Exploring current issues in development finance
A new book provides comprehensive coverage of contemporary issues in development finance from both domestic and external finance perspectives
The impact of the Covid-19 pandemic on economies around the world has been extensive – businesses have lost out, trade came to a halt, and health infrastructure has been struggling. These challenges show the huge gaps that exist in access to infrastructure development, says Charles Adjasi, a professor in Development Finance at the University of Stellenbosch Business School (USB) and editor of a new book titled Contemporary Issues in Development Finance.
“We need resilient, inclusive and sustainable economies; we need to be able to utilise technology to drive development and growth. This draws our attention to a key challenge – to attain equitable growth and development we need to be able to address some of these gaps we have,” he says. “We need to invest in education, health, infrastructure, and industrial strategies that can help grow small and big businesses.”
He adds that the financial system of a country must be well-oiled to address these issues. “If the financial system is not efficient we would not know how to mobilise resources, both domestically and internationally, to do this.”
The book, which covers topical issues such as microfinance, private sector funding, aid, trade finance, and sovereign wealth, was recently launched during an online engagement hosted by the business school. Prof Adjasi and fellow editors Prof Joshua Abor and Prof Robert Lensink unpacked current coverage of policy issues in development finance from both domestic and external finance perspectives. They were joined by contributors Prof Victor Murinde, Dr Pieter Opperman, and Dr Hanna Fromell.
Foreign banks’ impact on domestic economies
Prof Adjasi says the presence of foreign banks in countries positively contributes to the competitiveness of the domestic financial sector. “Typically foreign banks would locate into another local environment as a means of diversification to seek areas to make more profit or to expand. From a receiving economy’s point of view, it is important to look at a few things: If a bank gains entry into the local economy, is it going to promote competition and efficiency? Will it deepen the financial sector? Will it encourage outreach and will it make the financial sector stable?”
He says the empirical evidence so far shows that the presence of foreign banks in financially constraint environments with structural gaps in the financial market, has increased the competitiveness and efficiency while growing the depth in the financial markets. However, he warns that the presence of foreign banks can also pose a risk as they can imports risks from the country where they are coming from or they can easily leave when a crisis strikes.
“We must allow foreign banks but we must just watch the risks. Within Africa there’s Equity Bank Kenya that is spread around east Africa and seems to have been doing quite a lot in inclusive finance by increasing the technological-enhanced financial products,” he adds.
Relooking global financial architecture
Prof Abor, who lectures in the Department of Finance at the University of Ghana, says some issues need to be addressed in terms of reforming the global financial architecture.
“The issue of reforms of the global financial architecture has been on the drawing board for a very long time, even before the global financial crisis. As much as there has been some improvement in terms of improving global finance, a significant amount of reforms are still needed to enhance the ability to safeguard global financial stability and also address a global crisis,” he says.
He adds that it is important to look at how African countries are managing their resources and economies. “In the book, we try to capture some cases such as the Structural Adjustment Programmes (SAPs) in countries like Uganda and whether they have been successful or not.”
Abor says the Bretton Woods system, and international and regional development banks should concentrate on their core mandates. “The International Monetary Fund (IMF) needs to focus more on surveillance of the world economy and also ensuring that macroeconomic stability among member countries is attained.
“The IMF needs to look at its role as lender of last resort to member countries that are affected by crisis and countries should focus on being pre-qualified for assistance as opposed to imposing conditionality because conditionality hasn’t worked and we need to take a second look at that,” he cautions. “Conditionality is biased against developing countries and Africa. Developed countries don’t face or experience the kind of conditionality that is often imposed on developing countries.”
Abor adds that a reconsideration of the entities themselves is also needed. “Emerging economies need to be allowed to also contribute resources as opposed to always being net borrowers. If we are seen as borrowers then we take whatever is given to us. We should be giving greater representation on the board, the issues of voting rights need to be looked at, and the appointment process must be open,” he says.
Microfinance vs financial inclusion
Lensink, a professor of Finance and Financial Markets at the Department of Economics, Econometrics and Finance at the University of Groningen in the Netherlands, says the global discourse around financial development has shifted towards financial inclusion, “which is much more important so that we include everybody in the financial system of financial development”.
He says the concepts of microfinance and financial inclusion should not be confused. “Although related, these are two different concepts. Microfinance predominantly deals with credit to a particular group of poor people, while financial inclusion is much broader; it is not only credit from a microfinance institution to poor people but it is the financial inclusion of everybody in the economy.”
He adds that it is different in the sense that microcredit while focusing on the poor, is very often not available to the very poor. “When you talk about financial inclusion, you want everybody in the economy to be included; not just the moderately poor. Microfinance in itself will never lead to the financial inclusion of everybody but rather forms part of financial inclusion, which is much broader. We need financial instruments and institutions to enable each person to be included in the financial system in the end.”
The full recording of the event is available on the University of Stellenbosch Business School’s YouTube channel. Watch it here
If you would like to order a copy of the book, click here