Banking on Africa's diaspora: Institutionalising finance

Although locked out of borrowings on capital markets for most of the past five decades, African countries have been spared the twin woes of financial turmoil and economic downturn that have been besetting most countries of the world since 2008.

Throughout the 1980s and the 1990s these countries went through drastic structural adjustments imposed by the Bretton Woods institutions and their Western mentors. Official development assistance (ODA) has been their sole long-term source of financing. Worse, the development model spearheaded by these institutions, which was based on producing and trading natural resources without any further domestic processing whatsoever, was doomed. This situation, however, is currently changing. Several African countries have received ratings from credit agencies that opened up world financial centres to them. In some cases, these ratings have proved higher or equivalent to those of countries such as Turkey or Argentina. Stock exchanges are being established across the continent.

Furthermore, the economic assertiveness of countries such as China, India and Brazil has provided a platform for increased exports and the inception of a model of cooperation based on trade, investments and technology transfer rather than 'aid'. For China alone, trade with Africa increased from US$10 billion in 2000 to US$107 billion in 2008, and billions of dollars are being invested in sectors such as oil production, mining, transportation, electricity production and transmission, telecommunications and other infrastructure projects.

The combination and convergence of these developments have drastically improved the macro-economic framework of African countries. Many factors have contributed to fuel this upturn. First, there is the appreciation of commodity prices fuelled by demand from emerging markets. Another lever of economic growth relates to the rural exodus and the urbanisation that stemmed from it, giving birth to a dynamic informal sector. Improved governance, an increase in food production, inter-regional trade, debt cancellation, better use of ODA funds, and thriving telecommunications and housing markets are among the other engines driving economic growth in the region.

But migrant transfers from the African diaspora stand out as the most significant contributing factor to economic growth in the region. A study commissioned by the Rome-based International Fund for Agricultural Development (IFAD) indicates that more than 30 million individuals living outside their countries of origin are contributing every year more than US$40 billion in remittances to their families and communities back home in Africa. For sub-Saharan African countries, migrant remittances increased from US$3.1 billion in 1995 to US$18.5 billion in 2007, according to the World Bank, representing between 9 per cent to 24 per cent of gross domestic product (GDP) and 80 per cent to 750 per cent of ODA. This underscores the social, economic and financial importance of migrant remittances in recipient countries, the migrants representing, de facto, their first fund providers.

In the remittances market, migrant behaviour is essentially dictated by the regulatory environment, the quality of products and services offered by banks, money transfer companies (MTC), micro-finance institutions (MFI) and informal operators in relation to speed of service, collection times, cost, security, coverage and accessibility of network. In this respect, there are three different strategies in place in Africa. The anglophone strategy is focused on freeing up the market by inciting competition, relaxing regulatory constraints for non-bank operators, offering financial incentives, encouraging the development of technical and financial innovations and stimulating collaboration among market players. This approach, adopted also by Italy, contributes to reducing costs, removing barriers to free competition and generating an increase in the overall volume of funds for beneficiaries.

The Hispanic approach emphasises scaling up the involvement in banking of migrants, proposing a range of banking services available in both the country of origin and the host country, developing products of specific interest to the migrant and charging as low a commission as possible on foreign transfers. This approach, widely developed by Morocco and the Portuguese-speaking world, is epitomised by a policy of zero commission initiated by the partnership between the Spanish bank Santander and its Moroccan counterpart Attijariwafa Bank, which remains the best international reference.

The francophone approach works on two brands of monopoly. The first is enjoyed by money transfer companies such as Western Union, which controls up to 90 per cent of the total formal transfer volume within the franc zone. Western Union is characterised by the cost of the money-transfer fees it charges, which are as high as 25 per cent on transfers to African countries compared to an average world benchmark of 5 per cent. It has required that most African countries sign exclusivity agreements that prevent foreign exchange bureaux, post offices and micro-finance institutions from carrying out money transfers and expanding their network.

The second overwhelming dominating factor in the franc zone is exercised in the banking sector at two levels. First, there is the right of veto granted to France within the board of directors of the two central banks of the franc zone - the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO) and the Banque des Etats de l'Afrique Central (BEAC). Second, two French commercial banks, BNP-Paribas and Société Générale, exercise a quasi-monopoly on the dictation of lending programmes. Their main activities are centred on the short-term financing of trade and consumption, catering to the needs of their customers, especially governments, public and private companies and the elite. So far, all other banks operating in the area have adopted the same practice, instead of enhancing competition by lowering costs. Although realising handsome profits from their trade and constantly running a surplus of liquidities, these banks have contributed little to the productive investments desperately needed by these countries. This explains the high level of the un-banked population and the local entrepreneurs' lack of access to financial services. The less the market is subject to concurrence, the less the benefiting households are 'bankarised', and the more these transfers transit through informal channels. As a rule, it has been observed that the volume of informal transfers is inversely proportional to the level of 'bankarisation' of benefiting households.

In these times of financial turmoil, workers' remittances are being recognised for their contribution to the economic health of the region, as well as for their vital importance to recipients. For obvious historical and linguistic reasons, France remains the main host country for migrants from its former colonies, including the Comoros and Madagascar. Notwithstanding the increasing importance of new corridors from Italy, Spain and the United States, in absolute terms the largest share of remittances still originates from France.

There is a real need for the establishment of a medium- and long-term financing institution for leveraging the development impact of migrant remittances in converting these funds into medium- and long-term productive investments generating added value, wealth, jobs, economic growth and development. It will meet the needs of the diaspora, benefiting not just households but the states themselves, in terms of access to banking services, mortgages and productive investments, insurance products, co-development, pension plans, technical assistance and modernisation of the informal sector. It will enable competition, and restructure and fructify migrant savings. It will also contribute to the creation of hundreds of thousands of jobs in Africa, Europe and the United States in this age of economic and financial difficulty.

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* Sanou Mbaye is a Senegalese economist and former member of the African Development Bank senior management team.
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