Financial Liberalization and the Future of Financial Reform in Africa

GQEBERHA, South Africa, August 18, 2026 — Has financial liberalisation delivered on its developmental promise in Africa, particularly in the Southern African Development Community (SADC)? And what should the future of financial reform in the region look like? To answer these questions, it is necessary to examine the origins of financial liberalisation, one of the most influential and contested policy programmes of the past half-century. Drawing on the seminal contributions of development and monetary economists Ronald McKinnon and Edward Shaw in 1973, financial liberalisation has involved freeing interest rates, removing credit controls and directed-credit obligations, reducing state ownership of banks, easing restrictions on foreign-bank entry and opening economies to international capital flows. In southern Africa, the promise was particularly significant. Liberalisation was expected to give poor households, which make up much of the SADC population, greater access to financial resources and create pathways out of persistent poverty.

From Financial Repression to Liberalisation

Before liberalisation, roughly through the 1980s and early 1990s, African financial systems were characterised by widespread financial repression. Governments dominated banking, interest rates were often kept artificially low, and financial markets were shallow, fragmented and inefficient. State-owned banks were frequently used to direct credit, often producing weak performance and inefficient allocation. Negative real interest rates discouraged saving and distorted incentives. Central banks often had limited supervisory capacity, foreign-bank participation was restricted, and stock and capital markets were largely undeveloped. Financial systems were designed primarily to support public debt and state-led development rather than market-based commercial activity. By the 1980s, the weaknesses of this system were becoming evident.

Banking liberalisation became an important part of the response. By reducing state ownership, control and restrictions on banking, policymakers sought to create a more competitive, market-oriented financial sector. But the fundamental question remains — has this process delivered for SADC and Africa more broadly? The debate pits McKinnon and Shaw's view that financial liberalisation can support economic growth against neo-structuralist and post-Keynesian arguments that liberalised finance can generate instability. Freed from constraints, banks may compete by assuming greater risks. Credit booms can inflate asset prices, while subsequent reversals can trigger financial distress. The recurrence of banking crises associated with liberalisation across Latin America, East Asia and Africa gives weight to these concerns. Financial liberalisation therefore depends heavily on the institutional and economic foundations surrounding reform. Macroeconomic stability, prudential supervision, sound legal systems and institutional capacity all matter. So does sequencing. Domestic financial systems need to be strengthened before they are fully exposed to international capital flows. Reforms that deepen finance in one country can produce instability in another when institutional foundations are weak.

Why Africa Needs More Than Capital

Africa now faces a financial architecture that must do more to mobilise capital and direct it toward productive investment. The first priority is not simply finding more capital but creating structures capable of mobilising existing capital for productive investment. Africa holds several trillion dollars in domestic capital through bank assets, pension funds and reserves, much of which remains in short-term, low-risk instruments such as government bonds rather than long-term productive investment. At the same time, African projects often face high risk premiums, while the supply of well-structured, investment-ready projects remains limited. The second priority is reducing debt and restoring policy autonomy. Many African countries now devote more public resources to debt servicing than to health. High debt combined with limited policy autonomy makes financial liberalisation more precarious. Open capital accounts in heavily indebted economies can expose countries to volatile inflows and outflows, currency instability and dependence on short-term financing. Higher interest rates can also increase nonperforming loans and weaken bank balance sheets.

The third priority is deeper regional integration. African finance remains heavily dependent on banks, while only a small number of countries, including South Africa and Kenya, have deep and liquid securities markets. Weak regional integration leaves financial markets fragmented and more exposed to shocks. Regional integration should therefore be designed not only to increase financial flows but also to provide stronger safeguards against financial crises. The fourth priority is to establish the basic requirements for sustainable financial reform. Low and stable inflation helps maintain positive real deposit rates without requiring extreme nominal rates. It also allows banks to price risk more effectively and makes bond and equity markets more attractive to investors. Robust prudential regulation must be established before liberalisation, rather than introduced after a crisis exposes weaknesses.

Photo credit: Nelson Mandela University

The Next Phase of Financial Reform

The next phase of reform must also address newer challenges. The first is climate finance. Africa needs financing that can move into bankable, scalable mitigation and adaptation projects with transparent, results-based outcomes. Grants, loans, private investment, green finance and blended-finance structures can help bring private capital into projects that might otherwise struggle to attract funding. The second is resilience to shocks. The COVID-19 pandemic sharply increased inequality and tested financial systems. It also demonstrated that the capacity to save is fundamental to financial resilience. Without a financial buffer, households can quickly become vulnerable to income disruptions and predatory lending. Future financial reforms need mechanisms capable of protecting households and financial institutions against pandemics and comparable shocks.

The third is the competition-stability-growth trilemma. Policymakers must find ways to foster banking competition, preserve financial stability and support economic growth at the same time, particularly amid digital transformation and geopolitical uncertainty. Digital innovation may help reduce high market concentration, while lower barriers for new, foreign and niche banks could increase competition. But greater competition must be accompanied by risk-based supervision. The "too-big-to-fail" problem also requires credible resolution mechanisms so that the failure of a major financial institution does not automatically place taxpayers or the wider financial system at risk.

Financing Climate, Industry and Africa’s Natural Wealth

The fourth priority is financing Africa's natural wealth. Turning the continent's natural resources into sustainable development requires more than exporting raw commodities. African economies need greater domestic beneficiation, industrialisation and stronger governance, supported by financing structures that allow countries to capture more of the value generated by their natural endowments. This requires financial systems capable of directing domestic and international capital toward productive activity rather than leaving large pools of capital in short-term, low-risk instruments while businesses and infrastructure projects face high financing costs

The debate over financial liberalisation therefore cannot be reduced to whether it has succeeded or failed. Its results depend on the economic, institutional and regulatory foundations surrounding reform. Across SADC, credit conditions, banking stability, financial inclusion, institutional quality and the management of illicit financial flows all influence whether liberalisation helps reduce poverty or reinforces existing vulnerabilities. For SADC, the central challenge is not principally a shortage of capital. It is the shortage of financial architecture, institutional capacity and prudential strength needed to mobilise capital safely and direct it toward productive, inclusive and sustainable activity.

Financial reform should strengthen supervision before capital accounts are opened further, place financial inclusion alongside financial literacy, and address illicit outflows that drain African economies of resources. The future of financial reform in Africa should therefore not be framed as a choice between more or less liberalisation. The priority should be reform that is better sequenced, better supervised, more inclusive and increasingly aligned with climate and sustainable-development needs.

This agenda also requires financial systems that can support industrialisation, domestic beneficiation and sustainable investment in Africa's natural wealth while protecting households and institutions from future shocks. The challenge is to ensure that capital is mobilised safely and directed toward productive, inclusive and sustainable activity rather than simply increasing the volume or speed of financial flows. That is the task to which my research has been, and will remain, dedicated.

Note: Opinion by Professor Leward Jeke, economist in the Faculty of Business and Economic Sciences at Nelson Mandela University. This opinion is based on his inaugural lecture delivered on July 22, 2026.