Regional Financial Integration

Franc CFA bills

Regional Financial Integration (RFI) refers to efforts to broaden and deepen financial links within a region, whether through market-driven or institutionalised processes. Integration requires the elimination of barriers to cross-border investments and differential treatment of foreign investors within the region, but can also extend to harmonising legislation, policies and institutions, which over time can lead to national financial markets effectively functioning as one.

Most African financial markets are small and fragmented, and consolidating markets through RFI could yield several benefits:

  • Bring together scarce savings, viable investment projects and financial infrastructure;
  • Increase the numbers and types of financial institutions and instruments;
  • Increase competition and innovation;
  • Reduce inefficiencies in lending given a wider pool of bankable projects; and
  • Expand opportunities for risk diversification. 

In addition, RFI could help improve regulatory and supervisory bodies, insulate central banks from domestic excesses, harmonise regional laws and institutions, and create additional opportunities for learning by doing.

Currency unions have been proposed as a way to achieve greater integration. Three common currency arrangements currently exist in Africa, and namely the Common Monetary Area based on the South African Rand, in addition to two currency unions in the CFA zones.

Regional exchange, such as the Bourse Régionale des Valeurs Mobilières (BVRM), and several other initiatives to integrate African capital markets are also present. In the Southern Africa Development Community (SADC), the committee of SADC stock exchanges set up a strategy aimed at developing an integrated real-time network of securities markets within the region.  It has also achieved the harmonization of listing rules. 

While the benefits of RFI in Africa are being increasingly recognized and some regional efforts are underway, progress towards regional financial integration has been thus far moderate. Slow progress is in part attributable to the difficult policy choices facing governments between national, regional and international programs as well as multi-regional agendas caused by multiple memberships in regional economic communities (RECs) and the difficulty of giving up national ownership of market infrastructure. In addition, the financial costs of integration are at times considered prohibitive, especially for smaller countries which see such costs as tangible and immediate, whereas benefits seem abstract and far in the future.

Going forward, RFI can play a significant role in developing domestic financial markets in Africa. To this end, policy makers could devise a coherent RFI strategy based on national interests but amenable to regional goals. The experience from African countries thus far shows that while regional organisations may be easily formed, they can be quite difficult to take forward.