Africa: Finance for All Patrick Honohan Trinity College Dublin and The World Bank For money doctors: Africa is a priority Access to Finance Cost of Finance East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa (Average rating by surveyed firms of each item as an obstacle to business operation and growth)
Barriers to Firm Growth: Africa and Rest of World % of firms reporting as barrier 0 10 20 30 40 50 60 Cost of financing Access to financing Tax rates Electricity
Macroeconomic instability Corruption Tax administration Economic and regulatory policy uncertainty Anti-competitive practices Customs and trade regulations Crime, theft and disorder Access to land Skills and education of workers Telecom Transportation Legal system Labor regulations Business licensing and permits Africa Rest of World 70 Household Access to Finance
100 80 Access to Finance Indicator 60 40 20 0 Sub-Saharan Africa Rest of the Sample size: 141 countries Time period: Source: Honohan (2006), Peachey and Roe (2005) World
Access to Finance Distribution of countries in each region 100 90 80 70 % 60 50 40 30 20 10 0 AFR EAP ECA
LAC MNA SAR Sub-Saharan Africa: Access to Finance by Households < 20% 20-30% 30-40% > 40% Approaches (2): Activism (vs. Modernism) African environment (sparse population, low incomes, poor infrastructure) makes access problematic Mainstream banks etc have not delivered long term, risk finance; or any services for the majority (market failure) So new (or re-engineered) entrants with dedicated mission needed
To be patient, take risks, experiment with new technology including enhanced use of soft information/relationship lending To take up the fight for an inclusive financial system (example: South Africa financial sector charter, 2003) Activism presupposes governance (1) Activists are not restrained by immediate market pressures; they have chosen to plow money and effort into endeavors that the market has turned down. Willie Sutton effect To be even reasonably confident that these efforts and resources will not be wasted or subverted, the sponsoring agency must have good governance. Governance issues Composite Governance Indicator 2.0
1.0 0.0 -1.0 -2.0 Sub-Saharan Africa Rest of the World Sample size: 209 countries Time period: 2004 Source: D. Kaufmann, A. Kraay, and M. Mastruzzi (2005). Governance Matters IV Governance issues KKZ Data Africa & ROW, quartiles 1.0 0.5 0.0
1998 1996 1996 Governance issues Africa: Change in ratings median 1998-2005 Control of Corruption Rule of Law Regulatory Quality Government Effectiveness Political Stability Voice and Accountability -0.4 -0.2 0.0
0.2 0.4 0.6 Activism presupposes governance (2) The Achilles heel of many interventions especially of DFIs they may be better doing investment banking work with limited grant-giving or contingent liability component Exploit cross-country/regional frameworks to strengthen governance (development finance, banking, regulation) The social security fund as a natural provider of long-term and risk finance and increasingly paralleled by foreign including donor funding And some activism is counterproductivenotably tight interest ceilings Finance for all (1): Technology innovations Mobile phones and internet overcoming isolation and costly teller
services Weather and price insurance for farmers Some age-old techniques that mainstream banks have not hitherto bothered to introduce in Africa Finance for all (2): Who should do what? Institutional choice for MF: build on existing diversity. E.g. both coops or and joint stock can play a role Mainstream banks mainly as wholesalers until and unless they can get costs down and improve relationship lending Donors/development partners: resources, innovation, independence (might partly compensate for local governance gaps) Governmentsstay away from ownership, but actively create infrastructures and dont choke with over-regulation Share of different intermediaries in outreach All accounts Share of different intermediaries in outreach Borrowers Africa
Africa NGO 10% Credit Union or Coop 21% Other bank / nearbank 35% Postal or savings bank 48% NGO 48% Other bank / nearbank
21% Credit Union or Coop 17% Share of different intermediaries in outreach All accounts Share of different intermediaries in outreach Borrowers World World Credit Union or NGO Coop 6% 5% NGO 23%
Postal or savings bank 48% Other bank / nearbank 41% Credit Union or Coop 2% Other bank / nearbank 75%
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