12 November 2012

Africa: Investment Should Benefit All - Gordhan

Pretoria — Investment on the continent must be evenly distributed to benefit not only the rich but the poor too - given the high levels of inequity on the continent, Finance Minister Pravin Gordhan said on Monday.

Gordhan said lessons could be learnt from the financial crisis "dark side" with a number of various schemes and plots that eroded the stability of the financial system.

For Africa, there were several principles that the continent should consider when looking at financial development.

"The financial crisis has illustrated the destruction that can occur when underlying incentives are misaligned and risky behaviour is encouraged. We have seen that economic gains are often privatised, accruing to the wealthy, while losses are socialised, and must be carried by all.

"This is particularly important within the context of deep inequality on our continent. It is important to ensure the gains brought about by the financial sector and financial development accrues not only to the privileged few, but to the majority," said Gordhan.

Speaking at the inaugural Institute of International Finance (IIF) in Cape Town, Gordhan said the continent should avoid spill overs associated with financial crises with European banks withdrawing capital from their African operations leading to reduced lending and economic activity.

There was a need for a shift in how banks operate and behave. "This value shift is a not only needed for banking, but for society generally. Rapid profit maximisation at the expense of society ultimately harms everyone, and, as the crisis has shown, leaves us all poorer," he explained.

Gordhan said most people on the continent did not apply or were denied credit was due to insufficient collateral. "Collateral requirements in Africa are extremely high compared with other regions. As a consequence of these challenges, banks tend to favour large enterprises and government assets to minimise risk."

"A determined effort will have to be made to increase competition in the financial sector.

High levels of concentration lead to excess liquidity and risk aversion. The World Bank estimates that the average market share of the three largest banks in Africa is about 73%.

"These oligopolistic banking sectors have a number of negative consequences, including high interest rate spreads and banking fees which crowd out credit to the private sector by making loans too costly."

Gordhan however added that the continent is one of hope. "Africans have a new determination to leverage their recent economic success into sustained growth and development which must result in a better life for a billion Africans," said Gordhan.

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