Banking Exclusion – Limiting Africa’s economic growth


Windhoek ‑ A large majority of Africans is still without access to banking services, a major indicator to the continent’s lack of inclusive growth despite averaging a robust 5 percent growth during the past years.

Analysts say that economic growth has to be inclusive to be socially and politically sustainable and one key component of inclusive development is financial inclusion, an area in which Africa has been lagging behind other continents.

Less than one adult out of four in Africa has access to an account at a formal financial institution, a research report released by the African Development Bank (AfDB) recently reveals.

This is despite the fact that empirical evidence shows that broadening access to financial services is one way of tapping into greater household savings, marshal capital for investment, entrench a culture of entrepreneurship, and open a window for people to invest in themselves and their families.

For the majority in Africa, financial services merely mean being an account holder at a particular financial institution.

Yet financial inclusion goes beyond improved access to credit to encompass access to savings and risk mitigation products, a well-functioning financial infrastructure, which allows individuals and companies to engage more actively in the economy, while protecting users’ rights.

Low-income levels, often volatile high costs of banking, inflationary environments, high illiteracy rates, lack of infrastructure and lack of competition within the banking industry explain the sector’s limited reach.

Research has shown that account in Southern Africa is at 42 percent while in Central Africa it is at 7 percent.

More than 95 percent of adults in the Democratic Republic of Congo (DRC) and Central African Republic are ‘unbanked’. In North Africa 23 percent of adults have a bank account ‑ ranging from 39 percent in Morocco to 10 percent in Egypt.

Research shows that 80 percent of adults without formal accounts cited lack of enough revenue to open an account as a major reason. Cost, distance, and documentation are also cited by more than 25 percent of non-account holders.

The analysts say that bringing financial services to rural people is a major challenge on the financial inclusion agenda.

Key to overcoming this challenge is closing the distance covered in rural areas, investing in infrastructure and telecommunications.

Poor infrastructure and telecommunication partially explain the low number of commercial bank branches per 100 000 adults and low account penetration. 

Recently, financial institutions have opted for mobile money transfers, a rising phenomenon, to tackle this problem.

The research also says that even for those with formal accounts, the majority make deposits or withdrawals only one or two times in a typical month.

The report shows that for countries in Southern Africa such as Angola, 39 percent of the country’s adult population have an account at a formal financial institution, Botswana stands at 30 percent while the Democratic Republic of Congo (DRC), a miniscule 4 percent of the adult population has a banking account.

The research reveals that only 54 percent of South Africa’s adult population owns a banking account, 40 percent in Mozambique, 17 percent in Tanzania, 21 percent in Zambia and 40 percent in Zimbabwe.

Nigeria, Africa’s second largest economy, has only 30 percent of its adult population who have access to a bank account while countries such as Guinea has 4 percent, Cameroon, 15 percent, Ghana 29 percent, Niger 2 percent, Senegal 6 percent and Sierra Leone 15 percent only to mention a few.

In East Africa Kenya has the highest percentage of adult population with a bank account at 42 percent, Burundi 7 percent, Rwanda 33 percent, Somalia 31 percent and Egypt has 10 percent.

Mauritius has 80 percent of its adult population with access to a banking account at a formal financial institution, the highest percentage in the rest of Africa.

The problem of lack of access to banking services extends from small to micro, and small and medium enterprises ‑ generically referred to as SMEs, of which research has shown that they have a higher contribution to job and value creation than medium and large enterprises.

On average, one out of two enterprises in Africa does not have access to formal credit or lacks appropriate financial products needed to grow and innovate.

The analysts say that the funding gap is acute in Sub-Saharan Africa with only 29 percent of formal SMEs having access to a loan, line of credit or overdraft.

“Sub-Saharan Africa represents one of the most challenging regions for SMEs to get financing, along with East Asia and Pacific where 45-55 percent of the SMEs are also unserved,” the analysts say.

In Latin America and Caribbean, for example, around 15 percent of SMEs are unserved by financial institutions.

The analysts say that the value of the credit gap for formal SMEs in Africa is over US$100 billion, out of which between US$70 billion to US$90 billion applies to SMEs in Sub-Saharan Africa alone.

“Firms in Africa relative to other regions are the most credit constrained, and would thus require a significantly bigger leap in closing the credit gap they face. As a result, the interventions and solutions in Africa will need to be transformational rather than incremental as in other regions,” the analysts say.

The limited access to financing means that the majority of SMEs rely on retained earnings or other internal sources of capital to finance their growth.

Expensive borrowing, which results in SMEs paying a premium compared to other customers and short-term repayment periods, also curtails financing to SMEs.

In Malawi, for example, the longest tenor of loans available for SMEs is two years less than the maturity of loans offered to prime customers.

The funding gap is more acute for very small firms with typically less than nine employees and firms with female owners, and those companies operating in the informal sector are often overlooked by the traditional banking sector.

“Addressing these needs with only traditional finance solutions will not be sufficient. Africa requires scalable and transformational solutions that incorporate various types of financial services and products and complement financing with capacity building. Female entrepreneurs face more challenges than their male peers in accessing financing. Women account for only 20 percent of the banked population on the continent, compared to 27 percent for men.

The lack of financial access for Africa’s 600 million plus rural people, the majority of whom are involved in agriculture as an economic means, limits their ability to create wealth.

January 2014
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