Dollarization—the use of foreign currencies as a medium of exchange, store of value, or unit of account—is a notable feature of financial development under macroeconomically fragile conditions. It has emerged as a key factor explaining vulnerabilities and currency crises, which have long been observed in Latin America, parts of Asia, and Eastern Europe. Dollarization is also present, prominently, in sub-Saharan Africa (SSA) where it remains significant and persistent at over 30 percent rates for both bank loans and deposits—although it has not increased significantly since 2001. However, progress in reducing dollarization has lagged behind other regions and, in this regard, it is legitimate to ask whether this phenomenon is an important concern in SSA. This study fills a gap in the literature by analyzing these issues with specific reference to the SSA region on the basis of the evidence for the past decade.

Islamic finance is a fast growing activity in world markets. This paper provides a survey on Islamic Finance in SSA. Ongoing activities include Islamic banking, sukuk issuances (to finance infrastructure projects), Takaful (insurance), and microfinance. While not yet significant in most Sub-Saharan countries, several features make Islamic finance instruments relevant to the region, in particular the ability to foster SMEs and micro-credit activtities. As a first step, policy makers could introduce Islamic financing windows within the conventional system and facilitate sukuk issuance to tap foreign investors. The entrance of full-fleged Islamic banks require addressing systemic issues, and adapting the crisis management and resolution frameworks. The IMF can play a role by sharing international experiences and providing advice on supervisory and regulatory frameworks as needed.

This paper reviews the empirical relationships between credit growth, economic recovery, and bank profitability in Europe after the global financial crisis (GFC). We find that the post-GFC recoveries in Europe have been weaker than previous recoveries, with the “double-dip” recessions in 2011–12 in many countries and the worldwide reach of the GFC explaining the underperformance. Bank lending has been subdued as well, but this appears to have only held back the recovery relatively moderately. A 10 percent increase in bank credit to the private sector is associated with a rise of 0.6–1 percent in real GDP and 2–21⁄2 percent in real private investment. These relationships have not changed significantly during and after the GFC. Loan quality, customer deposits, bank equity price index, and bank capital appear to be closely linked to bank lending. As expected, bank profitability is positively and significantly influenced by credit growth, but this relationship has weakened after the GFC.

The effectiveness of macroprudential policy framework depends to a large extent on how the process of monitoring and assessing systemic risks and the calibration of macroprudential policy tools are operationalized in practice. This paper has two main contributions. First we propose an enhanced composite indicator, the Systemic Vulnerabilities Index (SVI), which captures the buildup of systemic vulnerabilities. The index is built on an innovative approach that uses optimal aggregation of subindices, and without imposing exogenous constraints. Specifically, making use of the Principal Component Analysis (PCA) for a broad set of relevant input variables, we determine their relative importance in contributing to the buildup of systemic vulnerabilities. Subsequent use of Monte Carlo simulation techniques allows us to select the optimal SVI that best predicts future credit losses. The proposed SVI captures both time and sectoral dimensions of the buildup of risks. We provide evidence showing a superior performance of the SVI, compared to the traditional credit-to-GDP gap in documenting risk accumulation. We investigate the relationship between our SVI and financial condition index and provide evidence of a negative correlation between the two, whereby a loosening of financial conditions is associated with more accumulation of imbalances. Second, we provide a framework that guides on how the SVI can be used for increasing Countercyclical Capital Buffer (CCyB) beyond its neutral level. Specifically, we propose a mapping that shows how the SVI can help determine the timing of setting a CCyB beyond the neutral rate as well as its magnitude.

Unconventional central bank measures are playing a key policy role for many advanced economies in the 2007-09 global crisis. Are they playing a similar role for emerging economies? Emerging economies have widely used unconventional foreign exchange and domestic short-term liquidity easing measures. Their use of credit easing and quantitative easing measures has been much more limited. Thus, unconventional measures are much less important for emerging economies compared to advanced economies in achieving broader macroeconomic objectives. The difference can be attributed to the relatively limited financial stress in emerging economies, their external vulnerabilities and their limited scope for quasifiscal activities.