How to accelerate inclusive growth in Africa

Sub-Saharan Africa’s steady and impressive economic growth remains on track, despite the recent weakening of commodity prices. The World Bank forecasts average regional growth of 4% in 2015, or 4.7% if South Africa is excluded. In 11 key countries, 600 million new middle-class households were created between 2000 and 2014. We expect to see an additional 14 million middle-class households created in these economies over the next 15 years.

This growing consumer base is driving the diversification of Africa’s economies. Financial markets are widening and deepening, and more Africans are accessing formal banking services for the first time. The financial services sector is expected to contribute as much as 20% of Africa’s GDP by 2020. This rapid growth is accompanied by impressive sophistication in several cases. The World Economic Forum’s Global Competitiveness Report 2014-2015 ranks six sub-Saharan African countries among the top 60 performers for “financial markets development”. South Africa ranks seventh worldwide, while Kenya and Mauritius are in the top 30.

Financial depth is, as a general rule, good for growth and development. IMF research has shown that, as the ratio of credit to the private sector to GDP rises to around 0.76, growth is stimulated, peaking at around 1.5 percentage points of additional growth a year compared to an under-financialized economy. Similarly, research by the World Bank and the UN shows that expanding access to financial products and services has a strongly positive impact on economic development. A 2007 World Bank study, for example, found a strong statistical relationship between financial development and faster growth in income for the poorest quintile of the population. It also found that growth in private credit has a significant negative relationship with income inequality. The evidence is clear: in developing countries, more finance means more growth and inclusion.

This is not just abstract economic modelling. The financial services industry plays a crucial role in facilitating infrastructural and industrial development at national and regional levels. And a broader, deeper financial sector facilitates the growth and prosperity of Africa’s businesses, from small-scale entrepreneurs to large corporations. A few examples from our business over the past few months illustrate the point.

Let’s start relatively small. In Lagos, Nigeria, we have just helped to improve the public transport system by financing the acquisition of 10 buses by a local company contracted by the Lagos government to operate part of the state’s Bus Rapid Transit scheme. Moving several thousand kilometres south and from a small to a medium-sized enterprise in Lesotho, we have just provided a substantial loan to a mid-sized construction company. The company, which employs over 600 skilled and semi-skilled workers, is contracted to deliver several important infrastructure projects for the Lesotho government, including a major water reticulation project and construction of a national museum. Bank finance was crucial to enable it to make up-front payments and manage cash flow.

And turning to the very large, in South Africa, each of the major commercial banks has played a central role in delivering the government’s Renewable Energy Independent Power Producer Procurement Programme, providing two-thirds of the required funding to date – that’s around ZAR 110 billion. This programme is now delivering sustainable, competitively priced green energy through dozens of public-private partnerships, while simultaneously creating a new frontier for local manufacturing. The programme’s scale, profitability and success are attracting international investor interest and South Africa is now a world leader in renewable energy.

The African financial sector could finance even larger infrastructure PPPs. Given African’s rapid growth, favourable demographics and enormous infrastructure gaps, we can be absolutely confident of great investor interest in infrastructure PPPs whenever – and this is crucial – strong and clear regulation creates certainty that investment today will be rewarded with a fair and reliable return.

But Africa’s financial sector could be doing even more to promote inclusive growth. IMF research shows that bank credit to the private sector in Africa represents, on average, 15% of GDP, compared to over 100% in many developing economies. The Global Findex Report 2014 finds that only 34% of adults in sub-Saharan Africa have a bank account (up from 24% in 2011). While great progress is being made through mobile banking and mobile money-transfer systems, far too many Africans remain underserved or excluded from the formal financial system.

To address this, we need a policy environment that prioritizes inclusion in product design and distribution; a regulatory framework that supports fair and healthy competition among financial services providers and that simultaneously encourages the rapid adoption of new technologies that assist inclusion while ensuring consumer protection.

Greater regional cooperation and integration would also be very helpful. We’ve seen good progress in recent years, including rapid strides in integrating cross-border payment systems. Further movement towards more closely integrated regional financial systems would enable Africa’s banks to reach a more efficient scale, manage risk more easily and allocate capital and liquidity more effectively. This kind of integration would also increase the types and numbers of financial institutions that African consumers could try out, boosting competition, lowering prices for consumers and improving access to capital.

Tackling these challenges requires collaboration on a cross-sector, cross-national scale. The World Economic Forum on Africa 2015 provides Africans with an excellent opportunity to make headway. I’m sure we’ll use it well.

The World Economic Forum on Africa 2015 takes place in Cape Town, South Africa from 3-5 June.

Author: Sim Tshabalala, Chief Executive Officer, Standard Bank

Image: A customer conducts a mobile money transfer, known as M-Pesa, inside the Safaricom mobile phone care centre in the central business district of Kenya’s capital Nairobi July 15, 2013. Picture taken July 15. REUTERS/Thomas Mukoya