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Distributed Ledger Technology: a South African financial services perspective

22.11.2017Langelihle Mnyandu, Associate in Banking & Fin. Services Regulatory, Bowmans

This post was originally published on the Bowmans website.

The advent of Distributed Ledger Technology (DLT) has caught the attention of the global financial services industry, with many labelling it a technological revolution that is set to disrupt the financial services infrastructure. DLT is a type of digital ledger or database that is used for the recording, safe keeping and decentralised sharing of data relating to the ownership and possession of a wide range of assets. It uses consensus-based cryptographic methods to record and distribute information among participants of that ledger without the need for a middleman to facilitate this. Blockchain is an example of a very popular and well-known form of DLT.

There is no doubting that DLT, and generally financial technology (fintech), has huge potential to challenge and impact conventional ways of rendering financial services and possibly even extending services to new consumers. However, very limited actual ‘use cases’ have been introduced to demonstrate how DLT can help expedite financial inclusion. At present, most use cases pertain to how DLT can improve the efficiency of existing methods in order to make them more cost-effective and secure. These use cases have been, for example, on how blockchain can help reduce costs and improve payment settlement times in the deposit and peer-to-peer payment environments, and how it can help enhance data protection and data sharing between consumers, regulated institutions and regulators. Yet use cases are still lacking on how blockchain can be more effective than existing methods in expediting economic participation and use of financial services by unbanked people.

Obvious challenges

Perhaps one of the biggest challenges in achieving financial inclusion through DLT is that current DLT (blockchain) based products and services are aimed at improving existing methods of rendering financial services. In other words, the current use cases do not seem to introduce any new services that would be useful in the daily transactions that unbanked people ordinarily undertake.

It may be argued, however, that DLT is not meant to expedite financial inclusion directly by developing new products or services but rather indirectly through the introduction of cheaper and more efficient methods of rendering existing financial services and products, which in turn makes it easier for service providers to extend these services to new markets.

Another challenge is consumer education and awareness. Regulators will always want to be comfortable that the most vulnerable members of society know about and understand new products and services well enough to use them for basic transactions without their protection as consumers being compromised. The difficulty is determining who is better placed to lead this initiative - the service providers or regulators - while also ensuring that consumers do not bear the costs.

Despite these challenges, there is general industry consensus that with appropriate regulatory supervision, DLT-based products and services hold huge potential to improve financial inclusion - whether directly by developing new use cases or indirectly by making conventional methods cheaper and more efficient and thus more accessible to underbanked people.

Regulatory buy-in and the way forward

Financial services industry participants have also taken comfort from the fact that South African regulators are actively engaged in the conversation and creative process around fintech. This eases some concerns about a potential disjoint between fintech innovation and regulation.

In most cases there may not even be a need to drastically reform legislation to cater for new product innovations such as DLT. South African financial services legislation is largely sufficient to regulate DLT-based services and products, albeit in a fragmented manner. Consider the insurance landscape, for example. The insurance Acts already have broad deeming provisions that allow the regulator to deem a person’s conduct as insurance business conducted in South Africa and therefore requiring licensing by the insurance registrars.

The same can also be said for legislation regulating the credit lending environment. As with the insurance Acts, the National Credit Act 34 of 2005 (NCA) applies to credit transactions having an effect within South Africa. Because the NCA is activities-based and not entity-based, it means that provided a credit transaction has an effect within South Africa, it may be regulated by the NCA regardless of the medium used to provide that credit. However, this does not mean that the need for some level of regulatory reform is completely negated in other areas.

Regulatory reform will likely be required if, for example, we are to realise the potential of DLT to satisfy other types of regulatory requirements. For example, DLT-based products, such as cryptocurrencies (like bitcoin, ethereum and corda based currencies), may potentially be used by regulated institutions to satisfy their prudential capital requirements. In particular, certain cryptocurrencies have qualities of a ‘tier 1’ type asset for purposes of meeting minimum and solvency capital requirements under the Solvency Assessment and Management (SAM) framework. Cryptocurrencies such as bitcoin have been lauded as being immune to inflation and highly liquid, thus making them readily available to absorb losses as required for tier 1 assets under SAM.

However, cryptocurrencies are currently not recognised as securities in South Africa, let alone as securities that can be used for purposes of meeting the capital requirements of regulated institutions. Also, the current insurance framework (including the Insurance Bill) does not provide a clear position on whether such instruments can be regarded as eligible assets for purposes of meeting capital requirements. This is just one of the areas that may benefit from regulatory reform or clarification.

Although regulation may not be moving as fast as innovation, it is positive to see that the Financial Services Board, in particular, is adopting a more hands-on approach in keeping up with fintech innovations and has indicated that it will establish a regulatory sandbox to test new product developments. This will also allow it to leverage off the strides made by the UK’s Financial Conduct Authority in regulating fintech-based products, as our financial services regulatory framework is largely similar to that of the UK.

There are clearly a number of moving parts with regards to DLT and fintech innovations. Whether it is from the perspective of expediting financial inclusion, developing regulatory sandboxes to test new DLT use cases or grappling with whether or not these innovations will necessitate significant regulatory reforms, it is reassuring to see DLT, and generally fintech, receiving buy-in from South African regulators.

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About the Author

Langelihle Mnyandu is an associate in Bowmans' Johannesburg office, more precisely in Banking and Financial Services Regulatory practice area. He holds an LLB degree from the University of Kwa-Zulu Natal. He has expertise in banking regulation, financial services, financial technology regulation, securities, insurance, financial markets regulation, investment funds structuring and investment management.

Innovation doesn't have to be disruptive

21.11.2017H. Miller, Associate Consultant, Nathan Associates & G. Njoroge, Advisor, KPMG

In the previous blog, we looked at what technology meant in the context of innovation and problem-solving for rural customers. In this second of three blogs, we dig deeper into the idea of innovation and what it means for the Mastercard Foundation Fund for Rural Prosperity.

                     

It is clear that technology is changing the landscape of financial services in rural Africa. From the largest banks to the smallest fintechs, financial service providers are gearing up for a world in which finance is digital first and in which anyone with access to a mobile phone can also derive benefits from formal financial services.

The rapid uptake of mobile money in many countries has sowed the seed for a thousand new innovations that could further extend inclusive financial services. An outcome of this success has been that everybody in digital finance is looking for "the new M-Pesa", in the same way that elsewhere, entrepreneurs want to be "the Uber of..." An underlying assumption here is that change is generally linear until a special company comes along with an idea that creates non-linear change, which we often call disruption.

But when you map this idea on to the landscape of unbundling that financial services are currently going through, it is not so clear that disruption is what's needed. It used to be that a bank, or a microfinance institution, or an insurance company, would aim to provide a vertically integrated service to the customer, from initial acquisition to all aspects of relationship management and back end services. This is changing. Technology, and in particular the ability for different platforms to link with each other, opens up new opportunities for collaboration. Not everyone needs to develop the next big product or service - there may be much more value and impact for a fintech company to build a business- to-business solution that works at a specific pain point for a financial institution.

For example, the Fund is supporting a partnership between Juhudi Kilimo, an asset financing company, and the Entrepreneurial Finance Lab to develop a psychometric credit scoring tool for smallholder farmer borrowers with no or limited verifiable credit information. This is a tech-enabled solution for a specific challenge - how to estimate likelihood of repayment in a data-light environment - that could reduce costs and improve efficiency of Juhudi Kilimo's credit processes.

A similar partnership in the Fund portfolio is between First Access, a fintech company, and Esoko, an agricultural information and communications company. The two will develop a rural agricultural credit-scoring platform for lending institutions from disparate data sets, from soil and weather data to mobile phone usage and farmer profiles. The solution has the potential to impact a large number of farmers who do not have traditionally accepted banking histories.

These are great innovations, that could have a real impact on micro and small business finance, but they probably won't be putting other lenders out of business. And that's fine. Innovation can be highly effective without being disruptive.

There's nothing wrong with ambition, and there is certainly scope for massive changes in Africa's rural finance markets. But if you focus too hard on the next disruption you can lose sight of the great ideas that represent an evolution, not necessarily a revolution. At the Mastercard Foundation Fund for Rural Prosperity, we love big ideas. But the most important aspect of the big idea is the impact it has on the livelihoods of rural communities in Africa, not necessarily on how it disrupts the structure of the financial system.

So if you want to apply for support from the Fund, we're not so fussed about if you're the next big disruption to African financial markets. We want a credible plan that overcomes some of the many challenges of financing rural populations, and can have a real impact on the lives of people living in or close to poverty. We want ideas that work from the bottom up, which solve real problems. Maybe you'll be disruptive. If you're not, that's fine too.

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About the Authors

Howard Miller is a Senior Consultant with Nathan Associates London, and Principal, Nathan Associates India. He specializes in financial inclusion, challenge funds and the market systems approach to development. A trained economist, Howard has extensive experience in consultancy, public policy, and investment banking. Since joining Nathan Associates in 2011, he has worked on DFID financial sector development programs in Uganda, Mozambique, Bangladesh, and Rwanda, and on the FSD Africa Program. Before joining Nathan, Howard was a fellow at the Overseas Development Institute working on macroeconomic and financial sector policy for the Government of Uganda.

8 years ago, Grace Njoroge ventured into the corporate world under a graduate trainee program with one of the top regional banks in East Africa. She expected to be a classic banker but this according to her did not happen, at least not all of it. Her typical day involved riding a motorcycle to help micro-traders and assist small-holder farmers open savings account. In a surprising twist, she fell in love with the power simple financial products had to drastically change life and businesses potential for low-income clients. At KPMG IDAS, she works with donors and funders to support financial and non-financial institutions, to better serve the unbanked and under banked segments.

Revolutionary change is upon banking and finance

22.05.2017Arshad Rab, Chief Executive Officer, EOSD

"The industry of banking and finance is not only entering the age of algorithms but also the age of disintermediation."

In this exclusive interview, Arshad Rab, Chief Executive Officer, European Organisation for Sustainable Development (EOSD), spoke to Jide Akintunde, Managing Editor, Financial Nigeria magazine, on the disruption of conventional finance and the future of the financial services industry.

Jide Akintunde (JA): The disruption of the financial services industry is underway. Is this something that will prove ultimately evolutionary or revolutionary in the provision of financial services?

Arshad Rab (AR): For centuries, the provision of financial services was the sole domain of banks. But that is no longer the case. Financial services are now increasingly being provided by technology companies, heralding the tectonic shift currently taking place.

The industry of banking and finance, as we currently know it, will cease to exist and this will happen much faster than many of us think. So, if we look at the emerging big picture, we can conclude that the change in the financial services industry will indeed prove to be revolutionary.

JA: Why is this happening?

AR: The disruptive nature of technological change is reshaping every aspect of our lives. We have entered the age of algorithms and artificial intelligence (AI) and computer machines are taking over much of the work humans currently do, significantly, including decision-making. Therefore, the technology companies are in a much better position than the banks to take full advantage of latest innovations and make banking and finance their business domain.

On the demand side of financial services, we are also experiencing a radical shift in the customer behaviour. Today, we all expect things to be done much faster than say five years ago. For example, people have problems in understanding why in this digital age, banks need days to transfer money. We can of course offer reasons for the time lag such as regulations for clearing houses, but most people will not be satisfied with such explanations. The customers of today want money to be transferred instantly; they would like loan decisions to be made quickly; and they want to be able to enjoy banking services from any device, at any time and from anywhere.

Another factor influencing financial services is the growing population of young people who are tethered to mobile devices. The services that are not available on those devices are simply non-existent as far as the younger generation are concerned. This generation, quite often referred to as millennials - which generally means the people born between 1980 and 1997 - are becoming entrepreneurs, decision-makers and customers. They need technological and speedy solutions much more than the older generation. And the centennials, those born after the millennials, are now a big market for consumer electronics and IT products and services. In the next few years, they will be one of the largest customer groups for financial institutions.

And let me also underscore a very key point: The competitive edge that the algorithms and artificial intelligence-driven technologies enjoy is that they are much faster and less prone to errors than humans - including in making decisions - making them very attractive for the financial services they offer.

So, one could argue that what is happening currently, particularly the proliferation of algorithms, artificial intelligence and blockchain, will make banking more a business of technology companies than of the banks. Referring back to your first question, this is a revolutionary change in the history of banking and finance.

JA: What is the real hope of a better future of banking and finance that is deliverable by the disruption of conventional finance?

AR: There are two words that immediately come into my mind: Inclusive and democratic. First, through the use of technology, banking services are being made available to unbanked and underbanked customers at affordable costs. The massive and fast growth in inclusive banking and finance, to a large extent, is because of technological advances.

Secondly, I can see the emergence of banking for the people, of the people and by the people. For example, if we look at crowd funding or peer-to-peer real-time payment solutions, you can clearly see that the industry of banking and finance is not only entering the age of algorithms but also the age of disintermediation. The role of financial intermediaries, be it commercial banks, development finance institutions or other intermediaries, will continue to reduce. And as blockchain technology becomes real, the financial services industry will experience historic disintermediation. This will make banking and finance more democratic than ever before.

JA: We see that in e-payment there is tension between conventional banks and the telcos. Also, the regulatory and consumer protection frameworks for fintechs are, at best, work in progress. Should the efforts at resolving the issues assert competition or cooperation?

AR: The role of regulators should continue to be about protecting the public interest. There can and there should be no compromise on this issue as we transform from conventional to digital banking and finance. In the emerging scenario, there is a dire need for actions that can create a level-playing field for both incumbents and new players such as the financial technology companies.

Since there is a real prospect that few big tech giants will dominate the financial services industry within the next few years, we need policymakers and regulators to act fast to ensure safe, fair and competitive markets and to avoid market domination by a handful of powerful players. A good regulatory framework, as always, will promote competition. This is in the interest of the society and in the long-term interest of all the current and future players.

Now, talking about cooperation, this is currently being led more by market dynamics than by regulatory pressures. A growing number of incumbent financial institutions are closely collaborating with small and medium-size fintechs to overcome technological challenges. In fact, this is one of the top trends happening today and some of the banks have even started to acquire fintech startups. Nevertheless, there will still be existential threats looming over the incumbents, including the big financial sector players.

Technology, market conditions, regulatory framework and socio-economic and political climate will continue to change extremely fast. However, the organizational structure and business processes of the incumbent financial sector players are not very responsive to the fast-changing environment, at least not in comparison with the fintechs.

JA: One issue that has been little highlighted is that disruptive finance can be zero-sum. While the fintechs are already helping to drive down the cost of financial transactions - especially remittances, aggregate labour in the financial services industry can be eroded. Do you have concerns about this trade-off?

AR: There is no doubt that a lot of work done today by humans will be done by robots in all sectors of the economy, and the financial services industry will not be exempted. But do we have a choice? Since we know that digitization of everything is unstoppable, it is time to move forward and meet the challenge head on. This means embracing the technological innovations and getting ready to benefit from the digital economy.

For instance, imagine if we could soon free up almost 50 percent of the world's human resources by taking them away from doing monotonous tasks and deploying them to do creative work. And imagine if we could enable majority of the world's workforce to unleash its true talent and potential, all because for the first time in human history, it is now possible to do so - thanks to technology. And let there be no doubt: All monotonous jobs can be and will be taken over by robots.

Nonetheless, my concern is not about the threat that technology poses to human labour. We cannot "undigitize" the economy or halt further developments, anyway. I am earnestly concerned that governments, regulators, businesses and society are not realizing the pressing need to take immediate and resolute actions to ensure a smooth transition to the age of algorithms and artificial intelligence. The danger of mass unemployment and destabilizing markets is real but preventable, provided we act fast and smart.

So, I am calling for urgent actions and inviting the stakeholders to work together to create a win-win outcome and not wait till the water runs dry.

JA: The EOSD has been encouraging financial institutions in the global South to embrace Sustainability. What would be your message to African banks on how they should continue to position for the future of banking and finance?

AR: This is a difficult question to answer in few words. However, I would like to suggest that banks must embrace technology and use it to its full potential. But let me hasten to add that investments in technology alone is not enough because it is very challenging to keep up with the fast pace of technological change. For the incumbents, it will be too tough to compete on the basis of technological edge with the tech giants and other fintechs entering financial industry.

In my opinion, the financial institutions, irrespective of their location, size and infrastructure - and in addition to full-scale digitization - need to focus immediately on true value creation for all stakeholders. The successful financial services providers will be those that deliver real socio-economic value in their communities and to society at large, while fully recognizing the natural environment as one of the key stakeholders. This is not only the right thing to do from a moral perspective. But, at the end of the day, this is where the battle for survival will be won or lost.

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About the author

Arshad Rab serves as the CEO of the European Organisation for Sustainable Development (EOSD) which is a dedicated body that has in its unique charter the purpose of developing strategies, programs and initiatives and undertaking projects that contribute in implementing the EU Strategy for Sustainable Development. Having his academic background in business administration, extensive work experience with private, public and multilateral organizations and wide-ranging in-depth knowledge, expertise and experience in the field of sustainability sciences, Mr. Rab today is a powerful voice on innovating for a sustainable future and leading with responsibility in times of disruptive change. His ongoing research interest include disruptive innovation in the financial services industry. In addition, he is the initiator of the Global Sustainable Finance Network that brings together about 70 financial institutions from over 30 countries.

Interoperability of Digital Financial Services in Tanzania

10.04.2017Kennedy Komba, Head of Strategy and Member Relations, AFI

This post was originally posted on the Alliance for Financial Inclusion (AFI) website.

In Tanzania, access to financial services for the unbanked expanded drastically when convenient and relatively cheaper options became available to receive and send money through simple feature mobile phones.

Four mobile network providers were in stiff competition in a market of 39 million registered mobile wallets (this registered wallet number does not include multiple wallet holders nor some of the dormant wallets from providers that did not exclude them after recycling their mobile numbers), 13 million of which were active ("active wallets" refers to the use of a mobile money account at least once in 90 days. This is the total number of all active accounts in the referenced month). This was in October 2014, when three of the four mobile money providers signed on to interoperability and made Tanzania the first country to successfully develop and implement standard business rules for interoperability (Source IFC: Achieving Interoperability in Mobile Financial Services: Tanzania Case Study).

By February 2016, the fourth provider had signed on and Tanzania was a global leader in the interoperability of digital financial services delivered by mobile network providers. How did this happen? This article highlights the key factors contributing to DFS interoperability in Tanzania.

Establishing an enabling environment

A regulatory environment nurturing competition and cooperation provided a foundation for dialogue and engagement around interoperability. The Bank of Tanzania, the country's central bank, played a monitoring role, ensuring that DFS providers offered services in compliance with risk mitigation frameworks (guidelines were issued that emphasized the use of international standards) that supported the dual objectives of financial stability and financial inclusion. This led to policies advocating for non-exclusivity in the use of mobile money agents and ultimately to agent interoperability. However, as the market continued to grow and mature, some market players demanded interoperability to kickstart client uptake, which had not seen rapid growth. Comprehensive interoperability was a clear need.

The Bank had to assume a leadership role in the push for sustainable interoperability. It opted for a market-based approach to interoperability, which was backed by evidence, and began to coordinate the process. It approved a neutral market facilitator, the International Finance Company (IFC) and the Financial Sector Deepening Trust (FSDT) of Tanzania, to facilitate engagement with DFS providers and reach agreement on an interoperable solution.

A market approach works

The IFC facilitated the industry-led interoperability project, with financial support from The Bill & Melinda Gates Foundation and the FSDT. This involved coordinating industry meetings to develop and reach consensus among mobile money providers on business rules and commercial agreements for interoperability and submit them to the Bank of Tanzania for consideration. This exercise began in September 2013 and, after several meetings in which participants reached a greater understanding of the regulatory framework, market demand, payment systems and rule development, consensus was reached. A year later, in September 2014, two of the four mobile network operators (MNOs) signed off on the wallet-to-wallet operating rules, which led to technical arrangements to initiate interoperability. In December 2014, the third MNO came on board. It took another year for the fourth to sign on, and by February 2016, Tanzania was one of the first markets in the world to have full interoperability of mobile money services (Figure 1).

Figure 1: Key Milestones for Mobile Money Interoperability in Tanzania

Other markets could learn lessons from Tanzania's journey. It is worth noting that although Tanzania was well-suited to a market-based approach to interoperability, with its supportive central bank, conducive regulatory framework, and a sufficient level of market competition and maturity, two other factors played an important role: (i) the value proposition for the private sector was taken into account; and (ii) private and public sector dialogue was enhanced through the public policy lens of financial stability and financial inclusion. This helped the regulator balance its dual mandate and ensure financial inclusion initiatives do not compromise financial stability.

The next frontier

Tanzania's interoperability journey is still underway: the market is currently expanding the use case for interoperable services through merchant payments and extending interoperable services beyond MNOs to banks and other players. This will also involve improving the clearing and settlement process, shifting from bilateral arrangements to a multilateral process that includes a switching process. The Bank of Tanzania is continuing to play a monitoring role and provides guidance and direction on a process that is efficient and creates value not only for market players, but also for users and other stakeholders. In the end, this will ensure the best solutions are implemented and satisfy both private sector and public policy objectives-a task guided by the same principles that led to interoperability in the first place.

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About the Author

Kennedy Komba is currently Head of Strategy and Member Relations of Alliance for Financial Inclusion. Prior to this new role which he assumed in April 2016, he was the Senior Advisor of the National Payment System in the Bank of Tanzania. He is an Accredited Fellow of Macro-economic and Financial Management Institute of Eastern and Southern Africa (MEFMI) and a Fellow of Fletcher Leadership School for Financial Inclusion of Turf University, USA. He has experiences in financial inclusion policy, strategies and regulatory frameworks. He was instrumental in leading the development of the Tanzania regulatory framework for the National Payment Systems including electronic money regulations. He also was involved in the development of the Tanzania National Financial Inclusion Framework.

Information sharing, credit booms, and financial stability

11.10.2016F.Leon, University of Luxembourg & S. Guérineau, Université d'Auvergne

The global financial crisis has highlighted the vulnerability of financial systems and stressed the need for improving the management of financial vulnerability. The financial stability issue in low-income countries (LICs henceforth) has received less attention in recent years, insofar as they have been less impacted by the global financial crisis than emerging economies. However, a better understanding of financial fragility mechanisms in LICs is crucial. The experience of LICs shows that they could suffer sharp increases in non-performing loans and banking crises, and that the cost of banking crises is high, even if the banking sector is small.

In a recent paper, we investigate the determinants of financial fragility in advanced and developing countries, focusing on the interaction between credit booms and credit information sharing systems. A large number of studies have shown that excessive credit booms are one of the main drivers of financial crises. The development of credit information sharing (CIS) institutions may attenuate the negative effect of credit booms and/or limit the occurrence of such booms.

First, CIS can mitigate the negative effect of credit booms. A rapid growth of credits can weaken the quality of credit screening. During credit booms, credit officers cannot devote sufficient time to correctly screen new projects and bad projects have a higher probability of being financed. The presence of efficient CIS institutions could attenuate the negative effect of credit booms with screening. In addition, credit booms often fuel a rapid rise in asset prices (real estate and equity bubbles). Since assets may be used as collateral, the price rise will itself help an acceleration of credit growth ("financial accelerator") and reinforce the deterioration of screening. The presence of information sharing mechanisms may allow banks to diversify their portfolio. This diversification can limit the increase of asset prices induced by rapid credit growth, and therefore limit the detrimental impact of such episodes.

Second, CIS might affect the occurrence of credit booms, even if its effect is theoretically unknown. On the one hand, information sharing may curb credit growth by avoiding some customers borrowing from several banks. On the other hand, a reduction in the information asymmetries across banks may lead to an easing of lending standards and, in turn, an increase in the volume of lending (lending boom). Mechanisms through which CIS alleviates the detrimental and occurrence of credit booms can differ between developing countries and industrialized economies.

In order to identify the impact of information sharing and its transmission channel, we built a dataset combining a bank-level and country-level database. The sample included 159 countries with 79 developing countries and 80 emerging and developed countries over the period 2008-2014. To study whether developing countries differ from other countries, two groups of countries were distinguished: countries with a GNI per capita below US$ 4,125 in 2014 (n=79, called developing countries) and countries with a GNI per capita exceeding US$ 4,125 (n=80, called developed and emerging countries). Financial fragility was assessed by scrutinizing annual changes in the ratio of NPL to total loans. Episodes of financial fragility were identified every time this ratio jumped by at least 3%. This measure enabled capturing all episodes of financial distress and not only the extreme ones (banking crisis). The development of CIS was assessed by the depth index and the coverage of CIS. Both were extracted from Doing Business.

Estimations confirmed findings from other papers by highlighting the stabilizing impact of CIS. The paper also documented that this result held for both less developed countries (GNI per capita below US$ 4,125) and other countries (advanced and emerging). In a second step, the complex relationships between CIS, credit booms and financial fragility were analyzed. Econometric estimations pointed out several important results: (i) information sharing development had a direct effect on financial stability, even when the impact of credit booms was taken into account; (ii) the higher the scope of information collected, the lower the likelihood to observe a credit boom (but the coverage of CIS did not matter); this effect was smaller and less significant in developing countries; (iii) CIS mitigated the detrimental effect of credit boom but this result held only for advanced and emerging countries; and (iv) credit booms were strong predictors of financial vulnerability, especially in advanced and emerging countries.

These results have several policy implications. First, credit growth is a key variable for macro-prudential policies in low and middle income countries. Second, current efforts to develop CIS schemes should be strengthened, since the latter allow for credit expansion without excessive increase in the overall credit risk. Third, CIS has little impact on credit booms in developing countries, which justifies the extension of other tools - such as macro-prudential policies - to prevent excessive credit growth. Finally, extending the coverage of information sharing systems is not enough, since depth of information sharing is more efficient in avoiding credit booms.

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About the Authors

Florian Léon is currently a postdoctoral research fellow at CREA (University of Luxembourg). Samuel Guérineau is an Associate Professor at the Université d'Auvergne.

This work is part of a research project which received financial support from the DFID-ESRC Growth Research Programme (Grant No. ES/L012022/1). Other project's contributions focus on the implications of capital flows (FDI, aid, remittances) on long-term growth. All contributions are available and can be commented on the blog dedicated to the project.

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What do renowned economists, financial sector practitioners, academics, and activists think about current issues of financial sector development in Africa? Find out on the blog - and share your point of view with us!

LATEST POSTS

Can you save money while repaying debt?Stephen Davies, Financial Blogger
Distributed Ledger Technology: a South African financial...Langelihle Mnyandu, Associate in Banking & Fin. Services Regulatory, Bowmans
Innovation doesn't have to be disruptiveH. Miller, Associate Consultant, Nathan Associates & G. Njoroge, Advisor, KPMG

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