Challenges for Financial Sector Reform in Africa

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Challenges for Financial Sector Reform in
AfricaOliver S. Saasa Premier Consult
LimitedDiscussant
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Fundamental messages from the Report worth
stressing
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• Finance is essential in transforming African
  economies
• putting African countries on a stronger and
  sustainable growth path by opening-up business
  opportunities to a wider clientele effectively

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Zambian example

• The Zambian financial sector is characterised by
  high cost of borrowing, thin capital markets and
  absence of financial services in most of the
  rural and peri-urban areas. Consequently, the
  financial system has not played a meaningful role
  in national development.

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2

• Africa needs more energetic and more innovative
  financial entrepreneurs
• New technologies using cellphones, internet and
  also new financial techniques

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3

• Reformers of African finance should have an eye
  on (a) the financing needs of sustained economic
  growth and (b) catering for the immediate needs
  of poor households and micro-enterprises.
• The needs of finance for growth and finance
  for all need not be conflictual

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• Access to finance and cost of finance still a
  major constraint to operation and growth of
  African firms much more than is the case in other
  regions
• Consequently, African firms finance about 68 per
  cent of their investment needs with internal
  funds.

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• The phenomenon of a missing middle in credit
  provision is real and must be addressed
• Medium and large firms are catered to by formal
  financial institutions, while micro-firms have
  often access to micro-finance institutions. But
  firms in between these categories have difficulty
  finding the funds to expand.

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Elaboration on Main Challenges in Africa
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• Low access often reflect general economic
  conditions
• Per capita income enhancement is essential
• Minimum deposit balances are often set by banks
  at levels that are unattainable by the poor

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• Financial access is woefully limited especially
  in rural areas due to price and non-price
  barriers
• Over 700 dollars are required to open an account
  in Cameroon, an amount higher than the GDP per
  capita of that country. On the other hand, no
  minimum amounts are required in South Africa or
  Swaziland.

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• Fees to maintain a checking account exceed 25
  percent of GDP per capita in Sierra Leone, while
  there are no such fees in the Philippines.
• The fees for transferring 250 dollars
  internationally are 50 dollars in several African
  countries, but only 30 cents in Belgium.

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• The requirement of a physical address or of a
  formal sector job as eligibility criteria to open
  an account excludes the majority of people in
  many African countries, where a large percentage
  of the population lives in rural areas and works
  in the informal sector.

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In addition

• limited access to finance especially in rural
  communities is due to sparse population, low
  incomes and poor infrastructure
• Weak delivery of finance for agriculture and the
  rural economy
• Documentation requirements to open a bank account
  (especially in the context of money laundering
  prevention) could also be quite restrictive to
  financial access for a large section of the
  community.

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• These fees and administrative requirements have
  effectively prevented the poor from using
  checking or savings accounts.

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Something that the report does not seem to have
addressed sufficiently

• Physical Infrastructure
• The quality of physical infrastructure, such as
  electricity networks and communications network
  is associated with the costs of doing business
  for banks, necessitating higher minimum balances
  for savings accounts and higher fees on loans

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The Way Forward(3 points)
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1

• Need for stronger underlying infrastructures,
  particularly in the information and legal
  dimensions

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2

• Strive, through enabling policy and regulatory
  environment, to increase access for households
  and micro, small and medium sized enterprises to
  formal financial services
• Strategic role of African governments in
  providing a regulatory regime that adequately
  protects the depositors and guards against abuses
  of the financial systems integrity (through
  money laundering)
• Central bank supervisory role is strategic

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• Developing and reforming the financial sector is
  critical
• Zambia Example
• The Financial Sector Dev. Program )FSDP) aims to,
  inter alia, improve the financial sector,
  focusing on developing the capital markets,
  enhancing the role of micro-financing in the
  economy, developing rural financing, and the
  strengthening banking and non-banking financial
  institutions.