The 2020 edition of the Economic Report on Africa shows that the financial services sector is still dominated by retail banking, with very rudimentary forms of such non-bank financial institutions as insurance firms and housing finance houses.
According to the report, the sector also features nascent capital markets, which do not provide the full mix of equity, company bonds, and government bonds.
The sector also lacks tailored financing mechanisms for start-ups or young enterprises such as venture capital as well as the financing mechanisms for company restructuring, such as leveraged buyouts.
The Economic Commission for Africa (ECA) described the recent growth of fintech start-ups in many countries such as Ghana, Kenya, and the United Republic of Tunisia as impressive in the report.
“The financial system in Africa needs to accelerate diversification to build a full range of financial institutions and offer a wide range of innovative financial products tailored to specific needs of the business eco-system, such as start-ups, marketing, transportation, and payment collection”.
According to the report, these businesses including start-ups, micro, and small enterprises, social enterprises, professional businesses (such as lawyers and doctors), exchange-listed corporates, and public-private companies that will drive inclusive economic growth, create jobs, and make pathways to better livelihoods for the African people.
Despite the challenges, the report noted that Africa continues to deepen its financial markets and build its financial institutions for long-term economic growth.
“Africa’s financial markets have continued to deepen significantly with 11 African countries issuing bonds with a total value that rose from approximately $1 billion at the end of 2011 to $11.2 billion by the end of 2019”.
The report suggested five ways African countries can scale up innovative financing for the private sector. This comprises the government’s support to the financial sector in leveraging short-term financing (such as bank financing for working capital) with long-term financing (such as development bank finance for plant investment).
“At the same time, governments should enhance the eco-system for private sector development, including raising investment to 35–40 percent of GDP”.
Governments could play a complementary role in financial innovations by all types of financial institutions and markets by creating a regulatory environment benefitting entrepreneurs at all stages of the business growth cycle.
Furthermore, the report pointed out that financial institutions should take advantage of the enlarged markets under the AfCFTA that would allow cross-listing, efficient pricing, increased competitiveness in regional and global value chains, and more opportunities for innovative business financing.
The report also calls for the use of domestic resources in local currencies as a requirement for increasing long-term private finance and investment in infrastructure. This, according to the ECA, would deepen capital markets and increase the scale of development banks.
As a result of increasing Fintech financing in many African countries even during the COVID-19 pandemic, the report stated that the power of fintech should be leveraged to provide diverse financing alternatives and revolutionize how companies access to finance.
The 2020 edition of the Economic Report on Africa: Innovative Finance for Private Sector Development in Africa examines the innovative financial instruments, practices, and policies required to enable African countries to make a step-change in growing the gamut of businesses. It was prepared by the United Nations Economic Commission for Africa.
