Greater innovation, inclusion and insurance: essential to “shake up” Africa’s financial system – Experts agree at latest 2015 Africa Progress Report consultation

Kofi Annan, the Chair of the Africa Progress Panel, and several other Panel members including Tidjane Thiam, Linah Mohohlo, Bob Geldof and Michel Camdessus met on 28 January 2015 in London with a small consultation group of senior financial and banking experts. The meeting was hosted by Prudential CEO, Tidjane Thiam. This followed an initial meeting on the same theme that was convened in Geneva at the end of 2014.

Participants at the meeting recognised that 2015 is an important year for finance in Africa. It is a year in which change may be the most important constant, with several nascent global initiatives poised to set new agendas that will have major ramifications for the continent’s finance sector. These include the expected outcomes of high level international conferences this year on financing for development in June in Addis Abba, the post-2015 development agenda in September in New York, and climate change (COP21) in December in Paris.

New international banking regulatory and compliance frameworks, meanwhile, have started to have a visible impact on the global financial system, in particular the flow of funds across borders. Several of these changes are having a disproportionate influence onAfrica. Without immediate action, this could worsen in the months ahead. With international aid unlikely to increase soon, Africa must also find new ways to tap private finance by boosting and making good use of domestic savings.

Within this dynamically changing policy environment, participants agreed that African nations must transform the banking and financial systems across the continent. Participants at the meeting discussed the importance of governments creating the right policy environment to enable increased domestic savings mobilisation. The creation of more and innovative financial products was agreed to be essential to the channelling of greater flows of funds to infrastructure projects, as well as increases in venture capital and risk credit to entrepreneurs in the region.

It was noted that Africa still lags behind many regions of the world, in terms of financial sector size and impact, largely because it has yet to fully harness the positive potential contribution to the economy of financial sector players, such as insurance companies or pension funds. This must change if the region is to seize the opportunities now to advance at a truly transformative pace.

As last year’s Africa Progress Report Grain, Fish, Money noted, developing the financial sector is one of the most urgent challenges facing Sub-Saharan Africa. Despite the robust growth of the past decade, the poor coverage of the region’s financial systems remains a brake on growth. While low average income is a constraint in much of Sub-Saharan Africa, the policy environment is not conducive to the development of efficient and equitable financial systems.

The participants agreed that the weak role of banks in Africa is reflected in interest rate spreads – the gap between the borrowing rates and lending rates of financial institutions – which are among the largest in the world. Many banks are structured principally to secure large profits on trade in treasury bills, rather than to develop wider saving and lending systems. International comparisons suggest that Africa is home to some of the most concentrated banking systems.

Financial sector weaknesses have far-reaching implications for the real economy, participants argued. Less than one-quarter of African businesses hold a loan or line of credit – and the problems do not end there. Most banks reprocess savings in the form of short-term loans rather than the long-term credits that companies need to finance investment.

Nowhere are the social and economic consequences of financial exclusion more evident than in insurance. Insurance provision is most limited where it is most needed. Lacking access to larger and more diversified risk insurance pools, people are left with no alternative but to self-insure. The meeting concluded in response to a trouble global banking system, increased US interest rates and less international aid, African investors and governments will innovate more.

Peer-to-peer banking and mobile banking will continue to thrive. More and more Africans will begin to embrace the power of domestic savings – and insurance markets will emerge as an exciting and effective means to invest those savings. As a result, it is possible that Africa’s financial systems will begin to support the continent’s transformation and Africa’s banks will finally face a much-needed shake-up.

List of Participants

AFRICA PROGRESS PANEL MEMBERS

KOFI ANNAN Chair, Africa Progress Panel
MICHEL CAMDESSUS Panel Member, Meeting Chair
BOB GELDOF, Panel Member
LINAH MOHOHLO Panel Member
TIDJANE THIAM Panel Member, Meeting Host

CONSULTATION GROUP

BERTRAND BADRÉ Managing Director and World Bank Group Chief Financial Officer
MAX BANKOLE JARRETT Deputy Director, Africa Progress Panel
STEVE KAYIZZI-MUGERWA Acting Chief Economist and Vice President, African Development Bank
CAROLINE KENDE-ROBB Executive Director, Africa Progress Panel
BERNARD MENSAH Global Head, Emerging Markets; Head, EMEA FICC Trading, Bank of America Merrill Lynch
KWAME PIANIM Economist; Management and Investment Consultant
ABEBE SELASSIE Deputy Director, IMF Africa Department
KEVIN WATKINS Executive Director, Overseas Development Institute

Photo gallery