Germany, World Bank and AfDB Launch Partnership for Making Finance Work for Africa

22/10/2007
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Washington D.C., October 20, 2007 — A new partnership to support stronger financial systems in Africa was launched today, by Germany, the World Bank and the African Development Bank.

Germany, which championed the partnership under its G8 presidency, stressed that by strengthening African financial systems, the new effort would support economic growth, job creation and poverty reduction.

Heidemarie Wieczorek-Zeul, Federal German Minister for Economic Cooperation and Development , said, "economic development is only possible if there is a thriving financial sector which accords both men and women access to appropriate financial services, enabling them to save, while allowing  businesses to invest and create lasting employment."

She added that "the lack of financial services is one of the main obstacles to private sector development in Africa."

A recent World Bank study, Making Finance Work for Africa, points to emerging opportunities for increasing the availability of affordable finance, so that enterprises end up with access to financial services that will help them invest in productivity and expand. During this past decade, African finance has been strengthened by a wave of reforms through which financial repression diminished, state-owned banks became privatized, and foreign banks re-entered the market. New products and technologies have created significant opportunities for innovation. The emergence of stronger African banks and increasing regional integration enable the provision of finance on a larger scale.

Robert T. Zoellick, President of the World Bank, added that "financial sector development will be a strategic driver of growth and employment in Africa. African firms view access and cost of finance as two of the three primary constraints to doing business."

The study points out some of the challenges that remain to be addressed:

  • Only 20% of adults in Sub-Saharan African hold a bank account at a formal or semi-formal institution. Increasing access to financial services will enable poor people, women in particular, to increase their household incomes, build assets, invest in health and education and reduce their vulnerability to household emergencies.
  • A very low share of deposits in African financial institutions flow into loans to private firms; rather, banks keep high levels of liquid assets and acquire government debt instruments.
  • Firm surveys show that access to finance is one of three biggest constraints for enterprise growth in Africa. More African firms name limited access to and high costs of finance as a key constraint in Africa than in any other region in the world.
  • Only 20% of adults in Sub-Saharan African hold a bank account at a formal or semi-formal institution. Increasing access to financial services will enable poor people, women in particular, to increase their household incomes, build assets, invest in health and education and reduce their vulnerability to household emergencies.
  • The availability of credit for the private sector is improving, but at 14% of GDP is still insufficient to drive growth and private sector development.
  • Interest costs, administrative expenses and collateral requirements for loans are significantly higher in Africa. Interest rate spreads – a measure of financial sector efficiency - average 8% in Africa compared to the world average of 4.8%.

In addressing these challenges, policy makers and financial service providers can take advantage of the technological innovations emerging on the Continent. With the entrance of new technologies like mobile phones into the African market, there is great potential to help overcome remoteness and process-cost barriers to providing payments and making deposits, as well as other types of financial services.

AfDB President Donald Kaberuka, applauded the partnership, noting that "we need to move beyond business as usual in order to strengthen African financial sectors. By making financial sector development a priority in Africa we are getting serious about providing the support that African enterprise needs to grow and generate jobs. We are determined to see steadily wider access to financial services, and at reasonable costs."

Architects of the effort emphasized that African financial institutions enjoy considerable liquidity. Thus, strategies to strengthen the financial sector should help to unleash the current potential of African banks and other financial institutions. Currently, total credit for enterprises and households is about 14% of the collective Gross Domestic Product in Africa, insufficient to ignite accelerated growth and poverty reduction. An increase to 25% of GDP — a level achieved by many other low-income countries -- would translate to more than $70 billion of additional investment resources for households and firms. 

The G8, meeting in Heiligendamm, Germany, in June, 2007, endorsed the partnership to support stronger financial systems in Africa. Representatives from Germany, France, Russia, UK, USA, Sweden, the African Development Bank, CGAP, EU, UN and the World Bank Group confirmed their commitment to financial sector development in Africa and their support for the partnership at a follow-up meeting in Berlin, proposed shared principles for the Partnership and encouraged other stakeholders to join.

The partnership will support actions to advance three primary objectives:

  • Expanding access to financial services by all actors in the economy: firms, individuals and households.
  • Increasing financial depth, diversity and efficiency: as indicated by the ratio of credit to the private sector as a percentage of GDP, improved interest margins and more positive indicators of capital market and other non-bank financial sector development across African financial systems.
  • Strengthening institutional and regulatory capacity; as measured by business environment and other institutional development indicators.

Noting that women represent Africa’s untapped economic potential, Ms. Wieczorek-Zeul stressed that better functioning financial institutions, providing full access to financial services to women, would go a long way to helping create opportunity on the Continent.