DAKAR – The world economic downturn and financial-market tremors have strained budgets across Africa. With the exception of Ghana, and a few other states, in 2009 most African countries’ fiscal balances deteriorated. But, thanks to prudent management of public finances during previous periods of robust growth, a significant number of African countries have endured the current crisis in better fiscal shape than during past crises.
In 2009, aggregate GDP growth in Africa averaged 1.6%, down from about 5.7% during the 2002-2008 period – but growth all the same. Moreover, several African countries continued to implement long-term reforms to improve their business and investment climate, despite the daunting challenges presented by the crisis. Now that international trade and global industrial production are on the mend, sub-Saharan economies look set for more robust growth, as demand for and prices of oil and other minerals rebound and general economic activity resumes.
Of course, numerous downside risks – adverse weather shocks, military conflict, and political turmoil – still can undermine the hard-earned benefits of this social and economic record. But it is the dichotomized nature of their economies and finances that represents Africa’s most intractable structural imbalance. Frankly, two Africa’s are emerging: a modern economy and a cash-based economy.
Across Africa, almost all governments praise – some honestly, some not – economic modernization as the cornerstone of prosperity and the yardstick by which their effectiveness should be measured. Many boast of the modernity of the financial infrastructure of their economies, which is based on an entire set of legal, regulatory, accounting, credit reporting, and payment and settlement systems.
National payment systems operate electronic-based payment products and services. A high-value inter-bank funds-transfer system settles transactions in real time, eliminates credit risk between system participants, increases circulation of funds, and enhances monetary-policy implementation. Banks are provided with a facility to monitor their positions in real time and hence make cost-effective investment decisions.
So far, only a few registered financial institutions, primarily offshoots of Western commercial banks, have access to such payment-system facilities. Non-banking financial institutions such as foreign exchange bureaus, post offices, and micro-finance lenders are not admitted, even when they are financially sound and sustainable.
The effects of banks’ hijacking of national payment systems to service only the modern economy are compounded by the exclusive agreements that banks and money-transfer companies such as Western Union have signed with most African countries. These agreements lock out non-banking entities from the highly lucrative market for migrant remittances from the African diaspora, which remain a key engine of growth.
Yet rapid urbanization everywhere in Africa has given rise to a dynamic informal sector unconnected to the modern economy. Although marginalized by African officials, this cash-based economy is a major contributor to the continent’s productive capacity. It employs more than 90% of the workforce and is home to 75% of the retailers. But, despite the pivotal economic role that the informal sector plays, it has no access to conventional bank loans. Micro-finance institutions provide the only credit lines open to informal operators.
The micro-finance business model is based on lending that is guaranteed by the group. This translates into a solidarity network and a support mechanism that mitigates credit risk and encourages payment discipline. Credit repayment in well-managed micro-finance institutions is around 95%. All studies undertaken in the area have also revealed that women are not only the most active among informal-sector entrepreneurs, but they are also quicker to meet their commitments.
African states must now recognize that modernizing their informal sectors by integrating them into the modern economy can be a major development tool. Yet only a few countries have started moving in that direction. Nigeria has refrained from signing any exclusive agreements with Western Union and others, and its newly consolidated banking industry is making significant inroads across the region.
Rwanda, too, has enacted regulations that eliminate exclusive agreements, opening doors for micro-finance institutions to become payment-service providers. The South African Reserve Bank has created a special platform within its national payment system for micro-finance institutions and non-banks. Malawi’s national payments system is directly accessible to non-bank participants, including third-party service providers.
Giving micro-finance institutions access to national and regional payments systems and electronic retail facilities will go a long way toward meeting the requirements of the retail and business sector in terms of banking facilities. It will also help facilitate access by the poorest to financial services, thus helping to reduce the high proportion of the un-banked population.
All of this will invariably spur development and integration of national financial systems and intra-regional trade. This will be a welcome development, because a large proportion of intra-regional trade is carried out by informal operators and small and medium enterprises that do not have access to the banking system. Moreover, economic integration and increased intra-regional trade are the best entry point into global markets for all countries.
When it comes to analyzing what ails Africa, it is customary to dwell at length on the continent’s traumatic past. But it strains the imagination to link Africa’s colonial-era pains with the willingness of African leaders to spend a fortune to equip their countries with state-of-the-art settlement systems, and then proceed to exclude their citizens from using them. Abraham Lincoln once said that a house divided cannot stand. There is an economic corollary to this: an economic house divided cannot prosper.
Sanou Mbaye, a former member of the senior management team of the African Development bank, is a Senegalese investment banker and the author of “L’Afrique au secours de l’Afrique” (Africa to the Rescue of Africa). Copyright: Project Syndicate, 2010.