This paper presents a comparative analysis of banking systems in central Africa — specifically Burundi, Rwanda, and the Democratic Republic of Congo — and European banking institutions. It examines how governments, markets, and individual banks have shaped each country's financial sector through periods of crisis, conflict, and reform. Drawing on secondary research, theoretical frameworks, and a primary survey of bank employees, the study identifies structural weaknesses in central African banking, including low financial intermediation, poor management, limited credit access, and the effects of political instability. The paper concludes with recommendations for restructuring, employee development, and institutional expansion, while proposing a theoretical model of banking system development informed by the three countries' experiences.
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.
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.
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.
The research addresses several key questions: What were the evolutionary stages of the three banking systems? How did governments, markets, and the banks themselves influence developments at each stage? What types of developments did Burundi, Rwanda, and Congo experience, and what were the deficiencies in the reforming process?
Burundi's banks comprise a nationalized bank and several commercial banks. At the outset, the banking systems of Ruanda-Urundi, Burundi, and Congo were merged together. Burundi became autonomous in terms of banking in December 1963 following the dissolution of the economic union. It then established its own central institution in the form of the Bank of the Kingdom of Burundi, which was renamed the Bank of the Republic of Burundi (BRB) in 1967. In addition to the BRB, several commercial banks operate in Burundi, primarily dealing in short-term credit (Maps of World, 2011).
"The country is exposed to terms of trade shocks mainly from coffee and oil prices, which could impact banks through real sector effects" (World Bank, 2009, para. 4). Furthermore, the economy is quite dependent on external assistance from the government. While Burundi was not directly affected by the international financial crisis at the time of writing, a second-round impact was considered possible (World Bank, 2009).
The primary risk lies in the credit area of the banking sector. "Banking soundness indicators are favorable, but the analysis of bank portfolios reveals a sharp rise in lending which may lead to vulnerabilities, since it occurred against the backdrop of weak economic performance" (World Bank, 2009, para. 5). Bank lending occurs at least 60 percent of the time but accounts for only 12 percent of GDP, making market risks relatively limited (World Bank, 2009).
Globally, Burundian banks meet the norm for capital adequacy and liquidity ratios. Stress tests indicate that the banking system is quite resilient when experiencing shocks, although the most vulnerable banks are those owned by the state (World Bank, 2009). Nevertheless, staff urged the authorities to closely supervise banks' risk management practices and credit standards, take appropriate steps to address emerging risks — especially in the trade sector and with regard to the concentration of lending — and begin regularly conducting stress tests while initiating dialogues with banks on stress testing (World Bank, 2009).
The BRB is striving to improve regulation through supervision of financial institutions under its authority, though obstacles remain. For example, strict compliance is difficult to enforce due to insufficient trained human resources personnel. According to the Basel Core Principles, Burundi is lagging in this area (World Bank, 2009). "The Banque de la République du Burundi (BRB) is the central bank and supervises the banking sector. In recent years, BRB has taken steps towards enforcing prudential requirements in the financial system" (Asias, 2011, para. 3). The BRB has also engaged in microcredit initiatives and aims to measure ways to increase capital and facilitate recovery, while reviewing banking law to keep current with best practices (Asias, 2011).
Within the banking industry, the National Bank of Rwanda (BNR) has worked to ensure that financial institutions operating within the sector contribute to the smooth functioning of the economy. Bank management in Rwanda has been restructured to ensure the sustainability of the industry. The new monetary policy reform, one of the key components of the macroeconomic reform program, falls within the responsibilities of the BNR. It aims to create an environment conducive to fostering production and investment throughout the economy by ensuring macroeconomic stability. The National Bank's action is geared toward building financial stability while deepening the financial system (Kanimba, 2008).
Rwanda's banking system experienced significant pressures in 2008 for several reasons. There was a significant improvement in the absorption capacity of the economy, reflected by a rapid increase in credit to the private sector, which rose by 22.4 percent in 2007 and 31.6 percent in 2008. A structural change in government spending occurred, with capital expenditure increasing in 2008 and resulting in a subsequent increase in the foreign exchange component of public spending. Important investments made by key depositors led to a reduction of their deposits with the banking system. Additionally, Rwanda experienced high inflationary pressure during 2008; as a consequence, banking deposits declined as demand for more cash increased to deal with rising prices. Demand for currency increased by 28 percent in 2008 against 9 percent in 2007, while bank deposits increased only by 6.6 percent against 35 percent in 2007 (Kanimba, 2008).
Management focused on implementing strategies to maintain liquidity in the Bank of Rwanda and increase credit demand from the private sector. The bank raised its policy rate in January by 8 percent to at least 9 percent and reduced the interbank corridor from 3 to 2 percent. The long-term aspiration was to have "at least one micro-finance institution in every village or at least one Sacco per Umurenge in the country where citizens can get public education to mobilize small savings" (Kanimba, 2008, para. 11).
On exchange rate policy, the bank continued to use the market as a means of selling foreign exchange, allowing it to smooth out fluctuations in the Rwandan Franc and maintain export competitiveness. A code of conduct and a dealers' association were implemented, and commercial banks were recommended to acquire Reuters dealing platforms and post their daily exchange rates on their websites (Kanimba, 2008).
Banks in Rwanda were encouraged to merge with one another to prevent unnecessary duplication and reduce startup difficulties. The Governor enacted a licensing policy to prevent further crowding in Kigali City, while directing new branches to be opened in rural areas. Starting a new bank required 5 billion Rwandan Francs and a business plan (Kanimba, 2008).
The ongoing Financial Sector Development Program (FSDP) was accelerated to cover banking system and MFI sector reforms, capital market development, non-bank financial service regulation, and modernization of the payments system. Priorities included "the full application of Risk Based Supervision and improved use of CAMELS benchmarks, continued on-site review of bank risk management processes and practices" and the inclusion of market risk as a component in the solvency ratio (Kanimba, 2008, para. 14).
A recent financial report showed net profit of 1,724 percent — or Rwf 4.6 billion — during January–March 2011. "All banks earned substantial profits in the first quarter of 2011" (The Independent, 2011), a sharp turnaround from the net loss of Rwf 300 million recorded in the previous year. The private sector managed to grow by approximately 20 percent in 2011, driven in part by fiscal policy that stimulated growth without hindering the Central Bank (The Independent, 2011).
The Central Bank also mobilized resources through improved asset quality management, triggering a funds mobilization of approximately Rwf 751.1 billion at the end of March 2011 — an increase of 26 percent from the Rwf 594.6 billion mobilized in 2010 (The Independent, 2011).
Despite these gains, management quality remains a concern. Many institutions are cautious on the issue of credit and lending, and non-performing loans dropped from 10 percent to 7 percent with the Central Bank. Critics have raised concerns about liquidity management and argued that banks failed to adequately address economic problems arising from the financial crisis, preferring to invest in mortgages rather than retail businesses. Because the Central Bank maintains a tight regulatory stance on lending and interest rates, commercial bank deposit interest rates declined slightly to 7.1 percent in December 2010 from 8.5 percent in December 2009, while lending rates remained high, oscillating between 16.7 and 17.6 percent (The Independent, 2011).
The banking system in the Democratic Republic of Congo — historically centered around Zaire — is considered underdeveloped and concentrated primarily in large urban areas. The country has a central bank along with at least seventeen commercial banks and several development institutions. "In addition to the traditional functions of a central bank — issuing currency, establishing monetary policy, and acting as a cashier for the national government" — the central bank has the authority to take charge over any financial institution and to manage the country's gold and foreign reserves (Photius, 1993, para. 1).
In the 1990s, the country experienced severe economic difficulties, including at the level of its central bank. The government survived this period in part by printing new currency at locations outside the country as a means of paying its troops, although this created debts to German and British printing firms (Photius, 1993). Of the seventeen commercial banks, "the People's Bank was publicly owned. The other sixteen commercial banks were mostly subsidiaries of Western banks" (Photius, 1993, para. 4). The largest bank in the region was the Zairian Commercial Bank, which focused primarily on financial and real estate investments.
In 1993, the banking system collapsed (Photius, 1993). Many banks closed due to bankruptcy. "Despite the demise of the official banking system, however, many banking services are available through the informal sector" (Photius, 1993, para. 5), with operators in the informal economy exchanging large amounts of currency outside formal channels.
As described more recently by Asias and Azizet (2011):
"The financial system is severely hampered by war, political instability, and unpredictable monetary policy. Commercial banks dominate the financial sector, but their assets account for only about 10% of GDP. The government retains shares in two of the 11 commercial banks. Access to financing for entrepreneurial activity remains poor as the country has one of the world's lowest bank penetration rates. Financial intermediation of the banking sector is minimal and very limited. Credit to the private sector accounts for less than 3% of GDP. Most banks act as financial agents for the government or extend credit to international institutions operating in the country. As much as 70% of the currency is in U.S. dollars and outside the banking system. Larger banks are mostly subsidiaries of foreign banks. Supervision is very poor, and most banks fail to meet basic prudential standards. Most credit is informal. There is no stock exchange." (Asias & Azizet, 2011, para. 10)
In 2001, the DRC liberalized foreign currency transactions. The government maintains a 40 percent share in the Société Financière de Développement, which lends primarily to the manufacturing and agricultural sectors.
"The financial-services industry and banking in particular is different from other industries. The business of banks is providing liquidity-transformation services" (Eichengreen & Rose, 1998, para. 4). Because of the exploitation of economies of scale, banks are able to ensure that investments within households and organizations remain liquid. This also gives them the opportunity to receive deposits from across the nation, though banks can experience losses through this process. Banks also manage credit risk by "assessing repayment capacity and monitoring the behavior of borrowers" (Eichengreen & Rose, 1998, para. 5).
Several theoretical implications are relevant. First, banking crises have macroeconomic effects. If banks are relatively efficient at overcoming information asymmetries through monitoring, or can reduce lending risks through portfolio diversification, disruptions of their operation will appear in the wedge between the return to lenders and the cost to borrowers. Increases in that wedge will in turn affect the level of economic activity through what is known as the credit channel policy (Eichengreen & Rose, 1998). Empirical studies confirm that banking crises impact economies through numerous channels, including changes in the money multiplier and macroeconomic variability. Bank failures have contributed significantly to business downturns — including during the Great Depression in the United States (Laeven & Valencia, 2008).
Second, "banks are fragile" (Eichengreen & Rose, 1998, para. 7). If confidence wanes, so will the deposits entering the financial system. This dynamic provides banks with an opportunity to give creditors the means to discharge deposits when trouble arises, but it also means that a single actor can undermine the system and trigger a broader crisis (Eichengreen & Rose, 1998).
Third, under asymmetric information, "borrowers with low-risk projects will be rationed out of the market by the price mechanism, since only those with high-risk projects will be prepared to pay high interest rates" (Eichengreen & Rose, 1998, para. 8). This makes banks more vulnerable to adverse selection (Eichengreen & Rose, 1998). A related implication is that "asymmetric information is the scope it provides for moral hazard" (Eichengreen & Rose, 1998, para. 9). When borrowers experience financial losses, they may engage in riskier behavior — analogous to a gambler doubling bets — in order to recover losses.
Fourth, "owing to the opacity of their loan portfolios, banks will find it more difficult than non-financial firms to raise the liquidity needed to restructure, increasing the likelihood that adverse shocks will result in failure" (Eichengreen & Rose, 1998, para. 10). As a result, many banks choose to merge with others to avoid the pitfalls of operating in isolation (Laeven & Valencia, 2008).
"Mixed-methods design, survey instruments, and employee data"
"Lessons learned and reform recommendations for central African banks"
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