The continent requires unique interventions and institutions {writer: Professor Meshach Aziakpono}

With six of the 10 fastest growing economies currently situated on the African continent, the access to development finance is now crucial for the continued growth of the continent’s economies and the realisation of the Millennium Development Goals.

In order to realise these goals, many African governments must first overcome the key challenges of inadequate and sustainable financial resources to finance the development needs of their countries.

The majority of enterprises in Africa are of small to medium scale (SMMEs), which accounts for more than 95% of all businesses. Moreover, the majority of the population is poor.

As SMMEs and the poor population lack the types of collateral required by the formal financial system to secure finance (often due to ill-defined property rights), they are often perceived as highly risky investments and are therefore sidelined.

This problem of access to finance in Africa is further exacerbated by the weak legal systems and poor accounting practices that make the establishment and enforcement of formal contracts difficult.

The main concern of development finance is to make access to finance available to the sectors where, due to the perceived high risks and low recovery of costs, there is a private capital gap.

In most African countries, the traditional financial institutions such as banks, insurance companies, unit trust companies, and markets such as stock and bond markets are typically underdeveloped.

Furthermore, where they exist, they have primarily catered for the needs of the small corporate sector and the few privileged rich individuals.

The inability of the poor population and SMMEs to access much-needed finance for investment from the formal financial systems only further entrenches their underdevelopment and, in turn, the underdevelopment of the countries, as potential investment opportunities cannot be realised.

The unique situation in Africa and many developing countries around the globe calls for unique development finance interventions and institutions. These interventions and institutions take the form of privately owned micro-finance companies, and government-sponsored development finance institutions (DFIs).

Lack of skills

Despite these laudable initiatives, the reality remains that they are often not equipped to play this crucial role due to lack of adequately trained personnel to design, implement, monitor and evaluate the required innovative development finance interventions or schemes.

The majority of employees of DFIs, government departments and micro-finance institutions have very little or no formal training in the field of development finance.

The consequence is that many of the institutions and their programmes perform very poorly.

Moreover, due to a gap in academic offerings in African universities, many policy-makers and regulators are not given the suitable levels of relevant training in this specialised environment.

While several development finance schemes and programmes have been initiated and implemented among DFIs and government institutions across Africa, the lack of research capacities among such institutions means many of the schemes and programmes are not properly evaluated after their implementation.

Furthermore, as a result of the limited linkages between universities and DFIs in Africa, very little research conducted by universities is focused on studying and improving the performance of the various programmes and schemes of the DFIs.

It is therefore crucial that universities in Africa develop academic programmes that can provide graduates with the skills to fill the gaps in the DFIs and in the policy-making and regulatory institutions, as well as to better understand the complexities of and manage the different development finance resources available on the continent.

In order to amend the disconnect that often exists between academic offerings and real-world practice, it is imperative that academic institutions work in partnership with the DFIs and relevant government departments in the design and delivery of such programmes. Such partnership will help to ensure the programme content and research is relevant and meets the needs of the development finance industry. Only then will African economies start to realise their full potential.

Prof. Meshach Aziakpono is the head of Development Finance at the University of Stellenbosch Business School and a member of the African Econometric Society. His topics of discussion include why African economies require a unique approach to development finance.