The politics of central banking and the shifting sources of public finance in developing countries

As regulators, central banks can play a stabilising role, using prudential regulation to ensure financial system stability, and a transformative role, using regulation to promote financial system development and so encourage the intermediation of financial resources into productive investment. While there are strong arguments for central banks seeking to strike a balance between their stabilising and transformative roles in financial regulation in developing countries, African central banks have had difficulties in this respect. This paper provides some starting points for thinking about why and when central bank policy reform is likely. The purpose of this paper is to illustrate and explain the political challenges faced by central banks in developing countries in striking a better balance between their stabilising and transformative roles in the governance of financial sectors. To explain the variation of central bank roles across Africa and their stickiness over time, this paper adopts a political economy approach. What little research has been conducted into central banking in Africa has largely been technical and so has little to say about the political challenges to financial reform. The paper therefore builds on political economy theory, statistical data and data derived from interviews with key political decision-makers, donors and researchers in three African countries, Nigeria, Uganda and Kenya. Both theory and the findings of field research in these three countries suggest that the financial needs of powerful interest groups, in particular the state, have shaped central bank policies, and that these groups seek to maintain the status quo in financial regulation. Reforms of financial regulation that aim at improving the balance between the stabilising and transformative roles of central banks are difficult because these interest groups have an incentive to capture regulatory reform processes.