Measuring Financial Development: The Case of MEFMI Region

By Liku Irene Kamba
July 2011
A developed and well-functioning financial sector is a key component of an economy, facilitating the exchange of goods and services, mobilizing savings, allocating resources and helping diversify risks. Member countries in the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) need an efficient and robust financial sector for delivering sustainable economic growth.
The study aimed at documenting the progress achieved by countries in the MEFMI region in revamping their financial sector from 2000 to 2008, provide detailed procedures on how to create indices that capture the development of some individual components of the financial sector and offer a common measure of financial sector development in the MEFMI region. The study used the Composite Financial Sector Development Index and the Traditional Financial Development Index to measure financial sector development and gave a clear picture of the progress made by Tanzania, Uganda and Zambia over the last eight years and the current level of financial sector development.
The Composite Financial Sector Development Index portrays the three countries at a similar stage of development and earmarks the banking sector, non-bank financial sector and issues surrounding the openness of the financial system as areas that require more effort to achieve the best results with the reforms in place. The Traditional Financial Development Index showed great progress in the last eight years in the area of banking sector size and efficiency as well as financial depth of the three countries. The study proposes using both the Composite Financial Sector Development Index and the Traditional Financial Development Index as the common measure for the region.