Sub-Saharan Africa has been on a sustained growth path for the last two decades. This trend represents a significant change compared to previous years. The positive developments could be attributed to many factors, most notably to continuous reforms and improved policies, debt relief, vast natural resources, and increased investment.
Thus, the resilience of sub-Saharan African economies has increased, as witnessed by a modest impact of the recent global economic crisis on the region. However, the preconditions for social and economic development vary significantly among the countries, and this has contributed to the uneven pace of growth across the continent.
Since the 1990s, financial sector reforms in many sub-Saharan African countries have contributed significantly to the development and efficiency of their financial - and particularly banking - systems.
Consequently, commercial banks’ capital bases have strengthened and their risk management practices have improved; credit to the private sector has risen and financial deepening improved, albeit both from a low base; and most of the sub-Saharan African banking systems have proved resilient to the recent events of global financial stress.
At the same time, there is potential for a significant change in the landscape for banking in many sub-Saharan African countries, such as the expansion of mobile banking and regional banking groups.
This bodes well for enhanced competition in national banking sectors and facilitates the spread of new technologies. It should be noted, however, that these developments have also brought about challenges for regulators and supervisors in the region.
Despite reforms and strong economic growth, the banking systems in most of the sub-Saharan African countries are still underdeveloped, with low and inefficient intermediation and limited competition. Impediments to the banking sector development include the small national markets, low income levels and weak creditor rights and judicial enforcement mechanisms. Consequently, sub-Saharan Africa still lags behind the rest of the world in financial depth, compared with countries at similar income levels, and access to finance remains among the lowest in the world, both for individuals and enterprises.
SMALL FIRMS AT A DISADVANTAGE
However, the main contribution that the financial sector can have to economic growth and poverty reduction in sub-Saharan Africa is the provision of credit and other financial services to enterprises, especially small and medium ones.
Yet, among enterprises, small firms are particularly at a disadvantage when it comes to access to finance. These enterprises, the-so-called “missing middle” could greatly benefit from new providers, new lending techniques, new products and services as well as better financial and business skills.
Although access to finance is one of the biggest hurdles to the activity and growth of sub-Saharan African enterprises, financing itself is only one among many obstacles faced by entrepreneurs across the region.
Business activity is particularly hampered by the inadequate physical infrastructure. Symptomatic examples are the constant power cuts due to a shortage of electricity – or alternatively, the number of power generators operating in any sub-Saharan African city.
There is no doubt that (inadequate) infrastructure and its financing present one of the key, if not the biggest development challenge faced by the region.
The African Development Bank has estimated that $93 billion per year would be needed to address the deficiencies in the region’s infrastructure, which implies a doubling of the existing investment levels and presents an enormous challenge for sub-Saharan African economies.
Therefore, large and innovative finance will be required if the region is to realize its economic potential. Against this background, regional integration and innovative products present an opportunity for commercial banks to play a more important role in infrastructure financing, but their small size and limited capacity constrain their contribution to this process.
- Sabina Zajc is an economist in the Country and Financial Sector Division, Economics Department, European Investment Bank. This article was inspired by the study “Banking in sub-Saharan Africa - Challenges and Opportunities.”
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