By Temitope Ponle
The Economic Commission for Africa (ECA) says Africa needs to rethink its financial services regulations to ensure functionality of financial innovation, transparency and delivery of financing for private sector development.
These were among the key outcomes of the virtual launch of the ECA’s “Economic Report on Africa 2020: Innovative Finance for Private Sector Development in Africa” on Tuesday in Addis Ababa, Ethiopia.
Experts defined financial innovation as the act of creating new financial instruments, as well as new financial technologies, institutions, and markets, such as updated technology, risk management, risk transfer, credit and equity generation, among many others.
Recently, financial innovations have also come to refer to crowd funding, mobile banking technology, and remittance technology.
In her opening remarks, Vera Songwe, Executive Secretary, ECA, said the report highlighted innovative financing as a way of ensuring that Africa grew into a prosperous and resilient continent.
“In the report, we looked at a couple of definitions; we looked at the private sector, the Small and Medium Enterprises, the non-business financial institutions and the role of technology.
“We are hoping that this report will allow us, particularly after this crisis, to look at how we design financing and particularly innovative financing toward infrastructure, agriculture and technology, going forward,” she said.
Presenting an analysis of the report, William Lugemwa, Director, ECA Private Sector Development and Finance Division, said the report had found that many economies in Africa remained undiversified, due largely to low levels of innovation and investments, limited productive capabilities, and low quality of education.
In addition, it also showed that financial innovation to support financial inclusion was a promising option to increase opportunities for firms and households, thus translating growth more equality.
“The private sector, as the engine of growth, can help catalyse investments in infrastructure and industrialisation, and so can contribute crucially to post COVID-19 economic recovery.
“The digital revolution, under way in Africa currently, and mainly based on mobile phone networks, presents opportunities for scaling up alternative finance and sustainably developing private sector finance,” he said.
Lugemwa said that while the report highlighted the many challenges that affected the private sector in Africa from playing its key roles as the engine of growth and enabler of economic recovery from COVID-19, it also observed that capital markets, private investments, crowd-funding platforms and other alternative methods of financing were gaining momentum in Africa.
He cited United Nations estimate of about $1.3 trillion dollars required annually to fund the SDGs in Africa, an amount that would increase due to population growth, the director quoted the report as saying that achieving the Sustainable Development Goals (SDGs) by 2030 in Africa, would, therefore, depend on innovative financing and increased private investments. .
Furthermore, the report revealed that a broad range of technological innovations could also help bridge Africa’s financing gap, including “fintech innovations, mobile money and digital payments, where Africa has made significant inroads”.
However, lugemwa added that Africa needed to put in place regulations on minimal capital requirements, early warning systems and central bank mechanisms that monitored and oversaw financial markets, in order to avoid the spread of financial instability.
“African policymakers and regulators can put in place emergency policy measures to manage financial stability and create a sound pathway toward economic recovery,” he said.
Amongst the key recommendations outlined by the report were regulations of the banking and financial services sector, creation of financial stability through effective policies, amendment and update of financial sector legislations and regulatory policies, Lumenga said.
In addition, he also cited a further recommendation as the need to embrace the Digital Transformation Strategy and the African Continental Free Trade Area (AfCFTA) to streamline policies and regulations.