Building an International Financial Centre
Paper prepared for the 50th Anniversary International Conference
of the Central Bank of Nigeria, May 2009
Omotunde E. G. Johnson
Quite a number of writers have recently addressed the question of what are the structural
factors that make for a reputable world-class financial centre. One publication1 lists the factors as
follows:
•open and fair financial markets;
•free flow of capital and a convertible currency;
•skilled workforce/flexible labor laws;
•prevalent use of a globally familiar language;
•fair, transparent, efficient legal and regulatory regime;
•sound and fair tax regime;
•implementation of international standards and best practices;
•low cost of doing business;
•high quality, reliable and appropriate physical infrastructure; and
•stable political and economic environment.
One element which is stressed by all writers on international financial centre, not
highlighted in the above list but clearly subsumed somewhere in it, is that quality of life is very
important in assessing financial centres. Indeed, the evidence seems to indicate that being high
on that index is an essential requirement —a sine qua non —for becoming a highly competitive
international financial centre. The geographical area in which the centre is located must be
attractive as a place where people want to live, work, and visit. Hence, transportation— within
the locality and between that locality and the outside world—housing, hotels, physical security,
medical services, facilities for leisurely activities (theatres, museums, art galleries, other cultural
attractions), and educational facilities must be of high quality. A cursory look at the leading

Economics Researcher and Consultant; former Assistant Director, Monetary and Exchange
Affairs Department, International Monetary Fund.
1
Securities Industry Association (2007).
2
centres in the world (see Table 1) lends support to the view that cities attractive to live in, from
this general perspective, do win. Mumbai, for example, with dreams of becoming an important
financial centre is racing to cleanup and beautify its city for precisely this fact.
Much has also been written about countries taking carefully thought-out steps to improve
the competitiveness of their financial centres. For example, Mumbai, Shanghai, Moscow, and
even Tokyo which is well-established as a financial centre, have been back to the drawing board
making plans for major reforms to boost their financial centre development.2 In Europe, both
Germany and France have been taking well-organized steps since the 1990s which for a while at
least raised serious concerns for promoters of the City of London.3 Among the UK’s reactions
was the reinvention of the organisation, British Invisibles, to become, on February 1, 2001, the
International Financial Services, London (IFSL) and to focus more coherently and resolutely on
promoting the UK-based financial services industry throughout the world.4
Thus, not only is there broad agreement on the major characteristics of a world-class
financial centre, many places with some reputation of having achieved international financial
centre status, although of varying degrees, are engaged in serious planning and promotion to gain
or retain competitive advantage in the international financial centre business. This means, inter
alia, that competition in that business will only get stiffer over the next two to three decades.
Clearly, there are implications for new entrants, especially those for which the financial
centre business, even for the domestic market, remains seriously underdeveloped. For the new
2
See, e.g., IDB Japan (2007), and Sanyal (2007).
In Germany, the government launched a drive for Finanzplatz Deutschland, which among other
things they hoped would help promote nonbank financing and spark greater German interest in
equities. It was essentially “an alliance of the Deutsche Börse, the Bundesbank, the big banks,
the City of Frankfurt, and virtually all the financial institutions, German and foreign, that operate
out of Germany” (Financial Regulator, Sept. 1999). The aims included a futures market,
improved electronic links among regional markets, longer opening hours, and elimination of a
German turnover tax on securities transactions. In France, Paris Europlace is an organisation
promoting Paris as a financial centre. It represents the major players—investors, corporate
issuers, brokerage firms, banking organisations market authorities, as well as legal, accounting,
and consulting firms and professional associations. It comprises some 150 members. Its mission
is to bring together all the players to promote and lobby (in France and Europe) for the French
financial industry, as well as to foster reforms and appropriate action programs to develop
French financial markets, firms and institutions.
4
IFSL is an independent, not-for-profit membership organisation. Its membership is drawn from
UK’s financial and related businesses, including banking, insurance, trading exchanges,
regulatory bodies and professional services. IFSL is the designated private sector partner of UK
Trade & Investment and the Corporation of the City of London for international promotion of
UK financial services. It is involved in research, providing analysis and statistics that, among
other things, inform on UK’s role in international financial markets; it works for greater
liberalization of trade in financial services; and it facilitates contacts and opportunities for their
members.
3
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entrants, a coherent strategy as well as benchmarks would be useful to motivate action and
facilitate objective monitoring and assessment of progress. In addition, for new entrants, a simple
and obvious way to start is to look at what others have done and are doing (that is, their policies
in some detail) and seek to understand the rationale for the others’ actions . That will help the
newcomers to define the problem and design an appropriate strategy.
For a country like Nigeria, of course, more financial development is valuable in its own
right. Hence Nigeria wants, in any event, to have a coherent program for developing its financial
system. The idea of striving to build an international financial centre is merely to ensure that, in
the process of developing the financial system, there is, as an integral element, a well thought out
strategy for starting a robust export business in financial services.
In this paper, I outline a strategy for developing such an international financial centre,
which builds on the stock of international experience. This strategy entails the following:
• conceptualizing a financial centre as a cluster;
• finding a niche for entry at the international level;
• enhancing competitiveness by building capacity, structuring incentives, and improving
the quality of the national governance environment;
• putting in place high quality financial services supervision and regulation; and
• promoting the centre by assisting it to access global value chains, implementing other
selective intervention policies, and granting it some enclave privileges.
The strategy would involve substantial cooperation among the government, the central
bank, the financial services supervisors and regulators, and the service providers in the financial
centre.
A Financial Centre as a Cluster
A financial centre, whether international or purely domestic, is a cluster or agglomeration
of markets and firms in financial and other related services. Seeing the financial centre as a
cluster and understanding the benefits of clustering and the sources of the benefits should help
organize thinking on strategy and the ordering of actions to develop the centre.
Benefits of clustering
The most fundamental benefit of clustering is knowledge externality. Firms are
embedded in a network of users, suppliers, consumers and knowledge producers. In general, a
well-functioning cluster will be characterized by increased collective efficiency. Collective
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efficiency accrues to clustered firms from two factors: external economies, generated from the
agglomeration of firms, and joint action. At least four types of external economies have been
outlined in the literature: market access, labour market pooling, intermediate input effects, and
technological (or, simply, knowledge) spillovers.
Market access has to do with the ability to attract buyers of the services as well as
suppliers of inputs. Labour market pooling is associated with concentration of specialized skills
that will tend to develop within the cluster. The pooling will occur through skills upgrading
within the cluster and the attraction to the cluster of persons who already have relevant skills.
Intermediate input effects are externalities associated with the emergence of specialized suppliers
of inputs and other services. This will be due especially to specialization among existing firms in
the cluster or attraction of new firms from outside. Technological (or knowledge) spillovers
involve the diffusion of technological and other knowledge and ideas among the firms in the
cluster. Collective efficiency, in other words, augments the benefit to any service supplier of
locating within a well-developed and functioning cluster and thus attracts investors and users to
the cluster.
An important consequence of all this will be greater depth and liquidity in the financial
markets located in the centre. 5 Hence, the opportunities for hedging, trading and diversifying
risks will expand as will be the access to alternative sources of funding and to greater investment
opportunities. Balance sheet management will be easier.
To reap the full benefits from clustering, there need to be high levels of collaboration and
interaction among key agents and organizations in the cluster. In particular, effective
communication and cooperation among firms will create opportunities for joint action. Such
agglomeration effects will also help the clustered firms shape patterns of innovations and
technical change.6 In short, when they work well, clusters help enterprises innovate, and upgrade
their processes, products, and functions.
Like other types of clusters, financial centres can emerge spontaneously or via central
direction and planning (constructed clusters). The most famous case of the latter is probably
Singapore. Dubai is a more recent example. For newcomers, in order to speed up the
5
Depth has to do with size of a financial market/organization relative to a relevant variable such
as gross domestic product (GDP). Liquidity has to do with the value of financial assets traded in
the financial market, during some time period, relative to, say, GDP; alternatively, liquidity is the
value of the assets traded, in the financial market, during some time period, relative to the total
value of the assets of the market.
6
The main focus of cluster analyses has been the industrial sector; see, for example, OyelaranOyeyinka and McCormick (2007) and Yusuf, Nabeshima, and Yamashita (2008). But the
analysis applies in general. In traditional growth and development analyses, ‘agglomeration’
rather than ‘cluster’ is the term of choice.
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development process, some central coordination of the institutional and organizational activities
should be useful, if carefully done.
The role of the firms, markets and individuals in the centre will be to (1) advise clients,
(2) structure and arrange deals, (3) provide finance to borrowers and equity issuers, and (4)
manage funds and investments of individuals and so-called institutional clients. In the process,
they would perform the five basic functions which have been highlighted in the finance and
growth literature.7 Namely, they will: (1) facilitate the trading, hedging, diversifying, and
pooling of risk; (2) allocate financial resources among competing users; (3) monitor managers
and exert corporate control; (4) mobilize savings in all the geographical areas they serve; and (5)
facilitate the exchange of goods and services in their niche countries.
A dense financial centre (cluster) will contain a substantial number of fair sized financial
services firms, major international accounting firms, and legal services and telecommunications
and computer engineering firms (including consultancies). The financial services firms will, as a
sector, be highly diversified with firms engaged in activities covering the whole spectrum of
activities in major areas like banking, securities, foreign exchange trading, insurance, derivatives,
fund management, and professional services. Not being strict about “firewalls” (for instance
between bank and securities business) will facilitate open competition among financial services
firms, joint action and exploitation of external economies.
Organizational issues
I argued above that to reap the full benefits of clustering, there need to be high levels of
collaboration and interaction among key agents and organizations in the cluster. Left to evolve
spontaneously, such cooperation could be slow in emerging, especially in the early stages of
development of the centre. Hence, there will be benefit to all, under such circumstances, from
official intervention to foster the process of cooperation. The authorities will need, though, to be
cautious in their approach to enhancing cooperation among firms in the centre. In particular, the
authorities must ascertain that, in fact, there will be benefit to intervention. Once they feel a need
to intervene, they should avoid imposing their agendas or preferred processes; rather they should
allow these to emerge via discussions and negotiations among the firms, even if with government
participation. The authorities should simply play the role of facilitators. In that case, they must
ensure that their representatives have credibility, especially by demonstrating knowledge and
competence.
More generally, there will be major issues associated with developing the financial centre
in a coherent and efficient way. Because of this, rational organization will help. A reasonable
approach would be to establish some national coordination council, say an International
Financial Services Development Council (IFSDC). This council would comprise representatives
from the national government, local government, the central bank, the financial services
7
See, e.g., Levine (1997).
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supervision authority or authorities, and the major sectors of the financial services industry. The
objectives of the IFSDC would be: (1) to promote cooperation among all public and private
persons and authorities with substantial interests in the development of the financial centre; (2) to
promote adoption of standards and practices in the financial centre which meet international
norms; and (3) to promote policies, institutions (that is, rules governing behaviour) and
infrastructure, which enhance the international competitiveness of the centre, including the
fostering of beneficial innovation. Within the IFSDC, ideas should be openly discussed. It would
be a forum where the different parties would be informed of what others are doing. Such
information should motivate joint action and timely exploitation of external economies. Also, the
national authorities would be able to hear suggestions and criticisms, from private parties, that
could improve policy plans and actions.
It would be useful to have working groups within the IFSDC structure to develop
initiatives and ideas on different aspects of the financial centre development. Final decisions,
when necessary, can then be taken by the whole group; alternatively, there could be an IFSDC
board, which arrives at such final decisions. The IFSDC would be concerned with all aspects of
the financial centre development. But its focus would be on broad policy matters and on hearing
all sides of an issue. As regards its legal status, the IFSDC would be an advisory group to the
authorities and to the industry as a whole. But it should have enough stature to make its decisions
respected. This would be aided by its being able to arrive at recommendations by consensus,
after hearing all sides.
Finding a Niche
The financial services industry can be subdivided into sectors which supply a variety of
products, where a product is a specific bundle of services. The products in this case are highly
heterogeneous. Still, it is a highly competitive industry; in fact, groups of products compete with
each other.
There are really only two truly global financial centres—London and New York. In these
global centres, the sectors cover the full range of financial services and their products are
supplied (marketed) all over the world. This means that their immediate clients are, or can be,
global. The other major centres (among, say, the top 50) tend to be international, in the sense that
they conduct significant cross-border transactions. Each of these other top centres could still be
major global players in only one or two sectors, although, even there, they may tend to have a
relatively limited number of products. Moreover, many (perhaps, most) of the financial centres
are international only within a small geographical region; in that sense, they are regional
financial centres.
An international financial centre, then, could operate cross-border only within a certain
geographical area, mainly in certain sectors, and provide only a certain limited range of products.
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Domestically, of course, that same centre could operate more broadly (sectors and products) in
financial services in general. The competitive advantage of the centre (and hence the level of
demand for its services) will depend on the cost of doing business with that financial centre, as
well as the reputation of the centre.
A Nigerian financial centre, say in Abuja, will inevitably be a niche centre for the
foreseeable future. But geography, rather than range of services, will be the more dominating
factor determining the niche. Of course, for some time there may need to be a niche also in terms
of products. But a Nigerian financial centre is unlikely to be global niche for any service area for
some time to come. Still, the speed with which the Dubai International Financial Centre has
established itself since 2004 shows what is possible, particularly with substantial investment in
financial and other infrastructure, generous tax incentives and legal framework flexibility. Apart
from these and other factors to be mentioned below, the success of a Nigerian centre in realizing
its chosen niche will depend greatly on the availability of domestic financial assets available for
investment domestically or inside the African region.
Finding a niche, then, is mainly a matter of deciding on the geographical area, the sectors,
and the general types of products/services for which it is possible, with appropriate policies, to
build reputation and comparative cost advantage in the provision of financial services to enable
domestic financial service providers to operate profitably in an open and competitive
international environment. In this conception, there must be a clear view, by the promoters, of
the potential clients of the products to be provided.
Clientele
As to geography, it makes sense for a Nigerian international financial centre to begin
with the Economic Community of West African States (ECOWAS),8 and then slowly expand to
the rest of the African continent. Within such a niche area, the clientele would be diverse. In
particular, it would include governments, public enterprises, local financial institutions and
markets in the various countries, private nonfinancial businesses, foreign companies who have
operations in Africa, and Africans in the Diaspora, particularly in Europe and North America.
As African enterprises grow in size and become more efficient and respected, they should
be able to raise outside finance from a global market—by issuing corporate bonds or equity. A
well-respected international financial centre in Nigeria can be useful in such operations. A
financial services firm located in Abuja, for instance, could be employed to help manage the
process for a particular enterprise X. Such a financial firm might have established relations with
financial services firms in Europe or America to get one of them to underwrite the X securities
and probably organize a syndicate. Other financial firms around the world could be invited to
The current members of ECOWAS are: Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, The
Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone,
and Togo.
8
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join the syndicate and to encourage investors (e.g., pension funds, sovereign wealth funds,
insurance companies), with whom they have relations, to subscribe to the X securities. A rating
of the X securities by one of the big rating organizations (Standard and Poor’s, Moody’s) could
also be arranged. The securities could be issued by a financial firm in a country outside Nigeria.
This also means that funds obtained from Nigeria and other African countries could be
invested via a Nigerian financial centre firm in syndicated loans abroad. Moreover, entrepreneurs
and enterprises from outside a country in the Nigerian financial centre niche may want to come
and invest in the Nigerian financial centre niche and may want to raise additional capital or
borrowed funds within the Nigerian financial centre niche. It could then use a financial services
firm in the Nigerian financial centre to assist it. It is useful to appreciate that, for many of these
types of transactions, none of the capital to be invested or loaned need to come from Nigeria.
Realistically, it is not clear how big the demand for the Nigerian financial centre services
will be at the start. Take the stock market activity, for instance. Basically, a Nigerian financial
centre will intend to attract listings. These will tend to be mainly from companies from the
region. The buyers of these securities will also be persons who want to invest in the region.
These could be persons from inside the region or from outside. As far as the latter group is
concerned, portfolio investment in African companies are rather small at the moment and the
companies operating in African countries with substantial public offerings of securities tend to
be listed in exchanges outside the continent. The Nigerian financial centre will have to work to
change this as it makes progress in its development.
Casual observation also seems to indicate that Africans with money do not seem to put
them in stock exchanges. They buy real estate abroad or put them with banks abroad. It is this
money that goes abroad to banks and real estate that banks and their fund managers in the
Nigerian financial centre can target. This money must be invested safely, reap reasonable returns
in the hands of the fund managers in the Nigerian centre, and, despite the new international
consensus against secrecy, must still enjoy some measure of secrecy from national and foreign
authorities.
Many businesses in Africa do not generate outside finance. The financial centre can
encourage public listing of more companies in the African region, especially the West African
region. Unfortunately, that will entail much education and change in the business practices of the
companies, including especially keeping of accounts that are properly audited. A soft way to
start, perhaps, would be to introduce the companies to the possibility of issuing bonds. Debt may
be easier than issuing equity for a business; of course, they will still have to modernize their
accounting and become more transparent. But at least the owners would not lose control of their
enterprises. African citizens are already used to buying government securities; so buying a debt
instrument would not be such a big step as long as the borrower is creditworthy. The obstacle,
which might be real, would be the rate of interest. For some countries, the rate demanded by the
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bond purchasers may be quite high, given the high real interest rates that are sometimes attached
to government securities.
Products and services
To bolster its cluster orientation, all the major categories of services be aimed at for the
financial centre. These would include: (1) foreign exchange services—for instance, obtaining
funds from financial firms abroad and lending them domestically or regionally, especially to
banks, and vice versa; (2) loan syndication; (3) stock and bond issues in local and foreigndenominated currencies; (4) fund management of various sorts; (5) money management; (6)
mortgage; (7) insurance; and (8) monitoring and rating services on firms, management,
individuals, governments and various kinds of securities and instruments.
More and more African countries are establishing pension funds and there are indications
that many of these are not being managed well. Foreign exchange reserves of countries can also
be better invested. Competitive commissions and fees, as well as expertise, can help attract these
fund management services to agents and organizations in a Nigerian international financial
centre.
Some financial services are indeed absent or rare in countries of the region, mainly
because the institutional and organizational set-up is lacking, with no formal finance
houses/companies with the necessary skills. These include hire purchase, leasing, and factoring.
Even the money markets can be further developed in all the countries. Venture capitalists of the
countries also invest only in activities and companies they manage themselves. Futures and
options are, not surprisingly, also non-existent in the region. To cap it all, there would seem to be
plenty of room for innovation and hence coming up with new products suitable to the African
investor and borrower.
Providers
From an organizational point of view, the providers of the above services, who must all
be of high quality in order to foster the idea of the centre being a true cluster, are obvious.
Clearly, banks, a stock market, insurance companies, and rating organizations of all kinds will be
at the core. The stock market, especially, should be highly liquid, with international listings.
Banks should cover investment, corporate, and retail banking. These highly diversified
organizations can be supplemented by specialist organizations, such as mutual funds, investment
trusts, leasing companies, factoring companies, credit rating agencies, professional service
consultancies and research and risk analysis service firms. Futures and options exchanges as well
as commodity exchanges could follow later, if economically efficient to do so. The idea is to
encourage the specialist firms and organizations to emerge or locate from outside to fill any
important niche that would strengthen the cluster.
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The authorities are well advised to be proactive in trying to ensure that the financial centre
be an innovative cluster. That is, the authorities, perhaps working under the aegis of the IFSDC,
should enable and promote high rates of learning and knowledge accumulation within the service
firms in the centre, thereby ensuring continuous change to the knowledge base of the centre.
There is a good case for taking a formal approach to ‘markets.’ Namely, markets like
stocks, bonds, government securities, money, foreign exchange, futures, and options should be
clearly identified. The identification is useful for reasons of regulation, supervision, or oversight.
Hence, there will be regulatory rules and requirements relating to risk management, settlement of
transactions, and corporate governance. But there may also be rules for participation and
transacting that are designed for reasons of market efficiency and smooth cooperation among the
participants. Indeed, such rules could be codified as by-laws when the “market” has an exchange
or centralized trading place. A decision that will need to be made at the beginning will thus be
whether it is a good idea for some markets to have centralized trading or exchanges. Of course,
even in such an eventuality the trading does not need to take place in a centralized physical
locality. Transacting could take place via modern communication devices. But, in general, when
the trading is centralized, ‘membership’ to the exchange or ‘market’ would be a requirement for
participation. To be in good standing, a member would need to be in compliance with both the
regulatory requirements and the rules of good behaviour in transacting with other members.
Normally, apart from the stock market, there is not usually a pressing need for centralized
trading places in the provision of financial services. The exception is typically when there is an
economic case for organizing financial services, like futures and options, for certain types of
commodities, such as gold or petroleum. In that case, for a new financial centre without a global
reach, there would seem to be a need for only one commodity exchange or, more generally, a
futures and options market.
For markets like those for most corporate and retail banking services, insurance, leasing,
and factoring, the question of formal membership to some exchange or body does not typically
arise. Regulatory rules will still be drawn up and applied of course. It is also normal for such
organizations, especially bank organizations and insurance companies, to form trade
associations. But the purpose of such associations is to foster the groups’ interests and encourage
certain behaviour vis-à-vis the government, regulators, clients, and the public at large. The
authorities should actively involve such associations not only in setting regulatory and
supervisory rules but also in formulating policies and incentives to promote the development of
the financial centre. Once again the IFSDC will be useful.
Enhancing Competitiveness: Capacity Building
As in so many activities, reputation is important in the financial services business. With
good reputation comes credibility of promises, expectations that the authorities are serious and
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committed to building a world class financial centre, and respect for the competence and
integrity of the firms and service providers in the centre. Now capacity to do the job well
enhances reputation. A strategy must therefore be put in place to build capacity of the people and
organizations in the centre to perform the tasks well.
In addition, mechanisms must be found to influence perceptions of the centre by
outsiders, in order for the centre’s service providers to be given the opportunity to demonstrate
that they can indeed perform the tasks efficiently. Thus capacity building must be supplemented
by mechanisms that influence outsiders’ perceptions of the centre’s ability to perform tasks for
which the latter has not yet established a reputation. Capacity building and positive outsiders’
perceptions will both be facilitated by the quality of the relevant innovation system, the human
capital of the centre, the financial capability of residents in the niche countries, the supporting
infrastructure, and the steps taken to improve effectiveness and efficiency of cooperation in the
cluster.
Innovation system
Innovation is important in the financial services industry and it is a continuous process,
which of course poses great challenges for regulators. More aptly, innovative ability will be very
important for the success of any new financial centre that is trying to become international in its
operations. In trying to develop an international financial centre, for example, the Nigerian
authorities will be advised to examine closely their innovation system to ensure that it supports
their plans for building an international financial centre.
The concept of a national innovation system is useful in ordering one’s thinking in this
regard. A national innovation system is the set of institutions, organizations, and mechanisms
supporting technical innovation in a country. Hence, here, one would be interested in the
processes by which firms in the financial centre master, use and supply products and procedures
that are new to them.
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The innovation system will comprise the whole set of institutions and organizations
whose interactions determine the innovative performance of the markets and firms in the
financial centre. Innovation will involve copying and catching up with products and practices of
others; research to facilitate appropriate adaption of existing products to the specific clients
and/or environment of the centre; investment in new equipment; organizational reforms; learning
new skills, including technical and analytical knowledge (mathematics and statistics, finance,
economics, etc.); and adopting new approaches in marketing and cooperating with other financial
centres. An objective of a policy on the national innovation system is, in short, to enable
domestic firms to develop sufficient technological, organizational, and scientific sophistication
and adaptability to compete effectively in this and other areas in the global environment.
9
See, e.g., Nelson (1993).
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Strengthening the national innovation system and making it supportive of the financial
services sector would involve looking at the quality of secondary schools; programs at
universities, research centres and institutes; technical and vocational training in the country; and
training and research programmes within firms of the centre. Apart from training and research
facilities, there are other important factors which will influence the innovation system and which
the authorities must influence. Among these, habits and practices of major actors in the financial
system are important. Firms must be motivated to inculcate habits and practices which encourage
innovation. In that regard, the incentive structures within organizations matter.
The competitive environment is also important. National policy fostering open markets
and safeguarding their integrity will be good for innovation. Incentives for export-orientation in
production will also encourage innovation and survival of only strong firms which tend to be
more innovative. Labor-management relations matter, inter-alia, because they can influence
attitudes and commitments towards technical change and innovation. Moreover, availability of
finance to support innovation (especially acquisition of equipment and training) is extremely
important; government policies can influence this, as can cooperative arrangements among firms
and organizations in the centre.
Human capital
The quality of the human capital at the financial centre will be crucial to its success. The
technical capability, innovative ability and integrity of the human beings operating in the centre
and overseeing its markets and organizations will be very important. Indeed, many of the policies
being implemented to boost the development of the centre will be designed with an eye to
attracting high quality personnel. The indispensability of high quality people to achieving a high
degree of competitiveness has forced all centres seeking to compete at the international stage to
be open in their recruitment policies, acquiring people from wherever they can they found. A
Nigerian international financial centre will have no alternative but to adopt such an attitude.
Given sound government policy, including support for education and training of
Nigerians in top universities around the world, within a relatively short period of time Nigeria
will have no problem having a substantial share of the top positions in the leading financial firms
in a Nigerian financial centre. But a world class financial centre will be open to firms—
especially banks, insurance companies, rating organisations, and accounting firms—from all
over the world. International firms and conglomerates thrive on their diversity and their ability to
rotate their employees worldwide. The authorities in Nigeria should not only welcome such
international firms to their centre but should also refrain from restricting their flexibility in
personnel management. Similarly, fund managers, advisors and consultants of foreign origin
should be encouraged to open offices in the Nigerian financial centre if they so wish. Their
experience and high-quality labour pool should enrich the centre with appropriate efficiency
gains of the sort discussed earlier.
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Two areas with thorny issues that all financial centres have had to address are labour
policies and personal income taxation. In the case of labour polices, the main issue is the degree
of freedom and flexibility that the top management will have with respect to freedom in hiring
and firing, overtime pay, minimum wage, leave, treatment of unions, and hiring of foreigners, at
all levels of the firm. A cautious approach would be to take a survey of what countries with
leading financial centres are doing at the moment and adopt a mix of policies that are sufficiently
flexible in light of competitiveness considerations but also fair to the workers in light of normal
practices in the country. If necessary, legal changes should be made.
The same can be said for personal income taxes. First and foremost, a country like
Nigeria with ambition to develop an international financial centre should negotiate double
taxation treaties with at least those countries where the risk of double taxation exists. As to the
level of taxation when relevant, the advice again would be to do a survey of the leading financial
centres and get a good idea of their personal taxation, both of nationals and of foreign nationals
who are residents in the country. Then an attempt should be made to modify domestic taxation
laws to become competitive. Depending on the situation, this may require certain exemptions, for
instance on export promotion grounds. Whatever the case, the authorities must realize that they
would not be able to attract many of even their own top nationals, in the appropriate financial
services, if the personal income tax rates are punitive by the standards of countries with top class
financial centres.
Financial capability of the populace
Other things being equal, it seems reasonable to expect that persons with enormous
financial capability, namely, “the knowledge, skills and motivation to manage their finances”
(HM Treasury, 2007, p. 3), will tend to use financial centres more than persons with little
capability. Indeed those with high financial capability will have greater ability to reap returns
from their savings and will be willing to explore alternative ways of investing their assets and
managing financial risks. Having a large proportion of the population with a high degree of
financial capability should motivate more business for a national financial centre than otherwise.
This will help build a solid demand base useful to sustaining a national financial centre and
hence giving its financial services personnel good practice. In addition, the population of young
persons from which could emerge future financial services experts would become greater.
The United Kingdom has introduced a useful initiative the objectives of which I believe
are worth copying in African countries, especially those trying to build an international financial
centre. This is the idea of putting together a coherent programme to enhance the financial
capability of the population. The overall strategy will include supply-side policies to improve
general access to financial services markets as well as to affordable financial advice. The
expected outcome of the strategy is “better informed, educated and more confident citizens, able
to take responsibility for their financial affairs and play a more active role in the market for
financial services” (HM Treasury, 2007, p. 7). One obvious indication of the relevance of this
14
approach to African countries is that when one looks at African countries, planning for
retirement and old age has always been a challenge, abated only by the willingness and ability of
the younger generation to voluntarily care for their old citizens.
As would be expected, key elements in the action plan will be: appropriate education
(mathematics, finance, etc.); improved avenues for information and advice; availability of
opportunities to practice and develop skills; and outreach programmes. The Financial Services
Authority of UK “leads the National Strategy for Financial Capability, in partnership with the
Government, industry and the voluntary sector” (HM Treasury 2007, p. 7). Other countries have
programmes that achieve some of the same objectives as the UK one and apply some of the same
tactics, most notably introduction to personal finance education in schools. Businesses and
voluntary associations and organizations offer free programmes to young people and
economically disadvantaged persons in other countries as well. Moreover, it is possible to obtain
much of the training and the advice in the open market. The novelties in the UK programme are
the planning and overall coherence and the offering of it without significant monetary outlays
from the recipients.
It is doubtful that, in Nigeria or any other African country, formal finance education,
advice and outreach programmes are available from schools, charitable organizations, or the
financial services industry anywhere close to those in the industrial countries. Hence, a publicly
organized financial capability programme would seem to be of much social value in those
countries. The IFSDC, as part of a programme of development of an international financial
centre, can advise countries in the niche area to introduce programmes similar to the financial
capability programme of the UK.
As in other programmes, with this sort of planning, it is always useful to organize some
sort of a survey so as to fully understand the nature and dimensions of the problem to be tackled
and the seriousness of the different aspects of the problem. Hence, it would be useful for the
Nigerian authorities if they want to mimic this effort to organize such a benchmark survey.
Infrastructure and public services
The physical and technological infrastructure in place will be important elements of the
capacity available to perform the financial services tasks, including the ability to innovate. This
infrastructure will comprise: (1) transport and communications networks; (2) basic utilities such
as electricity, water, sanitation, postal system; (3) accommodation (housing and office space);
and (4) financial system related infrastructure (trading facilities, clearing and settlement systems
for money and securities, other electronic linkages among participants).
Broadly speaking, I believe that we know the sort of infrastructure that we want to enable
a financial centre to function effectively. When it comes to the details, we also know that user
requirements (effective demand) must drive the process. The challenge is achieving economic
efficiency in the supply of infrastructure. For this, organization is crucial. This is so because
15
someone or some decisionmaking authority needs to answer questions like: Who builds what?
How are facilities and services financed? How does one sequence some accumulation, reform, or
remodeling process as needed? What is the time frame in long-term decisionmaking and what is
the real discount rate to be applied?
Some of the infrastructure decisions and investments will, of course, be left to the
financial services markets and firms themselves. My focus here is on public sector organization.
Now, the central government and the local government will have clear functions specified in law
regarding the provision of infrastructure and other public services. My suggestion here would be
that the effectiveness and efficiency in this area could be enhanced if a dedicated authority is
created to serve some of the requirements of the financial centre geographical area. In other
words, a Financial Area Corporation (FAC) could be formed and given land and other capital to
build and manage certain office space and perform other functions devolved to it under
agreement with the national and local authorities. The way the FAC finances itself—following
the initial grants—will depend on its duties. If all it does is manage buildings then it will simply
raise money through lease or rental income. But if it has municipal functions like garbage
collection, policing, fire service, maintenance of parks in the financial area, then it would need to
tax the businesses in the financial area. These sorts of questions would need to be addressed by
the political authorities of the country. So also would be the issues of who makes the capital
grants to the FAC and to whom the FAC is accountable.
Enhancing Competitiveness: Microeconomic Incentives to Enterprises
The policy environment will affect the amounts and types of the services demanded from
the centre. The economic returns to the people and firms that operate in the centre will therefore
be affected by the policy environment. If these returns are low, people and firms that can earn
higher returns elsewhere will leave, until an appropriate stock is left, such that the marginal
returns to those who stay equals the returns they would earn elsewhere. In the long run,
therefore, the policy environment, by affecting the competiveness of the centre, will affect the
capacity. This capacity will have both quantity and quality dimensions. To make matters worse,
there could be a serious social cost consequence; the human capital developed within the host
country (again, say Nigeria) could actually flow out of the country. Therefore, the private
incentives to attract and retain high quality people and firms in the financial centre are extremely
important.
I have already addressed some incentive issues when discussing human capital above. I
also mentioned the overwhelming consensus that the quality of life matters. Hence, making the
geographical area in and around the financial centre attractive to live in will be a positive
incentive to enterprises. Later, I will briefly discuss governance issues, which also can affect the
structure and hence the behaviour of enterprises vis-à-vis the financial centre. In this section, I
16
want to briefly discuss issues of openness, taxation, administrative obstacles, and the legal
environment.
Openness
In order to be truly competitive in the international financial environment, the financial
centre will need strong firms—by definition, firms that can survive in open competitive markets.
In order to attract such firms and keep them, an overarching requirement is the maintenance of
an economic environment (markets, institutions, immigration, information flows, ideology, and
access to authorities) that is open.
An open environment will exhibit several characteristics. First, there will be fair and open
access rights to all to locate in and/or do business with the centre, irrespective of national
ownership of a firm. Hence, firms with 100 percent foreign ownership will be welcomed.
Especially in the early years of the international financial centre, such firms have the potential,
when properly screened using objective standards, of bringing badly needed expertise and
business connections to the centre. Second, ‘firewalls’ limiting the types of business to be
engaged in by the same firm/organization will not be too restrictive, that is, not out of line with
the leading financial centres of the world.10 Third, innovation will be encouraged, that is without
regulatory and other obstacles that are more stringent that those found in the leading financial
centres. Fourth, there will exist institutionalized procedures through which policymakers and
regulatory and supervisory authorities consult and elicit the opinions of financial services
providers before implementing new or revised rules, taxes and other costly obligations on the
financial centre markets, firms and people. The authorities must also demonstrate that they
seriously consider the views and analysis of the financial centre organizations before finalizing
their decisions. Fifth, there must be a high degree of freedom and flexibility allowed firms in
their day-to-day operations. Hence, they must be allowed capital mobility, currency
convertibility in an open exchange market, and implementation of human resource management
policies that enable them to accumulate the human capital they find optimal.
Taxation
There is corporate taxation; taxation of wages, salaries, interest, and dividends; taxation
on capital gains; and taxation of specific transactions. Then, of course, there can be all kinds of
10
In its argument urging the Japanese authorities to remove certain firewall restrictions, the IBA
Japan (IBA Japan, 2007, p. 15) argued as follows: “IBA financial conglomerate members
currently encounter the following problems due to the firewall restrictions in Japan; (1)
inefficiencies due to the overlapping of human resources, organizational structures, and systems;
(2) constraints on effective and efficient business management practices, including the
formulation and implementation of business strategies and risk management at the group level;
and (3) constraints on providing comprehensive financial services that would maximize customer
convenience.” Note that a financial conglomerate could, for example, conduct banking, securities
as well as other financial services business.
17
taxes in the form of fees which are not labeled as ‘taxes’. Rather they may be called registration
fees, stamp duties, transfer fees (such as when shares are transferred).
Governments in their tax policies are usually concerned with revenue, fairness, income
distribution, protection, and efficiency. In the context of a financial centre, it is useful for the
authorities to see the problem as one in which they are trying to promote exports (of financial
services), enable the financial centre to attract and keep talent, and attract foreign direct
investment to the centre. Hence, the taxation of the financial services must not do damage to the
competitiveness of the centre in all these dimensions. In addition, the bargaining power (that is,
the special nonpecuniary attractions and indirect pecuniary benefits) of operating in the centre
are not likely to be great, at least in the initial couple of decades. So there will be no rents to be
captured. This means that the solution to the tax problem is straightforward. The taxes mentioned
above cannot, in their total burden on the firms and the highly talented employees, be higher than
appropriate competitor centres. In fact, it would seem to me that the general burden of the
different taxes should be as favorable as the most favorable of the top 50 financial centres in the
world.
Similarly, if special incentives are granted to exports of any kind, there is no reason why
financial services exports should not be extended similar benefits, as appropriate.11 There would
need to be careful attention to certain details, though, since the firms and individuals in the
financial centre would most likely be providing services to domestic residents as well. Indeed,
the concept of what is an export may itself be difficult to define for certain transactions. For
instance, a domestic resident firm may use a firm in the financial centre to borrow in US dollars
from domestic and foreign residence. Hence, a simple approach is useful.
A general advice would be to look carefully at what others are doing and be as
competitive as possible with respect to the types and levels of taxation. Double taxation treaties,
for instance, as mentioned before, should be signed where useful. Many countries have also been
directly addressing certain specific taxes that are relevant in this area. One could benefit from
what those countries are doing and at worst match the most favorable ones, in order to be
competitive. For instance, the much discussed UK investment manager exemption should be
copied. The idea is that using a UK investment manager to carry out permitted transactions
should not obligate a nonresident to UK tax, when the nonresident has no other connection with
the UK. The transactions which must pass certain tests are covered in legislation (see HM
Revenue & Customs, 2007)12
11
A similar point has been made by Sanjeev Sanyal (2007) in the context of Mumbai.
There are three tests: the independent capacity test, the 20% test, and the customary rate test.
The independent capacity test specifies conditions under which the relationship between the UK
manager and the nonresident is considered independent. The 20% test requires that the
investment manager and persons connected with it, including connected charities, must not have
a beneficial entitlement to more than 20% of the nonresident’s chargeable profit arising from
12
18
In its attempt to examine the tax code to remove elements that would be discouraging to
the development of an international financial centre, a country like Nigeria may use the
opportunity to reform the whole tax system. A compelling reason may be that some taxes may
not be easy to remove or lower for the financial system without doing so for the whole economy.
A way around this is to make the centre an enclave (see later) which will allow it to enjoy special
tax privileges not enjoyed by firms, organizations and individuals outside the enclave.
Administrative barriers
There should be a special effort made to reduce administrative barriers to investment and
entry into the international financial centre, especially to foreign firms and individuals. In brief,
the barrage of licenses, approvals, permits, and other requirements should not unduly raise the
costs of setting up and doing business in the financial centre. A one-stop agency or sub-division
could, for instance, be set up for the centre within the jurisdiction of the Financial Area
Corporation (FAC). This agency would handle all the administrative requirements for the initial
set up. But it should also be ready to assist in special needs during operations. For example,
problems with utility companies, the tax authorities and the immigration office could be greatly
alleviated by such an agency. The agency, of course, would serve all the firms and organizations
in the financial centre not only those with foreign ownership.
Legal environment
The law, the courts, and the police would all need to be reviewed in light of the
requirements to make the centre competitive. It would be advisable to do a formal review of the
legal system in light of the experience of the top international financial centres to ensure that the
legal framework is adequate. At the same time, there would be need to consider whether the
regular courts are equal to the task of enforcement, mainly in light of the normal efficiency with
which that system operates. The evidence on this score must be clear, since the courts have been
handling cases in which the financial services sector has been involved. If the evidence indicates
that the court system is not up to the task, especially in terms of speed and decisiveness, then
thought should be given to creating a special court system for the financial centre. This, again,
would be logically easy to defend if an enclave approach is taken to the financial centre. The
issue of jurisdiction of the court would then need a lot of thought, but the problem is still
solvable.
transactions carried out through the investment manager. The customary rate test specifies that
the UK investment manager “must receive remuneration at a rate that is not less than customary
for the services.”
19
Enhancing Competiveness: General Governance
The overarching policy environment of the country in which a financial centre is located
greatly affects the rating of the financial centre among peers and among regulatory authorities in
other countries of the world. Hence, given the abundance of alternatives, strong firms and highly
talented people may not find it good for their reputation to consider working in, or having
business relations with, a centre located in a country that is considered poorly governed. In
addition, the governance of a country has immediate wealth effects on the owners and employees
of firms and organizations that locate, or do business with firms and persons, in a financial centre
in that country. Of particular importance are three components of the national governance
environment, namely, macroeconomic policies, socio-political governance, and the degree of
compliance with relevant international standards and codes.
Macroeconomic policies
Macroeconomic policies are important for obvious reasons. They will affect the expected
real rate of return on earnings by the financial centre’s participants; the expected real value of
investments and other assets in the centre, over time; and the ability to transfer assets and
earnings in the centre from the domestic economy to another country. Thus a financial centre
benefits from low inflation, stable exchange rates, capital mobility, and convertibility of the
domestic currency or at least an absence of exchange controls. Attaining these outcomes is
important for the competiveness of the centre. But so are the means by which these targets are
reached.
The manner in which the central bank uses its instruments to achieve its objectives of low
inflation and financial system stability will affect competitiveness of the centre. Among
potentially harmful instruments are reserve and liquidity requirements; these should not be used
in ways that tax banks or seriously reduce the flexibility of their reserves. Central bank fees and
other regulations for use of payment systems facilities it controls should also be no more onerous
than those in other leading centres.
Capital mobility will pose challenges. A country cannot really be a big player in the
international centre business if it has stringent capital controls—inwards and outwards. At the
same time, capital mobility complicates risk management for individual financial firms and
makes macroeconomic management more challenging.13 Assuming that other governance
aspects (to be discussed below) are consistently well taken care of, the basic strategy is two-fold.
First, is to put in a place a macroeconomic policy framework that ensures low inflation and
exchange rate stability. The second is to ensure that the financial system is sound, most
importantly by establishing a prudential framework appropriately designed and tailored to meet
the challenge. An important quality of such a prudential system will be that: (1) there will be
clear understanding of risks by those who are the bearers of the risks; (2) the responsibility for
13
See, e.g., the discussion in Sundararajan, Ariyoshi, and Ötker-Robe (2002).
20
managing risks in financial transactions are clearly assigned; and (3) there are appropriate
incentives to those responsible for managing risks to do so in a socially efficient way.14
No matter how sound the underlying macroeconomic policy and prudential frameworks,
it is doubtful that the probability of a financial crisis can be reduced to zero. Hence, as part of the
public policy framework, the authorities will be well advised to have measures in place to
address crises when they do arise. Since the size of the financial system relative to GDP is bound
to increase with the development of the international financial centre, financial crises can
become particularly disruptive. Hence, having a policy response fairly well thought out in
advance will be even more important. Liquidity support (typically from the central bank) and
fiscal support from the government are the overarching elements of such a strategy, coordinated
with emergency measures by the regulatory and supervisory authorities.15
Socio-political governance
One of the problems that policymakers will have to address is that a financial centre
being located in Africa might face having to effectively pay a premium to attract, to the centre,
strong firms, highly talented people and business, because of uncertainties related to political
instability and governance. Investors will worry about corruption, government efficiency,
maintenance of rule of law, and sustainability of policies. Strategies must therefore be developed
to build credibility for political stability, low level of corruption and good governance. In a
sense, building credibility for political stability is easy. Evidence on political stability is much
easier to observe than evidence on corruption and good governance.
When assessing countries on corruption and good socio-political governance on the
whole, many analysts will resort to surveys and indices purported to measure, for instance, risk
of expropriation, general governance indicators, and constraints on the executive.16 Analysts
14
See Johnson (2002b).
See Välilä (2002) for a discussion of the basic analytical issues involved in considering fiscal
support.
16
Risk of expropriation comprises survey indicators of institutional quality from the
International Country Risk Guide. The data include subjective assessments of risk for
international investors along such dimensions as law and order, bureaucratic quality, political
corruption, risk of expropriation by the government, risk of government contract repudiation, and
overall maintenance of the rule of law. The governance indicators of the World Bank currently
comprise six dimensions: voice and accountability; political stability and absence of violence;
government effectiveness; regulatory quality; rule of law; and control of corruption. The
constraints on the executive measure comes from Polity IV data set (Polity IV Project). The aim
is to measure directly the limits of executive power. Constraints on the executive refer to the
extent of institutionalized constraints on the decision-making powers of chief executives. The
15
21
will also look at the global corruption reports of Transparency International. It would seem
sensible for the authorities of an African country wishing to develop an international financial
centre to treat such surveys, indices and reports with the same seriousness as they would a credit
rating report. In other words, as a first leg of a response strategy the authorities should try and
understand what go into these reports and what they can do to improve their ratings. This will
help them design an appropriate plan.
A second leg of a strategy is, of course, to design a plan to improve general governance
—with clear objectives and instruments—make it transparent, and then implement it resolutely.
In designing the plan the authorities should remember that they will need to worry about
sustainability during implementation. For this reason, especially, particular attention should be
paid to the deliberative process in putting the programme together and the legal and
organizational framework involved.17
So an African country with ambitions to have an international financial centre should try
to raise its governance ratings. Johannesburg is not perfect but it is listed among the top 50
financial centres in the world (Table 1), because the governance reputation of South Africa is
sufficiently reasonable not to seriously neutralize the other favorable characteristics of the
Johannesburg financial centre.
Compliance with appropriate international standards and codes
One of the costs of globalization is that countries are affected, through trade and financial
flows, by what other countries are doing. Hence, developments that adversely affect financial
sector stability and efficiency in one country can easily spill over into other countries. In
addition, countries are genuinely interested in adopting practices that have improved risk
management, efficiency and governance in other countries.18 For these reasons, countries have
been cooperating in various venues and organizational settings to agree on standards and codes
in a number of areas, which would be institutionalized in countries worldwide, thereby reducing
the cost of enhanced cooperation in financial services, among other economic activities.
The standards and codes are broad norms legitimated by the international community of
market economies. They have evolved from experience and widely accepted theory; arrived at by
agreement (via discussion among free agents); and are expected to be implemented by national
authorities, without a central world authority, because such implementation is in the self-interest
concern is with the checks and balances between and among the various parties in the decision
making process.
17
See the discussion in Johnson (2007), pp. 155-161.
In Ghana, for example, Asembri (1996) was proud of the high standards for listing and trading
that the young Stock Exchange of Ghana had set as confirmed by a visiting team from the
Commonwealth Secretariat in October 1992.
18
22
of the countries. The self-interest of countries emanates from two basic forces: the quest for
domestic financial stability and development, and the desire to participate in the increasingly
global and integrated system of trade and financial markets.19
In trying to develop an international financial centre, a country, then, must clearly
demonstrate that it is resolutely implementing relevant norms—the standards and codes.
Otherwise, as stated above, the rating of the centre, among peers and by regulators in other
countries, will tend to be poor. In that case, the centre will not be able to participate in the
exportation of financial services. Important standards and codes that would need to be
implemented to achieve credibility are listed in Table 2.
It will first and foremost be useful to develop domestic expertise to implement the full
compliance process, starting with a self assessment of the state of compliance. Even with such
expertise, a developing country, in particular, will still find that, for credibility, it will have to
invite peer review by experts from the leading financial centre countries of the world and/or from
appropriate international organizations, in essence, to validate the country’s own self-assessment
and implementation of compliance.
Regulation, Supervision and Oversight of Centre
The regulatory environment affects the competitiveness of a financial centre. High
quality regulation, supervision and oversight will not only prevent weak markets and firms,
which among other things take excessive risks. A high quality regulatory environment will also
not be so overbearing as to frustrate innovation in financial services. Hence, both the standing of
firms operating in the centre and the willingness of strong firms to come to the centre will be
affected by the quality of regulation and supervision.
There are at least three major consequences. First, a high quality regulatory environment
will have a positive effect on cooperation among the firms in the centre, since all the firms will
trust each other more than if the regulatory standards were suspect; the clustering gains from
location in the centre will accordingly be greater. Second, since firms outside the centre will
look favorably on building relationships with the firms and markets in the centre, the possibilities
for accessing value of global chains (see below) will be greater for all those in the centre. Third,
authorities in other countries will be less prone to imposing tight regulatory standards on
dealings of their local firms and markets with firms and markets of the centre; the cost of
association with other centres will be thereby lowered.
19
See Johnson (2002), who makes these points in the case of the compliance with the Core
Principles for Systemically Important Payment Systems.
23
Despite, the publicity accorded the recent communiqué of the G-20 meeting in London,20
the basic principles guiding regulatory frameworks for some time now are not likely to change.
The vigilance in the application of those principles might intensify and, perhaps, certain markets
and organizations which have been spared close supervision might now be subjected to scrutiny.
For example, the G-20 members in the communiqué agree: “to extend regulatory oversight and
registration to Credit Rating Agencies to ensure they meet the international code of good
practice, particularly to prevent unacceptable conflicts of interest.” Certain systemically
important hedge funds will also be subjected to regulation and oversight. Moreover, capital
requirements of financial organizations will most likely be re-examined and perhaps tightened,
which means raising minimum capital in absolute terms or, at least, in relation to (risk-weighted)
assets.
Approaches to regulation
In general, most fundamentally, the regulatory environment must ensure that financial
services firms are able to understand and to measure the risks they take from any given exposure,
to find ways to contain exposure to tolerable and profitable levels, and to protect the solvency of
the organization from adverse developments, given exposure. There has been a continuing debate
over the role of the market as opposed to official regulators in ensuring optimal risk management
by private firms, and the relative importance of oversight as opposed to regulation. An important
objective is to have financial firms institute appropriate internal processes to manage financial
risks in ways that are socially optimal. This debate will continue and indeed heightened because
of the recent G-20 communiqué. The reality is that the issues are complicated and financial
markets and instruments are becoming more varied and complex as well.
From the perspective of the firm, one can visualize two stages in risk controls: (1)
identifying, understanding, and measuring the risks; and (2) setting limits and controls to meet
the risk-return objectives of the firm. Many different types of risks are identified in the literature
the most important ones being liquidity, credit, interest rate, market, foreign exchange,
operational, sovereign, legal, and fraud risks. Often analysts would also add off-balance sheet
risk to address risk related to transactions such as loan commitment, letters of credit,
commitments to buy and sell securities before issue, and of course forwards, futures, options, and
swaps. But the risks involved in these transactions can usually be classified as one or more of
those mentioned in the main list of risks, even if, for example, one prefers to talk about
"contingent credit risk" or "contingent liquidity risk," etc. Moreover, many off balance-sheet
financial instrumentsin particular, forwards, futures, options, and swapsare actually used by
sophisticated firms as tools to manage risks such as interest rate, foreign exchange, or liquidity.
Similarly, analysts often speak of settlement risks or insolvency risks. But, again, these usually
flow from one or more of the above, especially credit and liquidity, although in payment systems
the concept of settlement risk is a valuable one.
20
G-20 (April 2009).
24
There are a number of reasons why development of clear risk management techniques
has become more important for financial firms in recent years. Perhaps primary among these is
the complexity of financial markets and instruments, which enable firms to rationally strive for
greater profits if they can manage the increasing risks involved. But this same financial
environment, coupled with serious incidences of bankruptcies of clients and failures of financial
organizations, has increased the vigilance of public authorities, leading them, often, to tighten
regulations, strengthen supervision and oversight, and to develop worldwide standards to prevent
regulatory arbitrage and cross-border transmission of financial crises.
As it turns out, dissatisfaction with some of the regulatory initiatives has been an
additional impetus motivating financial firms to develop techniques and approaches that would
be superior (from a perspective of firms' risk-return profiles) to the regulatory standardized
approaches. The intention is to convince the authorities to permit the firms to implement their
own internal processes, with only oversight by the authorities. It is fair to say that no other
regulatory move was more energizing to the financial firms than the BIS accord on risk-weighted
capital requirements. The "one size fits all" policy, as the firms saw it, was damaging to their
optimal portfolio management and hence profits. For example, banks believe that the credit risk
associated with a portfolio would be affected by the degree of portfolio diversification and the
credit quality of the counterparties. Thus, it is difficult to come up with capital requirements
without detailed analysis of a bank's particular situation. There has, therefore, been serious
debate on when and how to use internal models as opposed to the standardized approach; on
when the market is a more socially optimal regulator of governance behavior than public
authorities; and on how one goes about deciding an optimal regulatory regime and strategy.
As regards the issue of use of internal processes, the prevalent view would seem to be,
first of all, that banks (and where relevant other financial organizations as well) must have
adequate resources (analytical capacity, database, and infrastructure) if they want to develop and
maintain their own internal models and processes that regulators can trust, for example, in setting
capital requirements. Financial firms could then have the satisfaction of being able to tailor
capital requirements to the actual risks (including the effects of diversification and credit quality
of counterparties) they face in their activities. Second, it is the prevalent view that backtesting of
the models used in internal processes must take place and regulators must be informed of the
results. In the trading area (and hence for market risk) the ideal seems to be daily backtesting. 21
Third, the robustness of the model should be under constant review. Stress testing is thus usually
recommended. This involves seeing how the model performs under different plausible scenarios.
The case for the market is really a case for flexibility and the view that, after all, financial
organizations have an incentive to survive. From this perspective, market discipline can be
effective in promoting good governance in financial firms. Clearly, market discipline is most
effective when there is full and accurate information disclosure and transparency. In addition, the
21
See, e.g., Crouhy, Galai, and Mark (1998).
25
more sophisticated the pool of those who could monitor the management of financial
firmssuch as owners, depositors, customers, and rating agenciesthe more effective one
would expect the forces of market discipline to be.22
Even with substantial market discipline, the case for regulation is, first of all, that from a
micro point of view the actions of financial organizations could have certain adverse effects on
third parties for which it is very difficult to structure property rights sufficiently to ensure
internalization of costs and benefits. Secondly, from a macro point of view, the argument is that
the soundness of the financial system is essential for systemic stability and economic growth.
This concern for the impact of individual players on financial stability could, in addition to
regulation and supervision, also lead to a too-big-to-fail policymaking, which could be suboptimal in equilibrium because of incentive-conflicted behavior of regulators; there may be
reputational and career penalties for regulators who confront bank insolvencies in a timely way.23
As regards optimal regulatory regime and strategy, the general concern of public policy
is having in place an appropriate regulatory regime and a consistent regulatory strategy to
promote safety, efficiency, and stability in the financial system. Such a regime, among other
things, will balance regulatory rules, supervisory review, and market discipline. One natural
approach is to begin with a view of the components of a regulatory regime and to think of them
as inputs to be combined in an optimal way to design and implement an appropriate regulatory
strategy.
This is essentially David Llewellyn’s approach in a fairly recent paper.24 He argues that
there are seven major components of a regulatory regime and the objective of public policy
should be to optimally combine these components to design and implement an appropriate
regulatory strategy. The seven components are: (1) rules established by regulatory agencies; (2)
monitoring and supervision by official agencies; (3) the incentive structures faced by regulatory
agencies, consumers, and banks; (4) market discipline and monitoring; (5) intervention
arrangements in the event of compliance failures; (6) corporate governance arrangements in
financial firms; and (7) the disciplining and accountability arrangements applied to regulatory
agencies. Llewellyn stresses the complementarity of the seven components and argues that the
optimum mix would change over time as market conditions and compliance culture change.
Within the regulatory regime, trade-offs emerge at two levels. First, in terms of
regulatory strategy, a choice must be made about the balance of the various components and the
relative weights. Second, there are trade-offs relating to how the components of the regime may
be causally related. For instance, while regulation may be viewed as a response to market
failures, weak market discipline, and inadequate corporate governance arrangements, causation
may also operate in the other direction so that these other mechanisms weaken in tandem with
increasing emphasis on regulation.
22
See also Llewellyn (2002) on this point.
See Kane (2002).
24
Llewellyn (2002).
23
26
Llewellyn argues that several problems emerge with a highly prescriptive approach to
regulation. For example, the risks under consideration may be too complex for simple rules;
prescriptive rules may prove inflexible and not sufficiently responsive to market conditions; and
the rules may have perverse effects in that they are regarded as actual rather than minimum
standards. He stresses that a central issue is the extent to which regulation differentiates between
different banks according to their risk characteristics and their risk analysis, management, and
control systems.
With respect to incentive structures, Llewellyn argues that a central role for regulation is
to create appropriate incentives within regulated firms so that the incentives faced by decision
makers are consistent with financial stability. At the same time, regulation should refrain from
blunting the incentives of other agents (such as rating agencies, depositors, shareholders, and
debt-holders) that have a disciplining role vis-à-vis banks.
An important theme of Llewellyn is that regulation can never be an alternative to market
discipline. On the contrary, regulation needs to reinforce, not replace, market discipline within
the regime.
On the question of intervention by regulatory agencies in the event of either some form of
compliance failure within a regulated firm, or when financial distress occurs with banks, he
argues in favor of a rules-based approach to intervention rather than discretion.
I believe that most experts agree that regulators should not rely solely on rules, as market
discipline is often at least as important as—and sometimes even more so than—regulation. I
have already noted above the conditions under which market discipline works effectively. On the
other side of the coin experts generally agree that regulators must be made accountable so that
their decisionmaking truly reflects the public interest. Hence, the incentive structure within
regulatory agencies is very important.
In sum, how one determines, in practice, the balance between regulation, on the one
hand, and market discipline, on the other, will be a major concern for the authorities in their
approach to supervision and regulation of the financial centre. The relative weights will indeed
depend on the available expertise within financial firms and within regulatory agencies, the
nature of the risks faced by the financial firms in the centre, and the relative sophistication and
efficiency of the pool of others who could monitor the management of financial firmssuch as
owners, depositors, customers, and rating agencies.
Corporate governance
If one starts with the realization that the financial organizations under consideration will
be operating in a developing country and that failures in the financial system have systemic
economic effects, it is difficult to be concerned with only shareholder interests when looking at
corporate governance of financial firms and markets. Indeed, even extending the concern to
workers and other participants in the financial system is not enough.
27
These days, most experts in the field of corporate governance start from the view that a
corporation is “a complex web or ‘nexus’ of contractual relationships among the various
claimants to the cash flow of the enterprise.”25 In the context of a developing country and
financial services firms, the duty of managers and directors should be broader than maximizing
the value of the firm for shareholders. Loyalty of the organization’ officers to shareholders
should not have external economies for the community for which those shareholders do not pay.
The beneficiaries of directors’ fiduciary duties (in particular, of care and loyalty) in the case of
banks and other financial organizations should extend beyond shareholders. 26
The requirement of fiduciary duties of senior officers of financial services firms,
organizations and markets should, then, hold the officers liable not so much for mistakes of
judgment or wrong decisions but rather for actions and inactions that manifest fraud, illegality,
gross negligence, and conflicts of interests or wrong decisions not made in good faith. It is not
only shareholders that should take action to enforce the fiduciary rules but also the supervisory
authorities. In that regard, internal supervision of financial services firms, information reporting
systems of the firms, decisionmaking processes, and research facilities and standards of the
organization, will all be matters of supervision by the authorities.
A clear approach is thus necessary to ensure that, in exercising their fiduciary duties to
their shareholders, financial services firms and markets in the proposed financial centre do not
act in ways that threaten the stability of the economy or reduce confidence in the financial
system at large. I believe that in fact such an approach is implicit in the best supervisory regimes
around the world. Such regimes contain rules, procedures and processes designed to ensure the
soundness of financial firms, including their ability to withstand shocks of reasonable
probabilities. The fiduciary duties to shareholders are conditional on meeting these supervisory
standards.
Organizational structure: unified or not
It is obvious that, from an organizational perspective, a regulatory/ supervisory agency
must have clear objectives, autonomy, and expertise to do its job, as well as be accountable to
government, parliament, financial sector/industry, and the populace at large. Autonomy includes
budgetary and instrument autonomy. Instrument autonomy includes authority and power to
enforce its rules and to sanction for noncompliance, as well as immunity from prosecution of its
officials for official actions taken in the line of duty.
Macey and O’Hara (2003).
Macey and O’Hara (2003) take a view that is somewhat along this line when discussing the
corporate governance of banks. They call for “bank directors to expand the scope of their
fiduciary duties beyond shareholders to include creditors.” Hence they “call on bank directors to
take solvency risk explicitly and systematically into account when making decisions, or else face
personal liability for failure to do so.”
25
26
28
Most experts believe that a supervisory/regulatory agency outside the central bank or the
government must be funded by levy on the regulated firms and markets, rather than by
government. South Africa, for instance, has a Financial Services Board (FSB) that supervises
nonbank financial services; the FSB is financed by the financial services industry itself, with no
contribution from government. The FSA of UK also does not receive any funding from
government; it charges fees (which it classifies as periodic, application, and special project fees)
to firms they regulate and to other bodies (such as ‘recognised investment exchanges,’ according
to the FSA).
An important issue in trying to develop an international financial centre is whether there
should be a unified supervisory agency as in Australia, Canada, Denmark, Iceland, Japan,
Norway, Korea, Singapore, Sweden, and the UK, for example, or instead one should adopt
various models of splintered agency arrangements as in the majority of countries.27 My own
view is that, for a country like Nigeria, a unified approach would enable it to speed up its
development of an international financial centre, working in the context of the other
organizational elements mentioned above, especially the IFSDC.
A single, unified agency would have several advantages which are important for an
accelerated development of a financial centre. First, there would be efficiency gains—economies
of scale in regulatory activity—in the form of savings on administration, infrastructure, data
collection and management; absence of a need for modalities to share information and establish
cooperative committees and the like with other agencies; efficient use of highly trained and
experienced experts in short supply coupled with the ability to pay them well and hence to retain
them in the public sector; ability to finance continuous training of staff in-house or externally;
and externalities in knowledge and information sharing among staff of varied expertise in close
proximity to each other (clustering effect). Second, it makes sense to encourage financial
conglomerates28 and, for these, unified supervision makes sense; overall risk-assessment for the
whole enterprise is important, because problems in one area will spill over to other areas. Third,
products across sub-sectors are becoming more and more similar and hence directly competitive;
regulatory neutrality can be better attained with unified supervision. Fourth, there will be little or
no risk of financial services falling in-between the cracks due to lack of clarity of supervision
authority in a dynamic financial services environment, foreign regulators will have to deal with
only one supervisory agency, and the accountability problem is simplified as everyone will know
the agency that is responsible for the supervision of the financial services industry and hence for
any lapse or mistake. Finally, the gains from clustering and accessing global value chains will be
better appreciated and hence facilitated by a single unified regulator.
27
See, e.g., Abrams and Taylor (2000).
Fear of conflict of interest, insider trading and domination and abuse are, of course, risks that
should be addressed in this regard. Conglomerates are also more complex to supervise than
financial firms operating in only one subsector, because the risks, consumer protection, creditor
protection, and corporate governance issues differ in significant details across subsectors.
28
29
There are, of course, certain risks and challenges that will confront a unified agency. But
the experience of those agencies, particularly in the case of the UK’s Financial Services
Authority which deals with a global financial centre, demonstrates that the challenge can be
comfortably met. First of all, there will be a challenge to balance the multiple objectives of a
unified supervisory agency. But surely, these objectives would all revolve around risk
management, efficiency, consumer protection, and corporate governance issues. Second, possible
diseconomies may arise. One frequently mentioned is that politicians and policymakers may be
tempted to assign the unified agency functions that are outside it core domain. Another is that the
unified agency may become somewhat inefficient due to its monopoly status. But clearly the
direct solutions to these problems are not difficult to find. Third, it may be challenging to create
a single agency culture, since the mindset of supervisors of different types of specialized
financial firms and markets often appear to differ. Still, countries with unified agencies in place
have been well aware of this problem and have found solutions for it.
The role of the central bank
Even where there is unified supervision of financial services, by an agency separate from
the central bank, in the context of trying to rapidly build an international financial centre, in a
developing country like Nigeria, the central bank must ensure that it has up-to-date prudential
information on the banks.
The central bank needs up-to-date prudential information on the banks in connection with
its conduct of monetary policy, its foreign exchange rate policy and management, and its lenderof-last-resort function and other elements of its role in the payment system. In each of these areas
of activity, banks will be the primary, and sometimes the only, set of financial services firms
with which the central bank will be directly dealing. The central bank will need to have adequate
information on the state of banks and the authority to request information (including via regular
reporting) from individual banks.
Apart from direct contacts with banks, the central bank should in any event maintain
close contact with the financial services supervisor. That way, the central bank can obtain
additional insight from the financial services supervisor on the state of particular banks, as
necessary.
Promoting the Centre
There are a number of ways that the authorities and the International Financial Services
Development Council (IFSDC) and the Financial Area Corporation (FAC) can directly promote
the financial centre. In particular, the methods would comprise assisting the centre to access
global value chains, devising selective intervention policies that favour the centre firms, and
designing special enclave privileges for the centre.
30
Accessing Global Value Chains
On can visualize the production process of some commodity or service as involving a
‘chain’ of activities beginning with the conceptualization of the product and ending with
bringing the product to market. At each stage ‘value’ is added to the chain. In addition, the chain
can be cross-border. From such a perspective has emerged the concept of a ‘global value chain.’
A major objective of those at the lower end of a chain is upgrading. Four types of
upgrading have been identified in the literature and listed in the order they fall in the usual
upgrading path: process upgrading, product upgrading, functional upgrading, and chain
upgrading. Process upgrading involves increasing the efficiency of internal processes, making
the firm more competitive in making existing products. Product upgrading involves introducing
new products or improving old products. Functional upgrading involves changing the mix of
activities conducted within the firm, or moving from low-return activities to high-return
activities. Finally, chain upgrading occurs when the firm moves to a new and more profitable
chain.29 In the modern world, standardized products and processes, electronic linkages and
internet connections facilitate global chain relationships.
One of the great advantages of accessing global value chains is the benefit of learning
from others and hence the possibility of upgrading faster than otherwise. In this process,
important are standards and the ability to meet buyer specifications. Indeed, formal
benchmarking—measuring firm or cluster performance against specific product quality or
productivity targets—is widely used in value chains. The lead firms in global value chains often
will provide the benchmarks for their suppliers. A standard is this context would be a rule,
normally for measuring quality or other aspects of production and performance in general.
In the international financial centre business we see both major and minor value chain
relationships all the time. For instance, early in its development, Singapore International
Monetary Exchange (SIMEX) established a relationship with the Chicago Mercantile Exchange,
which was valuable to both. 30 Firms in Dublin, Hamilton, and the Channel Islands, have links
with firms in the City of London in niches were the first three are important. Noteworthy is that,
to benefit from such global value chain arrangements, a new or developing international financial
centre must not only be attractive to other financial firms and markets abroad, but its governance
and regulatory environment must also be respected by regulatory authorities of the leading
financial centres.
29
See Gereffi and Korzeniewicz (1994) and Oyelaran-Oyeyinka and McCormick(2007)
See Lee Kuan Yew (2000), p. 77. As Lee Kuan Yew put it, they “convinced the CME to adopt
a mutual offset system with SIMEX that enabled round-the-clock trading. This revolutionary
concept allowed an investor to establish a position at CME in Chicago and close off at SIMEX in
Singapore, and vice versa, without paying additional margins. The U.S. Commodity Futures
Trading Commission approved this arrangement.”
30
31
In addition, to facilitate such linkages, the authorities of the developing financial centre
can be proactive in making known their openness to joint ventures, 100 percent foreign
ownership of firms, and to allowing foreign firms to participate in certain “sensitive” activities in
the local financial centre—such as brokerage, underwriting, primary dealership in securities
(especially government securities), and membership in the stock exchange. Moreover, the
authorities and the IFSDC can assist the developing centre’s firms in making contacts and
structuring relationships with firms and markets abroad in order to motivate the global chains.
Other Selective Intervention Policies
There are other types of selective intervention policies that can promote the centre by
reducing operating costs of, and increasing demand for, the centre’s services. First, the
authorities can assist the centre with market research, providing information on new products and
other knowledge inputs as well as potential clients both domestically and abroad. Second, the
authorities could assist in making available, to the firms, critical infrastructure and public
services at lower costs than otherwise; for instance, leases, rentals, and user taxes could all be
made lower than full-cost pricing would dictate. Third, the authorities can assist with finance,
even if as credit rather than subsidies, for instance, to purchase equipment, train personnel or
implement innovation as mentioned already. Fourth, the authorities could make a special effort
to patronize the centre via demand for it services (fund management, for instance).
Possible enclave privileges
It may be very difficult for a new financial centre in a country to make inroads into the
global international financial centre business, without granting special enclave privileges to the
centre, mainly because of the difficulties of building credibility with respect to microeconomic
incentives and socio-political governance. As stated before, also, in the area of infrastructure and
public services having a Financial Area Corporation (FAC) to attend to some of the tasks could
be efficient and effective. For an enclave approach, in addition, special policies, practices, and
procedures would be designed for the financial centre in the areas of taxation, administrative
barriers, and the legal environment discussed earlier. Dubai is a case in point where this strategy
has worked.31
Conclusion
In this paper, I argue that the geographical area in which an international financial centre
is located must be attractive as a place where people want to live, work, and visit. In developing
such an international financial centre, a country can set up an International Financial Service
Development Council to help foster cooperation among the financial services firms and markets,
31
Sanyal (2007) also suggests a “custom-built” enclave for Mumbai financial centre.
32
the government, the central bank and the regulatory authorities. I outline a strategy for
developing such a centre, which involves the following: (1) conceptualizing a financial centre as
a cluster; (2) finding a niche for entry at the international level; (3) enhancing competitiveness by
building capacity, structuring incentives, and improving the quality of the national governance
environment; (4) putting in place high quality financial services supervision and regulation; and
(5) promoting the centre by assisting it to access global value chains, implementing other
selective intervention policies, and granting it some enclave privileges.
Approaching the problem as trying to develop a cluster will encourage focusing the
strategy on exploiting the collective efficiency advantages of clustering, namely fostering joint
action and experiencing net positive externalities. The developers should find a niche for entry
into the international arena, in terms of clientele, products and providers. The point is that aiming
to cover the whole world in all financial services would not be efficient. In many cases there may
be huge costs with little or no benefits. A financial centre in Nigeria, for instance, can find a
niche in Africa beginning with the ECOWAS countries. The clientele would include
governments, public enterprises, financial firms and markets, private nonfinancial businesses,
foreign companies with operations in Africa, and Africans in the Diaspora. When it comes to the
products and providers, all the major categories of financial services and major providers of such
services can be attracted to the centre. The specific products would then be left to markets forces,
including the ingenuity of the suppliers. Thus services would include: (1) foreign exchange
services; (2) loan syndication; (3) stock and bond issues in local and foreign-denominated
currencies; (4) fund management of various sorts; (5) money management; (6) mortgage; (7)
insurance; and (8) monitoring and rating services on firms, management, individuals,
governments and various kinds of securities and instruments. The providers, as a minimum,
would be banks, a stock market, insurance companies, and rating organizations of various kinds.
These highly diversified organizations can be supplemented by specialist organizations, such as
mutual funds, investment trusts, leasing companies, factoring companies, credit rating agencies,
professional service consultancies and research and risk analysis service firms. Futures and
options exchanges as well as commodity exchanges could follow later, if economically efficient
to do so. The idea is to encourage the specialist firms and organizations to emerge or locate from
outside to fill any important niche that would strengthen the cluster.
Capacity of the financial centre is built by strengthening the institutions, organizations
and mechanisms in the country to support innovation in financial services; investing in human
capital beneficial to the provision of financial services; raising financial capability of citizens,
that is, the knowledge, skills and motivation of the population to manage their finances; and
putting in place appropriate physical and technological infrastructure. On infrastructure, in
particular, I argue that the effectiveness and efficiency of the intended public sector contribution
could be enhanced if a dedicated authority, a Financial Area Corporation (FAC), is created to
provide some of the requirements of the financial centre geographical area (cluster). The FAC
could be given land and other capital to build and manage certain office space and perform any
33
other functions that can be devolved to it with the agreement of the national and local authorities.
The way the FAC finances itself—following the initial money capital and land grants—will
depend on its duties.
Structuring microeconomic incentives involves creating an open environment; keeping
taxation at rates similar to those of competitors; keeping administrative barriers to investment
and entry minimal; and having a legal environment that is effective and efficient in its operation
and does not result in costs to firms and individuals of doing business in the centre higher than
the costs for other competing centres. Openness, in particular, means that there is fair and open
access to operate in the centre; the types of business to be conducted by the same organization is
not unduly restricted; innovation is encouraged; the authorities do not impose or modify rules
without consultation with financial firms of the centre; and there is freedom and flexibility
allowed firms in their day-to-day operations.
The national governance environment has to do with macroeconomic policies, sociopolitical governance, and compliance with international standards and codes relevant for
financial sector efficiency and stability. The most relevant standards and codes are listed in Table
2. As regards macroeconomic stability, the attractiveness of the centre will benefit from low
inflation, stable exchange rates, capital mobility and convertibility of the domestic currency or
absence of exchange controls. With respect to socio-political governance, I argue that the
authorities of the country trying to develop an international financial centre should try to improve
its ratings in surveys and indices of risk of expropriation, general governance, constraints on the
executive and corruption. The authorities should design a plan to improve general governance —
with clear objectives and instruments—make it transparent, and implement it resolutely.
The discussion on regulation, supervision and oversight cover approaches to regulation,
corporate governance, the organizational structure for regulation and supervision, and the role of
the central bank. I argue that, most fundamentally, the regulatory environment must ensure that
financial firms are able to understand and to measure the risks they take from any given
exposure, to find ways to contain exposure to tolerable and profitable levels, and to protect the
solvency of the organization from adverse developments, given exposure. Regarding the balance
between regulation, on the one hand, and market discipline, on the other, I conclude that the
relative weights will depend greatly on the available expertise within financial firms and within
regulatory agencies, the nature of the risks faced by the financial firms in the financial centre,
and the relative sophistication and efficiency of the pool of others who could monitor the
management of financial firmssuch as owners, depositors, customers, and rating agencies.
On corporate governance, I argue that in the context of a developing country and
financial services firms, the duty of managers and directors should be broader than maximizing
the value of the firm for shareholders. Loyalty of the organization’ officers to shareholders
should not have external economies for the community for which those shareholders do not pay.
In exercising their fiduciary duties to their shareholders, financial services firms and markets
34
should not act in ways that threaten the stability of the economy or reduce confidence in the
financial system at large.
On organizational structure, I argue that, for a country like Nigeria, a unified approach
would enable it to speed up its development of an international financial centre, working in the
context of the other organizational elements mentioned above, especially the IFSDC. My
argument is on grounds of efficiency—economies of scale in regulatory activity; the benefit of
encouraging financial conglomerates for which unified supervision makes sense; the fact that
products across sub-sectors are becoming more similar and hence directly competitive; that there
will be little or no risk of financial services falling in-between the cracks; that the gains from
clustering and accessing global value chains will be better appreciated and hence facilitated by a
single unified regulator; that foreign regulators also will have to deal with only one supervisory
agency; and that the accountability problem is simplified. I argue that the risks and challenges
that will confront a unified agency have been met by countries with unified agencies, including
most notably the UK which has a global financial centre.
Even where there is unified supervision of financial services, by an agency separate from
the central bank, the central bank will need up-to-date prudential information on the banks in
connection with its lender- of-last-resort function, its role in the payment system, its foreign
exchange rate policy and management, and even more importantly because of its primary
responsibility, namely, the conduct of monetary policy.
The authorities and the International Financial Services Development Council (IFSDC)
and the Financial Area Corporation (FAC) can directly promote the financial centre. In
particular, I mention that they can help the centre access global value chains, devise selective
intervention policies towards the centre, and design special enclave privileges for the centre. The
authorities will foster global value chain arrangements for the centre firms via policies that make
the centre firms attractive to other financial firms and markets abroad and by the quality of the
governance and regulatory environment. In addition,, the authorities can be proactive in making
known their openness to joint ventures, 100 percent foreign ownership of firms, and to allowing
foreign firms to participate in all activities in the local financial centre. Moreover, the authorities
and the IFSDC can assist the centre’s firms in making contacts with firms and markets abroad.
Selective intervention policies to promote the centre can include assisting the centre with
market research, and information on new products and other knowledge inputs; making available
critical infrastructure and public services at lower costs, than otherwise; by assisting with
finance; and by making a special effort to patronize the centre via demand for it services.
I argue, finally, that it may be rational for a proposed international financial centre in an African
country, like Nigeria, to be granted special enclave privileges, mainly because of the difficulties
of building credibility with respect to microeconomic incentives and socio-political governance.
35
I that case, special policies, practices, and procedures can be designed for the financial centre,
particularly in the areas of taxation, administrative barriers, and the legal environment.
36
36
Table 1: Global Financial Centres Index:
Financial Centres Ratings (March
2009)—Top 621
1. London
2. New York
3. Singapore
4. Hong Kong
5. Zurich
6. Geneva
7. Chicago
8. Frankfurt
9. Boston
10. Dublin
11. Toronto
12. Guernsey
13. Jersey
14. Luxembourg
15. Tokyo
16. Sydney
17. San Francisco
18. Isle of Man
19. Paris
20. Edinburgh
21. Washington D. C.
22. Cayman Islands
23. Dubai
24. Amsterdam
25. Vancouver
26. Montreal
27. Hamilton
28. Melbourne
29. Munich
30. Stockholm
31. Glasgow
32. Brussels
33. Gibraltar
34. British Virgin Islands
35. Shanghai
1
Produced by the Z/Yen Group. The index is “based
on external benchmarking data and current
perceptions of competitiveness.”
Source:
http://www.cityoflondon.gov.uk/NR/rdonlyres/8D37
DAE2-5937-4FC5-A004C2FC4BED7742/0/BC_RS_GFCI5.pdf
36. Bahamas
37. Monaco
38. Copenhagen
39. Oslo
40. Milan
41. Taipei
42. Vienna
43. Bahrain
44. Helsinki
45. Kuala Lumpur
46. Qatar
47. Madrid
48. Johannesburg
49. Mumbai
50. Bangkok
51. Beijing
52. Osaka
53. Seoul
54. Sao Paulo
55. Rome
56. Wellington
57. Lisbon
58. Prague
59. Warsaw
60. Moscow
61. Athens
62. Budapest
37
Table 2: International Standards and Codes Useful for the Financial Services
Banking Supervision: Basel Committee's Core Principles for Effective Banking Supervision.
Securities: International Organization of Securities Commissions' (IOSCO) Objectives and
Principles for Securities Regulation.
Insurance: International Association of Insurance Supervisors' (IAIS) Insurance Supervisory
Principles.
Payments and Securities Settlement Systems: Committee on Payments and Settlements
Systems (CPSS) Core Principles for Systemically Important Payments Systems and
CPSS-IOSCO Joint Task Force's Recommendations for Securities Settlement Systems.
Anti-Money Laundering and Combating the Financing of Terrorism: Financial Action Task
Force's (FATF's) 40+8 Recommendations.
Corporate Governance: OECD's Principles of Corporate Governance and Basel Committee on
Banking Supervision’s Enhancing Corporate Governance for Banking Organisations.
Accounting: International Accounting Standards Board's International Accounting Standards
(IAS), and International Financial Reporting Standards (IFRS).
Auditing: International Federation of Accountants' International Standards on Auditing.
Data Transparency: The International Monetary Fund's (IMF’s) Special Data Dissemination
Standard/General Data Dissemination System (SDDS/GDDS).
Fiscal Transparency: the IMF's Code of Good Practices on Fiscal Transparency.
Monetary and Financial Policy Transparency: the IMF's Code of Good Practices on
Transparency in Monetary and Financial Policies.
38
38
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39