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of the population in many African countries has a bank account. Using simple
back-of-the-envelope calculations , Beck et al.show that 54 percent of the
population in Cameroon , 81 percent in Kenya, 40 percent in Madagascar, 94
percent in Malawi, 89 percent in Sierra Leone, and 93 percent in Uganda can not
afford the fees for checking accounts , given their annual income and the
assumption that they cannot spend more than 2 percent of household income on
financial transaction account charges...
It is submitted that what lies at the core of improving sustainable banking in
Africa is to bring about industrialization onto the continent. However for
industrialization to arrive and be successful a proper foundation needs to be built
by prioritizing the strengthening of the state institutions so as to entice and
enhance the investor confidence. This is the core of this article. It has been shown
in this article that there is correlation between political stability and economic
growth.
It is common knowledge that the vast majority of the states in Africa generally
have weak governance systems. There are various reasons that account for this
weakness. Kondlo (2011: 3 ), argues that ...The political elites have responded in
various ways to a range of problems and made different choices in response to
opportunities. But there are core challenges common to all African states in the
twenty-first century and these require a collective response. The challenges
include underdevelopment and economic stagnation, shallow political democracy,
collapsing public institutions and a growing number of failed states on the African
continent , despite interventions by organizations such as the African Union. The
twenty-first century is both a moment of hope and a moment of crisis-it is a make
or break period in the history of the African continent... He underscores the point
thus...A new awakening and a new consciousness among the masses of African
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people , which will lead to turn over a new leaf and do things differently , is the
solution the continent has not yet found...
Walter Rodney ( 1982: xii ), puts into context the challenges that the African
continent currently experiences thus...the question as to who , and what , is
responsible for African underdevelopment can be answered at two levels. Firstly ,
the answer is that the operation of the imperialist system bears major
responsibility for African economic retardation by draining African wealth and by
making it impossible to develop more rapidly the resources of the continent .
Secondly , one has to deal with those who manipulated the system and those who
are either agents or unwitting accomplices of the said system... In addition to
Rodney's contention above Mazrui (1998 : 3) , argues that ...colonialism
introduced capitalist greed without capitalist discipline and helped to promote
Western consumption patterns without Western productive techniques. By the
time colonial powers departed , to return to Europe, what had started as
inadequate African greed exploded into a frenzy of post-colonial African
acquisitiveness . Western tastes had indeed taken root in Africa-but not Western
skills...
The weaker the state institutions the stronger the potential that various forms of
risks will escalate to the detriment of the banking industry, and also the business
at large. Conversely the stronger the state institutions, the lesser the risk factors
are to the banking industry, the more likely that a country will experience
sustained economic growth to the benefit of the banking sector extending to the
business community at large. Kim (1993: 381), summarises the position as
follows...For international banks, country risk analysis is to assess the political and
economic factors of a borrowing country which can interrupt the sustainable
inflows of foreign credits to the country and the timely repayment of principal and
6
interest from the debtor country. Why do we need to consider country risk as a
separate risk instead of part of credit risk of individual borrowers? It is because an
individual borrower's ability to meet external debt-service obligations is
influenced not only by his own ability but also by the ability of the country as a
whole . The latter depends on other borrowers's ability , the availability of foreign
exchange relative to total external payment obligations, and the extent of
government interventions...
The issue relating to the interactive relationship between the economic
development and democratic transformation ( which creates strong states
through constitutionalism) has been widely debated by various scholars
( Acemogu Robinson 2005; Halperin et al .2005 ; Chen Lu 2007; Diamond-
The Pew Research Center 2009 and more ) . According to Shashvat Saurabhi ...a
free country has a better economic growth than countries which are partly free
and much better than the not free status countries...He underscores a point thus...
R.C Kormendi and P.G Meguire (1985 ) [who studied a group of 47 countries ]
found that countries in the high civil liberty category experience about 1% greater
annual economic growth. Similarly , K.B. Grier and Tullock (1989 ) conclude that
repressive ...[countries]...in Africa and the Americas have about a 1.5 percentage
[negative] point lower annual growth rate than do other countries included in
their study. R.J .Barro's (1989) results for a sample of 98 countries also indicate
that political rights are associated with lower per capita growth. (2006:9)
Beckett (2000: 82) , also supports the assertion that relates to the correlation
between economic viability and political stability . He contends that...Recent
history has shown that the greater a country's real and / or perceived economic
potential , the greater the likelihood that external factors , private , commercial ,
and governmental , will intervene in that country `s domestic affairs , financially or
7
even militarily, to help maintan political stability. If the last two decades of
political events in emerging markets have decisively shown us anything , it is that
a direct correlation exists between economic viability and political stability.
Knowledge of this fact has been a key ingredient for successful investors in Africa
and other emerging markets...
It is submitted that a proper approach to creating a sustainable banking
environment in Africa is to have the banking sector taking a pro-active role to
strengthening the institutions of weak states.
2.While it is correct that individual banking groups can, and infact do take the
necessary measures in their small corners to mitigate risks however this effort
would have a more profound impact if in addition the banking sector, in its
capacity as such, could play a more visible role to strengthen state institutions. It
is submitted that the starting point would be the creation of a fund specifically
designed for this purpose. It will be noticed that in this article the author has
deliberately refrained from mentioning specific names of the African states that
have specific weaknesses mainly because the purpose of this article is not to
judge nor condemn nor criticize any state in Africa but rather to create awareness
about the challenges that the banking sector ( and by extension the business
community at large) experience and how to address those challenges in order to
benefit all the stakeholders.
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FEATURES OF A STRONG STATE:
3.The list of features that characterize a strong state are vast as such in this paper
only a few are cited.
3.1 The separation of powers;
According to Rautenbach and Malherbe (1995: 59), ...The doctrine of the
separation of powers entails that the freedom of the citizens of a state can be
ensured only if a concentration of power, which can lead to abuse , is prevented
by a division of government authority into legislative, executive and judicial
authority, and its exercise by different government bodies...
Boulle , Harris and Hoexter ( 1989: 41) , contend that ...The separation of powers
principle has traditionally been regarded as the fundamental feature of the
American constitution, and one of its distinctive contributions to the doctrine of
constitutionalism...
3.2 Rule of law;
All the organs of the state including her citizens must respect the rule of law. At
all material times the law must be above all, including the government of the day.
Rautenbach and Malherbe (supra) argue that...Although the rule of law doctrine
contains principles which have formed a part of English law since the thirteenth
century, it was only in 1885 that the author Dicey used the term `rule of law' in his
work Introduction to the Law of the Constitution. According to Dicey, the
doctrine amounted to the following...(a) Nobody may be deprived of his rights and
freedoms through the arbitrary exercise of wide discretionary powers by the
executive-it may only be done by ordinary courts deciding that a person has
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breached a legal rule. (b)Nobody is above the law and everybody is subject to the
jurisdiction of ordinary courts.(c)In England, the rights of individuals are protected
by decisions of ordinary courts and not by guarantees contained in a
constitution...(1995: 231)
3.3 Independent judiciary;
The judiciary must apply the law in a fair, just , equitable and impartial manner
without fear nor favor . Furthermore the judiciary must not act as the servants of
the government, neither should the judiciary fear to give judgments against the
government nor anybody for that matter. Boulle , Harris and Hoexter (supra)
describe this phenomenon thus...In modern Westminster systems the
independence of the courts is secured by several factors. Although judges are
appointed by the political executive, there is usually informal consultation with
existing members of the bench before appointment is made. Once appointed , a
judge can not be removed from office except by resolution of both houses of
Parliament, and then only on grounds of unfitness and misconduct. The
remuneration of judges is fixed directly by Act of Parliament, and is not possible to
reduce a judge's salary during his or her tenure . There are restrictions on the right
to bring legal proceedings against judges , and even if an incorrect judgement is
given negligently the judge can not be held liable...(1989:41)
3.4 Elections;
The members of the public are afforded an opportunity to choose their leaders at
certain defined intervals so that the government of the day can claim legitimacy
as the government of the people. It is of critical importance though that the
elected public officials must be accountable to the electorate in order to
10
strengthen service delivery failing which the public officials end up travelling `on
the frolic of their own' with no consequences that will result from non-
performance. The electorate should have the power to remove from position any
elected public official from office if there is a good reason to do so. The business
of elections is usually contained in a separate statute. For example The (South
African) Electoral Act No.73 of 1998 contains various provisions that deal with
elections like, but not limited to inter-alia; holding elections at defined periods,
directives in relation to the voting stations, registration of voters and political
parties, nomination of candidates, counting votes, election expenses, education
of voters and the like. The election process is quite an expensive exercise.
3.5 A bill of rights;
A bill of rights enshrines the rights of all people within the state, and guarantees
human dignity, equality and freedom. Everyone including the state must must
respect, protect, promote and fuifill the rights in the bill of rights. Rautenbach
and Malherbe (supra) contend that ...the oldest and best known bill of rights is
that of the United States of America. It consists of human rights provisions in the
original constitution of 1789 and various later amendments...The American
constitution is so strongly entrenched that neither the federal legislature nor the
legislatures of the members states may on their own adopt statutes that amend
or repeal provisions of the constitution. This implies that all enactments of these
legislatures that limit rights must conform to the provisions of the bill of
rights...(1995: 233)
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3.6 The public protector;
As the name suggests the public protector protects the public against any
improper, irregular and prejudicial conduct by the state organs. The office is also
empowered to take remedial action as prescribed by legislation. The Internationl
Bar Association's definition of the office of ombudsman is ...a high level public
official who is responsible to the legislature or parliament, who receives
complaints from aggrieved persons against government agencies, officials and
employees or who acts on his own motion , and who has the power to investigate,
recommend corrective action, and issue reports...Rudolph (1983:92)
3.7 Ability to collect taxes;
A state must have the ability and the necessary infrastructure to collect taxes
from her citizens so as to deliver on services. One of the key institutional aspects
of democracy in Africa is the failure of the public service to render efficient
services to the public. The challenge originates from the manner in which the
state structures are configured to enable the structures to respond effectively to
the public needs ( Olowo 2003).
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BRIEF DESCRIPTION OF COMMON RISKS:
4.Risk is the potentiality of the expected and unexected loss. The expected risk is
generally borne by the borrower and hence is taken care of by adequately pricing
the products through risk premium and reserves created out of the earnings.
Unexpected risk is to be borne by the bank and is catered for by the reserves
and / or other provisions. Heffernan (1996: 163), defines risk as ...the volatility or
standard deviation ( the square root of the variance) of the net cash flows of the
firm , or, if the company is very large , a unit within it... The following risks are
generally known forms of risks that affect the banking sector thus;
4.1 Credit risk;
...Credit risk is the risk that an asset or a loan becomes irrecoverable in the case of
outright default, or the risk of delay in servicing of the loan. In either case the
present value of the asset declines, therby undermining the solvency of a
bank...(Heffernan 1996: 163); (Moosa 2004: 235).This is the potentiality that a
bank borrower fails to meet the obligation on agreed terms.Naturally the bank
creditor would institute a legal action to recover monies and / or goods that may
have been advanced by the bank to the debtor ( client ). To enable the banks to
recover the monies and / or goods advanced to the debtor the state must have a
fully operational and effective judicial system failing which the bank may end up
writing off a multitude of bad debts to the detriment of the bank creditor. The
Author ( of this article) has observed through personal experience in High Court
practice in the legal field in Africa over a period in excess of ten years that in an
environment of a weak state the judicial system is less effective due to various
structural weaknesses like undue and unreasonable delays in the prosecution of
claims by the courts, the sheriff of the court's inability to serve court processes
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