Financial liberalisation and interest rate risk management in sub-Saharan Africa

The appropriateness of financial liberalisation in Africa - at least over the short-term - is in doubt. It has been suggested that the credit risks faced by financial institutions will be detrimental to the supply of credit. The contribution of this paper is to point out that financial liberalisation creates a significant interest rate risk. It is argued that this interest rate risk will bias African banks’ activities towards brokerage rather than maturity-transformation functions. Furthermore, it is stressed that the management of interest rate risk is in itself likely to lead to a reduction in the supply of credit. In this regard the usefulness of capital adequacy as defined by the Basle Committee is investigated.