The Urgent Need for Financial Reform to Mobilise Savings in Sub-Saharan Africa

Costas Lapavitsas

Sedat Aybar

English

Research Papers in Economics

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      March, 2008      Number  50
The Urgent Need for Financial Reform
to Mobilise Savings in Sub-Saharan Africa
Gross domestic savings by developing regions, 1960-2004
(Percentage of GDP)
 Source: World Development Indicators, 2007.
by Sedat Aybar, Kadir Has University, Turkey and Costas Lapavitsas, School of Oriental and African Studies, University of London
In IPC Policy Research Brief #6, Pollin, Epstein and Heintz
provide alternative proposals for monetary policy and financial-
sector reform in sub-Saharan Africa, focusing on such issues as
targeting short-term interest rates, instituting moderate exchange
controls, proposing large-scale loan guarantee programmes and
reviving state development banks (see also the directly related
IPC Policy Research Brief #4).
This One Pager emphasises the importance of financial-sector
reform for domestic resource mobilisation. The reason: savings
mobilisation by liberalised financial systems in sub-Saharan Africa
has been deeply unsatisfactory, severely constraining investment
and making faster, sustainable growth unlikely.
Domestic savings collapsed in the 1980s, fell further in the 1990s
and, despite partial recovery after 2000, have remained low and
fluctuating. The Figure shows that savings performance in the
region has been worse than in Latin America, and in complete
contrast to that in East Asia.
External sources can partially plug this gap, but both FDI and workers’
remittances are low compared to those in other regions. Substantial
increases in ODA are required, but aid is volatile and often converted
into flight capital, in large part due to liberalisation of the capital
account. A longer-term solution requires stronger domestic resource
mobilisation based on reform of the formal financial sector.
There is not, in fact, an absolute scarcity of savings in sub-Saharan
Africa. Households hold substantial precautionary savings because
of low and uncertain incomes. But their savings pattern is very
irregular, and can involve as much dissaving as saving. Savings rates
might rise as a result of higher economic growth, but the region’s
growth volatility adversely affects household capacity to save.
In this environment households require secure saving assets that allow
for many small transactions—a service unlikely to be provided by
the liberalised financial sector. Thus, a large part of savings goes into
non-financial assets (livestock, real estate and jewellery) and into the
informal financial sector, instead of financing productive investment.
African households save in non-financial assets partly in order to
demonstrate status and wealth, but also because they typically
face a risky financial environment. Informal financial assets are
also favoured because they tend to involve small and frequently
repeated deposits with institutions that operate in geographically
and socially confined community settings.
The weakness of the formal system in mobilising savings has been
exacerbated by financial liberalisation. The closure of state-owned
banks with wide outreach was a significant factor. In addition,
commercial banks limited their branch network, focusing on more
profitable urban-based activities and reducing exposure in rural
areas. Small depositors have also been discouraged by high
minimum deposit and balance requirements as well as by the
time and administrative effort required to complete transactions.
Savings with the formal financial system could increase provided
that there were improvements in access, adequacy and reliability
of financial assets. First, the semi-formal financial sector should
be encouraged to provide further outlets for household savings.
Second, technological innovation should be promoted to ameliorate
the problems of remoteness and costs of access to finance, including
starting ATMs, mobile banks and, more significantly, mobile phone
banking, particularly in rural areas.
Third, microfinance institutions could play a significant role
in mobilising savings and pooling other financial resources in
conjunction with the formal system. Sub-Saharan African banks
should be encouraged to cooperate more with such institutions.
A more effective and radical measure, however, would be to use
public mechanisms to mobilise savings, such as revitalised postal
savings institutions and strengthened public pensions systems.
Development finance institutions, more than 60 of which remain
across the region, could also be rebuilt.
Public banking institutions in sub-Saharan Africa in the past have
been associated with inefficiency and misuse of funds, and have
often been subject to political pressure. Nonetheless, given the poor
performance of liberalised formal finance, there seem to be few other
viable alternatives if formal domestic savings mobilisation is to
recover and sustain increased public and private investment.

http://www.ipc-undp.org/pub/IPCOnePager50.pdf

The Urgent Need for Financial Reform to Mobilise Savings in Sub-Saharan Africa

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