Liberalisation of the financial sector involves removing restrictions and regulatory controls over financial institutions, thereby allowing key instruments, such as interest rates and credit distribution, to be determined by the market. Through the development of the Protocol on Trade , the Southern African Development Community (SADC) is implementing plans to increase economic liberalisation in Southern Africa. These Protocols operate in tandem, supporting the SADC goal of Regional Integration, supported by Member States to enable a strong regional economy and to encourage International Investment.
Financial Sector Liberalisation includes the following initiatives:
- Allowing interest rates to fluctuate based on market value;
- Reducing directed and subsidised credit;
- Redrafting financial and bank statutes;
- Adopting indirect instruments of monetary policy;
- Privatising banking systems; and
- Easing conditions for participation in stock markets.
The Protocol on Finance and Investment, and the Regional Indicative Strategic Development Plan
In 2006, SADC established the Protocol on Finance and Investment, which sets out policies for financial development in the region. It advises Member States to cooperate on the following aspects of financial systems as the region builds toward a market-driven, integrated regional economy:
- Banking supervision;
- Payment systems;
- Exchange control policies; and
- Stock exchanges.
SADC has also developed a 15-year Regional Indicative Strategic Development Plan (RISDP), which highlights specific priorities for the region in all major sectors. This Plan indicates that, as SADC incorporates more members into its Customs Union, it will be necessary to deepen monetary cooperation, along with trade cooperation, throughout the region. This level of mutual aid and Trade happens most effectively in a financial climate without restrictions on lending and Investment. Instead, the Regional Indicative Strategic Development Plan advocates a climate that attracts foreign capital and supports local entrepreneurs to develop businesses.
Progress in Liberalisation
In line with a global trend in the 1990s, many countries in Southern Africa explored liberalised financial systems. Since this time, Southern African economies have reduced trade tariffs, allowed floating interest rates, facilitated foreign exchange, and adopted indirect instruments of monetary policy. All of these changes have relaxed prior conditions that prevented new entries into the Banking system and the formal economy.
Recent reports indicate that these liberalised policies have generated a positive effect on economic growth in the SADC region. Interest rates have risen following liberalisation, which has encouraged saving. The financial sectors of Mauritius, Seychelles and South Africa developed significantly by 2004, with 50 % of their Gross Domestic Products (GDP) invested in highly accessible, short-term deposits and securities – a standard indicator of a country's financial health. Tanzania has also fared well. Prior to liberalisation, no foreign banks operated in the country; five such institutions were operating by 1998. Most recently, Angola, Madagascar, and Malawi have all made improvements to their credit systems, which should improve access to credit for local investors in the future.
Yet, increased financial liberalisation has not addressed all of the region’s economic challenges. Inflation has kept pace with interest rates in many Member States and differences in economic development among nations have widened. Furthermore, many Member States are not deeply integrated into the global economy and, indeed, observed even less international trade and investment during the initial stages of reform. However, many contributing factors other than financial policy – lack of infrastructure, labour issues, and regional conflict – have all impacted the economic development of the SADC region.
As improved industrial Productivity and foreign trade strengthen Member State ties to the global economy, the liberalised financial policies of SADC are expected to draw further investment into the region and build upon gains already made toward regional and national economic growth.