Africa’s financial systems have progressed over the past 20 years. Yet liberalization, privatization, and stabilization has yet to translate into more accessible financial services, especially credit, that reaches the majority of Africans. On average, banks in Africa are well capitalized and liquid. Still, the benefits of deeper, broader, and cheaper finance have not yet been reaped. Even though it weathered the 2008 global financial crisis, Africa will be affected by long-term trends that started before the crisis and have been reinforced by the crisis, especially the shifts in the distribution of global economic power. The BRIC countries, especially China and India, but, more recently, also Brazil, are playing a growing role in Africa. This book makes a series of recommendations to overcome them. They include focusing on increasing competition in the banking sector, expanding financial services, and expand financial literacy.
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Chapter 1 - Financing Africa: Setting the Stage
This chapter states the book’s objectives and main policy messages. It underlines the notion that while the challenges of expanding access, lengthening contracts, and safeguarding the financial system are similar across countries, the ways of addressing them depend on the circumstances and context of each country. The book has three main messages: i) Competition is the most important driver of financial innovation that will help African financial systems deepen and broaden; ii) Expanding financial services to the unbanked might mean looking beyond existing institutions, products, and delivery channels, such as banks, traditional checking accounts, and brick-and-mortar branches; and iii) There is a need for increased attention on the users of financial services, this means expanding financial literacy, developing consumer protections, and addressing constraints outside of the financial sphere, such as in agriculture.
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Chapter 2 - Landscaping African Finance
A landscape of the financial systems in Africa is presented. Evidence shows that Africa’s financial systems continue to be small in absolute and relative terms. They are based heavily on banks; few stock markets have sufficient liquidity; and the contractual savings industry is small and weak in most countries. The small size of financial systems also explains the high costs of intermediation and financial service provision, as well as the limited competition. The chapter also documents the progress Africa’s financial systems made before the 2008 crisis and trends since the crisis.
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Chapter 3 - Expanding Financial Systems
This chapter focuses on the challenge of expanding financial systems in Africa. The concept of an access possibilities frontier is introduced to benchmark access to formal financial services and to discuss policies that help turn the unbankable into the bankable population, and the bankable into the banked population. The access agenda has four elements that need to be address. They are: 1. The role of different financial service providers, and the importance of competition in alleviating supply-side constraints. 2. The need to raise financial literacy among users and suppliers of financial services. 3. Technology's possibilities and challenges for expanding access. In this context, the possibility that a new transaction-led approach toward financial inclusion might be more promising in Africa than a credit- or savings-oriented approach is discussed. The role of governments in expanding coverage through institution building and fostering competition is also discussed. The chapter closes with an overview of specific sectors, such as the ongoing challenges of agricultural and rural credit and the challenges of finance for small and medium enterprises.
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Chapter 4 - Lengthening Financial Contracts
The issue of lengthening financial contracts is the focus of this chapter. Financial services for households and enterprises are characterized by short maturities. At the same time, many of Africa's financing needs are long-term. The landscape of long-term resource providers is presented, including banks and capital markets, as well as institutions with unused potential to contribute to long-term finance, such as contractual savings institutions. Policy options for expanding long term finance are presented, for example, partial risk guarantee schemes, public-private partnership structures, and the use of development finance institutions.
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Chapter 5 - Safeguarding Financial Systems
This chapter focuses on safeguarding finance. Africa has made enormous progress over the past 20 years in improving the regulation of banking, and as a result financial systems are much more stable. However, the quality of supervision has been progressing slowly. The relevance for Africa of the regulatory reform in the North, including Basel III capital requirements, are discussed. Especial emphasis is placed on bank resolution and crisis preparedness, an area where there is a significant need for reform, especially in view of the increase in regional integration in banking. Expanding the regulatory and supervisory perimeter beyond banking has to be undertaken carefully.
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Chapter 6 - All Financial Sector Policy is Local
This chapter describes “who does what.” It focuses on the facilitating role of governments and the changing role of state-owned financial institutions. It also highlights the potential for regional integration in Africa and how to go about achieving it. It discusses the politics of financial sector reform and the challenge of the creation of a constituency for financial sector reform. Finally, we revisit a theme developed throughout the book—one size does not fit all—by discussing challenges and priorities among certain subgroups of countries.
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