Financial sector development - Sida

financial scene in all developing countries, and perhaps more so in the countries in
Africa, where they often account for about 70-80 per cent of total financial assets. All
other parts of the financial systems are directly or indirectly linked to the commercial
banking systems.
Banks are predominantly urban in their geographic locations and in their businesses.
They traditionally provide finance for governments (often through regulations imposed by
the authorities), for state-owned companies, and for established medium-size and large
private enterprises. Their branch networks are often limited, and their supply of credit to
small enterprises and small farmers is often negligible. In each individual country, one or
two banks, often publicly-owned, have traditionally dominated the banking scene.
The commercial banking systems have been -- and still are -- fragile. Between 1988 and
1996, twenty African countries experienced systemic banking crises. In five of these
cases, the costs of the crises exceeded ten per cent of GDP. In some countries, banks
have been restructured. In others, the restructuring process is still incomplete. One
indication, and often a crisis signal of potential bank failures, is the amount of nonperforming
loans in the banks’ portfolios. The existence of large, publicly-owned banks
with significant amounts of non-performing loans lies at the center of the financial
problems in Africa and is a key to understanding the present problems.
Table 2. Market shares and bad debts of
government-owned African commercial banks
(Estimates 1994-95 1 )
-----------------------------------------------------------------------------------------------------
Share of market (%) Bad loans (%)
-----------------------------------------------------------------------------------------------------
Ghana (GCB) 50 70
Tanzania (NBC) 90 60-80
Uganda (UCB) 50 80
Zambia (ZNCB) 20 small
Mozambique (BCM) 80 45
------------------------------------------------------------------------------------------------------
1 Before placing non-performing assets into separate recovery trusts in Uganda, Mozambique and Tanzania.
Sources: Various World Bank documents (Financial Sector Reviews). In 1996-1997 some of these banks have been
restructured.
-----------------------------------------------------------
The main factors behind the banking sector problems in the five countries studied (as
well as in most other African countries) are surprisingly similar. They have to do with: a)
poor economic policies; b) state ownership of banks and other corporate entities; c) lack
of competence and experience in the financial field, and d) legislation, regulatory systems
and supervision of financial activities.
a. Economic policies
Economic policies in most countries in Sub-Saharan Africa have been characterised by
heavy state involvement and extensive regulation of interest rates and credit flows. This
has destabilised the economies, weakened the financial systems, and inhibited an
efficient allocation of national savings.
33