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

The Potential of Pro-Market Activism for Finance in Africa: A Political Economy Perspective 217
sufficient precondition for group formation, democracy may be helpful in
encouraging political entrepreneurship because certain aspects of it—such
as freedom of both speech and association—make political entrepreneurship
easier.
Working within the existing power relationships of society. An alternative
to shifting the political power relationships would be to try to work
within them. The challenge here is to design policies that have the potential
to increase access to finance for productive investment in weak institutional
environments, but that are also incentive-compatible for those
with economic and political power.
In some parts of the financial development debate today, modernist
policies are regarded as the preferred solution for reforming financial
systems in societies where the political environment suggests that activist
policies are unlikely to succeed. Seeing only a limited role for governments
in financial markets, this approach posits that governments should
focus on policies that strengthen macroeconomic stability and the
market-based provision of financial services through large-scale finance.
Ensuring that banks can safely lend on financial resources, enabling companies
in the formal sector to find the mix of equity and debt finance
they need to grow, and implementing sophisticated tools for risk management
rank high on the agenda of modernists (Honohan and Beck
2007, 9). The guiding principle is that the best practices of the advanced
economies in developing countries should be imitated.
However, past experience demonstrates that the potential for building
inclusive financial systems by solely following the modernist approach is
limited. In Botswana, for instance, which has primarily followed a modernist
approach since its independence, large gaps still exist in access to finance
for the middle market, lower-income groups, agriculture, and industries
depending on long-term finance (Boone, 2005; Harvey 1998; Jefferis
2007). The experience in other Sub-Saharan African countries is similar,
and the increase in outreach during the modernist period has also fallen
short of expectations (Beck, Fuchs, and Uy 2009; Nissanke 2001). African
financial markets have remained highly fragmented with few effective linkages
and little competition between market segments. This means the
majority of the population is still outside the formal banking system, served
only by microfinance institutions or informal arrangements.
Moreover, empirical evidence shows that a modernist approach also
raises political economy problems and that inadequate governance