The Financialization of Africa’s Development


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.


[i] See for example Beck, T., Demirguc-Kunt, A. and Levine, R. (2007) Finance, inequality and the poor, Journal of Economic Growth, 12 (27), pp. 27-49.

[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.

[iii] Beegle, K., Christiaensen, L., Dabalen, A. and Gaddis, I. (2016) Poverty in a rising Africa: Africa poverty report. Washington DC: The World Bank.

[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.

[x] dos Santos, P.L and Kvangraven, I.H. (2016) Financial Inclusion and Its Discontents, Private Debt Project. [Accessed 23 February 2017].

[xi] Beck, S. and Ogden, T. (2007) Beware of Bad Microcredit, Harvard Business Review 85 (9), pp. 20-22.

Photo: Standard Bank in South Africa. By Keso S.

4 thoughts on “The Financialization of Africa’s Development

  1. Africa needs social justice as much if not more than any other country. Here is how to achieve it:

    Socially Just Taxation and Its Effects (17 listed)

    Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?

    Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors of production (the other 2 being labor and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015).

    However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (Mason Gaffney and Fred Harrison: “The Corruption of Economics”, 2005).

    Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife. There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.

    Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community and (after an initial start), not by the natural resources. As the city expands, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid by tenants make their residence more costly and the provision of goods and services more expensive. It also creates unemployment, causing wages to be lowered by the monopolists, who control the big producing organizations, and whose land was already obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.

    The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily for its right of access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce too, and can charge more for this access right than what an entrepreneur, who seeks greater opportunity, normally would be able to afford.

    A wise and sensible government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed 136 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and find that land dominance has its own reward.

    17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics

    Four Aspects for Government:
    1. LVT, adds to the national income as do other taxation systems, but it replaces them.
    2. The cost of collecting the LVT is less than for all of the production-related taxes–tax avoidance becomes impossible because the sites are visible to all.
    3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the management of national affairs.
    4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).

    Six Aspects Affecting Land Owners:
    5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
    6. The land owner pays his LVT regardless of how his site is used. A large proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not used).
    7. LVT stops speculation in land prices and the withholding of land from proper use is not worthwhile.
    8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce.
    9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
    10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below).

    Three Aspects Regarding Communities:
    11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
    12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
    13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.

    Four Aspects About Ethics:
    14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks– LVT is a natural system of national income-gathering.
    15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
    16. The improved use of the more central land reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
    17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty and improve business ethics.


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