The measure of financial system development often used in the literature, according to King and Levine (1993), are as follows in the next paragraphs. The ratio of liquid liabilities of financial intermediaries to GDP, for example, M3 money supply divided by GDP (Table 2). This measure is a proxy for the overall size of the formal financial system, often referred to as the depth of the financial sector. If the size of the financial system is positively related to its ability to meet financial services needs, then it can be viewed as a good measure of the function of financial sector in the economy.
The other measure of financial system development is the ratio of quasi-liquid liabilities to GDP; that is, M3 minus M1 divided by GDP. This measure is an improvement on M1 to GDP ratio which measures the highly liquid bank deposits and in most cases may not be closely associated with efficient financial intermediation of longer-term investments by financial intermediaries (Demirguc-Kunt and Levine, 1996). According to Demirguc-Kunt and Levine (1996), liabilities and quasi-liabilities that finance government deficit may not reflect efficient provision of financial intermediaries, such as information acquisition, corporate governance and risk diversification.
In light of the experiences of many African countries with recurrent domestic and foreign debt problems in the past, the financing of budget deficit by banks was a common practice in 1990s. Therefore, there is need to look at a measure of financial services provision to the private sector by financial systems, as to have a picture on how financial intermediaries help in extending developmental financial resources to productive uses. It is a standard indicator in the finance and growth literature: countries with higher levels of private credit to GDP have been shown to grow faster and experience faster rates of poverty reduction (King and Levine, 1993).
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Table 2: Liquid liabilities (M3) as % of GDP.
Country 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average Botswana 37 39 53 59 61 55 66 70 69 56 Cote d’lvoire 24 33 30 36 38 42 55 61 66 43 Egypt 72 70 63 67 76 83 94 100 100 81 Ghana 32 39 42 48 54 70 88 100 --- 59 Kenya 35 38 43 44 48 55 67 74 75 53 Malawi 19 22 21 23 24 22 28 42 48 28 Mauritius 78 83 108 123 121 118 130 156 146 118 Morocco 71 76 89 100 112 125 155 175 170 119 Namibia 34 28 42 51 55 62 63 60 63 51 Nigeria 25 27 26 27 32 42 66 102 86 48 South Africa 51 48 73 92 108 117 132 125 126 97 Swaziland 18 16 25 30 33 37 42 40 50 32 Tunisia 56 58 64 70 72 74 81 92 92 73 Zambia 22 22 24 30 32 53 56 70 53 40 Zimbabwe 58.4 173.0 76.1 34.2 50.4 111.6 --- --- --- 84
Source: World Development Indicators. ----indicates the information is not available.
In Table 3, for our sample of countries, the average amount of domestic credit to private sector was below 75% of GDP for the period 2001-2009, with the exception of South Africa. Countries like Botswana, Cote d’lvoire, Ghana, Kenya, Malawi, Swaziland and Zambia, have credit to private sector of less than 20% of GDP. This generally low level of financial depth in these economies compares to above 90% averages for developed countries (see Table A3.5, in the Appendix). Comparing this trend in financial depth with other emerging countries outside Africa, Table A3.5 shows that it is only India and Indonesia that have credit to private sector less than 90% of GDP, similar to patterns in African countries. The poor credit provision to the private sector in Africa was also hinted by Allen et al (2011). The main reason for poor credit intermediation in Africa, especially from the banking system is that large banks invest in government securities, primarily treasury bills which have minimal risk.
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The evidence from Table 3 and Table A3.1 seems to suggest that higher income countries such as Japan, Germany, France, South Africa, United States and United Kingdom have higher financial depth. This suggestive evidence portrayed by Table 2 has the support of Ang (2008) who found that financial development leads to higher output growth via its promotion of both private savings and private investment in Malaysia. Malaysia has a higher financial depth as indicated by its average of 113.7% for credit provided to private sector as a percentage of GDP (shown in Table A3.1, in the Appendix section).
Table 3: Domestic Credit to Private Sector (% GDP).
Country 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average Botswana 15.1 17.2 18.6 19.6 19.1 18.4 20.0 21.0 25.5 19.4 Cote d’lvoire 15.7 15.1 13.6 14.4 13.8 14.2 16.1 16.3 17.1 15.1 Egypt 54.9 54.7 53.9 54.0 51.2 49.3 45.5 42.8 36.2 49.2 Ghana 11.9 12.1 12.5 13.2 15.5 11.1 14.5 15.9 --- 13.3 Kenya 25.2 25.9 24.6 26.8 25.9 26.1 27.0 30.3 31.5 27.0 Malawi 8.4 5.8 5.5 6.0 7.9 8.8 10.9 11.9 14.2 8.8 Mauritius 57.8 58.6 73.2 73.1 75.3 74.2 77.7 87.8 85.1 73.6 Morocco 44.6 43.4 42.4 42.6 46.2 48.6 58.4 63.2 64.4 50.4 Namibia 41.3 41.9 44.7 46.7 51.8 50.8 49.9 44.9 46.8 46.5 Nigeria 15.2 13.0 13.8 13.1 13.2 13.2 25.3 33.9 37.6 19.8 South Africa 142.6 115.0 118.9 128.6 138.7 157.1 161.9 145.1 147.1 139.4 Swaziland 10.5 12.5 15.6 18.6 21.6 23.5 24.9 23.6 25.0 19.5 Tunisia 67.9 68.5 66.7 65.4 65.0 63.7 63.2 65.8 68.4 66.1 Zambia 7.5 6.3 6.7 8.1 7.7 9.8 12.0 15.2 12.0 9.5 Zimbabwe 34.6 104.5 57.7 18.5 16.3 46.5 --- --- --- 46.3
Source: World Development Indicators. ---- indicates the information is not available.
The overall size of formal financial system as measured by the ratio of M3 money supply divided by GDP portrays a better developed financial system in our sample countries, as shown by Table 2, than the picture in Table 3. This measure as an indicator of provision of
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financial intermediary services can be misleading. The higher liquid and quasi-liquid liabilities that finance government deficits may not reflect the provision of efficient financial intermediaries (Demirguc-Kunt and Levine, 1996). An efficient intermediation is the one that caters largely to the private sector’s production financing.
The liabilities and quasi-liabilities scaled by GDP captures the degree of monetization in the financial sector while the credit to private sector gives an account of the level of credit intermediation to productive sectors. But these measures of financial system sophistication do not capture broad access to specific financial services such as bank facilities by individuals and firms. More generally, credit to private sector scaled by GDP does not give the whole picture on the quality of credit allocation, quality of banking services and efficiency of providing banking services. These special features of banking sector development and efficiency will be highlighted in the next section for the sample countries.