Partnership for Making Finance Work for Africa (MFW4A)

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A partnership to help develop Africa’s financial sector has been established. The partnership, known as "Making Finance Work for Africa", is an increasingly widely-shared goal among policy-makers in Africa. African governments and development partners recognize that financial sector development is a strategic driver of private sector development, employment generation and shared growth in Africa. Africa needs stronger, innovative financial institutions, capable of making credit and other financial services available under terms ordinary citizens and small firms can afford.

The 2007 G8 Heiligendamm Declaration on Africa "Growth & Development" underscores the fact that "countries with functioning financial markets grow faster and achieve lower poverty rates by helping to channel resources to their most productive use, reduce dependence on external financing, and facilitate risk management. Financial sector deficiencies such as the lack of long term financing in local currency, pose key obstacles that act to constrain African investors, including small scale and informal entrepreneurs and women."

Reflecting this understanding, policy reforms have been adopted in many African countries over the past decade that have halted and reversed earlier deterioration. Macroeconomic reforms and improving governance have created a facilitating environment and important foundations have been laid. But the performance of national financial sectors still falls short of its potential.

Surveys show that access to finance is one of three biggest constraints for enterprise growth in Africa. More African firms consider 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, especially women, 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, it is still insufficient to drive growth and private sector development. Increasing the level of credit for the private sector from 14% of GDP today to 25% tomorrow - still a low income country level – would provide more then US$70 billion of additional investment resources to African households and firms.

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%. African borrowers could pay up to US$ 3 billion less interest every year on their loans, if spreads would be brought in line with the rest of the world.

African governments, development partners and the private sector need to move beyond business as usual in order to strengthen African financial sectors. At the same time, joint efforts to strengthen the financial sector can leverage unprecedented opportunities. The high unmet demand for investment funds coexists with high liquidity in most financial sectors in Africa. Innovative solutions could unleash the potential for significant levels of local investment finance. Innovative financial operators and the emergence of strong regional banks are changing the landscape of African banking. ICT and mobile phone technology provide new possibilities for the provision of financial services to a much larger number of Africans. Migrant remittances exceed Official Development Assistance (ODA) to Africa and could provide an even more viable source of income once costs and risks have been reduced – through the use of new technologies and information-sharing mechanisms. Regionally, integrating financial markets create economies of scale across the region that are necessary to build efficient financial and capital markets.

Building local financial sector capacity through innovative products, tailor- made and innovative financing, facilitating legal frameworks and efficient market infrastructure will increase access to financial services by firms and households, generate more credit flowing to the private sector, strengthen efficient intermediation of financial resources and ultimately generate growth and employment.

The Partnership for Making Finance Work for Africa recognizes the need to work together to strengthen financial sector development in Africa. This is motivated by a double imperative: that Making Finance Work for Africa is an African priority and that efficient cooperation among African governments, development partners, the private sector and other stakeholders can substantially leverage individual contributions.

The objective of the Partnership is to facilitate an increase in financial sector development support, overcome fragmentation and increase aid efficiency by addressing four key constraints for efficient support within country-owned development.

It aims at putting the Paris Declaration into practice by building a joint institutional framework for coordination and communication. A Partnership Secretariat hosted by the African Development Bank Group will facilitate enhanced communication and coordination and support integration of activities within country-owned and regional strategies.

The partnership will facilitate joint knowledge development in priority areas, which will bring together the expertise and experience of participating partners, aiming at generating consensus solutions, adapting international best practice to the requirements of the Region, and tailoring policy advice to the specific needs of individual policy-makers and country situations. It will foster knowledge sharing and dissemination on a broad variety of topics.

It will support joint country and sub-regional level diagnostic work and facilitate country-owned high-impact financial sector development strategies and action plans to broaden the coverage of country-owned frameworks. A shared results framework and key performance indicators will guide its activities. It will promote policy dialogue, advocacy and outreach with a broad range of African stakeholders facilitated through the leadership of the African Development Bank.

The MFW4A Partnership Initiative was welcomed by the G8 in the 2007 Heiligendamm Declaration. Representatives from the German BMZ, GTZ and KFW, the African Development Bank, DFID, the European Investment Bank, AFD, IMF, SIDA, UNCDF, USAID, Russia, CGAP and the World Bank Group confirmed their commitment to financial sector development in Africa and their support for the Partnership at a Making Finance Work for Africa retreat in Berlin on October 12-14, 2007. Participants proposed shared principles for the Partnership and encouraged other stakeholders to join as active partners.