Reducing the Cost of finance and Enhancing Financial Inclusion in Africa: Policy Options

On average, lending spreads are higher in Africa than in other developing countries. Several government have reacted by establishing lending rate caps, yet these administrative measures can be counterproductive because interest rate ceilings do not ensure lower long-term lending rates and can adversely affect financial inclusion. In fact, lending institutions can react by simply increasing other service costs to recoup lost income. Moreover, lenders can stop servicing riskier segments of the market (such as MSMEs) if the cap does not adequately compensate operating and other costs.

Constraints to SME Financing

Though the constraints are many, limited access to finance and the cost of credit are typically identified in SME surveys among the most important ones. (...) As a result of these constraints, SMEs (...) rely more heavily on informal sources of finance, such as borrowing from family and friends or from unregulated moneylenders. One important element behind the SME "credit gap" is the information asymmetries between external creditors and SMEs.

What has Worked in Credit Information Sharing?

Specific practices help increase credit coverage and encourage the use of credit information systems. Among the most common measures are 1) expanding the range of information shared, 2) collecting and distributing data from sources other than banks and 3) lowering or eliminating minimum-loan thresholds (figure 7.8). Reporting positive as well as negative information Credit information can be broadly divided into 2 categories: negative and positive.