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

The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective 195
distorted the lending decisions of government-owned banks so that many
of them ended up lending to the wealthy and politically connected.
Often public banks were used to make up for the losses of inefficient
public enterprises; central banks also served to finance the state apparatus
more generally (Brownbridge, Harvey, and Gockel 1998). For instance,
the Uganda Commercial Bank (UCB), which used to be the country’s
largest public sector bank, failed to adequately appraise or monitor loans
or to pursue their recovery because of the political nature of lending. The
discipline of UCB’s borrowers was low because they often regarded such
loans as rewards for political support and, in some instances, politicians
also told their constituents that loans from government banks need not
be repaid (Nsereko 1995, 28–29). As a consequence, loan recovery rates
for the lending schemes administered by Ugandan public banks were
below 50 percent in the 1980s, and banks mostly failed to reach their
targeted clientele (Brownbridge 1998a, 129–31).
Moreover, in many African countries, positions in development banks
were used by public authorities to reward political clients. This may
explain why the Nigeria Education Bank, a public institution intended to
finance the higher education sector, had failed to make a single loan seven
years after it was established, despite employing 261 staff in 21 offices
(Alawode et al. 2000, 55). The political costs of laying off excess staff
were a key obstacle to the privatization of government banks as part of
the financial reform process.
Private banks in Africa also failed to serve the real economy in a way
that increased broad-based private investment and instead provided
financial resources mainly to the government and a small economic elite.
Using political pressure, politicians and politically connected private
investors in some countries appear to have been able to access loans from
private banks at below-market rates, to fail to repay them, and to resist
repayment successfully when banks took action to recover the loans.
Moreover, African governments, chronically in fiscal crisis, used not only
direct measures such as lending requirements to public enterprises but
also indirect measures such as interest rate controls or high reserve
requirements to govern private banks so as to finance the state apparatus
(Brownbridge, Harvey, and Gockel 1998; Daumont, Le Galle, and Leroux
2004).
At the same time, private banks, in principle opposed to such government
interference in the banking sector, often came to a profitable modus
vivendi with the government. In many African countries, such as
Botswana, Kenya, and Ghana, private banks did not have to compete with