Workshop: Deepening knowledge of long-term finance in Africa

On October 6, the Africa Growth Initiative at Brookings and FSD Africa^[1] co-hosted a private workshop entitled, “Deepening knowledge of long-term finance in Africa.” Opening remarks focused on the global development industry’s shift of emphasis from improving livelihoods towards encouraging structural economic transformation. The critical role that the financial sector can play in that, as a key enabler, was acknowledged. Given that the lack of good quality financial information remains one of several barriers to financial sector deepening, and therefore impedes economic development, diagnostic tools that improve the availability of information on which decision-making can be based can make an important contribution to economic development and poverty reduction. This is especially true in the case of long-term finance where information is particularly incomplete. The opening remarks were followed by a presentation on “Deepening Knowledge of Long-Term Finance in Africa,” outlining three key topics:

1. Long-term finance in sub-Saharan Africa

The term long-term finance (LTF) is often used in relation to funding generated to support enterprises, households, and governments’ medium- and long-term investment, where the tenure is longer than a year. The presenters highlighted the importance of LTF for productivity growth, job creation, economic growth, enhancing the capacity of small and large firms, financing investments in housing markets, and bridging the infrastructure financing gap.

The presentation then offered a snapshot of the actors involved in providing LTF in sub-Saharan Africa. The presenters outlined six sources of LTF in sub-Saharan Africa: banks, equity, bonds, mortgage, insurance, and pension funds. According to the presenters, banks are the most important providers of LTF, with loans from banks making up to 24 percent of GDP in sub-Saharan Africa. At the other end of the spectrum, bond and insurance markets remain relatively untapped, only making up 2.7 and 2.2 percent of GDP in sub-Saharan Africa, respectively.

2. Data gap analysis and scoreboard

The figures presented in the previous paragraph must be considered with care. The presenters referred to the existence of a data gap, which is quite extensive. As Africa is relatively bank-based, the best data reporting is from the banking sector. Reporting is rather poor in the equity and bond markets, with many countries not reporting at all to the likes of the World Federation of Exchanges or the Global Bonds Database (part of the World Bank’s FinDebt database) and data collection efforts (by organizations such as the IMF) are somewhat ad hoc, which means that such information available is often out of date. Additionally, half of the statistics used to assess the state of LTF in sub-Saharan Africa are extracted from South Africa.

3. Diagnostic approach

FSD Africa has provided funding to a team of consultants to design a diagnostic approach that aims to bridge the data gap. The proposed approach comprises both a scoreboard and a country diagnostic tool.

Scoreboard

This is a collection of indicators used to assess the provision of LTF and the enabling environment in the region. The scoreboard includes several indicators on the depth and inclusiveness of long-term financial markets. The purpose of the scoreboard is to inform policymakers, the private sector and donors about the availability of LTF across SSA and, being comparable across borders, to engender a degree of peer pressure between countries. To be used for the scoreboard, the indicators must meet the following criteria: relevance, availability, feasibility, timeliness, and comparability. Still, the presenters highlighted that, while the scoreboard methodology is useful in providing guidance on the state of LTF in sub-Saharan Africa, it has its limits as it does not provide assistance in defining a clear development strategy.

Country diagnostic tool for LTF

As the scoreboard methodology has its limitations, the presenters also argued for the establishment of in-depth country-specific diagnostics in order to assess the current landscape for LTF. They suggested that the new diagnostic tool, which would be based on structured interviews, should focus on specific transactions (i.e., projects or investments and the instruments used). This approach would reveal strengths and weaknesses in the project/transaction pipeline. The presenters proposed that the analysis should focus on five areas in particular: the current pipeline of ongoing projects, financing channels, the available and prospective funding vehicles and financial instruments used to facilitate investment, the obstacles preventing the use of the said instruments, and the schemes put in place by governments and international financial institutions, and their success in providing LTF.

The information collected would create insights into a country’s commitment and preparedness towards implementing planned investment, the extent to which appropriate mechanisms are in place that would potentially reduce the cost of providing LTF, the lessons to be learned from other developing and emerging economies, and how political economy factors influence the availability of LTF.

The presenters concluded with recommendations such as the establishment of a publically available database and the conducting of country-specific case-studies. The presentation was followed by a Q&A session where participants asked questions and offered their thoughts on the topic of LTF provision.

[1] FSD Africa, based in Nairobi, is funded by the United Kingdom’s Department for International Development (DFID). FSD Africa describes itself as a market facilitator striving to reduce poverty across sub-Saharan Africa by building efficient, robust and financial markets. Supporting capital markets development is a major part of FSD Africa’s programming.