In their role as allocators of funds from savers to borrowers, banks have a central role in financial sector development. They bridge the gap between savers and entrepreneurs while also reducing some of the transactional and financial risk for both parties. By making funding available to the market, banks typically facilitate a reduction in barriers to entry for entrepreneurs.
Effective banking systems expand financing opportunities for both large and small companies, while also supporting financial sector development and the expansion of access to funding among low-income retail customers and micro-enterprises. Beyond funding, banks also provide essential financial services to individuals and enterprises including the collection, custodianship, safeguarding of deposits made by savers and the provision of payment services.
All African financial systems are dominated by banks, which remain at the core of financial sector development efforts for the continent.
There are significant differences across the various banking systems in African countries, which range from world-class standards to banking systems that are only beginning to overcome periods of financial repression. Still, a number of general observations can be made about banks and their role within the financial sector across the continent.
Most African banks are small in absolute and relative size. Lack of economies of scale is often linked to inefficiencies. In addition, a lack of sufficient expertise and technology often limits the capacity of banks to deliver adequate financial services to African economies. They often only offer a limited range of services, and outside of urban centers, banking is virtually non-existent.
Banking data clearly shows that African banks have significant development opportunities compared with banks in other developing regions. Indicators such as liquid liabilities to GDP (measuring the monetary resources mobilized by banks) and private credit to GDP (measuring the credit extended by banks) are considerably lower in Africa than anywhere else in the world. In addition, the region’s banking system has low intermediation ratios (measuring the deposits intermediated into the private sector), mainly explained by difficulties in assessing creditworthiness and enforcing creditors’ rights.
Reflecting the prevalence of poverty in the region, data suggest that not more than 20 percent of adult Africans have a bank account, compared to between 30 percent and 50 percent in other developing regions. This can be attributed in part to high fees, low bank branch penetration and the extensive documentation requirements for opening an account.
In terms of efficiency, African banks are generally characterized by high spreads, intermediation margins and overhead costs. They are smaller than banks in other developing regions, limiting benefits from economies of scale and risk diversification, while their weak contractual frameworks and regional political volatility increase the costs of doing business. These inefficiencies persist in many cases due to an absence of meaningful competition in the sector. Despite vast improvements during the past decade in the efficiency and accountability of African banking systems, much work remains to be done.
The Bank for International Settlements (BIS) is an international organization which fosters international monetary and financial cooperation and serves as a bank for central banks. The BIS Central Bank Hub provides a link to Central Banks’ websites and banking statistics.