Tamil Tigers attacked Sri Lanka’s central bank in 1996. Military revolt shut down Guinea-Bissau’s financial institutions in 1998. Guerrillas disrupt rural banking in Colombia today. The impacts of violent conflict for national financial systems are clear for all to see.

Bank collapse is common in countries emerging from conflict. In Bosnia and Herzegovina, fourteen banks have collapsed since the war ended in 1995. Such crises have major implications when the government is the sole owner or part-shareholder. The Government of Mozambique had to contribute at least US$100 million to the country’s two largest banks following the announcement of huge losses in 2000. Bank collapse often triggers recession, places pressure on exchange rates and threatens macroeconomic stability – with high social costs for poorer groups.

When state authority collapses during conflict, private currency suppliers emerge. In Afghanistan, for example, at least seven versions of the Afghani currency circulated before 2003 – printed by successive Kabul governments and warlords. Conflict can cause banks to lose capital and personnel. Borrowers often fail to repay loans, leaving banks with substantial bad debt.

Reconstructing shattered financial systems should therefore be central to all post-conflict reconstruction, according to new analysis from the United Nations University World Institute for Development Economics Research (UNU WIDER). The research identifies several obstacles to such reconstruction:

• weak and under-resourced central banks – leading to disorganised and lenient supervision of the financial system
• lax accounting and reporting standards of commercial banks – hindering the application of international models of supervision 
• failure to enforce regulation (due to the technical weakness of central banks and the pressure of powerful interests such as warring parties) – leading to excessive exposure to risk and a failure to control emerging crises
• the resulting destabilisation of the economy – limiting spending on development and poverty reduction, and threatening recovery itself.

This research offers several recommendations for post-conflict financial reconstruction that ensures that conflict recovery is broad-based (benefiting the majority, particularly poor people) and to avoid bank collapse:

• currency reform by introducing new currency, a new version of the existing national currency, replacing national currency with foreign currency, or legalising the parallel circulation of foreign currencies
• reconstructing, or creating, a central bank
• revitalising the banking system, possibly with foreign investment through privatisation
• strengthening regulation and supervision, possibly with technical assistance from international donors.

Source(s):
‘Reconstructing and Reforming the Financial System in Conflict and Post-Conflict Economies’, Journal of Development Studies, Vol.41 (4) pages 703-718, by Tony Addison, Alemayehu Geda, Philippe Le Billon and S.Mansoob Murshed, May 2005
 

Funded by: UK Department for International Development

id21 Research Highlight: 31 January 2006

Further Information:
Tony Addison
World Institute for Development Economics Research (WIDER)
United Nations University
Katajanokanlaituri 6 B
00160 Helsinki

Tel: +358 9 61599239
Fax: +358 9 61599333
Contact the contributor: Addison@wider.unu.edu

World Institute for Development Economics Research (WIDER)

Other related links:
'Prioritising infrastructure in post-conflict reconstruction'

'Bridging development and humanitarian work in protracted crises'

'Reshaping education in post-conflict countries'

'Picking up the pieces in Kosovo: understanding post-conflict livelihoods'

Conflict Prevention and Reconstruction; World Bank Resources