Remarks by W. Paati Ofosu-Amaah

Promoting financial literacy in Africa: The contribution of the African Development Bank

I would like to start by extending my thanks to the organizers for bringing to fore an extremely important, yet under-discussed topic and moreover, for providing us with the opportunity to present an African perspective on this topic.

This Summit takes place at a crucial point in the history of the world. What commands the attention of most in the world today and is an issue which id dealt with daily on television and in newspapers all over the world, is the ongoing global financial crisis. As we know, developed countries suffered the first round effects but second round effects are finding their way to the developing countries. This crisis has also griped the attention of the The African Development Bank, Africa’s premier development finance institution, because of its possible effects on its poverty reduction mission. 

Africa as a whole has made significant economic progress in the last ten years with relatively high growth rates. This economic renaissance was beginning to make a difference in the lives of its peoples especially the poorest in society. The effects of the crisis may however have dire consequences for the continent. As the President of the Bank, Dr. Donald Kaberuka, has eloquently said,

“It took over almost a decade of painful sustained reforms to turn around Africa’s negative per capita growth, yet it has taken only six months for the continent’s global growth prospects to be cut by half from 7% to 3%.”

During this ten year period, there have been significant efforts by the various stakeholders, government, the private sector, international organizations like ours and non governmental institutions to bring financial services to the poor--- “to bank the unbanked” and to give them an opportunity to emerge from poverty. It is not that Africa has not had financial systems; there is clear evidence of trading and financial transactions in the distant past, but they were neither extensive nor clearly suitable to present day economic activity.

As an example, I am sure many in this room have heard about the “susu” system utilized by women, in particular entrepreneurial women across the continent, as an investment mechanism. Each person in the group contributes a monthly amount. The aggregate amount is given to one person, in rotation, to utilize as they wished but mainly for investment purposes. Such an investment mechanism operates without formal knowledge of the fundamentals of finance as we know it today but this system clearly required an appreciation of some financial principles. This example is intended to signal that there is potential for generating great interest in this area of work.

“Financial Literacy” is more important than it has ever been before. This mainly because the level of sophistication in finance and financial transactions has increased tremendously particularly over the last 30 years and, to that end, citizens of the world, whether in developed or developing countries need to have a modicum of financial literacy to manage their affairs. By this, I mean, in simple terms, the development of financial skills and abilities to enable decisions to be made on a financially meaningful basis with a view to appropriately managing individual and family living conditions. The ongoing crisis has made the attainment of these skills more urgent.

Developing countries especially need much more literacy and financial literacy as their national financial markets become more complex and sophisticated. And, this is happening at a fast pace, due mainly to globalization, making this issue a key issue of concern in the development process. The global village is getting fairly closely integrated and we therefore commend Operation Hope and its Founder John Hope Bryant for bringing the issue of financial literacy to the “front burner”.

Africans who largely reside in rural areas are largely “unbanked”.  It is estimated that indeed, 80% of Africans do not utilize banking services. There are many reasons for this. Rural economies have not needed complicated market systems but it goes without saying that with the monetization of transactions, even for foodstuffs, banking and other financial mechanisms have taken on greater importance. With the advent of poverty reduction strategies, including emphasis on the role of the private sector as the engine of growth and the introduction of more sophisticated financial mechanisms, the use of banks and the financial systems across the continent has taken on more importance even in rural communities. In light of this, rural banks and microfinance institutions have sprouted all over Africa and we have to give recognition here for the special role women have played in this connection.

There are great opportunities in Africa for the development of its financial markets. The economic renaissance and globalization has opened the way for the establishment of banking and financial systems based on the decades of experience garnered in the world, including in some developing countries. African countries can certainly learn from the experiences of India and Bangladesh and perhaps even leapfrog straight into modern systems. For instance, cell phone use in Africa has greatly changed economic life in many rural areas and this presents an opportunity for innovation. The countries can draw inspiration from the growing utilization of this instrument worldwide as well as the introduction of mobile banking in countries such as India. But to do so effectively, citizens require a modicum of literacy and in particular financial literacy. Such innovations can assist in significantly ramping up access to finance to the rural poor.

In designing suitable and appropriate systems for use in Africa, policymakers and development agents need to mesh into the structure, tools that will ensure that three crucial components are all in balance. The three components being- ‘financial inclusion’, i. e., extension of financial products to the unbanked and poor, ‘financial literacy or financial capability’, i. e., making the agents understand and use the tools they are being introduced to and ‘financial regulation and consumer protection’, i. e., putting in place mechanisms to make sure these agents are able to use the tools in a transparent, organized and accountable manner and do not take advantage of consumers.

The imbalance among these three components has been indicated as the cause of the recent financial crisis; it is however this balance that African countries need to ensure that the spread of financial services in Africa is not only inclusive, but also stable and sustainable.

The African Development Bank approaches the issue of financial sector development from a three pronged approach. The first prong is building financial institutions and businesses in Africa. This is the core business of a development finance institution. Through its operations, the Bank assists banks and other financial institutions in countries to make finance available to deserving small and medium scale enterprises (SME) and entrepreneurs, to enhance their business activities. Some of these funds are then on lent to individuals and small business operators. In addition, the Bank assists African small business owners directly to become financially literate thus enhancing their ability to access finance and to operate their businesses efficiently and successfully. In this connection, the Bank has made equity investments in several Banks providing financial services to SMEs, including Advans Bank Congo (DRC), K-Rep Bank (Kenya) and Access Bank (Tanzania). It has also recently started making investments in private equity funds focusing on Africa. 

The African Development Bank is also currently engaged in two Africa-wide initiatives (Techmifa and Regmifa) that will assist both in capacity building of such institutions.
The Bank is also supportive of more ‘systemic’ projects, sometimes for specific SME target groups such as women and youth, whereby capacity is built with a number of players in the market to enable them to work together and jointly apply these skills for the provision of finance for small enterprises. Such projects often include business associations, business development service providers, various local financial institutions, governments and other essential stakeholders.

For reasons that have to do with efficacy in the use of monies, a combined provision of both technical assistance and finance is the best solution to address the needs of SMEs. It is in this line of thinking that the Bank continues to focus on promoting access to finance and financial literacy in a combined manner.

Hand in hand with this is our work throughout Africa, with small business owners to help them acquire financial knowledge and become financially literate. The Bank is part of “The Making Finance Work for Africa Partnership”, a joint partnership with the World Bank, German Development Cooperation and several bilateral agencies. This initiative supports the efforts of African countries to accelerate economic growth and reduce poverty by facilitating financial sector development. This work is driven by the recognition that sound and inclusive financial factors are strategic drivers of private sector development, employment generation and equitable growth. It is therefore a very important initiative in terms of supporting financial sector development and literacy.

In this regard, the Partnership organised its first Africa-wide Forum in Ghana in June 2008, involving more than 350 key stakeholders from the public and the private sector. Participants discussed the major challenges and opportunities for financial sector development in Africa.  In answering the guiding question of “What do we need to do (better) right now to make finance work for Africa?” the participants identified nine top priorities including “Financial Capability” which comes as no surprise. As a follow-up, the World Bank, DFID, USAID and German Development Cooperation are organising the upcoming Conference to be held from 8-9 September 2009 in Accra on “Promoting Financial Capability and Consumer Protection – A Step forward towards Financial Inclusion in Africa”.

The Government of Ghana itself has taken up financial literacy as a serious impediment to its development prospects. It launched a National Financial Literacy Week in late 2008 on the theme—“Literacy… Knowledge is Money”, during which various events were held to accelerate the financial literacy of Ghanaians in order to accelerate the economic rejuvenation taking place in the country. The financial literacy week was also used to raise public awareness and enhance knowledge about the range of products and services being offered by Ghanaian financial institutions. It has been reported that several thousand bank accounts were opened all across the country after this week.

A similar campaign in Uganda, involving the use of radios, posters, in conjunction with community events, yielded more than 300,000 new bank accounts.

Imagine the results that can be obtained from a financial literacy week across the whole continent!

A number of important initiatives are also being implemented in other parts of Africa where financial literacy is also a key issue. I refer to Southern Africa, with its relatively more prosperous countries such as South Africa, Namibia and one of the best managed economies on the continent, Botswana and like South Africa, a middle income country. All these countries have programs directed at improving financial literacy, from brochures, TV ads to the use of printed media, organizing events with educational components to counselling services and I am pleased to learn of Operation Hope’s activities in South Africa. Yet, financial literacy in these relatively better off countries leaves a lot to be desired. If they are not doing so well on this front, you can expect that more serious situations exist in other parts of Africa. In short, there is no doubt that much more needs to “bank the unbanked”.   

The third prong of the Bank’s approach is equally important. Financial regulation, governments’ capacity building and consumer protection are also hey elements in an appropriate functioning financial system. The financial capacity of many African Governments is similarly weak and this poses great challenges.

Thus, the Joint Africa Institute (which is a partnership of the Bank, the World Bank and the IMF), the Bank’s African Development Institute and various departments, including the Governance and Statistics departments, are working hard with policy makers, central banks, governments and ministries of finance to strengthen their understanding and capacity in a whole spectrum of topics ranging from macro and fiscal policy to national accounts and financial programming and financial governance.

In conclusion, literacy in all its forms is very very important and must be pursued with all the tools and financing available. The issue of literacy itself has been on the table for a long time indeed, but literacy must encompass understanding of what one reads. It also goes without saying that being illiterate does not necessarily mean the ability to be financially savvy. The market women of Ghana and Kenya are famous for their shrewd business practices. And, while they are an important facet of the commercial sector in those countries, many of them cannot read or write. But, they are very actively entrepreneurial and highly successful business women. Indeed, they are the fulcrum of economic life in many cities in Africa. But even for them, literacy and financial literacy have become important and today, they invest in the education of their children and other family members, in recognition that literacy and financial literacy can enhance the future family fortunes.

But, while being able to read and write may be advantageous, one must understand and imbibe what one reads. For if one does not, the education is useless.

All this is to say that, in present day circumstances, with the dire effects of the ongoing crisis, Africa and the rest of the world, including the poorer segments of the developed countries, need and should, continue the task of making their citizens financially literate in order to be able to hold their governments and the private sector entities responsible and accountable for their actions. Financial literacy and education can and should enable people of the world to enhance their personal living situations and contribute to the economies of their countries, particularly through savings.

There are additional reasons why countries around the world should redouble their efforts in this area. I recall the G-8’s 2006 Communiqué on this subject which includes the following additional reasons:

•    Along with good employment prospects, financial literacy can play a role in helping individuals build adequate long-term savings.
•    Improving literacy can have a positive impact on consumer behaviour and can contribute to the reduction of poverty in developing countries.
•    The lack of financial literacy can be an obstacle for the development and understanding of key financial instruments.
•    The lack of financial literacy may create conditions for deceptive financial practices.

I would like to end by thanking Operation Hope for its interest in Africa. In my humble opinion, the current financial crisis presents a unique opportunity for Africa and also for the not so advantaged in societies everywhere to take up the cause of financial literacy. Improving FINANCIAL LITERACY should indeed be a key ingredient in all assistance programs for the poor and not so fortunate in the world. It has the promise of taking them out of the trap of poverty. This Summit should be seen as a good beginning for much work remains to be done all over the world.