A critical challenge facing African countries is that of closing substantial development gaps such as financial exclusion and financial constraints. For example, more than 50% of individuals in Africa have no access to formal financial institutions and there are gaps in educational attainment, access to healthcare and infrastructural gaps in transportation, energy and water resources.
According to Africa Infrastructure Country Diagnostic (AICD) estimates, Africa's total infrastructure financing needs amounted to $93 billion a year in 2008, with only $45 billion financed. It is obvious that colossal financial resources are needed to finance developments to close these gaps. It is clear that new financing plans and strategies are needed.
The attractiveness of development finance lies in its ability to innovatively reduce or cover transactions costs, risk and information asymmetry, and to mobilise and pool large financial resources in a less costly manner while financing SMEs, infrastructure, social development and inclusive finance.
So what can be done to address the challenges?
Growth through microfinance banking
Microfinance (microcredit, microinsurance and microsavings) offers huge promise in terms of financing the poor as well as SMEs. Microfinance can help poor households optimise severely constrained resources across their lifetime. For instance, by insuring households against future welfare losses, microinsurance helps to reduce asset loss, vulnerability and poverty. The indemnity enjoyed by the insured prevents the liquidation of essential assets at below market prices. This facilitates the financial stability of households and the steady build-up of essential assets by families. The long-term effects are sustained poverty reduction and reduction in asset inequality among low-income households.
Innovative banking technologies such as mobile banking have grown extensively within the microfinance banking industry and have gained ascendancy from the success story of MPESA and recently MSHWARI pioneered by Commercial Bank of Africa and Safaricom in Kenya. Unique products have also proliferated in Brazil, Columbia, Bangladesh and India.
An added advantage is that this intervention could shape and rapidly expand the poor and underdeveloped financial markets on the continent, thereby improving financial markets. Microfinance also offers the promise to enable households to finance their educational and health expenditures through microsavings and microinsurance.
Growth through project finance
Project finance has the ability to raise funds to finance most if not all infrastructural projects. Major challenges in financing infrastructural developments in Africa include fiscal pressure by governments, underdeveloped financial markets and perceived risk and high transaction costs in typical straight debt or aid financing of such projects. Project finance helps to reduce transactions costs from information asymmetry and risk. If most African governments pay attention to this intervention, a significant amount can be achieved by way of financing energy and transport infrastructure projects.
The benefits of just two development finance interventions show massive potential if such interventions are harnessed and cultivated well. Unfortunately, not much has been done in most African countries. It is time that governments and private financial institutions in Africa realise the potential of development finance and upscale the deployment of development finance as a tool to finance growth and socioeconomic development.