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What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 2

05.09.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

In June 2016, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this second instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at some of the major takeaways of the conference.

In case you missed it, you can read the first part here.

Who are the stakeholders in fragile countries?

Ms. Anderson (Mercy Corps) stressed the need to better understand the nature of market participants in fragile countries. For instance, on the consumer side, people in fragile countries are typically more risk averse, invest less and if they do, they invest in safer activities. Related issues include understanding the consumers' negative coping mechanism: when faced with a shock, do they sell their assets or did they diversify their assets ex-ante? What financial products are appropriate and for whom? Even among fragile countries, situations differ. For instance, the usage of mobile money is very country specific and it is high in Somalia and lower in Central Africa. Agriculture and the informal sector were identified as being key to increasing financial inclusiveness in fragile countries. Similarly, non-resident citizens offer a potential for FSD through the remittances they send.

Domestic governments in fragile countries face a particularly difficult environment. Challenges to FSD include weak implementation, weak commitment to reform, high turnover of staff, and lack of data for diagnostics. As a result, governments and other stakeholders need to prioritize, sequence, and consider quick wins as well as measures to build long term capacity. Participants noted, however, that the particular context in which governments operate is important. For instance, governments in conflict countries face different constraints and policy options compared to those in transition countries.

Official development finance (ODF, which includes bilateral official development assistance and multilateral support) is particularly important in fragile countries where it typically exceeds foreign direct investment. In spite of its importance, many participants argued that procedures and processes to access ODF are particularly long and fastidious, and discourages banks from tapping multilateral institutions. Addressing such bottlenecks could support financial sector development in fragile countries. The timing of aid delivery was also questioned. For instance, aid is particularly valuable when there is a lack of liquidity in a crisis and nonperforming loans are higher. Ms. Anderson (Mercy Corps) noted that the high level of market distortion that humanitarian aid could bring in fragile countries when it crowds out existing financial institutions. Going forward, it will be important to identify ways in which ODF can play a stronger role in financial inclusion and how it can be leveraged to support FSD. For instance, the public sector and donors can partner with the private sector to help develop the financial sector and large infrastructure projects could be an important channel for such cofinancing.

Participants also noted that foreign governments should address the collateral damage on fragile countries from global financial regulation (Basel III and AML-CFT). Indeed, fragile countries are particularly exposed to actions by global banks to reduce the cost of regulatory compliance for instance through "derisking" activities (such as the closing of correspondent banks accounts).

Domestic financial regulators can play an important role in supporting financial sector development but at times limit the role that the financial sector can play through overly excessive regulation in the specific context of fragile countries.

Some participants stressed the need to view the financial sector as an ecosystem comprising many subsectors with different challenges (for instance banks, microfinance, leasing, housing finance, project finance, mobile finance, capital markets, and insurance). For instance, the development of micro insurance should consider the role of banks, insurance companies, and mobile operators as agents for insurance.

Mr. Sy (Brookings) noted that learning from successful developments in fragile countries was useful to help refine and prioritize stakeholders' strategies. For instance, while many stakeholders have prioritized institution building in fragile countries, it is a slow process. At the same time, digital inclusion has progressed at an unexpectedly rapid pace. As a result, policies should be balanced enough to continue the slow and long process of strengthening governance and at the same time capture the opportunities that digital financial solutions offer. At times, both policies can sustain each other. For instance, the provision of functional identification helps speed up the adoption of mobile payments and other digital solutions. At the extreme, having no phone but just a SIM card and proper identification could be enough to be financially included.

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You can download all the presentations on the conference website.

You can also view a selection of photos here.

 

 

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