Financial Sector Development in Fragile and Conflict-Affected States
- January 1, 2017
- Posted by: ADRES Group
- Category: Blogs
In this article, Martin argues that while infrastructure development and peace-building efforts are key prerequisites to address fragile states vulnerability issues, building an inclusive financial sector, as part of a well-coordinated effort between development partners, offers the promise to bring fragile states back on the path of financial stability and growth.
This statement brings forth a long-standing debate on the existence of ‘fragile’, ‘failed’, and ‘collapsed’ states which have attracted attention since the incident of 9/11 and the ongoing migrant crisis, with rising concerns that these states infringe on international security.
The question is, should fragile and conflict-affected states (FCAS) be left behind to fail? In this article, I reject the assertion that such states should be left behind. Instead, I argue, while infrastructure development and peace-building efforts are key prerequisites to address fragile states vulnerability issues, building an inclusive financial sector, as part of a well-coordinated effort between development partners, offers the promise to bring fragile states back on the path of financial stability and growth. Building inclusive financial systems in FCAS can create a conducive environment for the development of infrastructure, entrepreneurship, the growth of small businesses and job creation. Below, are various reasons that support financial sector development in FCAS.
First, while financial stability is to be distinguished from political stability, evidence suggests that “the reduction of income inequality through financial development and inclusion could lead to greater social and political stability, which in turn could contribute to greater financial system stability” (Cull et al., 2012). Hence, addressing income inequality issues, which financial inclusion can arguably help fix, could be considered as a potential means to tackle the vulnerability of African fragile states.
Second, according to a new report titled ‘Financing the Frontier: Inclusive Financial Sector Development in Fragility-Affected States’ published by the Financial Sector Deepening Africa (FSD Africa) in partnership with Mercy Corps, poverty rates in fragile states are, on average, 20% higher than in countries with comparable levels of economic development; the gap is widest for countries affected by repeated cycles of violence (Sile, 2013). As a group, fragile-affected countries lag behind in reaching the Millennium Development Goals; nearly two-thirds failed to meet the goal of halving poverty in 2015. Today, the 50 countries and economies on OECD’s 2015 fragile states list – of which 30 are African – are home to 43% of the global population who live on less than US$1.25 per day and by 2030, this figure could reach 62%. Finance plays a crucial role in poverty and conflict cycles, as lack of equitable access to financial services can lead to underdevelopment and stagnation, exacerbating social and economic unrest.
Third, the past decade has seen wide-ranging financial market reforms in Africa, which coupled with private sector-led innovation especially in the mobile arena, have led to far more people across the continent having access to formal financial services. However, In FCAS, only 14% of adults have access to a bank account, compared with 23% in Africa and 24% in SSA (Sile, 2013). Also, in FCAS women are 32% less likely than men to have a formal account (19% in other developing economies) and those aged 15-24 are 39% less likely than those aged 25-64 to have a formal account (World Bank, 2013). This is the cruel paradox of financial inclusion in FCAS: it is in precisely these countries that having a safe place to save or a reliable method to receive remittances is most important, yet access to and usage of basic financial services remains incredibly low.
On average, after access to electricity, lack of access to finance is cited as the highest business constraint in African fragile contexts (Leo, et al., 2012). Financial sector development in FCAS can reduce transaction costs, facilitate capital accumulation and more productive investments, encourage the development of entrepreneurship and business growth. It can also provide options for mitigating risk and responding to shocks and stresses as well as contribute to overall stability-building measures.
Amartya Sen, the Nobel prize winning Economist in his book ‘Development as Freedom postulates that, the central aspect of well-being is ‘functioning,’ defined as the freedom of choice and control over one’s life. For adults living in FCAS, the inability to smooth consumption and make investments through formal savings and credit systems is one of many restrictions on their ‘functioning’. He further asserts that, “market failures have to be dealt with not by suppressing the market but by allowing them to function better, with greater fairness and with adequate supplementation.”
Therefore, financial sector development efforts in FCAS through a market systems building approach needs to be driven by a clear vision with answers to critical questions such as: what is the government’s role in the future – interventionist or laissez-faire…or somewhere in between? Who is going to pay for the infrastructure to support financial systems in FCAS? What level of financial sector development should we be aspiring towards? Donor funding can play a very useful role in helping to build this vision and aligning market actors behind it. The donor community can crowd-in legitimate financial market actors and provide the flexibility needed to take risks, and allow development actors to pivot as the fragile and conflict-affected states in Africa change and adjust.
Cull, R., A. Demirgüç-Kunt, and T. Lyman. 2012. “Financial Inclusion and Stability: What Does Research Show?” Brief, CGAP: Washington, D.C.
Leo, B., Ramachandran, V. & Thuotte, R., 2012. Supporting Private Sector Growth in African Fragile States: A Guiding Framework for the World Bank Group in South Sudan and Other Countries, Washington, D.C.: Center for Global Development.
Sile, E., 2013. ‘Financial Inclusion in Fragile States’, in T. Triki & I. Faye, eds. Financial Inclusion in Africa, Tunis: African Development Bank, pp. 94-104.
World Bank, 2013. Findex: Financial Inclusion in Fragile and Conflict Affected States, Washington, D.C.: World Bank.