FINANCIAL SYSTEM INTEGRATION IN ECOWAS: OPPORTUNITIES, CHALLENGES AND PROSPECTS
Global financial integration has substantially increased in recent decades. This was manifested initially in growing capital flows between developed countries and has subsequently spread to emerging market and developing countries. It involves the removal of capital controls, financial innovation and technological progress. Financial system integration is achieved when there is a perfect mobility of financial assets across the national boundaries of member States of a regional economic community. Cross-border financial transactions on the various stock exchanges should be guided by a common regulatory framework specifying common rules and ethics as well as accounting, clearing and settlement systems and standards. Identical securities are traded at essentially the same price across the markets in a region after adjustment for foreign exchange rates and investors can buy and sell securities without restrictions. In effect, all types of participants/operators can offer their services in any of the capital markets within a regional economic community without restrictions. Financial integration in the emerging and developing economies has been driven by a belief that in addition to enhancing the quality of macroeconomic management, it facilitates economic growth and reduces volatility owing to its tendency to pool risks across borders. At the international level, capital markets are in a state of change driven by the current wave of globalization and consolidation amongst market stakeholders (particularly, investment banks, investors and issuers and the stock exchanges) as evidenced by the spate of deregulation and liberalization in most of the world’s capital markets. This development is mainly due to the increasing demand and supply of capital by companies on a borderless basis, partly as a result of large privatization schemes and partly by emerging entrepreneurial companies. Another facilitating factor relates to the rapid technological advancement (in internet, e-business and wireless technology) and new software for market participants. These trends are creating intense pressures on all markets to lower cross-border transaction costs, to allow market participants to deliver services across borders and to reduce all forms of risks inherent in the international trading process. At the ECOWAS level, the advancement of financial system integration has become widely perceived as critical, especially under regional economic community arrangements. Thus, it is expected that the integration of financial systems in ECOWAS would be useful as it would help address the limitations associated with market fragmentation. In the first instance, the possible liberalization and harmonization of the banking sector and financial markets regulatory principles would help widen the investment markets beyond the national boundaries, thereby, allowing the regional financial system to offer a single pool of liquidity to large investors. The resultant larger financial space and its consequential enhancement in investment opportunities would lead to increased competition, greater efficiency in the allocation of resources and higher production as productive units enjoy the benefits of economies of scale and improved performance. Efficient financial markets with broader regional scope would further lead to innovative financial products and services, cheaper corporate financing, higher returns on investment and lower prices for financial services. Other compelling reasons relate to reduced transaction costs, more liquid and broader securities market, better access to long-term funding and financing alternatives, more diversified investment opportunities and greater efficiency in the allocation of capital.
Financial System Integration in the region is a requirement under the ECOWAS Monetary Cooperation Programme. Specifically, Article 53 of the Revised 1993 ECOWAS Treaty provided for the establishment of appropriate mechanisms to encourage investments in enterprises located in the territories of other member States through cross-border dealings in stocks, shares and other securities. The objective of this provision was to ensure the unimpeded flow of capital within the community through the removal of controls on the transfer of capital among member states. To achieve the above-mentioned objective, the Treaty further recommended for the establishment of a Capital Market Issues Committee, which shall among other responsibilities: Interconnect banks and Insurance companies in the sub-region Encourage the establishment of national and regional stock exchanges as well as the integration of these exchanges Ensure that nationals of member states are given the opportunity to invest and seek loans throughout the ECOWAS region, acquire stocks, shares and other securities or even the opportunity of investing in companies located in the territories of member states. Establish a mechanism for widespread dissemination of stock exchange quotations of each member state as well as the regulation of the capital market circulation to not only ensure its proper functioning but also the protection of investors.
The aforementioned provisions underscore the importance the Authority of ECOWAS Heads of State placed on the development of an integrated financial system. There are currently five stock exchanges in ECOWAS, namely, the Bolsa de Valores de Cabo Verde, the Ghana Stock Exchange, the Nigeria Stock Exchange, the Sierra Leone Stock Exchange and the Bourse Régionale des Valeurs Mobilières (BRVM). Having been established under specific Acts of the countries concerned, a review shows that the existing stock exchanges are largely fragmented in nature. In addition to the fact that most of these stock exchanges are small in size with limited investment pool, variations in the regulatory principles place certain operational impediments on third party transactions. For instance, some of the countries concerned allow non-resident investors to deal in securities listed on their respective exchange whilst others do not allow this facility, depending on the extent of foreign exchange controls in place. In addition, some of the regulations forbid the cross-listing of companies unless the company concerned attains multinational status registered in accordance with the relevant laws. Furthermore, some of the investment laws forbid the repatriation of investment capital, dividends, interest payments and other related earnings. To facilitate the economic integration process towards realization of a higher standard of living for its people, there is the need for accelerated growth through increased investment opportunities. One of the means for realizing this objective is for member States to pool their resources by integrating their financial systems.
Thus, the study will attempt to proffer appropriate policy recommendations to facilitate financial system integration in ECOWAS. Specifically, the study will first of all analyse the status of the existing financial systems in the sub-region and then use an econometric model to test the level of integration of the financial system of the region, if any. Finally, the study would also delve into the opportunities, challenges and prospects of an integrated regional financial system.