Interest rate pass-through in Cameroon and Nigeria: a comparative analysis

One of the most important aspects of monetary policy is an understanding of the transmission process: the mechanism through which the monetary policy actions of the Central Bank impact on aggregate demand and prices by influencing the investment and consumption decisions of households and firms. Thus, commercial banks are regarded as conveyers of monetary policy shocks and are expected to adjust retail interest rates in response to policy shocks one-to-one. In practice, commercial banks adjust their retail rates in response to changes in monetary policy with a lag of several months and this delay is often viewed as an impediment on the ability of the Central Bank to steer the economy. Several reasons, such as credit rationing and adverse selection, switching costs, risk sharing, consumer irrationality, structure of the financial system, menu costs and asymmetric information are some of the causes advanced for commercial banks retail rates being sticky. In spite of the important role of pass-through analysis in the monetary policy transmission process, it has received very little attention in Sub-Saharan Africa, especially in Cameroon and Nigeria, which have implemented a series of reforms. To this end, this study gives a comparative analysis of interest rate pass-through in Nigeria and Cameroon using retail rates (lending and deposit) and a discount rate (policy rate) from January 1990 to December 2010 for Nigeria and from January 1990 to June 2008 for Cameroon. The study examines the magnitude and speed of retail rate adjustments to changes in the Central Bank policy rate as well as examining the possibility of symmetric and asymmetric pass-through in both countries. In addition, the study also investigates whether there is pass-through of monetary policy from one country to the other. The empirical analysis employs four different types of co-integration techniques to test the presence of a long run co-integrating relationship between retail and the policy rates in order to ensure that the relationship detected is robust. Three sets of analyses are carried out in the study. Following Cottarelli and Kourelis (1994), the study employed a co-integration technique, firstly, to analyse pass-through for the entire sample, secondly, to analyse symmetric and asymmetric pass-through using a ten year rolling window analysis in an error correction framework. Finally, the policy rates were swapped around to investigate if there are transmissions of impulses from one country to the other. Overall, evidence from the entire sample and rolling window analysis suggests that monetary policy in Cameroon is less effective. This is perhaps one of the reasons why the Banque Des Etats De L’Afrique Centrale (BEAC) is unable to sterilise the excess liquidity of the banking sector in Cameroon. The long run pass-through of 0.72 and 0.71 for the entire sample, and the average long run pass-through for the rolling window of 0.78 and 0.76 for the lending and deposit rates, suggest that monetary policy is highly effective in Nigeria compared to Cameroon. The empirical evidence confirmed asymmetric adjustment in six rolling windows in the lending rate in Nigeria. Three rolling windows indicated that the direction of rigidity is downward, supporting Scholnick’s (1996) collusive pricing arrangement between banks, and the other three suggested that the lending rate is rigid in the upward direction, corroborating Scholnick’s (1996) customer reaction hypothesis. The deposit rate in Cameroon was also found to adjust asymmetrically and the direction of rigidity is downward, supporting Hannan and Berger’s (1991) customer reaction hypothesis. The investigation of impulse transmission between the two countries revealed that only the policy rate in Nigeria exerts some influence on the deposit rate in Cameroon. Policy recommendations are also discussed

Financial development, financial inclusion and welfare dynamics in sub-Saharan Africa

Thesis (PhD)--Stellenbosch University, 2017.ENGLISH SUMMARY : Over two decades of post reforms, the financial system of many sub-Saharan African countries remained underdeveloped and highly exclusive with only 34% of adults 15 years and above having a basic bank account. Nevertheless, sub-Saharan Africa has experienced robust growth, on average 4.8% per annum over the past 15 years surprisingly with widening income inequality and sluggish decline in headcount poverty ratio. This unfolding evidence challenged conventional thinking about the role of finance on growth and welfare. However, there is a shortage of empirical evidence linking financial development and financial inclusion to welfare. Knowledge of this relationship is important to shape policy thinking on how financial reforms can help to redress poverty and income inequality in sub-Saharan Africa. The purpose of this study is to fill this knowledge gap by examining the relationship between financial development, financial inclusion and welfare dynamics in sub-Saharan Africa. The thesis is structured into four main chapters, a descriptive chapter and three empirical chapters. The evidence from the descriptive analysis showed that financial inclusion, financial stability, financial integrity and consumer financial education are interrelated and under a suitable balance re-enforces each other. It also emerges that the level of financial intermediation in sub-Saharan Africa is low. As a result, huge unmet demands for credit and saving facilities exist across all regions. By regions, the rate of formal saving and borrowing in Southern, Eastern and West African countries is two times higher than the rate in French West and Central African countries. Overall, the level of financial inclusion in French West and Central Africa is the lowest in sub-Saharan Africa. The results from Chapter 3 revealed that income inequality will increase at the early stages of financial development but the positive trend reverses to negative as the financial sector reaches a higher stage of development – inverted u-shape. Specifically, financial sector might lend more to the rich and well-connected elites at some levels of financial development especially when institutions are weak, but as the system develops, more people have access and resultant effects tickles down to the lower income earners, hence income inequality starts to reduce. Finally, income inequality has some links with GDP per capita – increases with lower GDP per capita and declines as GDP per capita grows, translating into an inverted u-shape. Empirical evidence from Chapter 4 suggests that financial inclusion has both positive and negative relationships with welfare, depending on the aspect of financial inclusion and the indicator of welfare used. First, account ownership, formal loan and saving have a positive relationship with human development index but the relationship with electronic payment is mixed. Secondly, health insurance and loan to pay school fees reduces headcount poverty whiles, account ownership, formal loan and health insurance reduces under-five mortality rate per 1000 live birth. Finally, formal account use for business purposes, electronic payment and formal loan increases income inequality at least in the short run. These results reflect the prevailing robust growth and rising levels income inequality in sub-Saharan Africa. Finally, evidence from Chapter 5 revealed that financial inclusion has a positive relationship with assets ownership. The results suggests that a one-unit change in financial inclusion (credit, monthly saving and insurance) can increase assets ownership by 21% at the 10th quantile of the conditional assets distribution for users of financial services compared to non-users holding other factors constant. For all the aspects of financial inclusion analysed, the magnitude of the response to a unit increase in financial inclusion at the 10th, 20th and 30th quantiles is higher than the response at the median quantile. This suggests that financial inclusion and assets building programmes can have a substantial effect at the bottom of the assets distribution. Hence, this evidence provides a good case for a progressive assets building social welfare for the poor and low-income families in South Africa. In summary, these results showed that French speaking west and Central African countries have lower levels of financial inclusion compared to other regions in sub-Saharan Africa. Furthermore, the emerging evidence suggest that financial development increases income inequality in the group of African countries studied and that low GDP per capita also increase income inequality. Finally, evidence also revealed that financial inclusion exerts some positive influence on welfare with exception of income inequality and that asset building social welfare programmes can be used to complement the income transfer approach to poverty reduction.AFRIKAANSE OPSOMMING : Geen opsomming beskikbaar

The relationship between financial inclusion and income inequality in sub-Saharan Africa: Evidence from disaggregated data

Over two decades sub-Saharan Africa has grown by an average of 4.8 percent per annum, a trend called “Africa rising in the literature” but this robust economic growth has benefited only a minority of elite individuals as poverty in the region remains high and income inequality continues to rise. This study analyses the relationship between various aspects of financial inclusion and income inequality in sub-Saharan African using the World Bank Global Findex 2011 with the intention to determine which aspects of financial inclusion have the greatest effect on income inequality. Our results show that account use for business, electronic payments and formal savings have a positive relationship with income inequality. This possibly reflects colonial institutional design as Obeng-Odoom (2016) indicated that colonial administration left behind uneven development structure which in some cases are re-enforced by current urban governance practices and processes. These colonial institutions significantly define financial sector development and shape the distribution of economic opportunities. Thus, we argue that though account ownership has improved, it does not necessarily imply an increase in credit accessibility. This is because of problems of information asymmetry associated with lack of financial infrastructure in the region that encourages banks to hold excess liquidity and thus grant fewer loans. The study accordingly recommends genuine efforts to engage in democratic governance to improve the quality and functioning of institutions to support financial sector development. Furthermore, a holistic approach to development that involves both top-down and bottom-up is recommended to encourage participation by all the sectors of the economy.Keywords: Financial inclusion; Financial institutions; Financial services; Welfare and povert

Understanding the behaviour of house prices and household income per capita in South Africa: application of the asymmetric autoregressive distributed lag model

Purpose Homeownership provides shelter and is a vital component of wealth, and house purchase signifies a lifetime achievement for many households. For South Africa confronted with social and structural challenges, homeownership by the low and lower middle-income household is pivotal for its structural transformation process. In spite of these potential benefits, research on the affordable housing market in the context of South Africa is limited. This study aims to contribute to this knowledge gap by answering the question “do changes in household income per capita have a symmetric or asymmetric effect on affordable house prices?” Design/methodology/approach A survey of the international literature on house prices and income revealed that linear modelling that assumes symmetric reaction of macroeconomic variables dominates the empirical strategy. This linearity assumption is restrictive and fails to capture possible asymmetric dynamics inherent in the housing market. The authors address this empirical limitation by using asymmetric non-linear autoregressive distributed lag models that can test and detect the existence of asymmetry in both the long and short run using data from 1985Q1 to 2016Q3. Findings The results revealed the presence of an asymmetric long-run relationship between affordable house prices and household income per capita. The estimated asymmetric long-run coefficients of logIncome[+] and logIncome[−] are 1.080 and −4.354, respectively, implying that a 1% increase/decrease in household income per capita induces a 1.08% rise/4.35% decline in affordable house prices everything being equal. The positive increase in affordable house prices creates wealth, helps low and middle-income household climb the property ladder and can reduce inequality, which provides support for the country’s structural transformation process. Conversely, a decline in affordable house prices tends to reduce wealth and widen inequality. Practical implications This paper recommends both supply- and demand-side policies to support affordable housing development. Supply-side stimulants should include incentives to attract developers to affordable markets such as municipal serviced land and tax credit. Demand-side policy should focus on asset-based welfare policy; for example, the current Finance Linked Income Subsidy Programme (FLISP). Efficient management and coordination of the FLISP are essential to enhance the affordability of first-time buyers. Given the enormous size of the affordable property market, the practice of mortgage securitization by financial institutions should be monitored, as a persistent decline in income can trigger a systemic risk to the economy. Social implications The study results illustrate the importance of homeownership by low- and middle-income households and that the development of the affordable market segment can boost wealth creation and reduce residential segregation. This, in turn, provides support to the country’s structural transformation process. Originality/value The affordable housing market in South Africa is of strategic importance to the economy, accounting for 71.4% of all residential properties. Homeownership by low and lower middle-income households creates wealth, reduces wealth inequality and improves revenue collection for local governments. This paper contributes to the empirical literature by modelling the asymmetric behaviour of affordable house prices to changes in household income per capita and other macroeconomic fundamentals. Based on available evidence, this is the first attempt to examine the dynamic asymmetry between affordable house prices and household income per capita in South Africa. </jats:sec

Value-adding effect of foreign direct investment inflow on manufacturing: evidence from South Africa

The manufacturing sector drives economic growth and structural transformation by fostering job creation, innovation and exports. Achieving and sustaining high-income status is challenging without manufacturing development, except for oil-rich nations and small financial hubs. Existing studies have overlooked the relationship between foreign direct investment and manufacturing value-added in emerging markets such as South Africa. This investigation examines the influence of foreign direct investment on manufacturing value added in South Africa. We utilised annual data from 1970 to 2020 and analysed them using linear and nonlinear autoregressive distributed lag (ARDL and NARDL) models to account for possible asymmetric effects. The ARDL analysis reveals that both foreign direct investment inflow and domestic investment negatively impact manufacturing value added in the short and long runs. Under asymmetry analysis, adverse shocks to foreign direct investment negatively affect manufacturing value added more than positive shocks. Positive and negative shocks in trade openness significantly boost MVA, highlighting globalisation’s role in economic growth. These findings underscore the nuanced dynamics between investment flows, trade openness and manufacturing performance. By incorporating asymmetric effects, our study provides new insights for policymakers. The results suggest that strengthening domestic resources mobilisation can support manufacturing growth, reduce reliance on external capital inflows and mitigate vulnerabilities linked to geopolitical risks