Global Financial Crisis: Implications for Africa‟s Financial System

This paper invokes a flow-of-funds framework to scope the implications of the global financial crisis for Africa‟s financial system. The paper argues that because the financial crisis is characterised globally by bank fragility, the contagion effects may impair (through exchange rate and stock price propagation mechanisms) the financial intermediation function of domestic banks in Africa in three main ways: (a) the immediate effect is a reduction in the supply of intermediary capital i.e. a credit squeeze, or credit crunch; (b) a collapse of the prices of real assets (e.g. residential houses), leading to a collateral squeeze; (c) a fall in prices and incentives for attracting deposits, leading to a contraction in the supply of savings i.e. a savings squeeze. The paper then examines the nature of the current crisis, in view of other recent financial crises, and highlights the implications for key players in a flow of funds sense, namely banks, companies, investors (households) and the government. It is noted that although the largest four economies in Africa have undertaken comprehensive financial reforms and achieved a high degree of bank competitiveness and financial intermediation, most African banks and capital markets are vulnerable to contagion effects of the financial crisis. The paper concludes by proposing corrective actions for Africa and by highlighting the main recommendations for Africa‟s financial system during the crisis (immediate and short run actions) and in the post-crisis period (medium term actions)