The Global Financial Crisis and the African Economy

Abstract

This chapter attempts to explain the major causes of the global financial crisis and how it affected African countries. Understanding the structure of African economy will provide more insight into investigating the effect of the global crisis. This study reviewed different episodes of financial crises, the consequences of different African countries, and the theoretical literature on the crisis. Most African countries were directly affected by the 2008 global financial crisis due to multiple transmission mechanisms, namely credit expansion, trade-export, portfolio capital flow, remittances, and commodity prices. For example, countries like Kenya, Ethiopia, and South Africa were affected through weak demand engendered by the commodity boom and importation of goods stimulated by the reduction of interest rate in 2009, reducing demand for credit in these African countries. Also, there has been a drastic decline in export volumes due to low commodity prices of many goods. Existing theories on different types of crises and regulations have been able to establish some salient issues, namely that banks are fragile in nature, hence regulations are needed to stabilize the market. The literature is not clear on whether financial regulation is associated with an increase in financial instability and if more regulations usually set up more barriers to lending and reduce competition in the banking sector. Therefore, regulations need to be dynamic rather than just responding to crises in the financial sector.