Ashly Hope, tralac Research Advisor, comments on financial sector regulation and how the Continental Free Trade Area negotiations could be used to help realise wider development objectives

Neither trade agreements, nor sector development strategies, are ends into themselves. Even their end goals – more trade; or a larger, deeper sector are not the ultimate objectives. Rather, central to both sector development and trade agreements is the broader aim of promoting and encouraging inclusive and sustainable growth.

Financial services increasingly operate globally and Africa is no exception. Pan-African banks are proliferating, mobile money now crosses borders and as goods, services and people move around the continent, financial services must follow (or even lead). Africa has a population of more than a billion people, overall incomes are rising, fees for financial services are proportionally high, and service is low in quantity and quality.

Financial services themselves are tradeable services, and, like other enabling services – such as electricity, education and skills development, research and development, transport and logistics, internet and other communications access – investment in financial services development is crucial to broader and more inclusive economic growth.

In the case of financial services, many African countries already have relatively open borders. The environment should be ripe for disruption from foreign entrants, but promise of the benefits of financial sector liberalization have not necessarily been fulfilled in Africa. One factor contributing to this, is that liberalization commitments are really just the tip of the iceberg for delivering the benefits of trade in services.

Investment – both human and financial – in the regulatory and policy settings that are so critical to shaping how financial services work or don’t work is essential. It is not just financial regulation itself that prevents the market from delivering the promised benefits. Other, complementary regulations and the general regulatory and business environment are critical. For many African countries, these remain challenges. Robust competition laws and enforcement are a good example, as are improved communications infrastructure and the regulation of ICT.

The Continental Free Trade Area (CFTA) negotiations offer an opportunity to reach consensus on key regulatory issues and implement continent-wide, Africa appropriate sectoral disciplines. Of course, it remains critical to keep the end aim in mind when thinking about the relationship between the CFTA negotiations, regulation and sectoral development.

Regulation is ultimately about influencing the decisions of economic decision makers. In financial services, it is particularly useful to consider the problems that are occurring for businesses and citizens in their dealings with the financial sector. For example, are small businesses unable to grow because they cannot access credit, or won’t invest because they are afraid to take risk? Are individuals unable to save or smooth their income because they don’t have access to appropriate products, or are the products too expensive? Are large businesses unable to raise funds – inside or outside the banking system?

These ‘problems’ will be different in different places and for different sectors – but considering what the problems are, rather than immediately leaping towards a solution, will help ensure that any solutions, tools or instruments put in place will be directed towards the end goals.

There are a variety of mechanisms and instruments that are already directed towards these problems, and it is of course vital to know and understand what these are and how they work – this is where processes like regulatory audits become critical. Rather than only looking out for possible trade restrictions, these audits can be leveraged to identify how and why a specific sector is regulated as it is, and whether the regulatory structure is directed towards the overarching sector development objectives.

Like national regulation does, regional and continental sector development strategies and the CFTA can be used as tools to address the financial problems identified above. Importantly, these are tools that operate beyond national borders. These two tools can provide an essential contribution to motivating financial sector development across the continent, and to shaping it in a way that drives inclusive and sustainable development outcomes.

To achieve this, however, attention must be given to ensuring that these two mechanisms draw on existing knowledge, tools and instruments; and that they continue to point in the same direction – towards a single, continent-wide market for financial services.

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