Outside of South Africa, Africa's financial markets are small and undeveloped, largely dominated by commercial banks. Worse, a disproportionate share of bank lending is allocated to the public sector. This has crowded out the private sector who are left to foreign borrowing which entails foreign exchange risk that increases its cost.
The outcome: credit for firms, especially for small and medium-sized enterprises (SMEs), is limited and produces low investment rates. The ratio of credit to the economy averages less than 20 percent of gross domestic product (GDP), compared with 138percent in East Asia and the Pacific region for instance. In short, the underdevelopment of capital markets hurts critical progress.
