Cementing banks’ role in African development

A sound banking sector is critical for sustained growth in Africa. Despite notable progress since the 1990s in terms of the sector’s depth, access and stability, policy and institutional gaps must be addressed to cement its developmental role. We must maintain sociopolitical and macroeconomic stability, along with expansive financial sector reforms. In the 1980s, deteriorating …

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A sound banking sector is critical for sustained growth in Africa. Despite notable progress since the 1990s in terms of the sector’s depth, access and stability, policy and institutional gaps must be addressed to cement its developmental role. We must maintain sociopolitical and macroeconomic stability, along with expansive financial sector reforms.

In the 1980s, deteriorating economic conditions pushed a number of countries to embark on structural adjustment programmes alongside financial sector reforms, with support from the International Monetary Fund and World Bank. This bolstered growth in a number of countries. In the 2000s growth was further boosted as states with vast natural resources benefited from the commodity boom. Real GDP growth averaged 5.4% over the decade to 2007, and Africa accounted for six of the world’s 10 fastest-growing economies. But the narrative changed with the global financial crisis, while some of Africa’s largest economies faltered under slumping commodity prices.

Post-1980s financial sector reforms in most African countries concentrated on developing the architecture, based on strong supervisory and regulatory frameworks, required to establish stable banks. These included elimination of credit ceilings and directed credit, interest rate liberalisation, removal of barriers to bank entry and exit, and the privatisation of most state-owned banks.

These reforms have transformed the banking sector as financial depth, coverage and efficiency indicators have improved. Banks’ performance across the continent has reflected stronger balance sheets and capital bases, while risk management has been enhanced. There has been an influx of foreign and pan-African banks, attesting to the sector’s scope for expansion.

Growth in Africa’s banking sector has been underpinned by expanded economic activities and strengthened supervisory and regulatory oversight, while innovative financial products have emerged. However, banking penetration is low compared with global averages and large segments of Africa’s population lack access to financial services.

Information and communication technologies have helped to address the problem of bank penetration and paved the way for the development of alternative financial services. Mobile banking has contributed significantly to financial inclusion and job creation. Pioneered in Kenya and Tanzania in 2007, real-time mobile money transfer technology and agency banking models continue to gather momentum in other countries, enabling customers to transfer money without necessarily owning a bank account. The fusion of banking and ICT is providing a framework for growth in domestic savings and investment.

But while these developments provide significant benefits, they pose challenges regarding financial stability and consumer protection. These have led to deposit insurance schemes to ensure stability and protect small depositors. In Ghana, a deposit protection bill is expected to boost domestic savings and investor confidence.

A focus on infrastructure development and institutional capacity is required to enhance financial services delivery and consumer protection. We need advances in ICT to facilitate the inclusion of Africa’s large unbanked population, and a secure legal and regulatory framework to facilitate long-term savings.

The banking sector is a key part of Africa’s future. Building a sound, stable and efficient banking sector will be crucial to Africa’s economic growth.

Stephen Opata is Head of Risk, Foreign Reserves Management, Bank of Ghana.

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