Africa Finance Forum Blog
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For many people, development banks are synonymous with poor financial performance, inefficiencies, crowding out of the private sector, and cronyism. These development banks’ ascriptions have dominated the debate for a long time, turning the discourse about their potential role for African finance into a topic nongrata. Whilst industrial policy making was celebrated in East Asia and made big news yester-year, today’s development finance policy formulae largely abstain from making reference to their role in providing development finance.
Certainly, in a perfect world private sector solutions would be the preferred option. And yet, reality in Africa is far away from that: lacking long-term finance in general, and value chain and infrastructure finance in particular to name only a few. So why should the recipe that seemed to make East Asian economies strong, not hold at least some lessons true for Africa? In a forth coming publication, Financing Africa – through the Crisis and Beyond, my co-authors, Thorsten Beck, Issa Faye and Thouraya Triki and I take a fresh look at development banks and their potential role in African finance.
Africa is badly in need of innovative long-term finance sources, especially for infrastructure and agricultural finance. Many African countries show that the vast majority of loans remain short-term, rarely exceeding five-years. Infrastructure financing needs remain hugely unmet. Agricultural finance in particular has been left ignored by commercial financiers for being too high-cost and high-risk, aggravated by Africa’s small scale, informality, volatility, and governance problems.
Financing Africa acknowledges the disappointing performance of many publicly owned financial institutions. With a few exceptions, these have performed poorly: low levels of profitability 2.4% and high levels of loan impairment 15.8%, to name only a few indicators. For many development banks, political interference, lack of capacity, and the lack of economies of scale persist. All this while the typical credit subsidies provided by African development banks have failed to address underlying causes of access problems, forcing the question why they still exist at all.
We argue that instead of doing away with development banks – they should be given different mandates. Many of the above stated failures could be overcome by reorienting the current business model aiming for policy-oriented development banks being more geared towards whole-sale financing tasks. These should include managing partial credit guarantee funds, facilitating value chain finance arrangement for agriculture, and managing investment funds provided by donors and serving as conduit to private commercial banks as ultimate lenders, to name but a few.
The gap in long term financing is significant, and the lack of private investor’s attention illustrates that other solutions should be taken into consideration that might deviate from the modernist path but fill in important gaps. The stress is on gaps – Africa needs complimentary development banks – and certainly not market-replacing ones. We argue that this can be achieved if the following conditions apply (i) limited to wholesale facilities, (ii) strong private sector buy-in and participation, and (iii) clear sunset clauses and managed using sound corporate governance structures, in the interim might have their place in the financial system.
Most certainly, we believe that private sector solutions are to be preferred, and are first-best solutions. And yet these have not reached target in the African context thus far, asking for interim second-best solutions. We contend that many African countries need to pay attention to realities that call for the design and development of solutions that go beyond the pre-occupation with, for many countries, unachievable optimal policies and institutions. For as long as African financial systems remain commercial bank-dominated systems, finance will remain short-term, expensive and of limited reach.
The proposed shift in focus may not be transformational. But it is important. African finance needs a new and positive activist reform agenda - one that expands the reach of financial markets and lengthens financial contracts, yet honors the progress that has been made in making financial systems more stable – one that enables markets rather than replaces them.
Samuel Maimbo is a Lead Financial Sector Specialist in the Africa Finance and Private Sector Department of the World Bank. In his current position, Samuel guides the World Bank’s finance and private sector development activities in Malawi, Mozambique, Zambia, and Zimbabwe and plays a key role in shaping the Africa regions financial sector development strategy. He is a co-author of the forthcoming AfDB, BMZ, and World Bank publication, Financing Africa: Through the Crisis and Beyond and co-editor of the World Bank seminal work on remittances: Remittances: Development Impact and Prospectspublished in 2005. A Rhodes Scholar, Samuel obtained a PhD in Public Administration with a thesis on the design, development and implementation of banking regulation and supervision practices from the Institute for Development Policy and Management at the University of Manchester, England in 2001; a MBA (Finance) Degree from the University of Nottingham, England in 1998; a Bachelor of Accountancy Degree (with Distinction) from the Copperbelt University, Zambia in 1994. He is also a Fellow of the Association of Chartered Certified Accountants (FCCA), United Kingdom and a Fellow of the Zambia Institute of Certified Accountants (ZICA).
There is an absence of investment banks in the Franc Zone. The banking system is dominated by a small network of commercial banks whose main activities are centred on short term financing of trade, and cater for the needs of governments and public and private clientele. Although realising handsome profits and constantly running a surplus of liquidities, these banks contribute little to the productive investments that these countries desperately need.
At the same time African migrant remittances are one of the most important sources of external development finance available to African countries. Annual amounts are estimated to be between 30 to 40 billion dollars for Africa. According to the World Bank, for sub-Saharan African countries, they increased from 3.113 million dollars in 1995 to 18.586 million dollars in 2007, representing between 9% to 24% of their GDP, and 80% to 750% of the ODA they receive, making migrants, de facto, their first fund providers.
Migrant behaviour on migrant remittances markets is essentially dictated by the quality of products and services offered by banks, money transfer companies and informal operators in relation to speed of service, collection times, cost, security, accessibility of agencies and coverage.
However, the Franc Zone is characterised by a small number of commercial banks such as BNP-Paribas and Société Générale. The quasi-monopoly they enjoy explains the excessive cost of transfers due to high commission rates. This also explains the high level of the un-banked population and the local entrepreneurs’ lack of access to financial services, in spite of a thriving informal sector that contributes to the generation of up to 90% of jobs created in most of these countries.
Additionally, the Money Transfer Companies (MTC) market, present in francophone countries of the region since the late 1990s,, is dominated by Western Union which, controls up to 90% of the total volume of formal transfers in some countries. As with commercial banks, this lack of competition allows for high profit margins and prohibitively high transfer costs which reach up to 20% of the total amount sent.
There is, therefore, in the Franc Zone a real need for the establishment of a medium and long term financing institution in order to efficiently channel remittance flows, stimulate the development of a banking mentality among the population and to increase saving rates in a way that satisfies the needs of the Diaspora, the benefiting households, and the Franc Zone States themselves.
The project for creating an African Diaspora Investment Bank seeks to meet these demands. The objective is threefold:
1. Putting in place an important network of offices, branches, representations, collection and distribution agencies in France, Europe, the USA and Africa in order to capture the flow of migrant remittances;
2. Proposing the most competitive, adapted and performing products, tailored to the needs of African immigrants;
3. Financing, in the most favourable conditions, projects contributing to the fulfilment of the objectives of regional bodies whose mandate is to foster economic integration policies.
The capital of the African Diaspora Investment Bank will be open to the Diaspora through African financial institutions, and the international financial institutions wishing to take part. The declared aim is to assemble a shareholding that guarantees an excellent financial appraisal from rating agencies, bearing in mind that, in addition to its own resources, the African Diaspora Investment Bank will mobilise resources from international and regional capital markets to finance its investment programmes. The Bank will enjoy legal status and financial autonomy, and act in strict compliance with best banking practices. It will rely on a highly valuable human capital and will work in close collaboration with the banking world. Its organisation, structures and operation procedures will be close to those of the European Investment Bank (EIB).
A multi-disciplinary engineering and advisory Bureau will also be integrated to the structures of the bank to serve as a think tank. Its purpose will be to provide technical assistance to both migrants and benefiting households in developing and spearheading innovative and specific banking products, and set up an efficient market monitoring mechanism to help adapt the bank ‘s strategies to its customers’ needs.
There is a real need to reform the banking and monetary institutions of the Franc Zone, especially with regard to exchange rate, reduction of fees and commissions. The creation of the African Diaspora Investment Bank, combined with strategic partnerships with banks and financial institutions of the Franc Zone, and of the rest of Africa and Europe, will act as a trigger for reforms, enable competition, restructure and fructify migrant savings. It will also contribute to the creation of thousands of jobs in Europe, the USA and Africa in these times of economic and financial crisis.
Sanou Mbaye, a former member of the senior management team of the African Development Bank, is a Senegalese investment banker. He is the author of "L’Afrique au secours de l’Afrique" (Africa to the Rescue of Africa).