Finance in Africa – Achievements and challenges

Thorsten Beck, Michael Fuchs, Marilou Uy

20 July 2009



In spite of shallow financial markets, Sub-Saharan Africa will not escape the repercussions of the global financial crisis (IMF, 2008). Moreover, this global turmoil threatens the progress Sub-Saharan Africa has made in deepening and broadening its financial sector in recent years and underlines the importance of continuing and deepening the necessary institutional reforms. In this context, it will be important to define the role of government in expanding financial sectors in a sustainable and market-friendly manner and not draw the wrong conclusions from the crisis. The crisis has also led to a rethinking of the advantages and shortcomings of globalisation, including foreign bank entry. We discuss these issues in a recent chapter for the African Competitiveness Report (Beck, Fuchs, and Uy 2009).

Finance in Africa: Growing from a low level

Given the central importance of finance for economic development and poverty alleviation, the superficiality of African finance is alarming. African financial systems are small, both in absolute and relative terms (Figure 1). In addition, Africa’s financial systems are characterised by very limited outreach, with less than one in five households having access to any formal banking service (World Bank, 2007). Banking is inefficient and expensive in Africa, as reflected by high interest spreads and margins and high overhead costs. Banking is also very expensive for deposit customers, as reflected by very high minimum balance requirements and annual fees in many African countries (Beck et al. 2008; World Bank, 2007a.). High documentation requirements to open an account – that is, the need to present several documents of identification – also represent significant barriers given that large parts of the population live and work in the informal sector. Similarly, physical access is limited, as the low bank branch and ATM penetration numbers for Africa illustrate.

Figure 1. Liquid liabilities relative to GDP across countries

However, hope has been in the air. Standard indicators of financial intermediary development, such as the ratios of liquid liabilities to GDP, bank deposits to GDP, and private credit to GDP have shown financial deepening in most African countries in recent years (Figure 2). As credit has been growing faster than deposits in most countries, financial intermediation – that is, the extent to which banks intermediate society’s savings into private credit – has also increased, although from very low levels. Although not documented in a statistical sense, there seems to have been progress in expanding outreach as well.

Figure 2. Financial deepening in Africa, 1995 to 2007

Although the direct impact of the current crisis in the US and Europe on African financial systems is relatively contained – given that African banks are not as closely integrated in the global financial system as other regions of the developing world and hold most of their assets and commitments on rather than off the balance sheet – indirect effects through reduced real economic activity and reduced private capital inflows caused by reduced risk appetite might very well have negative repercussions for the real and financial sectors in Africa. Critically, the current crisis has put the debate on the appropriate role of government in the financial sector and the benefits and pitfalls of globalisation on policymakers’ agenda again. We will argue that it is important to study carefully past experience both in the region and other parts of the developing and developed world.

The role of government in the financial sector

Supported by international financial institutions in the 1960s and 1970s, governments traditionally had a decisive role in African financial systems, ranging from regulatory restrictions, such as interest rate ceilings and floors, to directed credit programs and government ownership of banks and development finance institutions. This activist approach in which government were directly involved in providing financial services aimed to replace markets that did not exist at the time of independence. The outcome of these market-replacing efforts has been disappointing, which can be explained by flaws in the two main assumptions of the market-replacing approach, (i) governments know better than markets and (ii) governments act in the best interest of society. Both assumptions have been proven wrong across the developed and developing world. Bureaucrats have turned out to have limited knowledge and expertise for running financial institutions and systems and they are subject to influence from the political sphere and the regulated entities.

Again following the advice of international financial institutions, many countries in sub-Saharan Africa started liberalising and privatising their financial systems in the 1980s and 1990s. Following the Washington Consensus policies, Sub-Saharan Africa has made significant progress in monetary stability and in private ownership of banks over the past two decades. African financial systems are significantly more stable than before, and, as discussed above, many countries have started to reap the benefits of reforms of the 1990s that were politically often difficult. Despite this progress, however, Africa’s financial systems are still characterised by their shallowness, high costs, and limited access to finance, as discussed in the previous section.

Disappointment with some of the outcomes of the modernist approach has fostered yet another swing back toward more government involvement. This time around, however, African governments have leant more toward a market-friendly role that creates and enables markets instead of trying to replace them. The agenda of this new market-developing approach ranges from developing the contractual framework to informational requirements (such as accounting and disclosure standards) and strengthened bank regulation and supervision. It goes beyond transplanting laws and rules from the developed world to building up local capacity and norms (Beck and de la Torre, 2007).

There are other shortcuts that have been identified through experience and that can be summarised under the heading market-enabling policies. Creating the necessary legal and regulatory frameworks for leasing and factoring is among them, as both financing techniques are especially conducive for small- and medium-sized enterprise lending, which is predominant in Sub-Saharan Africa. The regulatory and supervisory framework can also be an important policy lever, as it critically influences the degree of competition and innovation in a financial system. Sometimes the role of government in fostering access might have to go beyond competition policies and take the form of affirmative regulatory policy. Examples include the moral suasion exercised by authorities to make South African banks introduce the Mzansi (basic transaction) Account. Inducing banks to share or ensure interoperability of payments infrastructures (including ATM networks) can help avoid undesirable competition on access to infrastructure while enhancing desirable competition on price and quality of service and lowering entry barriers to new financial service providers. Finally, market-enabling policies can address market failures by creating supporting incentives for private lenders and investors to engage without unduly shifting risks and costs to the government. Examples include properly priced partial credit guarantee schemes and private-public partnerships in infrastructure financing.1 These market-promoting interventions also provide a new role for existing development finance institutions beyond retail lending, although their success will require adjustments in their business models and governance structures.

The challenge of globalisation

Integration into international financial markets has been a second important and controversial aspect of financial-sector policy over the past decades. Although capital account restrictions are still in place in many countries of Sub-Saharan Africa, these are often more de jure than de facto. And while capital account liberalisation has many benefits, it has to be managed carefully on the macroeconomic level and accompanied with appropriate regulatory policies (Kose et al., 2009). While there has been a focus on opening capital accounts toward developed countries, the potential of regional financial integration has been much less exploited, although there are large economies of scale to be reaped by cooperation in technical areas such as harmonising approaches to bank regulation or payment systems (World Bank, 2007b). Reducing, if not eliminating, intra-regional capital account restrictions can help overcome the scale problem for financing large projects, such as those in infrastructure. While reducing dependence on international capital markets to a certain degree, such intra-regional capital account liberalisation seems less risky than complete capital account liberalisation vis-à-vis international investors.

Having gone through the cycle of nationalising and privatising their banking systems, by now, more than half of the region’s countries have a banking market with either a dominant or a significant share of foreign-owned financial institutions. Foreign bank entry has several advantages that are specific to Africa: international banks can help foster governance, bring in much-needed technology and experience from other parts of the region, and help exploit scale economies in their small host economies.2 However, there are many factors that can prevent countries from reaping the potential benefits of foreign bank ownership, such as the presence of dominant government-owned banks that reduce competitive pressures or the small size of many financial markets in sub-Saharan African markets preventing the necessary competitive pressure to emerge. The result in many sub-Saharan African countries has been a concentration of both domestic and foreign banks’ portfolios on government papers and international assets and shying away from private sector lending.

Nevertheless, the new wave of foreign bank entry after liberalisation in the 1980s and 1990s has seen not only the return of old colonial banks but also some new important players, such as several South African banks, banks from non-African regions other than Europe, and several regional banks, such as the Bank of Africa and Ecobank. Many of these new entrants have put a much higher weight on sustainable outreach, introducing new products and technologies.

Looking forward

Africa’s financial systems have seen deepening and broadening over the past years, the result not only of improvements in the macroeconomic and institutional framework, but also of the worldwide liquidity glut, which directed more capital flows into Africa. The current global crisis threatens to reverse this trend and undermine recent progress. In these adverse circumstances, it is even more important to upgrade the necessary frameworks for sound, efficient, and inclusive financial systems. This calls for further institution building as well as cautious and context-specific government intervention to help financial market participants expand financial services to the frontier of commercially sustainable possibilities.

For better or worse, the future of Africa’s financial systems is closely linked to the development of global finance, as are its real economies. However, it is up to Africa’s financial sector stakeholders – bankers, donors, and policymakers – to guide financial sector reforms in a way that maximises Africa’s opportunities, learning both from their own experience over the past 50 years and the experience in other emerging and developed economies.


1 See De la Torre, Gozzi and Schmukler (2007) for examples from Latin America.

2 See Cull and Martinez Peria (2007) for an overview.


Beck, T. and A. de la Torre. 2007. “The Basic Analytics of Access to Financial Services.” Financial Markets, Institutions and Instruments 16 (2): 79-117.

Beck, T., A. Demirguc-Kunt, and M. S. Martinez Peria. 2008. “Banking Services for Everyone? Barriers to Bank Access and Use around the World.” World Bank Economic Review 22 (3): 397–430.

Beck, T., M. Fuchs, and M. Uy. 2009. “Finance in Africa: Achievements and Challenges.” In: World Economic Forum, World Bank and African Development Bank (Eds.): The Africa Competitiveness Report 2009, 31 – 47.

Cull, R. and M. S. Martinez Peria. 2007. “Crises as Catalysts for Foreign Bank Activity in Emerging Markets.” In Power and Politics after Financial Crises: Rethinking Foreign Opportunism in Emerging Markets, ed. J. Robertson. New York: Palgrave Macmillan.

De la Torre, A., J. C. Gozzi, and S. Schmukler. 2007. Innovative Experiences in Access to Finance: Market Friendly Roles for the Visible Hand? Stanford University Press and the World Bank.

International Monetary Fund. 2008. Regional Economic Outlook: Sub-Saharan Africa. Washington, D.C.

Kose, M. Ayhan, Eswar Prasad, Kenneth Rogoff and Shang Jin-Wei. 2009. Financial Globalization: A Reappraisal. IMF Staff Papers, forthcoming.

World Bank. 2007a. Finance for All? Policies and Pitfalls in Expanding Access. Washington, DC: World Bank.

World Bank. 2007b. Financial Sector Integration in Two Regions of Sub-Saharan Africa. Washington, DC: World Bank.



Topics:  Development Financial markets

Tags:  globalisation, Africa, financial deepening

Thorsten Beck

Professor of Banking and Finance, Cass Business School; Research Fellow, CEPR

Lead Economist in the Finance and Private Sector Development Department Sub-Saharan Africa of the World Bank

Sector Director of the Africa Region’s Financial and Private Sector Development Department at the World Bank