The Horn Of Africa States: Africa’s Finance Architecture – OpEd

Africa is generally presented as a poor continent in any financial and/or economic paper or book. But is Africa really poor? This is a question that Africans should address and if they do, they will know that Africa is not a poor continent as is presented, but it is a continent that is mismanaged, misgoverned and whose monies are stolen and/or misplaced, which makes other continents and countries appear richer than they really are and, of course, the continent look poorer than it really is.

In an article on ESI Africa by a Guest Contributor entitled “Critical Minerals Potential and Benefits in Africa” and dated November 17, 2023, it was noted that Africa has “85% of the World’s manganese, 80% of the world’s platinum and chromium, 47% of the world’s cobalt, and 21% of the world’s graphite.”  Other reports indicate that “ Africa is home to approximately 30% of the world’s mineral reserves, many of which are essential to renewable and low-carbon technologies.” No wonder the competition for Africa’s minerals is intense and rising.

Africa has a plentiful share of both renewable and nonrenewable resources. These include among others vast arable lands for agriculture, forests and wildlife, water, oil and gas, enormous marine spaces all around the continent. It is also reported that Africa owns 60% of the best solar resource and 30% of world’s mineral reserves which include among others gold, diamonds, lithium, nickel, copper, cobalt, manganese, iron ore, silver, uranium, platinum, rhodium, oil and gas, and many others. According to an IFC study report in 2020, Africa also has 180,000 terawatt hours (TWH) per year of wind energy – enough to meet the continent’s electricity needs 250 times over. The continent is not actually poor but mismanaged and, therefore, the need for new institutions to manage its resources and income properly is not only necessary but a must. 

Africa’s financial resources disappear into the ether and/or keep other economies running and operational while the continent remains poor and underfunded. Worse, the financial institutions that serve them including the globally owned financial behemoths like the IMF and the World Bank and their many subsidiaries and associate companies like the African Development Bank Group, the European Development Bank, the Asian Development Bank, the IFC, and the many others, overcharge the continent on the basis of ratings designed for different economic parameters and infrastructures. Many normal commercial banks and financial institutions either shy away from the continent or, indeed, also overcharge them even under heavy collaterals. 

In many countries credit is not the norm of life but a curse and people rely on people than on numbers and papers. Such was the case for West Asia and most of Africa, where a person’s word was stronger than whatever financial reports one may present. It is still the case in most of Africa. Indeed, the continent has limited financial systems as the accounting and auditing business of the continent remains underdeveloped. 

Banks were initially designed to serve only the colonial administrations and the elite of the society. This has continued with governments replacing colonial administrations and the banking system continued to serve only the upper echelons of society and governments. The small and medium companies of the continent, which form the backbone of the economies of Africa and hence the largest employers, still self-finance and work with their wits. It would, therefore, be a good step forward if Africans started to develop their own financial institutions to manage their own finances. 

It is not sure if the French, for example, who still control the finances of a large sway of African countries, would easily give up. Last year one may recall the coups that occurred in the Sahel region where one of the French Ambassadors even refused to leave when he was told to leave the country.

Creating an African Central Bank, an African Monetary Fund, an African Investment Bank and Pan-African Stock Exchange, perhaps even an African Metal Exchange is a good idea but would the forces that control the continent’s finances at present let this happen, with ease? They would surely resist, although they would eventually have to give up as they do not own the resources and may cause a new wave of mayhem in the continent. However, African money to create all the above is available and it is a matter of will. 

The African Union, which is promoting the creation of these institutions, needs itself to become an African Union as most of its activities are co-financed by international bodies and countries, which then have a say in all its matters. No wonder, most of its decisions and resolutions are never implemented. It would only become a truly African Union when it self-finances through its African member countries. The same would be true if all the aforenoted financial institutions are created unless their management and their financial resources are truly all African.

The world is competitive place and those who are not competitive do lose. Africa, up to the present, has been on the losing side, not because they do not have resources, but they abuse and misuse these resources. Most of the funds from Africa are deposited with financial institutions outside the continent when they should be deposited with institutions in the continent such as the planned financial institutions or even with some of the institutions in other countries within the continent. It is how the pricing for Africa can be lowered and controlled within the continent instead of seeking borrowings from outside. 

What does a banking clerk in Ireland or Denmark or Norway know about a potential borrower in Africa? Nothing really! No wonder the first thing that comes to his mind would be to reject the deal, but if the pusher of the deal insists, a hike in price and collaterals follow as both the country in question and conditions thereof are unknown to that clerk and his credit committee.

The issue is not related to the unfairness of the current global financial infrastructures but more to the ability of the Africans to manage their resources and placing them where they are comfortable with and not where they are obliged to, as seems to be the case at present. Substantial funds are floating in the continent as almost fifty per cent of the continent’s population have no links to banking and banking products and services. The continent can assist in the creation of local institutions with minimal requirements that makes both the customers, and the financial institutions succeed on win-win basis. Africa has money which can be recycled within the continent and does not need to borrow from beyond the continent at exorbitant prices.

The Horn of Africa States  is a part of the continent and suffers from the same outflow of funds, mostly through deposit processes imposed on local banks to collateralize their letters of credits and other securities. They suffer from high perceived risks and hence prices, and especially because of the continuing conflicts of the region, higher government debts and lack of inter-bank markets among the banks of the region. Each bank lives off its wiles and on its individual strengths. The banking systems in Somalia, for example, are family businesses and are hence manned mostly by family members who may not be as qualified as they should be. In Ethiopia they are mostly tribally owned institutions such as the Oroma owned banks, the Amhara owned banks and/or the Tigrayan owned banks. The Eritrean banks are all state owned, and the Djiboutian banks are the only banks that are organized on international norms and rules. It is, indeed, the governance of the continent’s monies and financial systems and not lack of money that is the cause of most of Africa’s financial problems. And here, one is not talking about the fistful of dollars which the leaders and  officialdom misappropriate. It is the total outflow of funds from the continent to service other continents that is at stake.