Africa Finance Forum Blog

Financing Africa’s Infrastructure Gap

14.02.2011Mohamed Hassan

When we talk about Africa’s infrastructure finance gap it is easy to be pessimistic.  I am not.  I am an optimist.
Some see the gap as a problem, a major challenge. But while I agree this finance gap is a challenge, I see it primarily as an opportunity – an opportunity for the private sector to maximise returns on their investment in what is a nascent market.

The highly-regarded Africa Infrastructure Country Diagnostic study (don’t be put off by the title) recently concluded that an annual investment of over $90 billion is required over the next ten years if Africa is to bring its infrastructure to the levels of other developing regions of the world.
About half of these investment needs are currently being met through official development assistance, foreign private sector investment  and, often overlooked, domestic investment  from within Africa.  In fact, the African taxpayer is the biggest investor in African infrastructure.  So it is not all gloom.  

African governments are not only committing public resources to infrastructure development.   They are also creating an economic environment that encourages private sector investment – micro-economic reforms, institutional reforms, efficiency improvements – alongside a commitment to improved corporate and economic governance.  Further,  enabling legislation for effective public-private partnerships (PPPs) is also being introduced.   

These improvements might not be consistent across all of Africa’s nations, but they will certainly continue.  And this improving climate will increase the opportunities for private sector involvement in Africa’s infrastructure sectors.  
The pessimists say that Africa is too risky for investors.  Yet we know that no investment is without risk, in any part of the world.   Indeed, the belief that investing in Africa is a higher risk than in other regions is a myth.  A recent study by the ratings agency Moody’s, which analysed project finance loans in Africa over 20 years, found that only one of the 92 loans defaulted.
What about rates of return?  Africa is an emerging market, so returns are high for those who invest early.  Many privately financed infrastructure projects in Africa are seeing returns that compare well with other parts of the developing world.    

Africa’s infrastructure finance gap is the result of demand and real growth -- demand that comes from Africa’s recent solid growth.  Some countries in Africa have seen double-digit growth and  Africa is now one of the world’s fastest growing economies, with GDP growth rates that are often at par with China and Brazil.  That growth produces demand – for power, for water, for transport and for communications.  Projects in all of these areas are bankable.

Even the recent economic downturn has shown that Africa is not the economic basket case some would like to believe it is. Across Africa, real GDP grew by 5% from 2000 to 2008. Hitting a peak of $1.56 trillion in 2008, the financial crisis brought Africa’s collective GDP down to $1.4 trillion in 2009. The negative impact was therefore not as great as in other parts of the world.  Importantly, Africa’s growth is built on solid foundations and is rebounding. 2010 finished with growth at 4.5% and economists expect growth to reach 5% in 2011.  

Ultimately, it seems we, the optimists, have both the facts and the figures in our favour. If you are an investor, you can’t ignore Africa.  And you can’t ignore infrastructure.  You will want to back a winner.


Mr. Hassan is the Coordinator of the Infrastructure Consortium for Africa (ICA) Secretariat housed by the African Development Bank in Tunis, Tunisia. He holds an MBA in International Banking and Finance from the University of Birmingham in the United Kingdom and a Masters Degree in Economics from François Rabelais University in Tours, France. He has 18 years of experience as a Financial Analyst and Investment Officer in the infrastructure sector.

Effective Financial Intermediation: Key to Zambia’s Sustainable Growth

31.01.2011Caleb M. Fundanga

The Zambian economy has continued to recover from the effects of the global economic crisis. In 2010, real GDP is estimated to have grown by 7.1 percent from 6.4 percent in 2009, far exceeding the target of 5 percent for 2010. This was largely driven by the continued strength of the agricultural, mining, and construction sectors, and a rebound in the tourism sector.

However, Zambia, like many other sub-Saharan countries, has been grappling with the problem of low domestic savings needed to enhance economic growth and development. Excessive reliance on foreign savings to finance investment is highly unsustainable as evidenced by the decline in Zambia’s foreign private investment inflows to about 7.2% of GDP in 2009 from 16.7% of GDP in 2007, due to the global financial crisis.   

Over the long term, greater reliance on domestic resources is critical if Zambia, like other African countries, is to develop more resilient economies. Domestic savings and investment in Zambia, and many other African economies, are low. Investment has thus been financed mainly through foreign savings. One of the reasons for this has obviously been low income levels and a narrow tax base. Another important constraint has been that of low financial intermediation.  

However, the potential of savings in rural areas is high and, if captured, could help redress the situation.  

The issue of high lending rates has become topical in Zambia. After the liberalisation of the economy in 1991, the Government moved away from financial repression by abandoning the administrative controls on interest rates. This means that lending rates are determined by the forces of demand and supply in the credit market, overcoming the inefficiencies that resulted from financial repression. An important effect of this repression in the credit market was that it limited the supply of credit while at the same time increasing demand when the rates were set below the market equilibrium level. This partly led to credit rationing and thus limited the ability of financial intermediaries to effectively use their roles to contribute to economic growth and development.  

In a liberalised financial market environment, the Central Bank contributes to the reduction in lending rates by reducing inflation. The Government also contributes by implementing prudent fiscal policy, thus limiting the crowding out of the private sector by the Government. This should reduce the cost of lending to the private sector.  

A key factor that commercial banks take into consideration in determining lending rates is the risk of default arising from the poor credit culture in the economy in general. To help  resolve the problem, the Bank of Zambia, through the financial sector development plan, has facilitated the establishment of a credit reference bureau which collects information on borrowers that is  used by credit providers. It is hoped that this will lead to a fall in default rates and thus increase intermediation.  

The response of commercial banks to the factors outlined above has been slow. Therefore, another avenue taken by the Central Bank to achieve lower rates is the stimulation of competition in the financial system. In this regard, the number of commercial banks registered in Zambia has increased from 13 in 2002 to 18 at end 2010. It is envisaged that as competition in the banking sector increases, banks will be more innovative in attracting savings from the unbanked public, especially in rural areas, and making their operations more cost effective. This will lead to competitive pricing of banking products and services and enhance financial intermediation.  

For its part, the Zambian Government has tried to address the problem of low financial intermediation through the implementation of a financial sector development plan. With 67 percent of the population having no access to financial services, effective financial intermediation is inhibited. There are a number of factors that can be attributed to this, including high transaction costs associated with opening bank accounts and low outreach by existing financial institutions, especially in rural areas. As there are very few banks outside urban areas, most people in rural areas have limited access to finance.  

In 2011, the Bank of Zambia aims at further reducing inflation to lower levels. The decline in inflation and Government securities yield rates should, in the coming periods, contribute to a decline in banks’ lending rates and thus stimulate borrowing by the private sector. These efforts are expected to be complemented by efforts aimed at enhancing financial inclusion, including financial literacy and improving the supply and outreach of innovative banking and financial services. These efforts will go a long way in improving financial intermediation, which will in turn contribute to sustainable growth in Zambia.

Income Inequality and the Growth of Africa’s Financial Sector

16.01.2011Kupukile Mlambo

In the 1980s and 1990s, most African countries embarked on a series of structural and policy reforms in the financial sector as part of overall economic reforms. The goal was to revive restart economic growth while improving economic and financial sector efficiency. 

Initial reforms in the financial sector included the abolition of explicit controls on the pricing and allocation of credit, reducing direct government intervention in the financial sector. They also included a relaxation of controls on international capital flows and the determination of interest rates by the markets, rather than government. The second generation of financial sector reforms focused on structural and institutional constraints, such as improving the legal, regulatory, supervisory and judicial environment, restoring bank soundness, and rehabilitating financial infrastructure. The impact of these reforms on Africa’s financial sector was generally positive and a result is that financial depth on the continent has improved. A conductive business and investment environment as well as the improvement of   financial systems have now begun to attract foreign capital, although this is directed mainly at natural resources.

The impact of the reforms on the reduction of financial inequality has, however, been questioned. For sub-Saharan Africa, the proportion of the poor surviving on less than $1.25 per day has hardly shifted between 1981 and 2005, falling from 53% to 51% between the two periods. In South Asia, which is a relatively comparable region with Africa, the poverty head count ratio fell from 59% to 40% between the two periods. Not only is poverty in Africa high but inequality, as measured by the Gini-coefficient, is also high. For the period 1992-2007, the Gini-coefficient for Africa averaged 0.44, while that for Latin America and the Caribbean averaged 0.51. But the figures for Africa also show a large variation in the Gini-coefficient between countries. Cote d’Ivoire and Tunisia have the lowest average Gini-coefficient (0.41) while Cameroon and Lesotho have the highest (0.54). In general, the level of income inequality in African countries has been very high and rather consistent over the period.

A functional financial system fosters the accumulation of capital, improves economic efficiency and thus promotes long term growth. This, a number of writers have stated, has been the case in Africa. The impact of the development of financial systems on income distribution and poverty reduction, however, remains a matter of debate. Some argue that more developed and freer markets have widened the availability of credit, allowing the poor to invest in their human and physical capital, and also establish small businesses. By widening the financial opportunities available to the poor, the development of financial markets has helped reduce income disparities.  

Indeed, most empirical research gives substantial support to the view that financial development reduces income inequality. One such study finds that when the financial sector is underdeveloped, inequality increases with financial markets development. However, as the economy, and the sector, develop and enters an intermediate and later a mature phase in which more people gain access to the financial sector, incomes rise while income disparities are reduced.       

Others, however, argue that while this view may seem plausible, it is not based on any real evidence. They, indeed, go so far as to say that this ‘development’ of Africa’s financial sector may in fact have raised income inequalities on the continent. While the well-to-do have had the capacity to seize the opportunities created by this development of the financial markets, they argue, the poor have been left in a limbo as they have failed to obtain equal access to credit due to their lack of collateral and connections, among other factors.  This development of the financial markets may thus actually have worsened income inequality on the continent.

Similarly, Banerjee and Newman (1993) and Galor and Zeira (1993), for instance, suggest a linear relationship between financial development and income inequality. Their view is that financial market imperfections such unaffordable transaction and contract enforcement costs; hold down the poor, who lack collateral, credit histories and contacts. As such, even when the poor may have projects from which high returns can be expected, they may still find it difficult to obtain appropriate levels of credit. This reduces the efficiency of capital allocation and limits the social mobility of the poor. Under such circumstances, income inequality rises with the development of financial markets.

It is against this background that I and my two co-authors, Francesco Guidi of the Department of International Business at University of Greenwhich and Michael Enowbi Batou of University of East London, embarked on what we believed was the first study on the relationship between financial development and inequality based purely on Africa countries.

In particular, we sought to investigate whether financial development in Africa has had an impact on income inequality, drawing on the experience of the continent’s financial reforms amid a very high and persistent level of inequality. Our purpose is to investigate whether the developments taking place in financial sector as a result of financial reforms can reduce the persistent level of inequality. The sample comprised of 22 out of 53 African countries for which we had data on inequality indices. We found this dataset sufficient for the analysis. The length of the dataset, covering the period 1980 to 2004, also allowed us to gather a good number of observations within each country. The findings of the study are in the paper titled Financial Development and Income Inequality: Evidence from African Countries.’

Our findings still showed that high levels of financial development tend to reduce financial inequality. Indeed, our results showed that a 1 percent rise in financial development is associated to a reduction of income inequality between the ranges of 0.02 to 0.05 per cent. However, we found no evidence supporting a direct relationship between financial sector development and the growth of income inequality. We also found that improved education was also a major contributor to the reduction of income inequality, suggesting that spending more on education and expanding coverage would have a substantial impact on the distribution of income.

It is our belief that in trying to widen access to the financial markets, targeting especially those in the lower income cohort and the rural populations will help to reduce the persistent income inequality that exists in African countries.     

From these findings, we believe it is important that financial policy designs take into account issues of poverty and inequality.

Lessons for Bank Regulation from the Impact of the Global Crisis in Africa

13.12.2010Louis Kasekende

The global financial and economic crisis exerted a serious macroeconomic impact on the economies of sub-Saharan Africa (SSA); average real GDP growth in 2009 fell by more than 4 percentage points compared to the annual average in the five preceding years. Nevertheless, the banking systems in most countries of SSA weathered the crisis without major damage. Unlike many of the advanced countries and some of the emerging markets, SSA avoided a systemic banking crisis. Banking systems in SSA remained both solvent and liquid. Many commentators have attributed this to the lack of integration of SSA banking systems into global financial markets; a somewhat incongruous conclusion given that international banks dominate the banking systems in many SSA economies.

Less attention has been paid to the strength of prudential regulation in SSA and the contribution which this made to maintaining banking system stability on the continent. It is now recognised that weaknesses in prudential regulation in the advanced countries contributed to the financial crisis. Regulators in advanced countries employed “light touch” regulation in which most of the emphasis was placed on capital adequacy requirements which proved vulnerable to “gaming” by banks, enabling them to ramp up leverage and operate with very little equity capital. In several important respects, SSA bank regulators imposed stricter prudential regulation than did their counterparts in advanced countries.  I will use the bank regulations in Uganda to illustrate these points but Uganda is not unique in SSA and its regulatory framework is qualitatively similar to that of many other SSA countries.

Many SSA countries impose higher statutory minimum capital requirements than do advanced economies; for example Uganda imposes minimum tier 1 and total capital to risk weighted asset ratios of 8 percent and 12 percent respectively, compared to the Basel minimum of 4 percent and 8 percent respectively which was the standard in advanced economies. In addition, SSA regulations impose much stricter standards in respect of the quality of tier 1 capital; for example, banks in Uganda must deduct all intangible assets when computing tier 1 capital, hence there is little scope for meeting the tier 1 capital requirement other than with paid up equity capital and retained earnings.

In contrast to bank regulations in the advanced countries, SSA countries did not put excessive emphasis on (an arguably flawed) capital adequacy requirement. Although capital adequacy requirements play an important role in bank regulation in SSA, they are complemented by other prudential regulations, in particular restrictions on the composition of banks’ asset portfolios and their business activities which are designed to curb risk taking. Uganda imposes restrictions on large loan concentrations, on the trading activities of banks (such as trading equities) and on foreign exchange exposures. Uganda bank regulations also restrict dividend distributions when a bank’s capital is impaired or close to being impaired. Loan loss provisioning requirements are stricter, with less scope for deducting collateral values (which are often difficult to realise) from the value of non performing loans which must be provisioned for and a requirement for a general provision irrespective of the performing status of the loan. Uganda also imposes a minimum liquidity requirement.

Stricter prudential regulations did not prevent dynamic growth in SSA banking systems in the 2000s, a period in which several SSA countries experienced credit booms. In the five years from 2004 to 2009, bank credit to the private sector in Uganda expanded in real terms at an average annual rate of 20 percent. However stricter prudential regulations did help to ensure that the rapid credit growth did not lead to financial fragility in the banking system and they also ensured that banks business activities remained focused on supplying traditional banking products, such as loans to the private sector, which are the priority for the development of SSA economies, rather than proprietary trading activities.

The Basel Committee on Banking Supervision has drawn up proposals for strengthening bank regulations at the global level which in some respects move the global minimum standards towards the standards already in force in SSA. Minimum tier 1 capital requirements will be raised, banks will not be allowed to count intangible assets towards tier 1 capital (to raise the quality of capital), a capital conservation buffer, a countercyclical capital buffer and a liquidity requirement will be introduced. In the United States, restrictions are being re-imposed on banks’ proprietary trading activities. Bank regulations in SSA are not perfect and will need to be upgraded in the years ahead to meet evolving challenges to financial stability, but it is fair to conclude that the stricter approach taken by bank regulators in SSA, compared to their counterparts in advanced economies, contributed to the resilience of the banking system in the face of the worst global financial crisis in more than half a century. African bank regulators got the basics right.


Dr. Louis A. Kasekende is the Deputy Governor of the Bank of Uganda. He began his five-year term in this position in January 2010. From May 2006 to 2009, he served at the offices of the African Development Bank (AfDB), in Tunis, Tunisia, as Chief Economist.

The Virtues of Savings Mobilization for Economic Development in Africa

26.11.2010Hugues Kamewe-Tsafack

Sub-Saharan Africa (SSA) has continuously exhibited the lowest savings rate in the developing world. The average gross domestic savings rate1 in SSA was 16% of GDP in 2008 compared to 22% in Latin America and Caribbean and 35% in South East Asia. Although the picture varies significantly across economies with some countries displaying modest domestic savings rates [e.g. Guinea (3%), Burundi (4%), Mozambique and Ghana (7%)] to relatively robust savings rates [e.g. Lesotho (22%), Rwanda (27%) and Mali (28%)]2, the reality is that we need to increase savings rates in Africa to levels consistent with sustainable economic development, which are considered to be above 25% of GDP.

Why have most African countries failed to achieve high savings rates?

The causes of this problem are extensively documented in the economic literature. Savings has long been repressed by controlled low interest rates and high inflation in various countries. Negative real interest rates have really discouraged people from monetizing their savings using formal financial institutions; rather; they favor savings in tangible assets (e.g. livestock, stockpiles, etc.). While we thought these were stories from the past, people have seen their savings completely vanish with hyperinflation as recently occured in Zimbabwe. Nevertheless, we should recognize that financial liberalization measures have helped address the problem in most countries.

However, what has not evolved very much is the scanty regard policy makers in Africa have paid to savings mobilization. And the strong reliance on foreign aid to finance development needs has certainly played a role in this attitude. Initially, aid was supposed to complement domestic financial resources in order to boost development efforts and help countries break away from poverty; instead it has ended up dampening domestic savings and creating dependence in Africa. Despite the pervasive interpretation of the “vicious cycle theory”, no country is indeed too poor to save. Research in microfinance has brought to our attention the variety of savings practices by poor people. These small deposits provided social safety nets to the bottom end of the pyramid during the food and fuel crisis in 2008 since microfinance institutions and savings banks in many African countries experienced serious declines in their deposit balances.

How then to harness this potential and create a dynamic for savings mobilization?

Increasing awareness from policy makers

Greater awareness from policy makers that a low domestic savings rate is a bottleneck to economic growth is essential. Kenya Vision 2030 recognized the need to raise the domestic savings rate above 30% as vital to ensure long-term double digits economic growth. In South Africa, a Savings Institute has been established to promote thrift values and reverse the downward trend, which has seen the domestic savings rate fall from 26% in the 80s to 16% in 2008. In the same vein, the C103 underscores the need to mobilize untapped savings as part of the African countries' efforts to increase domestic resource mobilization4.

Deepening financial sectors

This implies a wide array of transformational changes that positively affect savings rates. Efforts to reduce barriers (e.g. physical distance to banking outlets, high minimum balances, financial illiteracy, disproportionate KYC5 requirements, etc.) certainly deepen financial access. At the institution level, the emergence of non-bank financial intermediaries such as insurance companies and pension firms is instrumental to the development of contractual savings while MFIs and savings banks are vital in canvassing small savings. At the product level, it is important to leverage remittance flows and e-money stores in cellphones for the purpose of increasing savings. Upgrading regulatory and supervisory frameworks shall also instill and preserve confidence in the financial system, which is favorable to savings. Some countries have plans to introduce deposit guarantee schemes, which are often viewed as genuine mechanisms for protecting depositors. Finally, financial market infrastructure should be improved to facilitate financial intermediation.

Would demand-side drive supply-side policy reforms?

Sir John Hicks (Nobel in Economics, 1972) argued that the real challenge is to create the link between potential savings and effective investment. Unlocking the potential of savings is not an end in itself. Most important is to create the conditions for proper financial intermediation. If the environment is conducive for banks to increase lending to individuals and enterprises, they will certainly deploy aggressive strategies for mobilizing savings. Likewise, governments stimulate the mobilization of savings by resorting to domestic markets for the financing of their own needs. Allow me to skip the debate about potential “crowding out effects” on private investment and “budget deficits”. The case is made here against external debt as the alternative. It is well known that African economies are particularly vulnerable to external shocks, which can rapidly render the debt service burden in hard currencies unsustainable.

To conclude, the virtues of savings for economic development are unquestionable. Africa should try to follow the same route taken by industrialized and emerging economies.

[1] Gross domestic savings (GDS) is defined here as gross national income (GNI) less total consumption (C) + net transfers (NT).

[2] World Development Indicators (WDI) 2010, World Bank.

[3] The Committee of Ten African Ministers of Finance and Central Bank Governors (The C-10) was created in Tunis in November 2008. The members of the C-10 are the following countries and institutions: Algeria, Botswana, Cameroon, Egypt, Kenya, Nigeria, South Africa, Tanzania, the Central Bank of West African States (CBWAS), and the Central Bank of Central African States (CBCAS). At its creation the C-10 was charged among other responsibilities to identify strategic economic priorities for Africa and develop a clear strategy for Africa’s engagement with the G-20 through South Africa, the only African representative in this Group. For more information - 

[4] See Communiqué of the Meeting of the Committee of African Ministers of Finance and Governors of Central Banks (C 10), October 6, 2010, Washington, D.C, pp. 2-3 (§8).

[5] Know Your Customer (KYC).


Dr. Hugues Kamewe Tsafack is currently the Stakeholder Relationship Officer at the MFW4A Secretariat . Before joining the Secretariat, he worked for 10 years with the World Savings Banks Institute (WSBI) as Financial Sector Development Advisor in charge of the Africa region.

The views expressed in this article are those of the author and do not represent Making Finance Work for Africa.


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