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Financial Sector Development in African States facing Fragile Situations Concept Note ------------------------------------------------------------INTRODUCTION The African Development Bank (AfDB), through the Transition Support Department, the Financial Sector Development Department, and the Initiative for Risk Mitigation in Africa (IRMA), along with partner organizations {‘Making Finance Work for Africa (MFW4A)’, ‘Financial Sector Deepening Africa (FSD Africa)’ and `FIRST Initiative (World Bank)’} are organizing a Conference on June 28-29, 2016, in Abidjan, Côte d’Ivoire, on financial sector development in African countries facing fragile situations. The Conference will present a platform for sharing knowledge and experience, and to identify innovative policy and private sector solutions to promote financial sector development in African countries facing fragility.1 The Conference supports AfDB’s Hi-5 strategic medium and long term deliverables.2 In fact, successful achievement of the HI-5s and economic transformation of the continent require to develop efficient and inclusive financial systems. This would enable efficient mobilization of savings and allocation of financing to firms and entrepreneurs wishing to invest, thus enabling capital accumulation and job creation. Additionally, well-functioning financial systems would help mobilize long-term private capital necessary to bridge Africa’s infrastructure gap, notably in the areas of power and transnational railways and highways. They would also help to build individual and household resilience, and to improve livelihoods, by providing the required financial services that allow the poor and vulnerable groups to reduce their vulnerability to shocks, to better manage their resources, and to seize economic opportunities. Developing Africa’s financial systems3 is therefore imperative, especially in countries and regions facing fragility, where development needs are particularly more important. BACKGROUND Many African countries have undergone a series of financial sector reforms aimed at modernizing and bolstering the performance of financial systems in the past two decades. Whilst these reforms have 1 The African Development Bank defines fragility as ‘a condition of elevated risk of institutional breakdown, societal collapse or violent conflict’. In June 2014, the Bank’s Boards of Directors approved the Bank Strategy for “Addressing Fragility and Building Resilience in Africa (2014-2019)”. The Strategy marks a shift in the Bank’s approach to addressing fragility as it moves away from the narrow approach of categorizing states into a set of ‘fragile states’, to a new approach in favour of referring to ‘fragile situations’. The Bank acknowledges that all countries and regions globally and on the African continent face issues of fragility in varying degrees. 2 Light up and power Africa, feed Africa, integrate Africa, industrialize Africa, and improve quality of life for the people of Africa. 3 A financial market system encompasses the central bank, banks and non-banking financial institutions, as well as financial markets. resulted in substantial improvement in African financial systems, large gaps remain. African financial systems are still shallow, especially in terms of credit depth, with ratios of private credit to GDP among the world’ s lowest. Financial access is still very low in many parts of the continent, even in comparison with other developing regions: Recent Global Findex data (2015) show that the proportion of African adults having an account at a formal financial institution averages 29%, compared with 45.5 per cent in South Asia, 51% in Latin America and Caribbean, and 69% in East Asia and Pacific. The gaps are particularly more important in economies in fragile situations. Figure 1 shows that financial sector performance of countries affected by fragility is significantly lagging behind the rest of countries not severely affected by fragility in Africa. Comparison is considered across a number of key indicators: Bank credit to the private sector as percentage of GDP; Commercial bank branches and depositors with commercial banks (per 1,000 adults); Percentage of adults having an account at a financial institution, and who borrow from a financial institution; and Bank overhead costs as a proxy for the cost of bank intermediation; the strength of legal right index; and the depth of credit information index. An exception is with regard to the percentage of adults having a mobile money account, which is higher on average in fragile countries than in non-fragile countries. 2 The gaps illustrated in Figure 1 above raise a number of questions: what are the specific constraints on financial sector development in fragile situations compared to non-fragile situations in Africa and how best can these be addressed? What has been done so far to promote financial sector development in fragile situations and what are the lessons learned? What remains to be done and what should be the priorities? What instruments and innovative solutions are available, both from the public and the private sectors, to support financial sector development in fragile situations in Africa? Addressing these questions is a matter of urgency. Currently, Africa has up to twenty (20) member states severely affected by high levels of fragility, according the AfDB fragility-risk rating criteria. Development prospects of these countries are particularly limited by fragility-risk. Building effective financial systems, can help overcome this risk by creating an environment conducive for job creation, infrastructure development, and for the development of entrepreneurship and small businesses, which are the conditions most relevant to reducing a country’s levels of fragility. Financial sector development in fragile situations can also help to promote financial inclusion, thereby contributing to building more resilient societies through inclusive and equitable access to economic opportunities. It is against this background that the AfDB, in partnership with MFW4A, FSD Africa, and FIRST Initiative, is convening a Regional Conference to examine how best governments, development partners and the private sector can contribute to developing and expanding effective financial systems in African countries facing fragile situations. CONFERENCE OBJECTIVES The Regional Conference will provide a platform to: i. Discuss the links between fragility and financial sector development, and explore appropriate public and private sectors responses. ii. Share experience and lessons learned in promoting financial sector development in fragile situations. iii. Explore opportunities for strategic and operational partnerships, including PPPs, to drive financial sector development in fragile situations in Africa. TARGET AUDIENCE The target audience size is around 150 people, including: i. High-level representatives of African countries facing fragile situations, in particular from Ministries of Economy and Finance (Ministers, Permanent and Economic Secretaries), Central Bank Governor and Deputy Governors, as well as CEO and Managing Directors of private financial institutions. ii. High-level policy makers from countries that transitioned out of fragility. iii. High-level representatives from international development institutions, including bilateral and multilateral organizations. iv. Private financial institutions in Africa and abroad. v. Academia, think tanks and research centres. 3 EXPECTED OUTCOMES The major expected outcomes of the Regional Conference are the following: i. Create a common understanding of the linkages between fragility and financial sector development, and identify appropriate policy responses; ii. Raise awareness of innovative public and the private sector solutions to support financial sector development in African countries facing fragile situations. iii. Catalyse new partnerships between the private sector, other non-state actors, and the public sector, to drive financial sector development in African countries facing fragile situations. CONFERENCE DOCUMENTS A number of background papers are in preparation to support discussions at the Conference. These papers cover the following topics: i. The role of financial sector development in exiting fragility ii. Factors affecting financial sector development in Africa, with a focus on fragile situations. iii. Priority areas for interventions in promoting financial sector development in fragile situations. iv. Financial sector country profile for each of the 20 African countries facing fragility. TENTATIVE AGENDA The Conference is scheduled for two days and will be structured around plenaries and a marketplace providing opportunity not only to discover new ideas and emerging initiatives, but also to explore new deals and new partnerships that have potentials for promoting financial sector development in fragile situations. A preliminary agenda is attached. 4