Financial Repression, Interest Rates, and Credit Allocation in Sub-Saharan Africa

The paper looks at the trends and experiences of nine sub-Saharan African countries between the period of 1980 and 1994. It considers the depth of financial markets, effects of interest rates on savings and the patterns of claims on domestic credit.

Presents an overview of the financial repression hypothesis and explains reasons why countries resort to financial repression.

Concludes that:

• The financial system in sub-Saharan Africa is dominated by a small number of commercial banks and financial sector reforms have focused largely on banking;
• Financial liberalisation in Sub-Saharan Africa has generally aimed at, among other things, mobilising domestic savings, achieving reasonable levels of real positive interest rates and improving efficiency in the use of financial resources;
• It is clear that financial repressive systems were prevalent in Sub-Saharan Africa;
• The role of government in a liberalised system has been a contentious issue;
• Eight of the nine sub- Saharan African countries reviewed from 1980 to 1994 have not show any radical and positive change in financial depth. Mauritius is the only country whose financial system has continued to deepen over the years. However, this country has not been keen in adopting implementing financial liberalization measures proposed by the World Bank and IMF.

Concludes that trends in financial development -- the behaviour and responsiveness of domestic credit to interest rates, and domestic credit allocation -- portray stagnation in the majority of the countries. This contradicts the results expected from financial liberalization.

[Adapted from the author's abstract]