by Thorsten Beck 

For European financial economists traveling to Africa certainly makes for a nice break from the gloom and doom of Eurozone crisis, unfinished regulatory reforms and the politics of banking union.  So, escaping last November to Nairobi to the bi-annual meeting of the African Economic Research Consortium was a nice opportunity to contemplate the enormous changes that African financial systems have gone through over the past decade.  And while Kenya is certainly one of the countries most advanced in this transformation, many others are not far behind.

As much as the rest of the African economies, African finance used to be a basket case; shallow financial systems, dominated by inefficient state-owned banks, and regular crises, fuelled mostly by governance problems (if not outright theft) both in public and private sector.  The financial liberalization of the 1980s and 1990s and the consequent regulatory upgrade brought financial stability, but not many gains in financial deepening and inclusion.  This has changed over the past ten years, which have seen a persistent financial deepening across most countries on the continent.  Financial innovation, such as mobile banking, branchless banking, weather-insurance for farmers, bio-metric identification techniques and psychometric screening, to name just a few, has helped make African finance more dynamic and more inclusive. And financial systems have become more diverse, with new players competing with banks or filling the gaps left by banks, including equity funds and mobile phone companies.

Coming with this development is a new brand of banks in Africa. Where financial systems used to be dominated by European banks, pan-African banks have taken a more prominent role. While some of them seem to copy the model of the European banks, focusing on the high-end of the market, others have been more innovative, pushing out the frontier.

Is the picture all bright and shiny?  Certainly, not.  Long-term finance, so urgently needed for infrastructure and housing, is still scarce. Only a fraction of the population has access to quality banking products.   And as history tells us financial deepening comes with risks.  And as the Europeans can attest to, financial integration carries enormous challenges and risks. Regulators will have to be on the watch for any new sources of fragility.  Cross-border banking imposes high requirements for cross-border cooperation. But, all in all, there seems a clear trend upwards.

For a recent overview of African, please see this forthcoming handbook chapter.

About Thorsten Beck

Thorsten Beck joined the Faculty of Finance in September 2013 as professor of banking and finance. Since 2008 he has been professor of economics at Tilburg University in the Netherlands and was the founding chair of the European Banking Center from 2008 to 2013. He is also a research fellow of the Centre for Economic Policy Research (CEPR).  Full Profile