Central African vs. European Banking Systems: A Comparative Study

Introduction

This dissertation is a descriptive study of how and what local central African banks can learn from the way European banks operate. It focuses on banking sector development in central Africa and Europe, with particular attention to the region known as the Great Lakes — encompassing Burundi, Rwanda, and the Democratic Republic of Congo. Because the traditional financial sector in this region is unable to meet the needs of the majority of the population, these three countries serve as the primary African examples throughout the analysis.

The research represents a comparative study of how African banks and European banks operate within their respective banking systems, examining their development across different institutional environments. The goal is to analyze these systems in order to propose a restructuring model for the banking sector. The study examines the complex role of government in banking, the many channels through which governments have intervened, and the economic and institutional environments in which these banks have operated.

The history of banks dates back to the early thirteenth century, and from the beginning, they have been instrumental in shaping society and our understanding of the value of money. One of the very first banks in the world was founded in Europe, and even the word bank is derived from the Italian root word banco, meaning bench or desk.

Banking in Central Africa: Structure and Challenges

In their role as allocators of funds from savers to borrowers, banks play a central role in financial sector development. They bridge the gap between savers and entrepreneurs while reducing transactional and financial risk for both parties. By making funding available to the market, banks typically facilitate a reduction in barriers to entry for entrepreneurs.

Effective banking systems expand financing opportunities for both large and small companies, while also supporting financial sector development and broadening access to funding among low-income retail customers and micro-enterprises. Beyond funding, banks provide essential financial services to individuals and enterprises, including the collection, custodianship, and safeguarding of deposits made by savers, as well as the provision of payment services.

All African financial systems are dominated by banks, which remain at the core of financial sector development efforts for the continent. There are significant differences across the various banking systems in African countries, ranging from world-class standards to systems that are only beginning to overcome periods of financial repression. Still, a number of general observations can be made about banks and their role within the financial sector across the continent.

Most African banks are small in absolute and relative size. A lack of economies of scale is often linked to inefficiencies. In addition, insufficient expertise and technology frequently limit the capacity of banks to deliver adequate financial services to African economies. They often offer only a limited range of services, and outside of urban centers, banking is virtually nonexistent.

Banking data clearly shows that African banks have significant development opportunities compared with banks in other developing regions. Indicators such as liquid liabilities to GDP — measuring the monetary resources mobilized by banks — and private credit to GDP — measuring the credit extended by banks — are considerably lower in Africa than anywhere else in the world. In addition, the region's banking system has low intermediation ratios, mainly explained by difficulties in assessing creditworthiness and enforcing creditors' rights.

Reflecting the prevalence of poverty in the region, data suggest that no more than 20 percent of adult Africans have a bank account, compared with between 30 and 50 percent in other developing regions. This can be attributed in part to high fees, low bank branch penetration, and extensive documentation requirements for opening an account.

In terms of efficiency, African banks are generally characterized by high spreads, intermediation margins, and overhead costs. They are smaller than banks in other developing regions, which limits benefits from economies of scale and risk diversification, while weak contractual frameworks and regional political volatility increase the costs of doing business. These inefficiencies persist in many cases due to an absence of meaningful competition in the sector. Despite vast improvements during the past decade in the efficiency and accountability of African banking systems, much work remains to be done.

European Banking Systems: An Overview

Though hundreds of banks worldwide have introduced new services to attract more customers, European banks have consistently remained a step ahead of the competition. Due to their unmatched reputation for keeping bank transactions confidential, European banks have long been the preferred institutions of high-profile clients or those who value financial privacy. With growing technological advancement, European banks continuously update their banking criteria and procedures to provide customers with high standards of security and to prevent unauthorized transactions.

European institutions such as the European Central Bank and the European Investment Bank play a vital role in supporting the European Union's objectives and overseeing the financial situation in the Eurozone. Other European banks — in Switzerland, Italy, Germany, France, Sweden, Spain, Austria, Belgium, Luxembourg, Malta, Portugal, Ireland, and the remaining EU member states — collectively shape the monetary policies that affect European countries both as a whole and individually.

The analysis of European banks encompasses three perspectives: an analysis of the banking reforms undertaken by governments, including the role of the central bank and its actions to facilitate a developing environment; an analysis of changes in market behavior in relation to the banking system, examining the macroeconomic reforms that indirectly led to changes in banking; and an analysis of the actions initiated by the banks themselves, investigating their internal environments and external relations. The final goal is to create a generalized theoretical representation of the African banking system, including the main elements of past developments, the determining factors of future developments, and a critical identification of deficiencies.