Banking in SSA has undergone very significant changes over the last two decades. Financial liberalization and related reforms, upgrades in institutional and more recently the expansion of cross-border banking activities and the rapid development of Pan-African banking groups are signaling greater financial integration and significant changes in the African banking and financial landscape. Nonetheless, excess liquidity in many countries reflects limited lending opportunities and, despite improvements, asset quality and provisioning remain comparatively low. Dollarization has also been a persistent characteristic in several natural resource-dependent economies.

Introduction

Since the 1990s, sub-Saharan Africa (SSA) has been among the world’s fastest-growing regions. For the first time since the 1970s, a large number of countries in SSA have been enjoying an extended period of strong economic growth. The recent pace of growth represents a sharp break with the falling living standards and macroeconomic instability of the 1970s and 1980s – a period when the region fell behind developing countries in other parts of the world. The acceleration in growth has been accompanied, and facilitated, by a sharp reduction in inflation, which in most SSA economies is now typically in the single-digit range, despite persistent vulnerabilities to food and fuel price shocks Among the key factors contributing to this turnaround in economic fortunes were the improved macroeconomic policies in many countries. These include the strengthening of fiscal positions, the enhanced emphasis given to containing inflation, the liberalization of exchange controls and unification of exchange rates, and the building of foreign reserves to help contain the impact of adverse external shocks. These shifts in domestic policies were facilitated by international debt relief initiatives, which freed up fiscal space and mitigated against external payment pressures in several SSA countries.

The acceleration in economic growth has been accompanied by an expansion of access to financial services – particularly commercial banks, which have been traditionally, and remain, the backbone of financial systems in SSA. Indeed, banking in SSA has undergone dramatic changes over the past 20 years. Financial liberalization and related reforms, upgrades in institutional and regulatory capacity, and more recently the expansion of cross-border banking activities with the rapid development of pan-African banking group networks have significantly changed the African banking and financial landscape. Once dominated by state-owned institutions and distorted in their operations by restrictive regulations, banking systems in SSA are now deeper and more stable, and the incidence of systemic banking crises have declined dramatically in the past two decades. In fact, banking systems in SSA survived relatively unscathed the turmoil of the global financial crisis, despite indirect pressures through international trade linkages.

Yet, despite these remarkable achievements, concerns persist that this progress may not have been significant enough to sustain future growth, that several countries still display shallow banking systems with insufficient depth and instruments, that financial inclusion – that is, the extent of access to financial services and products by the majority of the population – is still limited, and that high costs, short bank lending maturities, and limited competition remain a drag on the development of a competitive and diversified economic structure in many countries of the region.

Against this background, the purpose of this paper is to take stock of banking-sector developments in the region, outline the challenges, and discuss policies that could deal with them. In discussing trends for SSA as a whole, it is important to keep in mind the striking diversity within the region, whose 45 countries vary markedly in terms of population size, income levels, resource endowments, access to international transportation corridors, and the extent of sociopolitical stability. These diverse conditions have had significant effects on the pace of growth and on the development of financial systems, which show considerable variation in depth, size, reach, and complexity within the region.

The rest of the paper is organized as follows. Section II discusses the key stylized facts and trends of banking development in SSA, looking at a variety of dimensions such as size, depth, soundness, and efficiency. Section III takes stock of the integration of SSA banks with the international banking system. Section IV discusses the rapid expansion of pan-African banking groups and the challenges they pose for cross-border oversight. Section V looks at the role of SSA banks in financing infrastructural development. Finally, Section VI concludes by discussing financial sector policy issues linked to the need to further develop banking and financial markets and forge a stronger financial infrastructure.