African Financial Systems, World Bank Partnership Aims for Growth

The World Bank in partnership with Germany and the African Development Bank today launched a new action plan having as its objective the strengthening of the financial systems in Africa, and this step is the fulfillment of commitments endorsed at the G8 summit in Heiligendamm, Germany.

Financial systems, in the context of the new World Bank-German-AfDB partnership, refers to money markets that are responsible for providing businesses and the private sector with financial services that allow for growth in productivity and expansion. These financial institutions accomplish this through making available access to low-cost financing. In a study recently conducted by the World Bank, Making Finance Work for Africa, business owners in Africa complained of the inaccessibility of and high cost of financing. Afican businesses have a higher prevalence of this complaint than anywhere else in the world.

Currently, financial institutions in Africa keep a high level of liquidity, meaning that bank's deposit funds are held in cash or instruments that can easily and quickly be converted to cash. This is because a very low proportion of deposit funds are circulated into loans to the business and the private sectors. Add to this the statistic that only 20 percent of adults in Africa hold bank accounts and make deposits into banks, and the picture of restricted productivity, investment and growth is amplified.

Along with the benefits to business that are realized from accessible financing, there are decided benefits to the private sector in having access to affordable financing, and this is shown to be especially true in the case of African women. The World Bank study lists these benefits as being increase in household income via business growth and expanding earning capacity; accumulation of personal assets; increased opportunities for health through nutrition and health care; opportunities for greater education as time can be spent at studies instead of at work; and reduced vulnerability to household emergencies because of acquired assets and access to low-cost financing, if needed.

The World Bank study further discusses the ratio of credit to Gross Domestic Product in Africa. Growth in business and the economy depends on capital investment, so a low percent of total national credit results in low business and economic development, which then results in a low Gross Domestic Product (GDP). The result of a low GDP is a low national revenue. The ramification of a low national revenue is that government cannot create and sustain infrastructures, schools and healthcare agencies and the quality of life declines because populations, and the needs of populations, continue to increase.

Because African financial institutions have high liquidity (cash or properties convertible to cash), measures implemented by the World Bank-Germany-AfDB partnership to support and strengthen African financial institutions will open an avenue for redirection of institutional liquidity to the business and private sectors, with a special emphasis on the participation of African women. An increase in the accessibility of low-cost financing would raise the total ratio of credit to GDP, with credit measured as a percentage of GDP. A rise from the current 14 percent up to 25 percent would mean the addition of more than $70 million in the business and private sectors.

Some of the aims of the partnership are to support African financial systems to increase financial depth through providing accessible financing and through diversification of institutions holdings so that liquidity is reduced. This change will be most fully reflected in the ratio of credit extended to the private sector, which will be higher than the current ratio of 14 percent of GDP. Through these and related means the new partnership aims to aid Africa to grow and generate jobs and greater life security.

"Germany, World Bank and AfDB Launch Partnership for Making Finance Work for Africa," World Bank.