The International Monetary Fund. (AFP/File, Saul Loeb)
Limited access to financial services is a key constraint on growth across the East African Community, according to the International Monetary Funds (IMF).
Through a working paper dubbed ‘Assessing Bank Competition within the East African Community’ that aims at estimating the degree of competition in the EAC banking systems, the IMF challenged new entrants for not taking the advantage to include the large number of the unbanked population.
Despite large numbers of financial exclusions, the IMF says that new entrants into the market in recent years show there are no regulatory barriers per se to competition in the banking system of the EAC countries
It comes when more than half of the population in Rwanda and Tanzania has no access to financial services at all, a key policy challenge even in other EA member states.
According the IMF analysis, Kenya has the highest percentage of people with access to formal financial services, at 40 percent, Rwanda 21 percent, Tanzania 17 percent and Uganda with 28 percent.
“Why are these new participants unable to take advantage of the opportunity presented by the large unbanked segment of the population in each country to compete more effectively with the former state owned banks that retain a dominant position in each country?” the IMF asked in the paper.
The possible explanation for the high level of financial exclusion lies in the lack of competition within the banking system and economic literature, it states.
IMF team recommended that, to strengthen bank competition and increase access to financial services, policy makers will need to aggressively pursue reforms aimed at eliminating the structural barriers to contestable banking systems in the region.
On ranking depending on banking sector competitiveness, Kenya led, followed by Tanzania, Uganda and Rwanda.
The degree of competition is low due to a combination of structural and socio-economic factors.
According to the report, in Kenya, Rwanda and Burundi, their governments control majority shareholding in the largest banks although this is not the case in Tanzania and Uganda.
Some of the proposed ways to tap into the unbanked population is to adopt comprehensive microfinance policies that safely increase access to financial services for lower-income households and SME’s.
Mobile-banking revolution and the introduction of agency banking is an example of a microfinance initiative that is already accelerating financial deepening. Mobile-banking has particularly advanced rapidly in Kenya, but is also quickly gaining popularity in the other EAC countries.
By Gertrude Majyambere, The New Times