While many African countries have achieved growth rates over the past decade and many aspired to structural transformation, the good performance has not translated into significant poverty reduction and shared prosperity, African Development Bank (AfDB) chief economist and VP SMEs still facing financing constraints said in the AfDB’s 'Financial Inclusion in Africa' report released on Monday.

Ncube stated that the concept of inclusive growth was multifaceted, with financial inclusion as one of its main building blocks.

“For sustained and inclusive development to thrive, a great deal of innovation and thinking is needed to ensure that appropriate financial services and instruments are put in place for the benefit of the poor and other vulnerable groups,” he said.

According to the AfDB report, Africa was lagging behind other continents with regard to financial inclusion.

“Less than one adult out of four in Africa has access to an account at a formal financial institution,” the AfDB stated, adding that broadening access to financial services would mobilise greater household savings, marshal capital for investment, expand the class of entrepreneurs and enable more people to invest in themselves and their families.

The AfDB report stated that 80% of adults without formal bank accounts surveyed cited the reason for not having a formal account as a lack of revenue to use one.

Cost, distance and documentation were also cited by more than 25% of nonaccount-holders in Africa.

However, the study found that people who did not have an account at a formal financial institution often employed fairly sophisticated methods to manage their day-to-day finances and plan for the future.

“A growing number of Africans are using new alternatives to traditional banking made possible by the rapid spread of mobile phones,” the AfDB pointed out.

SMEs
Meanwhile, the AfDB also found that the great financing constraints faced by small and medium-sized enterprises (SMEs), especially in accessing bank finance, limited these firms’ growth opportunities.

“Firms in sub-Saharan Africa have limited access to external funding. World Bank Enterprise Surveys show that, on average, only 22% of enterprises [in sub-Saharan Africa] have a loan or line of credit. In comparison, the average [percentage] of enterprises with a loan or a line of credit in other developing economies, excluding Africa, is 43%.

“Like elsewhere, small firms in sub-Saharan Africa are at a relative disadvantage in accessing external credit. In sub-Saharan Africa, 45% of firms cite access to finance as a major constraint to growth. However, a higher percentage of small firms identify access to finance as a major constraint relative to medium and large enterprises,” the report stated.

Further, the AfDB said, during interviews conducted with 29 leading banks across six emerging markets worldwide, poor business cases were cited as a critical factor for credit declines.

“Financial institutions perceive poor customer information availability as a critical barrier to lending.”

The report stated that, in Africa, addressing both elements was crucial in enabling a more inclusive environment for vibrant and growing SMEs.

“In particular, improvements in the credit information systems, collateral registries to reduce the information asymmetries and capacity-building and business-development services at the firm level need to be addressed to accelerate financial inclusion on the continent.”

However, addressing the needs of SMEs with only traditional finance solutions would not be sufficient, the AfDB said, adding that Africa required scalable and transformational solutions that incorporated various types of financial services and products and coupled financing with capacity building.

Further, transformational solutions that had the potential to successfully address the SME finance challenge in Africa in a sustainable way had to be holistic, the AfDB said.

“Interventions should be taken at all relevant levels: firms and financial institutions, nationally and globally,” the report said.

ROLE OF TECHNOLOGY
The AfDB stated that while growth in mobile phone penetration had revolutionised the delivery of financial services in Africa, regulators had a difficult task in striking the right balance between supporting growth-enhancing innovation and implementing prudent regulation and effective risk-based supervision.

Nevertheless, successful experiences with implementation in Kenya, Tanzania and South Africa have shown that mobile financial services have the potential to significantly reduce the number of unbanked in Africa, which could, in turn, boost domestic savings, incoming money transfer from the diaspora and lower the cost of doing business by SMEs and the overall private sector, all of which should help Africa achieve greater development and move out of poverty.

However, for this to take place the provision of conducive regulatory frameworks was required and data collection was needed to underpin financial service strategies.

Further, the AfDB also stated that mobile government-to-person payments had to be promoted and the development of financial literacy programmes was required.