Financial development has gained prominence in Africa. Only with slight reservation around the regulatory environment, most country and regional studies of financial development paint a strikingly positive picture of its impact on growth, poverty and inequality. [i] This optimism with finance in Africa is corroborated with increase in financial flows, expansion of commercial bank branches, growth of regional banks, rise in microcredit institutions and success of mobile payment systems. [ii] However, poverty and inequality remain persistently high. There are more poor people in Africa today than in 1990, and 7 of the 10 most unequal countries in the world are in Africa. [iii] Hardly has any progress been made in addressing a most obstinate infrastructure gap unsettling the continent. In addition, Africa’s most recent average growth of 1.5 per cent is at its lowest in two decades. As such, the underscored belief in financial development as a driver of progress is exaggerated, since it seems to disregard the immediate needs of the people on the continent.
For these reasons, a growing body of literature now demonstrates wariness with the financial development narrative. An aspect of this literature reveals that the success story of microfinance in Africa is not quite what the proponents claim it to be. There is evidence of how the poor were plunged into a crisis of over-indebtedness in South Africa, through microfinance lending. By 2012, the country’s debt amounted to a staggering 75 per cent of disposable income. [iv] This experience contradicts the proposed poverty alleviating effects of microfinance. Like other forms of finance, its dominant motivation has been found to be profit seeking rather than poverty alleviation. Similar caution has been expressed about the celebrated rise of electronic payment systems,[v] prominent in Kenya, Nigeria and Uganda. Yet, more than just caution is needed to ensure that the proliferation of finance does not continue to wield detrimental effects on economic development in African countries.
What is “financialization of development”?
Undeniably ambiguous, the term financialization attempts to conceptualize the recent prominence of finance, not least, its potential to expand disproportionately from real output. Financialization of development therefore, is a phrase I have coined to describe the new meaning ascribed to development. [vi] It is the growing focus on financial expansion and the misplaced belief that development can be achieved solely through financial development policy. In essence, it is the pursuit of financial development rather than more comprehensive development approaches, such as the developmental state. The financialization of development is further underpinned by the increasing exclusion of the state from the development space and its replacement with private capital. It aims to capture and include the poor in developing countries into the cycle of financial expropriation, through access to credit. Inherent in the process, is the potential to re-direct capital away from developmental investment and into the financial system. Such finance then tends to be used for speculation and profiteering as opposed to pursuing development objectives. As a result, underdevelopment persists.
It is problematic to expect that the infrastructure gap in Africa can be fixed primarily by the private sector, whose main objective is profit-making. But this is what financial development policy seems to propose, in its disproportionate focus on private finance for development, especially in the context of African countries. It continues to relegate the role of the state to maintaining a regulatory environment for the private sector to thrive. But there cannot be substantial economic development in African countries without robust developmental state policies underpinned by infrastructure development. It is evident that the state played an important constructive role (in some cases, engaging the private sector) in the development experiences of countries in Europe, America and Asia,[vii] with context-specific development plans.
This renewed scepticism towards financial development stems from the fact that there is obvious misunderstanding around the main narratives promoting it. Besides the exaggeration of the positive impact of financial development, many narrow methods are used to arrive at positive results. One of these techniques is Randomized Controlled Trials (RCTs) [viii], which are likely to produce different results in different contexts. [ix] Driven by the push for integration and openness to the global market, financial development is said to cause growth in small open economies. But this is without consideration of the underdeveloped state of institutions and regulatory environments in these countries that tends to lead to the misallocation of finance towards speculative rather than productive uses.
Among the narratives used to drive financial development are the concepts inclusion and access. According to the World Bank, financial inclusion means that individuals and businesses have affordable financial products and services that meet their needs, delivered in a responsible and sustainable way. The first step to inclusion is said to be access. But this view of inclusion and access conveys some naivety in that it abstracts development from the context-specific complexity of the needs of the individuals.[x] In addition, it completely ignores the social relations that (may) derive from these specific contexts and subsequently underpin the nature of financial development therein.
It is deficient to affirm unequivocally that proximity to financial institutions, in of itself, has the potential to elicit positive outcomes for the poor. At least, the World Bank found in a global survey that 59% of adults without bank accounts cite lack of money as reason for this. In practice, most microcredit borrowers re-direct their loans to healthcare, education, food and other subsistence. [xi] The fact remains that there is no substantial improvement in the standard of living in the communities experiencing so-called innovations in financial development and extreme poverty perseveres. So, despite inclusion and access, the poor continue to be alienated from the gains of financial development. Only a few people who control finance are enriched. The pertinent point then needs to be made: financial inclusion and access without a distributive element is rhetorical.
In light of this, extension of credit to the poor mainly serves as a means to broaden the reach of finance. It is therefore necessary to re-think the financial development narrative, as the financialization of Africa’s development is unlikely to deliver desirable development outcomes.
Richard Itaman is a PhD candidate in Economics at the School of Oriental and African Studies (SOAS), University of London.
[ii] Allen, F., Carletti, E., Cull, R., Qian, J., Senbet, L. and Valenzuela, P. (2012) Resolving the African Financial Development Gap: Cross-Country Comparison and Within-Country Study of Kenya, NBER Working Paper, No. 18013.
[iv] Bateman, M. (2014) South Africa’s post-apartheid microcredit-driven calamity, Law, Democracy and Development, Vol. 18.
[v] dos Santos. P.L. and Kvangraven, I.H. (2017) ‘Better than Cash, but beware the Costs: Electronic Payments Systems and Financial Inclusion in Developing Economies,’ Development and Change, 48 (2), pp. 205-227.
[vi] See for example African Development Bank (2014) Finance to accelerate Africa’s transformation: Draft financial sector development policy and strategy 2014-2019 – revised. [pdf] Addis Ababa: OFSD and COSP Departments. [Accessed 03 April 2017].
[vii] Chang, H. and Grabel, I. (2014) Reclaiming Development: An Alternative Economic Policy Manual. 2nd ed. London and New York: Zed Books.
[viii] Banerjee, A., Duflo, E., Glennerster, R. and Kinnan, C. (2015) The Miracle of Microfinance? Evidence from Randomised Evaluation, American Economic Journal: Applied Economics, 7(1), pp. 22-53.
[ix] Deaton, A. and Cartwright, N. (2016) Understanding and misunderstanding Randomized Controlled Trials, NBER Working Paper, No. 22592.