Event Report - MFW4A/AfDB Eastern and Southern Africa Financial Sector Dialogue

Jul 29, 2019

Making Finance Work for Africa (MFW4A) and the African Development Bank (AfDB) convened a Financial Sector Dialogue in Nairobi, Kenya, from 25 to 26 October 2018 to assess the state of play and progress made by Eastern and Southern African countries in support of deepening and broadening the financial sector. The dialogue also aims to address constraints that prevent the financial sector from fully playing its role as a catalyst for growth and in supporting economic and social development objectives, both at the national and regional levels. Among other major outcomes, it is expected that discussions will provide Multilateral Development Banks (MDBs) with relevant information and data to support their strategies. This high-level meeting was attended by government officials, donors, multilateral financial institutions and the relevant private sector stakeholders.

Discussions around 7 thematics highlighted progress, challenges, and opportunities of the regions’ financial sector.

Eastern and Southern Africa financial sector challenges

  • Avoid overregulation of innovation

Innovation in mobile technology has impacted financial inclusion by providing several services such as sending money, paying taxes, bills, etc. Technology, which is now driving the financial sector, has brought the unbanked into the banking system. Since its introduction in Africa, mobile money has tremendously increased the velocity of money and helped formalize the informal sector. As enablers, fintech seeks to make financial services more relevant to a changing society. Despite greater access to financial services, inadequate regulation and learning by doing attitude can impede inclusion goals. The government and the private sector should work together with fintechs, banks and other stakeholders to define the scope and content of each set of regulations. Most important is the fact that “innovation comes first, before regulation and not vice versa”.

  • Support widespread adoption of Person-to-Government (P2G) and Business-to-Government (B2G) payments

It is agreed that when government make payments into a savings-linked account, it enables recipients, usually the poor and disadvantaged, to accumulate capital and, over time, improve the family’s wellbeing. In return, digitizing the payments businesses and people make to the government has the potential to reduce economic leakage from cash payments, cut bureaucratic inefficiencies, increase transparency between citizens and governments and protects people against fraud. Countries are encouraged to actively explore P2G and B2G as a means to also enhance financial inclusion.

  • Resume efforts toward harmonization of capital markets regulations

Liquidity in most African capital markets is generally low and retail depth is also insufficient. Many companies are struggling to list on the stock exchange due to their size and require additional capital and capacity to grow. Other challenges include the high cost of government borrowing, forex risks and countries’ reluctance to support the capital market integration roadmap due to concerns over ownership and control of financial assets. Harmonization of capital market requirements across countries should be priority to boost liquidity. Countries are invited to entice companies to list on exchanges and other stakeholders should nurture the pipeline of high growth companies with capital and capacity building programs.

  • Encourage local Micro, Small and Medium sized enterprises to enter the formal economy

Building financial integration should be based on a formal economy but most East African economies are largely informal, with the informal sector contributing more than 80% of employment. There is need to support small scale traders by creating a credit guarantee fund given that most small-scale traders access loans through informal or formal money lenders.

  • Develop a bold financial sector roadmap for transition countries

The payments system in transition countries is under-developed: Mobile money penetration is high but lacks inter-operability. Furthermore, settlement and clearance of inter-bank transactions do not occur at Central banks in local currency and international payments are largely transacted through global banks who face “de-risking” and correspondent accounts challenges. These problems inhibit efficient financial intermediation and robust economic growth. Transition countries are therefore required to revise their national development plan to strengthen the financial sector, the function of the central banks and the role of non-bank financial institutions. The success of such economies requires coordination with all stakeholders both internally and externally. Investment in human capital by offering trainings through technical assistance is also critical. Developing the financial sector in transition countries requires lowering cost of doing business, investing in mobile money infrastructure, improving payment systems and addressing money laundering and institutional weaknesses.

  • Mobilize African diaspora for increased contribution to financing the economy

Diaspora funds are emerging as a source of foreign funding for a country’s development as they can be used to finance infrastructure projects. Diaspora financial flows include diaspora remittances; diaspora direct investments; diaspora investment in capital markets. There are softer issues that need to be addressed when mobilizing diaspora capital. The African diaspora is very skeptical and lacks confidence in governments of their home countries in the appropriate use of the capital at their disposal. Demonstration of good governance in the management of funds is critical when raising diaspora capital. In addition, most diaspora is faced with tremendous information asymmetries regarding investment opportunities or financial investment instruments. It is imperative that countries focus on incentives to attract diaspora capital and also leverage on migrant diaspora networks to bridge the information gap around opportunities that might exist in their home countries.

  • Coordinate isolated efforts for data-centric activities

In order to positively influence policy, the role of data is critical. Large data infrastructure projects to better manage risks and cross-border financial flows should be undertaken and lead by Development Finance Institutions (DFIs) with supports from local governments. Building a regional centre for data on SMEs in Africa should also be among top priorities due to lack of data on SMEs in Africa.

  • Build capacity for green projects

Several challenges affecting climate financing in Africa include weak capacity of local institutions supporting climate finance, lack of adequate data required to inform the sector’s growth, larger share of public projects, lack of instruments. Transiting to green growth projects will require some level of support and targeted initiatives to effectively tap carbon markets. Carrying out education sessions for the private sector on climate finance is highly recommended.

  • Increase the role of insurance in supporting the real economy

Insurance supports economic growth through four pillars (i) the government (ii) the demand side – where customers must be satisfied with the services and must see the perceived value (iii) the supply side – where insurance companies need to come up with products that meet the needs of the people and (iv) the general public – that needs to be informed about the value of insurance. Insurance penetration in the regions is low, between 1% and 3%. Insurance uptake remains low mainly due to information asymmetry between insurers and consumers. Advocacy and capacity building programs are key to growing the insurance market. Efforts are being made to push for agriculture insurance and provide coverage for SMEs. More involvement from governments to expand agriculture insurance and is required.

  • Adopt stronger regulations to protect consumers

One of the challenges in achieving financial inclusions in Africa lies in developing appropriate digital products to meet the needs of the broader population while complying with local regulations. Financial inclusion affects financial services and should ensure affordability. It also addresses poverty while enhancing growth. There are some risks associated with digital extension of credit. Customer protection is important to strengthen confidence in the system. Regulations to address the unattended consequences of mobile financial services such as over-indebtedness must also be in place.

  • Develop financial literacy programs

Financial literacy is critical towards improving regional integration through the financial sector Both governments and market players should allocate funds towards consumer awareness and financial literacy programmes. Mobile Network Operators (MNOs) and mobile money companies can share infrastructure to reduce costs and a share of the savings can be used to fund financial literacy programmes. Existing platforms such as mobile phone platforms can be used to create financial awareness; In addition to educating the end users, development programs must include specific regulations designed to ensure customer protection.

Conclusion

Development Finance Institutions have a high level of involvement in the regions. They will continue to make investments in sectors and countries that would not otherwise attract significant capital, support transformative initiatives and widen access to long-term funding.


Full Report and Presentations

Please find the full event report here.

Some of the presentations made during this regional dialogue are available below:

- Financial Sector Development in Post-Conflict: Case of Somalia

- De-risking the Real Economy through Insurance

- AfDB Climate Finance Strategic Framework

- Diaspora Investments in Developing Country Capital Markets

- Developing SSA's Capital Markets