Financial Sector Development in Africa: Opportunities ... - World Bank

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lack access to external investment resources (Honohan and Beck 2007,
166). Moreover, even relative to other developing countries, financial
systems in Africa have remained poorly developed in terms of size and
efficiency (Allen et al. 2010; Honohan and Beck 2007).
The lack of financial intermediation into higher levels of domestic
investment results, to a substantial extent, from market failures that make
providing financial services to SMEs prohibitively costly or, because of an
uncompetitive market environment, unattractive. 3 The need for banks to
downscale operations and find less expensive ways of serving SMEs is
limited, as banks operate very profitably: subsidiaries of foreign banks in
Sub-Saharan Africa have higher returns on assets than subsidiaries of the
same banks in other world regions (Honohan and Beck 2007, 36). In light
of the alarming situation in the financial sectors of many African countries,
policy makers are taking a renewed interest in the question of how
governments could govern the financial sector so that it better serves the
needs of the real economy.
African policy makers asking this question received different advice
in different eras of economic thinking. In the 1960s and 1970s there was
a consensus that developing-country governments should assume an
activist role and intervene directly in the financial sector to increase
outreach; in the 1980s and 1990s, the dominant view of the Washington
Consensus was that governments should take their hands off the financial
markets. Today the appropriate role of the state in the financial
sector is still a controversial issue. Acknowledging that the private financial
sector has often not been very successful in providing finance for
productive private investment, the debate now focuses less on whether
governments should intervene and more on the degree and the best way
to intervene (Beck, Fuchs, and Uy 2009). The key proposition of the
current consensus on the role of government is that governments should
concentrate on creating an enabling environment and on supporting
activist actors outside the government, thus promoting access to finance.
Moreover, based on more recent experiences, it is increasingly accepted
in some parts of the debate that governments could themselves assume
an activist role if they have appropriate governance (Beck, Fuchs, and
Uy 2009; De la Torre, Gozzi, and Schmukler 2007). So far, however,
there is only a dearth of research exploring the circumstances under
which activist government interventions could be a successful tool for
increasing the financial resources available for productive investment in
developing countries.