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Bank Financing to SMEs in East Africa

27.02.2012Pietro Calice

Small and medium enterprises (SMEs) play a major role in economic development in Africa. Studies indicate that SMEs contribute on average about three-quarters of total employment in manufacturing, when the informal sector is included. A number of factors affect the growth of African SMEs, including the business environment and the quality of the labour force. However, a crucial element in the development of the SME segment is access to finance, particularly to bank financing, given the relative importance of the banking sector across the continent.  

African SMEs are more financially constrained than in any other developing region. Only 20 percent of SMEs in Sub-Saharan Africa have a line of credit from a financial institution compared, for example, with 44 percent in Latin America and Caribbean, and only 9 percent of their investments are funded by banks versus 23 percent in Eastern Europe and Central Asia. It is, therefore, not surprising that the international development community has listed access to finance for SMEs as an important policy priority for Africa.  

In spite of the importance of the topic, relatively little research exists on SME financing from a supply-side perspective.

This is compounded by the fact that comprehensive data on SME finance is still to be more consistently collected and monitored over time. Nonetheless, existing studies conducted in other developing economies show that, contrary to the conventional perception that financial institutions are not interested in dealing with SMEs, banks consider the SME segment as strategically important. Yet institutional constraints remain and the market is far from being saturated.  

In a recent paper co-authored with Victor Chando and Sofiane Sekioua, we shed light on current trends and practices in bank financing of SMEs in four East African countries, namely Kenya, Tanzania, Uganda and Zambia. In particular, the paper forms part of a broader African Development Bank regional project on the topic, whose objective is to identify best practices in SME lending as well as constraints that impede growth in the SME finance market so as to draw relevant policy implications.  

We find that the SME segment is a strategic priority for the banks in the region. SMEs are considered a profitable business prospect and provide an important opportunity for cross-selling. Banks consider that the SME lending market is large, not saturated and with a very positive outlook. A number of obstacles are, however, constraining further banks’ engagement with the SME segment, including SME-related factors such as the lack of adequate information and collateral as well as their largely family-owned structures. Macroeconomic factors, business regulation, the legal and contractual environment, the lack of a more proactive government attitude towards the segment, some areas of prudential regulation and some bank-specific factors are also perceived to negatively affect the SME lending market in East Africa. Nonetheless, banks have adapted to their environment and developed mechanisms to cope with it through innovation and differentiation. Most banks have dedicated units serving SMEs, to which they offer largely standardized products though the degree of personalization is growing. And albeit advanced transaction technologies based on scoring and risk-rating systems remain relatively underdeveloped, banks are gradually automating their risk management frameworks to achieve efficiency gains.  

On the whole, our findings are broadly akin to those of similar studies in other geographical contexts, suggesting that banks in the region have enthusiastically embraced the SME segment and are making substantial investments to develop their relationship with SME clients. This holds good promise to contributing to close the “SME financing gap” which characterizes Sub-Saharan Africa, including East Africa, compared to other developing regions. It is, therefore, important that this trend is supported and encouraged by removing those institutional and policy obstacles that constrain SME lending.  

A necessary condition for the sustainable growth of the SME lending market in East Africa is the presence of a stable macroeconomic environment and a predictable policy regime. The findings of the paper suggest that banks in the region are pursuing the SME segment because of its attractiveness, despite important constraints. In order to ensure that this trend continues uninterrupted, strong macroeconomic performance and a stable and consistent fiscal and monetary framework have been identified as important considerations. It is also important that countries in the region continue their efforts to modernize their financial systems, including the prudential regulatory framework, enhancing competition and innovation so as to give rise to alternative financing providers and financial solutions to better serve the SME segment.  

Reforming the legal and regulatory environment might contribute to increase banks’ involvement with SMEs. A first area of intervention might be the legal framework for creditor rights and for secured lending. Efficiency of the courts and issues surrounding the definition of collateral have been listed as important constraints to the development of the SME lending market. Targeted interventions on the relevant legislation might contribute to speed up enforcement procedures and improve the efficiency of the judiciary. For SMEs, what constitutes acceptable collateral is also an important issue. Reforming the legal framework for secured lending and reviewing the regulatory treatment of collateral would facilitate SMEs to pledge a wider share of their assets as a guarantee for their borrowings. Finally, governments might explore the possibility of introducing a simplified company registration process, which takes into consideration the peculiarities of SMEs compared to larger companies.  

There is also room for optimizing the role of the governments in the region. Current government programs in the SME space are perceived as generally insufficient in supporting the growth of the market. This might be due to the lack of consistency. Governments might therefore consider introducing a dedicated and organic SME policy to boost this segment. A first start should be the adoption of a uniform definition of SME. Most of the banks in East Africa use loan size and turnover as criteria to define SMEs. The adoption of such criteria and their formalization into relevant legislation might ease the attainment of policy objectives. A second area of intervention might include an optimization of current financing support mechanisms, including national and regional development finance institutions, by focusing on additionality and on developing new instruments. In this respect, an assessment of their mandate and their development effectiveness would help fine tune a policy review in this area.  

Finally, a better understanding of the SME segment and the implementation of measures aimed at addressing some of their intrinsic weaknesses should be a further policy priority. Given the crucial importance attributed by banks to SME-specific constraints, priority might be given for example to the collection of statistics and data on their characteristics in order to better understand the demand-side perspective, which is equally important in the development of the SME lending market. Measures in this domain might include the scaling up of capacity building programs and the introduction of incentives for SMEs to formalize.

Pietro Calice is a Principal Investment Officer within the Private Sector Department, Financial Institutions Division, at the African Development Bank (AfDB). In his capacity, Pietro focuses on financial stability and financial inclusion, with a particular emphasis on the intersection between the two dimensions. He covers the financial sector through an appropriate mix of knowledge development and dissemination, selected transactions and policy dialogue. In particular, he has written expensively on the Basel capital accord and its effects on developing economies as well as on access to finance for SMEs. He has designed and implemented innovative financial inclusion initiatives, including the African Guarantee Fund for SMEs. Prior to joining the AfDB, Pietro worked at ratingagencies and investment banks as a credit research analyst.

Social Performace Management (SPM): A Necessity for Responsible Institutions

13.02.2012Boubacar Diallo

All organizations across the globe have been created for a noble cause which goes beyond the financial gains of the creators or promoters.  This cause is usually symbolized by the organization’s mission and constitutes the reason for its being. The analysis of the performance management system of the organizations and more specifically that of microfinance institutions show that most of them do not measure to or abide by their mission. They often satisfy themselves with measuring their financial performance which is, of course, important and critical, but it is not the sole objective of an organization with a social mission.

Social performance is currently defined as the effective implementation of the organization’s mission. As defined, social performance is not achieved fortuitously, there must be a real will and clear intentions to convert the mission into positive changes for the client, motivation for employees and social returns for investors.

Justification and importance of social performance management to the microfinance industry: During the last 5-10 years, the microfinance industry has been marked by increased interest in the concept of social performance and the social impact of microfinance institutions. There are many reasons for this tendency:

  • Parting from mission: Initially, microfinance institutions had been created to include, as much as possible, those excluded from the traditional financial system (including the poorest of the poor) in the financial system but for various reasons (donor and regulator pressure, need for profits, lack of a clear vision for social impact), many institutions have increasingly withdrawn from the poorest zones and target beneficiairies to focus on a richer clientele while sometimes ignoring their very mission.
  • Performance management problems: The majority of microfinance institutions continue to evaluate their success by focusing almost exclusively on financial indicators whereas they have – as stated by their mission statement – an essentially social mission.
  • High reputational risk: In certain countries, it is common today to hear that microfinance institutions are rather helping to downgrade the living conditions of the poor instead of helping to improve them. There was (and there still is) a real need to improve the industry’s image by proving that it is significantly helping to increase social inclusion and reducing poverty.

SPM Initiatives: Success and Challenges in Africa

For a number of years, many initiatives have been created to deal with these huge challenges. I would, among these challenges, like to highlight the Social Performance Task Force which plays a key coordination and standards development role.

MISION Africa project (Microfinance Institutions Improve their Social Impact and Outreach through Networks in Africa) is one of these initiatives which focuses on the promotion of social performance management on the African continent. This project translates the common commitment of the Catholic Relief Services (CRS), African microfinance networks (AFMIN) and national microfinance networks in Benin, Senegal, Burkina Faso, Ethiopia, Uganda and Kenya and that of donors (the Ford Fondation and Mastercard Foundation) to transform microfinance into an effective and sustainable tool for financial inclusion and human development.

It is a capacity building project which helps partner microfinance institutions integrate the social component into their performance management system and improve their key processes with a view to achieving better financial and social results. This can be done through the provision of technical assistance in strategic management.

Regarding the sustainability and efficiency of operations, MISION Africa has strategically opted to provide technical support only through local consultants whose work is coordinated by national associations.

To date, significant results have been achieved by MISION Africa: in two years, more than 50 African microfinance institutions (in the 6 target countries) have undertaken the implementation of the concept of social performance management by clarifying their mission and defining clear social objectives and indicators. The objective is to extend to the entire Sub-Saharan Africa in five years. Another important aspect is that national authorities (for example, Burkina Faso) are increasingly committing themselves to the promotion of social performance management by including it in their national microfinance strategies.

However, there are still major challenges. The lack of visionary leadership in certain institutions is of course the biggest challenge for the promotion of social performance management in Africa. Some institutions have a tendency to focus on sourcing funds instead of seeking quality technical assistance to strengthen their management systems. The lack of coordination among promoters of social performance management is a huge challenge. Initiatives and tools are increasing and sometimes target the same associations and institutions. That sometimes creates real confusion instead of creating a multiplier effect. The third challenge stems from the lack of resources to promote social performance management on the continent where only about ten countries are receiving financial support in this regard. There is a need for greater state and donor commitment to promote this concept.

Boubacar Diallo is a Microfinance Expert with over twelve years experience in the microfinance sector. He is currently the Director of MISION Africa project. He is also the Regional Technical Advisor - Microfinance for Catholic Relief Services - CRS’ West Africa Regional Office.  Prior to joining CRS, Mr Diallo was Regional Director, West Africa for Freedom from Hunger.  He also worked as a teacher and researcher with the University of Mali (Faculty of Economics and Law) and the Center for Development Policy.  He holds a postgraduate degree in Economics from the University of Ouagadougou in Burkina Faso, a Master in Economics from Ecole Nationale d'Administration in Mali, and a Master in Microfinance from the State University of Bergamo in Italy.

The Arab Spring and Microfinance Regulation in North Africa: Threat or Opportunity?

30.01.2012Johannes Majewski

Looking back about one year in time, many things are not as they used to be in the Arab region in general and in North Africa in specific. The so-called Arab spring which started in the beginning on 2011 affected almost all dimensions of life including politics, the economy, and society. The microfinance sector was no exception. In particular the impact on MFIs and their clients has been widely discussed within the last months. Many MFIs were unable to physically visit their clients due to the unstable security situations, some clients were simply not able to repay credits as their businesses have been heavily affected by the turmoil, and other clients did not pay back their loan since legal consequences were not to be expected under these circumstances.

However, in addition to this direct impact at the operational level, also a link on the policy level exists, raising various questions: How will the political change affect the framework conditions of the microfinance sector? Will it rather boost or hamper initiatives to reform legal conditions? While we already see some first results in Tunisia where a new microfinance law was passed last year as a consequence of a new political environment, a closer look has to be given to the Egyptian case, where the overall process of political change is taking more time.

In Egypt, some initiatives to enhance the legal framework conditions of the microfinance sector already existed before the revolution started. However, these have been rather delayed by the recent political developments. Initiated by the Ministry of Investment back in 2008 and with support from development partners, a set of regulations has been developed. One major objective of these regulations is to professionalize the sector and enable new players to enter the field. Whereas currently only banks and NGOs are allowed to offer credit, a new institutional type of lending institution shall be created: microfinance companies. While these companies will not be allowed to collect savings, they would be able to run a profit-oriented business with low entry barriers (no minimum capital requirements). Also, the Egyptian Financial Supervisory Authority (EFSA) has been set up, which among other things is supposed to supervise these newly to be established microfinance companies. The draft law on formally assigning EFSA this role has already been approved by the Cabinet and sent to Parliament. This happened just before the political upraise started. Currently, the overall process is on hold as the new parliament is about to become operational.

Wh While the overall process is being delayed, there are many reasons to be optimistic about the future of microfinance in Egypt. During the past couple of months’ political change process, many questions arose on how this process will impact all the efforts made in the past to promote the microfinance sector. While at this point in time, no final judgment can be made, some first indications exist:

  1. More than ever, in the current transitional period, a well developed MSME sector is considered core for employment generation and poverty reduction: Similar to the case of Tunisia, current political decision makers identified the MSME sector to be crucial for economic development. This importance is underlined by various initiatives, such as ideas in the past to create an SME bank (which is currently not followed up), or the assignation of an advisor to the Prime Minister on the promotion of the (M)SME sector.
  2. It is quite likely that also in the future the above mentioned position will be upheld: While no detailed program on economic policy by future decision makers does exist so far, some general assumptions can be made, based on public statements and ongoing debates on future directions: i) private business will be promoted ii) financial markets will be protected iii) (M)SME lending will be enhanced.
  3. Religious aspects will become more important in day-to-day life: It became evident that religion will play a stronger role in the future than in the past. These elements may also lead to increased efforts of selected financial institutions on alternative financial instruments, such as Islamic finance products which so far have played a rather minor role in the Egyptian microfinance sector.
  4. Microfinance will most probably not be the first issue to be tackled under any new government: Taking into consideration the huge political challenges in the country, it is understandable that enhancing the microfinance sector will not be the first priority of any future government. Thus, results cannot be expected in the short run.

Wh While no political decisions may be taken for the moment, it is important not to lose the momentum and get ready for the future. The current transition state does not mean that nothing can be done to move the regulatory agenda forward. The following points represent some potential areas of action in the short term:

  1. Join forces: A broad set of players in Egypt is affected by or involved in regulatory issues of the microfinance sector (MFI, public bodies, donors, etc.). Forces have to be joined and aligned to set the path for the future. The creation of a working group could be a good start.
  2. Enhance dialogue between the public and private sectors: New policy decision makers may need to be sensitized about the importance of microfinance. Such tasks could fall into the scope of actions of a working group.
  3. Review draft regulations: There still exist differing views among the major players on selected issues of the regulations (e.g. lack of transformation possibilities from a NGO to a Microfinance company). The new political set up may be taken as a chance to commonly review and discuss the current regulations.

While no clear cut answer can yet be given to the question raised above, there are many indications to believe that by the end of the day, the Arab Spring movement will positively impact (legal and regulatory) framework conditions in Microfinance.

Johannes Majewski works for GIZ as a Program Coordinator of a regional microfinance program based in Egypt. Areas of intervention of the program include the strengthening of regulatory frameworks of the microfinance sector in selected countries of the Mena region as well as support to the Sanabel network. The program is being implemented on behalf of the Federal Ministry for Economic Cooperation and Development, Germany. Before joining GIZ, Johannes worked for Frankfurt School of Finance and Management in Germany and South America.

FDI and Financial Market Development in Africa

17.12.2011Isaac Otchere, Pierre Yourougou, and Issouf Soumaré

African countries have experienced a surge in private capital inflows between 2000 and 2008. According to UNCTAD (2009) (1), the inflows of foreign direct investment reached an unprecended level of $88 billion in 2008, representing 29% of Africa’s gross fixed capital formation. Interestingly, African countries differ significantly in terms of their capacity to attract foreign direct investment. The UNCTAD report also shows that the top 10 recipient countries accounted for nearly 82 percent of the total foreign direct investment inflows.

Meanwhile, financial markets in Africa exhibit significant differences in terms of their levels of development. Most of them are characterized by a low liquidity and a lack of transparency and depth. As reported by Beck et al. (2009) (2), the shallowness of finance or the lack of developed financial market in Africa has dampened economic growth on the continent.

In our research paper, we conduct an empirical study on the direct causal relationship between foreign direct investment (hereafter FDI) and financial market development (hereafter FMD) in Africa, and their combined impact on economic growth. This study is even more relevant in the African context for a number of reasons. On the one hand, one can expect FDI to be an impetus for financial market reforms and serve as a mechanism to improve the transparency, liquidity and depth of financial markets in Africa. On the other hand, well-functioning financial markets on the continent can contribute to a more efficient allocation of foreign investments into productive sectors and create more value for foreign investors, hence foster more foreign investments. Therefore, we would expect FDI and FMD to simultaneouslyimpact positively on each other in the African context.

There are several theoretical rationales for expecting a causal relationship between FDI and FMD. First, an increase in FDI net inflows would contribute to the expansion of the economic activities and lead to an increase in funds available in the economy, which in turn would boost financial intermediation through available financial markets or the banking system. Besides, companies involved in FDI are also likely to be listed on local stock markets as they usually originate from industrialised countries where financing through stock market is a tradition and a must-do for any company that wants to enhance its image among investors. Second, using political economic analysis, one can argue that an increase in FDI would reduce the relative power of the elites in the economy and can prompt them to adopt market friendly regulations, thus strengthening the financial sector. Third, a relatively well functioning financial market can attract foreign investors as they will perceive it as a sign of vitality, openness from the countries authorities and market friendly environment, thus inducing them to invest more in the country. In addition, a relatively developed stock market increases the liquidity of listed companies and may eventually reduce the cost of capital, thus making the country attractive to foreign investors. Each of these arguments providesa theoretical rationale for a positive relationship between FDI and financial market development.

Furthermore, the literature on the relationship between FDI, FMD and economic growth has focused primarily on the relationship between FDI and economic growth and the role played by FMD in that linkage. The literature is almost silent on a possible direct causality between FDI and FMD. The few empirical papers that address this issue consider the role played by FMD in the channelling of FDI into economic production or focus on specific regions. Although, it is established that FDI contributes more to growth in countries with more developed financial market, it is not clear how FDI and FMD interact with each other, especially in Africa, where financial markets are still at the very developmental stage.

The extant literature has not clearly established, at least empirically, a direct link between FDI and FMD, especially for African countries where stock markets are at their embryonic stages and these countries rely strongly on foreign investments for economic development programs. The forgoing discussion relating to the link between FDI and FMD clearly suggests that the relationship between FDI and FMD is endogenously determined. We therefore use a system of simultaneous equations involving both FMD and FDI variables as dependent and independent variables in assessing this direct relationship between FDI and FMD, while controlling for other factors that affect the inflows of foreign direct investments and the development of financial markets.

Compared to previous studies, we use a multiple ofvariables to measure FDI and FMD, as suggested by the literature. For FDI, we use the ratio of FDI net inflows as a percentage of GDP and the ratio of FDI net inflows as percentage of gross capital formation (GCF). For FMD, we use stock market and as well as banking sector development variables; namely: (i) stock market capitalisation as a percentage of GDP, (ii) stock market turnover ratio, (iii) stock market value traded as a percentage of GDP, (iv) total credit by financial intermediaries to private sector over GDP, (v) liquid liabilities of the financial system divided by GDP and (vi) ratio of commercial bank assets to commercial bank andcentral bank assets. We also include in our regressions other variables found in the literature to be key determinants of FDI and FMD.

Based on Granger causality tests and multivariate analyses, we document a bidirectional positive relationship between FDI and FMD. We also find that FDI impacts positively and significantly on economic growth in Africa when we control for the simultaneous effects of both FDI and FMD.

Our work provides additional evidence that FMD facilitates the inflows of FDI and significantlycontributes to economic growth. More importantly, the statistical results also support the view that economic growth, FDI and FMD are interconnected. While the surge in private capital inflows in the 2000’s may be facilitated by the combined effects of worldwide excess liquidity and high commodity prices, it arguably reflects the progress made by a number of African countries in financial sector reforms. Yet, for most African countries, FMD is still in its infancy. Despite the policy measures adopted by some countries to make the business environment more attractive to FDI, the financial system remains bank-based rather than market-based. With the exception of a few stock exchanges such Johannesburg Stock Exchange, several African exchanges suffer from a lack of scale and the network economies needed to create the level of liquiditynecessary to make the markets effective channels to mobilize long-term capital resources in general and induce greater inflows of FDI in particular. The extent to which a consolidation of African stock exchanges and a greater integration of financial markets would induce greater inflows of FDI and foster higher economic growth could be an interesting subject for a future study.

Dr. Isaac Otchere is Associate Professor of Finance at Sprott School of Business at Carelton University in Ottawa, Canada. His research interests include valuation, mergers and acquisitions (M&A), and privatization. He taught MBA courses at Universities in Canada, Australia, Singapore and Ukraine, among others and has received a number of awards for excellence in teaching.

Dr. Pierre Yourougou is Clinical Associate Professor of Finance and Kiebach Fellow at Whitman School of Management at Syracuse University in New York, USA. His research interests include emerging markets, corporate finance, and financial markets and institutions.

Dr. Issouf Soumaré is Associate Professor of Finance and Managing Director of the Laboratory for Financial Engineering at Laval University in Canada. He is also responsible for the MBA & MSc Finance and MSc Financial Engineering programs at the same university. His research and teaching interests include risk management, financial engineering and numerical methods in finance. His theoretical and applied financial economic works have been published in leading international economics and finance journals.

(1) UNCTAD, 2009, World Investment Report 2009, Transnational Corporation, Agricultural Production and Development, United Nations, New York and Geneva.
(2) Beck, T., Fuchs, M., and M. Uy, 2009, Finance in Africa: Achievements and Challenges, World Bank Policy Research Working Paper 5020.

Finance in Africa – A new focus on users

20.11.2011Thorsten Beck

Most of the discussion on financial deepening and broadening focuses on financial institutions and markets and thus on the supply side.  And it is natural to start the analysis here, as that is where traditionally data have been. Similarly, regulators focus on financial institutions and markets as natural starting point. Looking at the big picture, however, we care about the users and beneficiaries of financial services.  We care about enterprises that need external financing for working capital and investment. We care about households that need access to payment and deposits services. We care about risk management services for both households and enterprises. Only in a second instance do we care about who provides these services.  In the recent Financing Africa flagship report, my co-authors and I therefore emphasize the need for increased focus on users, with important repercussions for both analysis and policy.  

This increased focus on users is supported by recent data collection exercises for both enterprises and individuals that have allowed a closer look at users and non-users of financial services, understanding both supply and demand-side barriers and the extent of use. However, it also requires a reorientation in regulatory approaches, as I will discuss in the following.   What does a closer focus on users imply? First, it implies an increased effort at financial literacy, i.e. knowledge about products and capability to make good financial decisions, both for households and enterprises. There is often a lack of awareness about available financial products, as well as a lack of capability to manage resources well, knowing to evaluate and compare different financial products and services, and demanding one’s rights if necessary. 

Specific activities in this area might include the design of graphic tables with comparative information on the full pricing of financial products, community and village road shows to explain major financial concepts, training on the delivery of financial education by retail officers, financial literacy messages in m-banking systems, campaigns on new pension systems, basic brochures on financial services, the inclusion of financial literacy in school curricula, campaigns on the management of debt and the avoidance of over indebtedness, and campaigns on the economics and the benefits of the insurance market. A lot has happened in this area in recent years, but significantly more research and analysis is needed to explore what kind of program targeted of which population group can be helpful.  

Second, there is a general trust issue. Overcoming households’ mistrust of financial institutions might be easier in the case of transaction services, where the inter temporal nature of financial services is reduced to a few minutes, especially in m-banking, especially in the case of mobile phone banking, in contrast to savings or credit services, where the result can only be seen after months if not years. The rapid success of m-banking services focusing on payment and remittance services in several African economies has shown the promise of using transaction services as entry point for the inclusion agenda.  

Third, an increased focus on users implies more tailor-made products for the bottom of the pyramid. Transaction accounts, often linked to the use of ATMs rather than shiny banking halls, might be more attractive and cheaper for large part of the currently unbanked population. Agency banking, i.e. financial service provision through non-financial institutions, such as supermarkets or gas stations – a success in Latin America - can help overcome geographic and cultural barriers. Linking with informal financial service providers and microcredit institutions can also help barriers between banks and users.  

Fourth, for enterprises, a focus on users refers mostly to the challenge of turning investment into bankable projects. Standard barriers include the lack of collateralizable assets and audited financial statements. To address the lack of collateral one has to look beyond the upgrade of property registries – part of the necessary infrastructure of any modern financial system, but a rather long-term goal; products tailored for SMEs such as leasing or factoring rely less on traditional collateral. Combining lending with extension services for entrepreneurs can be promising.  

Standard accounting rules are too much of a burden for most SMEs. There might a need for the development and implementation of simplified accounting standards for microenterprises and for SMEs.  

Fifth, it is important to stress that financing is only one of the many obstacles that African enterprises face in their operation and growth. African firms report greater obstacles than firms outside Africa in access to land, customs and trade regulations, transport, and, most strikingly, electricity. This points to the deteriorated physical infrastructure that African enterprises have to deal with, as well as the deficiencies in the broader regulatory environment, and thus a broader reform agenda than financial sector reforms.  

While a focus on users is important in the financial deepening and broadening agenda, it is as important in the financial stability agenda. We care about stability of financial systems not for the sake of bankers and stock market traders, but for the sake of users. 

This implies consumer protection, including (1) consumer disclosure that is clear, simple, easy to understand, and comparable; (2) prohibitions on business practices that are unfair, abusive, or deceptive and (3) efficient and easy-to-use recourse mechanisms.    

On a more general level, it might have to imply a rethinking of supervisory focus. The decision to extend regulation and supervision to non-bank segments of the financial system has to take into account the need for protection by different users. We therefore advocate a caveat emptor approach for segments of financial markets with mostly sophisticated users, such as equity funds and over-the-counter segments of capital markets, whereby the weight of the responsibility for monitoring lies on sophisticated investors rather than supervisors. For bottom-of-the pyramid segments, on the other hand, we advocate an increased supervisory focus, especially in the case of deposit-taking institutions. Experiences from low- and middle-income countries have shown the risk that pyramid schemes and their collapse can pose for socio-economic stability.  Beyond regulation and supervision of deposit-taking institutions and conduct of business regulations for non-deposit taking institutions, this implies increased consumer protection as outlined above.  

The increased focus on users is thus a broad agenda. As with the rest of the financial sector agenda, one size does not fit all. While South Africa has established a multi-tiered consumer protection framework, the institutional demands for such a framework might be too large for many small low-income countries, where simpler versions, maybe based on industry self-monitoring, might be necessary. Regulation and supervision of many small microfinance institutions can be costly in many African countries with limited supervisory resources, using apex structures can be helpful in this context.


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