Financial sector central to Africa's growth
An article by David Christianson entitled “Reforming Africa’s Financial Sector”, caught my attention.
The article is based on the latest IMF Regional Economic Outlook for Sub-Saharan Africa released in May 2006 that has a chapter dedicated to “building up the financial sector” in the region.
Although there is no consensus on whether Africa should pursue the capitalist or socialist route to address its development challenges, the development experiences of other continents suggest that a private sector-led approach offers more promise than a state-driven one that has condemned many African states to poverty and underdevelopment.
While the role of financial services in transformation societies is widely acknowledged, the question remains where to begin in the case of Africa and whether there is a way of prioritizing reforms to deliver disproportionate benefits upfront and in so doing accelerate the development agenda.
In Zimbabwe, like the rest of the continent, there are many areas that need reform but the financial sector stands out as the most promising one in changing the political and economic architecture of the continent. The IMF’s experience as observed in the report is that countries with better functioning financial systems grow faster. The report argues that there is a causal relationship between good financial sector and higher growth and this is supported by historical data. The report also observes that outside of South Africa, African economies have a higher share of foreign ownership than any other continent.
Indeed, we have seen foreign banks even in South Africa like Barclays Bank reclaiming the space lost under apartheid to take a commanding position in Africa’s financial markets. The trend has increased since 2000 not only because Africa is a profitable market but these banks lend almost exclusively to governments and foreign owned corporates that dominate the African market at the expense of indigenous institutions.
The IMF report highlights two related factors about African financial markets i.e. they are very small which increases overheads and thus raises the cost of banking operations and secondly, banks tend to be inefficient by international standards thanks to the mostly high levels of inflation, corruption and the excessive concentration of the sector. As a result, it is argued that indigenous firms end up paying a great deal for their capital compared to their counterparts in other parts of the world.
Under these conditions, banks can charge high interest margins and still remain profitable notwithstanding difficult operating conditions imposed by bad macro-economic policies. While the IMF argues that sub-Saharan banking systems can be made more efficient by eliminating distortions, many of these distortions are a source of lucrative economic rents for the ruling elites who stand to lose by any greater internationalization of African economies through removals of senseless interventions by unaccountable central banks.
The IMF provides three general prescriptions for Africa. First, it suggests that more use should be made of alternative instruments to collaterisation like leasing, group guarantees and reversible equity stakes to overcome bottlenecks. Second, sub-Saharan countries should avoid the temptation to introduce a new range of state-owned financial institutions. As most are aware, Zimbabwe since the appointment of Gideon Gono as governor in 2003 appears to be going the other way.
We have observed the emergence of institutions like ZABG and its role in the nationalization of private banks. Equally, Finhold is now virtually a state-owned and controlled institution. Although the IMF publication does not find it necessary to point to recent experiences, many African governments are now well aware of how disastrous these sorts of institutions have been. In many cases, they become instruments of state sponsored corruption through political lending decisions like the productive sector facilities in the case of Zimbabwe.
While the IMF report recommends the need to maximize the role of markets, minimize costs and avoid distortions from interventions, countries like Zimbabwe have chosen risky and potentially disastrous paths where the central bank has effectively crowded out private sector institutions at a great cost to the country by assuming quasi-fiscal functions. Many have observed that under Gono’s leadership, the Reserve Bank of Zimbabwe has been turned into a super trader, banker, government and a conduit for sophisticated corruption where the parallel market is being managed to the benefit of a selected few and to the detriment of the majority.
Third, the IMF suggests that there is a need for African governments to apply the legal and regulatory framework more even-handedly in response to the over politicization of the financial sectors of a number of African countries including Zimbabwe. It advocates the establishment of specialized commercial courts and the harmonization of commercial law and practice within the emerging trading regions.
The report also points out other well known problems with respect to African banking like the role of governments in crowding out the private sector for capital and consequences on costs of capital and marker efficiency. Interventions like the ones we have seen in Zimbabwe where banks are no longer able to price their own risk limit the potential of private banks. A development strategy that is premised on interventions such as prescribing artificial floor price on deposits and a cap on lending rates is a recipe for an economic tsunami. Africa is generally characterized by poor legal frameworks which affect among many other things, property rights and enforceability of contracts.
We have observed how in Zimbabwe, the state has become an instrument of illegality by passing a number of laws that would be abominable in many functioning economies, and the price the nation has to pay. There is a causal link between respect for property rights and the potential impact of financial sector reform in so far as the legal rights of creditors and shareholders are protected. In countries where the share of private loans as a percentage of GDP is higher than state loans, the potential impact of financial sector led development strategy is higher. There is a close relationship between the strength of the private sector growth and the effectiveness of any financial systems. In the case of Africa, the problem is not just the financial sector but the entire business environment and climate.
It is difficult for indigenous African enterprises to access capital through the formal financial sector. This problem is not unique to Zimbabwe but is common in the whole continent. In fact white controlled corporates domiciled in South Africa are increasingly taking advantage of the situation by accessing credit from international capital markets and deploying the funds through equity investments in the rest of the continent. Through initiatives like NEPAD, South African companies are colonizing the rest of continent to the detriment of indigenous African companies who have difficulty in accessing capital.
Indeed South African corporates are spreading their wings in Africa. In the case of Zimbabwe, we have seen the government embarking on a suicidal mission to quash the emergence of a vibrant indigenous business sector and replacing it with a foreign controlled sector. Someone drew my attention to an article published two weeks ago by the Herald in which four Chinese companies were reported to have concluded mining deals with the state-controlled Zimbabwe Mining Development Corporation (ZMDC). In the four deals, the Chinese had a controlling stake of a minimum of 51% contrary to the posturing by the government about sovereign control of resources.
I have had my own share of experiences in accessing capital in the Zimbabwean market. When I took over control of SMM in 1996 following the acquisition of asbestos and industrial assets by Africa Resources Limited (ARL) from T & N, I was confronted with a real dilemma when the foreign owned banks that were the banking partners of the acquired companies withdrew their facilities because the control of the companies had changed. Overnight, the companies were confronted with a financial predicament that only was resolved by the intervention of three indigenous banks.
Without the support of these indigenous banks, the indigenization project was doomed from the start. However, it did not take long before the Reserve Bank of Zimbabwe applied pressure on the indigenous banks to offload their exposure from my companies. This left me exposed resulting in me realizing that without a robust and functioning banking systems that is nationally anchored the prospect for an African renaissance is just but a pipe dream. I was forced to respond by establishing First Banking Corporation (FBC) in 1997 and this helped a great deal in addressing the financial challenges confronted by many entrepreneurs in Africa. Although it is argued that the prospects for Africa’s transformation lies in the small, medium and micro-enterprise sector, my experiences have demonstrated that Africa needs its own giants like Toyota in the case of Japan, Mittal in the case of India, Samsung in Korea etc that can then underpin an African banking platform as well as support the downstream players who may be SMMEs.
In Africa with the exception of South Africa, we do not have African brands or corporate institutions that can drive the African development agenda. The vacuum is more obvious in the financial sector notwithstanding it’s catalytically and pivotal role in the development process. In fact only South African banking institutions are emerging as pan-African players and their attitude to African risk may not be too different as during the apartheid era. Even in South Africa, we still have to see the emergence of black controlled financial institutions as a prelude to the required transformation that needs to take place before Africa can take its rightful place in the commonwealth of progressive nations.
Africa’s promise is firmly rooted in the ability of its people to take ownership of their destiny. There can be no better place to start than in the financial sector not only because of the critical role it plays in lubricating the development process but because it banking is a repository of trust and as long as Africans do not trust and respect each other, the continent will remain a football for other nationalities to play their game to their advantage. No African government has come up with an agenda that seeks to place Africans at the pinnacle of the financial services industry rather we have seen governments take measures to diminish and in some cases eliminate indigenous involvement in the financial architecture while enabling foreign controlled banking institutions to take the lead.
It is up to us to appreciate the centrality of financial sector reforms in Africa to the development challenge that confronts the continent. Some have argued that Gono has used the financial system in Zimbabwe to create a new power centre that is not accountable to anyone but whose impact on nation building could be decisive in positioning the country as a basket case of the world. Every generation has to account for its existence and our generation is particularly blessed in having access to technology to know what other nation states have done to reduce poverty and enhance development and yet we have allowed buffoons to take charge of our destiny without a destination in mind.
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