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

The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective 187
(World Bank 2005, 165). In some countries, such as Ghana or Nigeria,
sectoral lending requirements were on the books, but not applied effectively
(Daumont, Le Galle, and Leroux 2004, 25). However, there are
examples of successful directed credit programs, although most of them
are from East Asia (Stiglitz and Uy 1996; Vittas and Cho 1996).
Another common tool used to broaden access to finance in rural areas
was to compel banks wishing to expand their networks of urban branches
to also set up branches in rural areas. A prominent example is the Indian
experiment of the late 1970s and 1980s, where the government imposed
the so-called 1:4 license rule. This rule stated that banks could open one
branch in an already-banked location only if they opened four in
unbanked locations (Burgess and Pande, 2005). Other countries where
rural branching legislations were in place include Botswana, Nigeria, and
Zambia (Brownbridge, Harvey, and Gockel 1998).
The effectiveness of such legislation has been mixed at best. In
Botswana and many other countries where rural branching legislation was
tried, it was not enforced effectively (Brownbridge, Harvey, and Gockel
1998; Daumont, Le Galle, and Leroux 2004). While the prominent rural
branch expansion program in India terminated because of high bank loan
default rates, it is also regarded as one of the success stories: the rule not
only caused banks to open relatively more rural branches in Indian states
with lower initial financial development and broadened access to finance,
but also significantly reduced rural poverty (Burgess and Pande 2005).
The “modernist” period. Although some examples of market-replacing
activism were successful, in most cases it was not and might even have
impeded development. From the 1970s onward, it was increasingly
accepted that two major assumptions of the market-replacing approach—
that governments know how to replace markets and that they always
seek to maximize social welfare—were flawed. A growing body of work
found that public authorities in developing countries often had limited
technical capacities for running financial institutions and that their willingness
and capacity to govern financial institutions in a way that
increases private investment depended on the interests of the political
leadership (Brownbridge, Harvey, and Gockel 1998).
In response to these insights, a consensus emerged in the 1980s that
governments should withdraw from markets, including the financial sector.
The costs of government failures were regarded as exceeding those of
market failures, and direct government interventions were therefore seen
as counterproductive. The new benchmark became the best-practice