22.10.2007 Business & Finance

Germany, World Bank, AfDB in financial partnership with Africa

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A new partnership to support stronger financial systems in Africa has been launched by Germany, the World Bank and the African Development Bank in Washington.

A statement from the African Development Bank on Monday said Germany, which championed the partnership under its G8 presidency, stressed that by strengthening African financial systems, the new effort would support economic growth, job creation and poverty reduction. The partnership was launched last Friday, according to the statement.

Heidemarie Wieczorek-Zeul, Federal German Minister for Economic Cooperation and Development, said: "Economic development is only possible if there is a thriving financial sector which accords both men and women access to appropriate financial services, enabling them to save, while allowing businesses to invest and create lasting employment."

She added that the lack of financial services was one of the main obstacles to private sector development in Africa.

A recent World Bank study, Making Finance Work for Africa, points to emerging opportunities for increasing the availability of affordable finance, so that enterprises end up with access to financial services that will help them invest in productivity and expand.

During this past decade, African finance has been strengthened by a wave of reforms through which financial repression diminished, state-owned banks became privatized, and foreign banks re-entered the market.

"New products and technologies have created significant opportunities for innovation. The emergence of stronger African banks and increasing regional integration enable the provision of finance on a larger scale," the statement said.

Robert T. Zoellick, President of the World Bank, added: "Financial sector development will be a strategic driver of growth and employment in Africa. African firms view access and cost of finance as two of the three primary constraints to doing business".

The statement said the study pointed out that some of the challenges that remain to be addressed.

It found that only 20 per cent of adults in sub-Saharan Africa hold a bank account at a formal or semi-formal institution, adding that increasing access to financial services would enable poor people, women in particular, to increase their household incomes, build assets, invest in health and education and reduce their vulnerability to household emergencies.

It also found a very low share of deposits in African financial institutions flow into loans to private firms, saying rather, banks keep high levels of liquid assets and acquire government debt instruments.

"Firm surveys show that access to finance is one of three biggest constraints for enterprise growth in Africa. More African firms name limited access to and high costs of finance as a key constraint in Africa than in any other region in the world."

The study noted the availability of credit for the private sector was improving, but at 14 per cent of GDP was still insufficient to drive growth and private sector development.

It said interest costs, administrative expenses and collateral requirements for loans were significantly higher in Africa. Interest rate spreads - a measure of financial sector efficiency - average eight per cent in Africa compared to the world average of 4.8 per cent.

The statement said in addressing these challenges, policy makers and financial service providers could take advantage of the technological innovations emerging on the continent.

With the entrance of new technologies like mobile phones into the African market, there was great potential to help overcome remoteness and process-cost barriers to providing payments and making deposits, as well as other types of financial services.

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