Financial Market Fragmentation and Reforms in Ghana, Malawi, Nigeria, and Tanzania |
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| Authors: | Aryeetey, Ernest Hettige, Hemamala Nissanke, Machiko Steel, William |
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| Affiliation: | Ernest Aryeetey is with the Institute for Statistical, Social, and Economic Research at the University of Ghana, Hemamala Hettige is with the Policy Research Department at the World Bank, Machiko Nissanke is with the School of Oriental and African Studies at the University of London, and William Steel is with the Private Sector Finance Group of the Africa Region at the World Bank. This study was supported by the World Bank Research Committee, the Swedish International Development Association, the Overseas Development Institute, the School of Oriental and African Studies (University of London), and the Leverhulme Trust. The fieldwork was conducted by Ernest Aryeetey (Ghana), Mboya Bagachwa (Tanzania), Chinyamata Chipeta (Malawi), M. L. C. Mkandawire (Malawi), and Adedoyin Soyibo (Nigeria), with assistance from Martin Wall on the flow of funds and Deborah Johnston on editing. The authors are grateful for comments from the referees and from Gerald Caprio, Carlos Cuevas, Jean-Jacques Deschamps, Marcel Fafchamps, Sergio Pereira Leite, Kazi Matin, Richard Meyer, Ademola Oyejide, and Hennie van Greuning |
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| Abstract: | ![]()
This article reports the findings from surveys of formal andinformal institutions and their clients in Ghana, Malawi, Nigeria,and Tanzania. It investigates the hypothesis that reformingfinancially repressive policies would not be sufficient to overcomefragmentation of financial markets because of structural andinstitutional barriers to interactions across different marketsegments. The four countries have substantially fragmented financialmarkets, with weak linkages between formal and informal segmentsand interest rate differentials that cannot be adequately explainedby differences in costs and risks. Nevertheless, the relativelylow transaction costs and loan losses of informal institutionsindicate that they provide a reasonably efficient solution toinformation, transaction cost, and enforcement problems thatexclude their clients from access to formal banking services.The findings imply that financial liberalization and bank restructuringin the African context should be accompanied by complementarymeasures to address institutional and structural problems, suchas contract enforcement and information availability, and toimprove the integration of informal and formal financial markets. |
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