. The potential value of these latest proposals for the reform agenda will be discussed below. In essence, the introduction of Basel II into African jurisdictions requires a significant buildup of supervisory capacity to allow banks to leverage capital more efficiently. Conversely, Basel II does not provide an adequate framework to enhance financial stability in African countries if supervisory capacity remains low. African supervisors often view high capital requirements as a way of compensating weak supervisory practices to safeguard financial stability. But capital cannot replace adequate supervision—rather, it creates a false sense of security and can impose a significant burden on banks’ ability to intermediate the depositor funds at their disposal. The goals of ensuring the maintenance of financial stability and enhancing intermediation efficiency can be achieved jointly
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lic Disclosure Authorized Public Di
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Financial Sector Development in Afr
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Contents Foreword Acknowledgments E
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Contents vii PART III Safeguarding
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Contents ix 4.4 Size of Mortgage Lo
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xii Foreword In their own way, each
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xiv Acknowledgments led by Stefan N
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xvi Editors and Contributors of Acc
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xviii Editors and Contributors deve
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xx Abbreviations FSB FSD FSDT FSI G
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2 Beck and Maimbo to the bottom of
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4 Beck and Maimbo advocate a “bui
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CHAPTER 1 Microfinance in Africa Al
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Microfinance in Africa 9 Figure 1.1
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Microfinance in Africa 11 A Special
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Microfinance in Africa 13 Figure 1.
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Microfinance in Africa 15 Impedimen
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Microfinance in Africa 17 Figure 1.
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Microfinance in Africa 19 to physic
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Microfinance in Africa 21 Understan
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Microfinance in Africa 23 Some exam
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Table 1.2 Fanikisha Project Type of
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Microfinance in Africa 27 world reg
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Microfinance in Africa 29 implicitl
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Microfinance in Africa 31 Financial
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Microfinance in Africa 33 situation
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Microfinance in Africa 35 have yet
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Microfinance in Africa 37 9. This i
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Microfinance in Africa 39 Ehrbeck,
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CHAPTER 2 Mobile Financial Services
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Mobile Financial Services in Africa
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Table 2.2 African First- and Second
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Table 2A.1 ID and SIM Registration
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79 Guinea Yes http://fr.allafrica.c
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Togo Yes http://www.mediaf.org/fr/t
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84 Coates and Hofmeister chains. It
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86 Coates and Hofmeister unions in
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88 Coates and Hofmeister trap for t
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90 Coates and Hofmeister Sources of
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92 Coates and Hofmeister Box 3.1 Ca
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94 Coates and Hofmeister farm input
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96 Coates and Hofmeister Technical
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98 Coates and Hofmeister agree to b
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100 Coates and Hofmeister Box 3.3 C
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102 Coates and Hofmeister Attitudes
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104 Coates and Hofmeister developin
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106 Coates and Hofmeister specifica
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108 Coates and Hofmeister ———
Page 133 and 134: CHAPTER 4 Housing Finance Simon Wal
Page 135 and 136: Housing Finance 113 Figure 4.1 Mort
Page 137 and 138: Housing Finance 115 countries, down
Page 139 and 140: Housing Finance 117 • The housing
Page 141 and 142: Housing Finance 119 limited to a fe
Page 143 and 144: Housing Finance 121 housing and inf
Page 145 and 146: Housing Finance 123 borrowed by ext
Page 147 and 148: Housing Finance 125 Box 4.1 Afforda
Page 149 and 150: Housing Finance 127 Box 4.2 South A
Page 151 and 152: Housing Finance 129 the degree to w
Page 153 and 154: Housing Finance 131 markets is the
Page 155 and 156: Housing Finance 133 are unable to o
Page 157 and 158: Housing Finance 135 greenfield vent
Page 159 and 160: Housing Finance 137 Figure 4.5 Obst
Page 161 and 162: Housing Finance 139 changes in the
Page 163 and 164: Housing Finance 141 • Introduce a
Page 165 and 166: Housing Finance 143 Box 4.6 Progres
Page 167 and 168: Housing Finance 145 of the impact o
Page 169 and 170: Housing Finance 147 funds. Within s
Page 171: Housing Finance 149 Hassler, O., an
Page 175 and 176: CHAPTER 5 The Reform Agenda for Fin
Page 177 and 178: The Reform Agenda for Financial Reg
Page 183: The Reform Agenda for Financial Reg
Page 199: PART IV Financial Sector Reform: Ac
Page 202 and 203: 180 Dafe lack access to external in
Page 204 and 205: 182 Dafe having a positive theory o
Page 206 and 207: 184 Dafe In sum, high transaction c
Page 208 and 209: 186 Dafe through the selective allo
Page 210 and 211: 188 Dafe institutions of the indust
Page 212 and 213: 190 Dafe the boundaries of informat
Page 214 and 215: 192 Dafe range of examples of both
Page 216 and 217: 194 Table 6.1 Period Since the end
Page 218 and 219: 196 Dafe state-owned financial inst
Page 220 and 221: 198 Dafe The degree of success, in
Page 222 and 223: 200 Dafe Although the current conse
Page 224 and 225: 202 Dafe The interdependence of the
Page 226 and 227: 204 Dafe in the 1980s and 1990s wer
Page 228 and 229: 206 Dafe Alternative Approaches to
Page 230 and 231: 208 Table 6.2 Approach to explain/
Page 232 and 233: 210 Dafe state-centered, and interd
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212 Dafe particularly important fac
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214 Dafe Table 6.3 (continued) Mana
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216 Dafe activism in the developing
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218 Dafe structures can undermine m
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220 Dafe Conclusion There is strong
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222 Dafe policy is not straightforw
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224 Dafe banks that open agents in
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226 Dafe Bankable Frontier Associat
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228 Dafe Goldsheid, R. 1958. “A S
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230 Dafe ———. 2001. Types of
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