Event Report - MFW4A/AfDB Northern Africa Financial Sector Dialogue
In 2018, the six countries (Egypt, Libya, Tunisia, Algeria, Morocco and Mauritania) comprising North Africa accounted for 26% of Africa’s GDP. These countries, except for Egypt, are part of the UMA (Arab Maghreb Union) and present a very heterogeneous development of the financial sector. The dialogue on North Africa financial sector, which brought together several stakeholders in Tunis, from 27 to 28 February 2019, provided a state of play and proposed measures to accelerate the development and integration of the financial system.
Articulated around different themes, the discussions have drawn important conclusions and lessons.
Recommendations of the North African Dialogue
- Strengthen regional financial sector infrastructure through digitalization of payment systems and interoperability
Interconnection improvement achieved by West African Economic and Monetary Union (WAEMU) countries could serve as a business case for North Africa. In the WAEMU region, a single payment card can be used in 7 countries and is being extended to cover 15 countries. Various experiences shared by representatives of North African countries enabled participants to take stock of developments in financial systems interconnection. Better coordination of efforts to strengthen regional payments infrastructure, taking into account the integration of mobile financial services, is needed.
- Overcome Challenges to financial inclusion in North Africa
With African diaspora being an important source of foreign exchange and, in general, a significant lever for financial inclusion, several North African countries have pledged to include specific initiatives for the diaspora in their financial inclusion strategy,. Multilateral Development Banks (MDBs) could help structure instruments for mobilizing international flows/remittances. Support for Islamic or participative finance and microfinance institutions is also needed to strengthen their support toward micro businesses. It is imperative that this support include training sessions aimed at the most vulnerable stakeholders and populations.
- Facilitate credit availability to Micro, Small and Medium Enterprises (MSMEs)
Streamlined administrative procedures and guarantee mechanisms to support MSMEs growth, especially during the first three years of existence, would facilitate access to bank and non-bank financing for MSMEs. The provision of equity funds targeting MSMEs, expansion of leasing and private equity support also have the capacity to improve their access to finance.
- Achieve under the leadership of MDBs, including the African Development Bank, a comprehensive framework for cross-border banking supervision
Some progress has been made in regional banking integration in North Africa: subsidiaries of some North African banks have operations in other countries in the region and some bank subsidiaries in North Africa are also active in sub-Saharan Africa (Moroccan, Tunisian and Libyan banks). Memoranda of Understanding (MOU) have been signed between Moroccan and Tunisian regulators for cross-border supervision of Moroccan bank subsidiaries in Tunisia. However, these agreements should become systematic. The proposal was made to establish, with the support of donors, a standard agreement or MOU, defining the framework of cross-border surveillance and accepted by all African countries.
- Improve the depth of capital markets
Narrow and heterogeneous, North African capital markets remain illiquid and contribute little to financing the real economy. Government debt market is dominant and foreign exchange regulation is a major obstacle. It is therefore important to :
- Pass new regulations to spur the development of new products and increase liquidity;
- Promote simultaneous listing of securities on multiple exchange;
- Improve quality of financial reporting and transparency of local equity markets;
- Boost the secondary market through the systematic use of yield curves and the reduction of transaction costs;
- Facilitate banks’ access to the secondary market and liberalize the foreign exchange market;
- Establish multilateral guarantee schemes in addition to training and technical support programmes for listing candidates;
- Accelerate the implementation of new laws to diversify the supply of private equity and enable the creation of regional funds and public-private funds to mobilize local savings
- Strengthen the role of institutional investors, particularly Deposit Funds (Caisses de Dépôts), in financing the economy
The ''Caisses de Dépôts'' have a complementary role to the conventional financial system. Maintaining sufficient economic and financial profitability for these players with a public mandate requires working with private partners such as banks, in order to diversify risks and secure households savings. Given their importance in the development of the financial sector in African countries, deposit funds must be promoted and their role in financing not only structured investments but also economic and social policies needs to be reaffirmed.
- Reform the insurance industry
The poor reputation of insurance in North Africa is one of the reasons for its very low penetration rate. In order to significantly boost insurance penetration in the region, it is imperative to reform the insurance code in order to modernize this sector and bring it closer to international standards. These reforms should include measures to expedite disbursements to policyholders, adoption of an enabling regulatory environment, and a coverage requirement for key industries (construction, infrastructure). They should be accompanied by a change in the ecosystem driven by the digitalization of processes and the development of new products such as microinsurance and index-based insurance which are critical to improving financial inclusion.
- Implement, harmonize and enforce the regulation of Islamic finance
Regulation is the main obstacle hindering the development of Islamic/participatory banks. Although Islamic banks have been present in Algeria, Mauritania and Tunisia since the 1980s, their operations have always been limited. The regulatory framework is totally absent in Algeria and Libya, is embryonic in Mauritania, and was finalized in Morocco in late 2014 (participative finance regulation). In Tunisia, Islamic financial institutions began to operate even before the law was drafted, which was finally adopted in 2016.
- Create a framework for communication and cooperation between the private sector, the public sector and the banks (or financial intermediaries) to take advantage of the potential offered by green finance
Green finance now weighs US$460 billion worldwide, of which only 4.3% goes to the African continent. Only $3 billion is allocated to adaptation projects that Africa needs most. The continent is facing its inability to mobilize these flows. One of the areas of improvement is to build capacity for the development of green projects and to support the greening of sectoral plans/programs. There is also a need to overcome specific challenges preventing African countries to set climate change as a policy priority.
- Deploy proactive policies to promote regional value chains in favour of cross-border trade
States have established regional institutions to facilitate trade and investments. These aspire to become the driving forces behind government policies. However, political will is needed to facilitate regional integration, through improved infrastructure and harmonization of fiscal and foreign exchange policies, thereby facilitating inter-regional trade. The effectiveness of the UMA’s Maghreb action plan ‘BIAT- Boosting Intra-African Trade’ adopted in 2014 should be accelerated. The untapped potential of cross-border trade requires proactive policies promoting regional value chains and adoption of new incentive structures.
States have engaged in strong policies aimed at densifying their financial system. Strengthened support is expected on the part of technical and financial partners who expressed their readiness to support efforts in areas such as regulation, financial inclusion and cross-border trade.
Some of the presentations made during this regional dialogue are available below: