Africa Finance Forum Blog
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I – The impasse: A banking system beset by bad practices
After twenty years of impasse, the Tunisian banking system should emerge from the doldrums
Today, considering the country’s size, it is not unfair to say that the Tunisian banking system is made up of a constellation of small banks. At the regional and international levels, they count for very little. With some US$ 30 billion in total assets, Tunisia’s major banks are far behind their African counterparts - South Africa: US$ 570 billion, Egypt: US$137 billion, Morocco: US$102 billion, and Nigeria: US$87 billion.
For over twenty years, no major reforms have helped stimulate the banking environment, especially with regard to restructuring. The banks are observing each other, and due to constraining private practices and the high stakes, they are unable to attain their real potential to finance the economy. Trapped by their capital structures and conflicts of interest, they have opted to live discretely off their investments. Cradled by the market, a degree of sluggishness has set in. What has therefore become of their mission of contributing to development efforts?
A demanding anti-economic environment and missed opportunities
During these times of financial and political crises, it is fair to denounce and condemn banks. No! Tunisian banks are not responsible for the issues facing the Tunisian society. They have respected the logic of the markets that was imposed and administered upon them. They have mobilized skills and capitalized on expertise. Unfortunately, their efforts were thwarted by an anti-economic environment characterized by « business » and private interests that were unfavorable to entrepreneurial initiative and creativity. The banker was incapable of playing their role because they hadn’t the means or rather, the power to do so. As for the entrepreneurs, they could not express their talent because they neither had visibility nor hope. The lack of convergence between the Tunisian banker and the entrepreneur represents serious “economic failure”. We are unfortunately paying a huge price for this in terms of job creation.
II – Hope: Mobilizing resources through meaningful measures
Consolidating and reforming the banking system to enable it play its role as an engine of growth
Bold reforms are expected. Regardless of the situation, bank regroupings are essential. It is an opportunity to restructure and consolidate the capital of both public and private banks. Mergers are vital and even urgent. It’s the opportunity to introduce good practices. It’s also time to send a strong message to the international community, the rating agencies that are watching us, our historical partners, and investors. It’s time to finally rebound and restore the confidence that we henceforth deserve and which will mark our accession to a mature financial system.
Prudent financial liberalization which avoids excesses and unnecessary mimicry
We should not throw out the baby with the bath water. No! Ignoring the past and resetting the financial and banking sectors would be a serious mistake. Similarly, adopting a status quo would be the best way to discredit our economic and human potential in the eyes of the international community. Financial liberalization can be a source of efficiency if it is well managed. Opening up the economy, including the dinar’s convertibility, should be done without excesses and zeal. We are still a fragile economy. Seeking to please others amounts to putting in place conditions for chaos.
Dhafer Saidane is a professor at the Université de Lille III and the Skema Business School. He also acts as an expert for the United Nations Economic Commission for Africa (UNECA) and the United Nations Conference on Trade and Development (UNCTAD), and is an advisor to the Club of Banking and Financial Institution CEOs in Africa for the Maghreb region. He is the author of numerous works on the topic of finance, including such prominent publications as “La Finance Islamique à l’Heure de la Mondialisation” and “Les Banques, Acteurs de la Globalisation Financière”.
Sub-Saharan Africa is one of the poorest regions of the world, with almost half of its population living in extreme poverty.
Financial exclusion is one of the multiple facets of this poverty. It translates into a total or partial lack of access to mainstream financial services, preventing people and small enterprises from seizing opportunities that would help them break out of the vicious cycle of poverty.
Formal microfinance, channelled through microfinance institutions (MFIs), is considered an effective means of combating financial exclusion and fostering economic development. However, the viability and effectiveness of microfinance is often threatened by the uncertainties around its long-term sustainability. Commercial funds are believed to be a solution to this concern. They, however, raise further concerns about the ability of microfinance to continue serving the poorest, on the one hand, while providing substantial returns to investors, on the other hand.
Commercial funds (provided by, among others, investment funds and banks), do have a positive impact on MFIs by responding to their funding needs, fostering responsible behaviour and good management practices. Thus, getting private investors involved in microfinance is seen as a solution to filling the funding gaps faced by MFIs.
Microfinance Investment Vehicles (MIV) are funds that exclusively invest in microfinance assets. The number of these Microfinance Investment Vehicles is growing fast and the amounts involved are “booming” through much of the world -- in spite of the recent financial crisis -- underscoring the growing interest of investors in the new area.
Yet Africa still lags behind. Only 6.2% of the 4.8 billion USD assets under MIV management in 2009 were dedicated to Sub-Saharan Africa. This ‘neglect’ is generally attributed to Africa’s poor business environment.
The general business environment on the continent is said to discourage entrepreneurs, particularly foreign investors, from involvement in microfinance. Indeed, from the MIVs' standpoint, Sub-Saharan Africa is dominated by a large number of small, unprofitable MFIs, constrained by high operating costs and poor regulation. The returns of African MFIs' are also lower than those in other regions.
To develop Microfinance Investment Funds in Africa, microfinance stakeholders, governments, and donors must work together to build a more conducive environment and positive reputation that in which Africa is seen as ‘ready for business’ and not as a continent ridden with ‘financial aid and corruption’. Improved financial performance, good governance and transparency are essential if the micro-finance industry is to attract the necessary investment, grow and thrive in Sub-Saharan Africa.
With regard to funding, donors should cede more space to private investors by focusing their action on MFIs that work with the poorest and are less able to mobilise private capital. Their role in risk mitigation, here, can also be valuable.
As for fund promoters, they have to strengthen their knowledge of the continent and their technical expertise at all levels of management in order to encourage private investors to invest in African microfinance.
In conclusion, it seems the main challenge faced by the African microfinance industry in Africa is largely twofold. The first is proving the value of microfinance as a profitable investment and diversification instrument, and the second is building an enabling environment that will convince private investors that the Sub-Saharan Africa region can offer worthwhile investment opportunities in the sector.
Aissatou Eugenie Sow Camara is a Financial Analyst with 10 years of experience in life insurance, banking and financial markets, including investment and risk management in Europe and Africa. She holds a Master of Science degree in Statistics and Decision Methods from the University Paris 1–Panthéon-Sorbonne (France) and a MSc. Degree in Development Finance from the University of Reading (United Kingdom). Her main interests include development issues related to financial sectors in Africa.