Banks are more than holders and custodians of the monies of governments and the rich. They are also more than intermediaries facilitating transactions among them and with the outside world. They mobilize funds and channel them to productive sectors of the economy and hence play crucial roles in job creation and expansion of economies. In many developing economies like the Horn of Africa States region, they include microfinance institutions that cater for the marginalized segments of society and insurance companies.
With the advancement of technologies and innovation, banks and financial systems are adopting the digital economies and processes for improving efficiencies and hence participate in facing environmental, governance and even social issues. Financial institutions and banks have thus become more than just transactional tools but are also engineers of progress and development.
It is understanding these roles of the financial systems which makes them unique and an important pillar of modern societies and economies. Many countries, including the Gulf countries of Arabia place them in the foreground with respect to regional development. Financial institutions in those parts, in addition to being custodians of the enormous funds of the region, participate in financing the development processes of the region with respect to infrastructure projects including rail, roads, real estate, ports, manufacturing, services, tourism, and travel. In every aspect banks and financial institutions play pivotal roles.
Financial institutions also play significant roles in capital formation in those countries and others and contribute to development in general. They play important roles in risk management, adoption of technologies and an ever-growing inclusive economic development.
But what is economic development? It is, indeed, improvement in the general wellbeing of a society with respect to standard of living, services available, availability of good rewarding jobs, good education, good healthcare systems, advanced technologies, and in effect a better and more comfortable life than the generations before.
It is where banks and financial institutions come in to facilitate the flow of funds and monies in the system, provide the necessary funds if needed, invest funds in profitable ventures when necessary. It is, indeed, fostering the adoption of new technologies or new ways of doing things and providing services which were not possible before.
Financial institutions vary widely and may include conventional and Islamic banks. They may include credit unions and savings institutions. They may include leasing and insurance companies and investment firms. They are all controlled through the central banking systems which regulate how the business is done and conducted in accordance with the rules of the business.
The Horn African banking and financial system is barely getting up. Its penetration in its natural market is limited. The old thinking that only the rich can deal with the banking system and can have accounts with a financial institution still prevails. The governments do not encourage the populations to have accounts with the banking systems, at least, to figure out its bankable population and what is available in the market.
Many people do not have confidence in the banking and financial systems and prefer to keep their wealth, monies and gold and gems outside the financial systems. One is never sure of the wealth of the region, and how they dress and eat may not really reflect the financial stature of the Horn African society.
It is where the role of the governments of the region are needed to ensure that financial institutions play their rightful roles in the economic development processes of the countries of the region. This would include providing the proper supporting infrastructures which should include first peace, strong legal rights for creditors and investors and the same for shareholders.
They should also ensure sufficiency of information disclosures and standards. This would, of course, involve political commitment, which appears to be not the main concern and understanding of most of the current leaders. They generally appear to be of the belief that only they understand and only they can decide on things.
That is usually a recipe for disaster and the cause of most troubles in the region. A better way is using the best professional people to handle matters of any nature outside the tribe, clan or religious grouping or even close but unqualified friends. These are some of the evils that have been plaguing the Horn of Africa States region over the past four decades.
It is still an argument in the region not to allow expansion of banking and financial systems in some of the countries of the region in this twenty first century, when the main argument should have been how to use the banking and financial systems to develop the economy and capital accumulation and capital acquisition including even allowing foreign institutions to operate in the region.
Money is a lake and moves out of the lake through rivers, and of course when there are no opportunities money may move out of a country or region to where it can make more money or stay locked away. However, the region is far from saturation. It needs many lakes of money to be invested in the region to develop the economy to the level and growth rates it should be comfortable with.
The current banking infrastructures discourage the major part of the populations to participate in the banking systems of the region as most deposits are channeled through unrewarding current accounts, which do not attract any returns for the depositor populations. No wonder the deposit mobilization levels revolve around government revenues and remittances from the diaspora. Many traders keep their monies through real estate which provides better returns than funds deposited in banks, which the bank owners mostly use to build their own non-banking businesses and real estate assets. There are no adequate rule to manage and regulate the financial systems of the region.
The financial systems of the region do not provide adequate capital and/or the required services for businesses in the region. They fail to participate in the financing of the development of infrastructures of the region such as roads, rail, shipping, ports, airlines and others.
Financial institutions have major impact on any economic development whether this is an advanced economic system or a developing one. They, indeed, provide the resources, the capital and the facilities from which other sectors of the economy draw liquidity.
Banks and financial systems represent a sophisticated interconnected network of agencies and institutions that provide transmission facilities to transfer monies between lenders and borrowers and between projects and banks and between governments and businesses and even between governments and its networks. This is an essential system which is not given its necessary recognition and which itself does not understand its proper role.
Investments create jobs and create additional investment opportunities and hence reduce poverty. The financial systems need to play this role in the region, but alas! They do not. Many in the banks and financial institutions of the region, stay in their beautiful offices not knowing what to do with the resources entrusted to them which generally lay idle in strong rooms. The region needs to seek wealth from within and it will not be disappointed.