Microfinance against the Resource Curse? Lessons for Ghana to learn from Botswana

How to Transfer National Resource Wealth into Economic Development with the Help of an Inclusive Financial Sector

Scientific Study, 2011

31 Pages, Grade: A



Table of Contents

1) Introduction

2) Conceptual Framework: The Resource Curse Phenomenon

3) Background to the Study: Financial Sector Development and Resource Curse Evaluation in Botswana and Ghana
3.1.) Overview of the Financial Sector and Microfinance in Botswana and Ghana
3.2.) The Presence of the Resource Curse in Botswana and Ghana

4) How Financial Inclusion May Help Prevent the Resource Curse
4.1.) Deficiencies of Current Approaches
4.2.) Proposals for the Development of Conducive Financial Inclusion

5) Botswana as a Successful Example? Evaluation of the Theories

6) Lessons to Learn for Ghana: Key Recommendations

7) Conclusion

8) Bibliography

9) Appendix:


This paper creates a linkage between the two at first sight unrelated concepts of the resource curse phenomenon, and financial inclusion with an emphasis on microfinance. I posit that in certain states of financial inclusion and with specific public policies for the financial sector and microfinance, the resource curse can be averted better in emerging economies. Hence, the focus of this work is not in the widely discussed institutional political realm whose deficient top-down approach often supports the resource curse. In contrast, I advocate an unconventional bottom-up strategy enabling the poor and marginalized parts of society to participate in the financial arena, which can prevent the resource curse phenomenon in countries rich in natural resources. In line with this idea I will present five proposals that foster an environment to absorb windfall revenues from natural resources positively. As a case study, Botswana’s successful development despite resource abundance is examined along those theoretical concepts of financial inclusion. For this country, the results strongly suggest that the financial sector is not key for explaining the positive trajectory of the country. Nonetheless, we can draw several conclusions from Botswana’s experience that serve as recommendations for Ghana. The West-African nation started exploiting petroleum this year, and is currently facing the challenge of averting the resource curse. I conclude that financial inclusion together with microfinance can aid Ghana in its future development and suggest specific policies that shall support the resource curse prevention in the country.

1) Introduction

When thinking about the effects of discovering natural resources such as petroleum in a country, we are likely to have images of prosperous economies and societies in mind, reflected for instance in excessive Gulf States investments and affluent places such as Dubai or Oslo. Discovering resources of oil, ores, precious metals or the like, is seemingly equivalent to the jackpot for a country. Although this is the conventional idea, it is also one of the most intriguing common misperceptions in the area of economics and social sciences. Natural resources have changed the trajectory of all countries with the fortune of being located on top of such enormous resource basins more significantly than social scientists could have imagined. In geographic terms, the Middle East has received most academic attention, followed by a few Latin American nations. This paper focuses on the case of Africa, more specifically on two of its most promising cases of development: Botswana and Ghana.

Despite recent positive trends and policy initiatives, in most African countries, especially in Sub-Saharan Africa, financial services are only available to a minority of the population. The majority have no savings accounts, do not receive credit from formal financial institutions, and have no insurance policies. The limited use of financial services in developing countries has become an international policy concern. The reason for concern about widespread financial “exclusion” in developing countries is straightforward: access to a well- functioning financial system can economically and socially empower individuals, in particular the poor, allowing them to better integrate into the economy of their countries, actively contribute to their development and protect themselves against economic shocks. Hence, financial inclusion should be a key concept for development, countering the marginalization of large parts of society.

As additional impediment, Africa also appears to be the prime example for the “Resource Curse“ hypothesis, which refers to the paradox that countries with abundant natural resources are likely to experience worse economic and socio-political development than countries which lack those resources. Wide research has been devoted to causes and effects of resource abundance, and often Botswana is cited as a textbook example for successfully diminishing the downsides of possessing natural resources. Recently, the Ghanaian government announced offshore petroleum discoveries under the waters of the Gulf of Guinea. The country, having a promising track record of economic development and political stability, consequently faces the challenge of channeling oil revenue windfalls wisely. For Ghana, in order to avoid falling into the resource curse like neighboring Nigeria, an analysis of possible successful strategies taken from Botswana´s experience with resource abundance can serve as a guidebook for Ghana´s future growth and is, thus, a relevant and applicable point of departure for scientific research. While a more comprehensive comparative analysis of the entire region may be worthwhile, the very heterogeneous character of the African continent requires far more extensive work. Simply lumping together resource-rich countries as different as Libya and Congo, for instance, is virtually impossible. Hence, the need for elaborating on the various characteristics inherent in that geographical area is inevitable, which would exceed the scope of this paper.

For this paper, I specifically aim to explore the relationship of the two concepts presented above, which both fall in the area of development, but from seemingly unrelated perspectives. Here, my research will investigate into the link of an inclusive domestic financial sector, represented mainly by microfinance services, and their effects on a country rich in natural resources. Hence, the focus is narrowed down to examine how microfinance can help to overcome the danger of falling into the Resource Curse trap, and how it may even support to transfer resource revenues into society-wide development.

Hypotheses regarding this conceptually developed theoretical relationship will be tested empirically using an analysis of Botswana. It will be shown to what extent its economic development can indeed be related to a successful connection of financial inclusion to an environment of resource abundance, and if so, which factors played a major role. With those findings, I will turn to Ghana’s current situation. After having outlined the level of possible comparability of the two countries relating to natural resources, my analysis is targeted towards giving practical policy recommendations for Ghana. Following the conclusions of the analysis of Botswana, I will emphasize factors and topics where Ghana needs to take action, I will point to already promising developments, and call attention to detrimental tendencies. All those will be in the framework of financial inclusion and directly related to effects of the recent petroleum discovery.

Overall, this paper is therefore structured around three big building blocks: First, how is the situation in Botswana and Ghana regarding the two elements central to this study (financial sector and resource curse existence)? Secondly, what theoretical considerations do exist or can be newly established that would build a linkage between financial inclusion and resource curse prevention? Thirdly, can those hypotheses be upheld when testing them empirically with the two countries?

2) Conceptual Framework: The Resource Curse Phenomenon

Despite skyrocketing oil prices, why have the majority of the oil-exporting countries not yet joined the league of the richest nations in the world? What Karl (1997) refers to as the Paradox of Plenty remains one of the greatest puzzles and most counter-intuitive phenomena of economics. Yet, the impact of the resource curse is generally accepted, with many resource- exploiting countries suffering from its consequences. With regards to the theme of this paper, the potential dangers of natural resource abundance inevitably pose challenges for the countries’ governments to achieve and sustain economic development. For Botswana and Ghana, both rich in oil and gas, I will evaluate the presence of the resource curse as well as the ability of financial inclusion to fight its negative effects. Therefore, a brief introduction into the complex topic of the resource curse is given here, upon which will be built in the later sections.

Numerous studies refer to the resource curse as the paradox that resource-rich countries typically develop more slowly, are less diversified, more corrupt, less transparent, subject to greater economic volatility, more oppressive and more prone to internal conflict than non- endowed countries at similar income levels (Sachs and Warner 2001; Collier and Banno 2003; Karl 1999; Wick and Bulte 2006). Meanwhile, the outsized revenues available to resource-rich governments allow them to pursue more radical policies than they would otherwise be able to support.

Stiglitz (2003) gives a brief, yet comprehensive explanation of the complex phenomenon of the resource curse. National resource riches invite rent-seeking, meaning that individuals try to get the biggest share of the revenue inflow they can, while weak state and judiciary institutions pave the way for corruption, bribery, and often armed conflicts. Governments also often stop taxing citizens, which decreases civil engagement, the accountability of incumbents, and the linkage between ruling elites and the people. Negative economic effects exacerbate these political difficulties. First, each country runs a risk of obtaining the so-called ‘Dutch disease’, which is an over-reliance on a single primary commodity export, and the adverse effect it has on exchange rates and productivity of other sectors (Birdsall and Subramanian 2004). Abundance of natural resources is likely to shift factors of productions away from industries and sectors which feature increasing returns to scale. Marginal spillover effects, that is, weak stimulating linkages of the oil industry to the rest of the economy, result in significant and persistent unemployment rates, while broad based development and growth do not take place (Torvik 2002). This, in return, creates even higher rent-seeking, dampened development, and a country that finds itself trapped in the resource curse.

Consequently, as previously stated, every national government ruling over territory with natural resources has to face the challenge of formulating policies that aim at self-sustaining development while averting the negative effects of the incoming revenue windfalls. There are, admittedly few, positive cases of successful natural resource management. Botswana, an example for a developing country, and Norway, being rich in petroleum, are the most often cited examples (Stevens 2003; Birdsall and Subramanian 2004). Also, recent criticism points towards the fact that methodological flaws in empirical studies and conceptual mistakes have erroneously supported the Resource Curse hypothesis which, thus, can no longer be considered a generalizable concept (Haber and Menaldo 2010; Cavalcanti et al. 2011). However, being permitted the label Resource Curse or not, this discussion does not reduce the relevance of this paper. There undoubtedly remain a large number of countries unable to absorb resource revenues successfully. Especially Ghana’s direct neighbor Nigeria continues to be a reminding example of a petroleum curse. Ghana must not fall in a similar trap.

3) Background to the Study: Financial Sector Development and Resource Curse Evaluation in Botswana and Ghana

3.1.) Overview of the Financial Sector and Microfinance in Botswana and Ghana

This review covers a brief analysis of the economies, central banks, deposit-taking banks, other actors such as the stock markets, and microfinance institutions of the African countries Botswana and Ghana. Generally, sub-Saharan Africa (SSA) is regarded as the least financially developed region in the world, underpinned by various indicators (Allen, Otchere and Senbet, 2011). However, the discouraging stories on financial development should be considered in the light of important new developments under way in the African financial systems. In recent years, certain indicators have improved significantly, along with advances in economic performance. Evidence to bolster this optimism comes from growth rates for the region that are projected at 5.1 and 5.4 percent in 2011 and 2012, respectively, after a 6 percent dip in 2008 due to the financial crisis. Strengthened macroeconomic stability and increased private capital flows are other positive indicators (World Bank, 2010). Again, these improvements have been associated with favorable trends in the regulatory and economic environments that SSA has experienced over the recent past. We shall now explore in further detail the financial development situation in the two countries that are subject of this paper along several key dimensions.

A first glance at GDP per capita figures suggests that Botswana is significantly ahead of Ghana in terms of overall development, with a PPP-based number for 2010 of $15,500, versus Ghana’s of $2,600 (IMF, 2011). As table 1 on page five shows, GDP growth figures are significant for both countries, and suggest a strong re-bound from the global economic crisis (see also Appendix C). As it will be shown in this section, the differences regarding financial sector development are somewhat in line with this gap in economic development, although Ghana appears to be further advanced than the initial impression of the country might suggest.

A key indicator for this analysis is the central bank. In Botswana, the objective of monetary policy in centered on achieving a sustainable, low and predictable level of inflation. The Bank’s monetary policy goal is to achieve a 3-6% medium term inflation rate. Controlling inflation helps Botswana to maintain competitiveness and stability in the real exchange rate of its currency, the Pula (Bank of Botswana, 2011). Since its introduction in 1976, Botswana has adopted a fixed but adjustable peg system such that it may avoid the two extremes (pegged vs. free-floating) of exchange rate mechanisms and reconcile its policy objectives. For Botswana, currency issues are key due to the large inflow of diamond revenues, as the resource curse phenomenon appears often first in this context (see Appendix E). A pure free float currency might lead to an appreciation to levels that would make non-diamond production unprofitable (the so-called “Dutch disease”), which would be inconsistent with the country’s development and harm its diversification objectives. The focus on and recognition of the important role of the pula is a sign of the country’s advanced stage of monetary policy and of the independence of its central bank. In addition, the well-established Southern African Customs Union (SACU) has shown to be a stabilizing and mediating element for the macroeconomic and financial environment (Kappel, 2005).

In Ghana, the central bank has a dual mandate: to maintain price stability and to promote economic growth (Allen, Otchere and Senbet, 2011, p.35). Although already in 2007 a policy brief regarding Ghana’s future expected oil revenues recognizes the challenges linked to those windfalls, the text does not go beyond citing common wisdom of resource curse theories (Bank of Ghana, 2007). It calls for strong institutions and good governance, but fails to start by the central bank itself and avoids new considerations explicitly pertaining to its monetary policies. Hence, one may obtain the impression that the bank has not fully grasped the implications behind the oil findings.

Secondly, the banking system presents itself as fairly developed. As illustrated in Graph 1, both countries are among the few SSA states with a penetration rate, in terms of bank accounts per person, of more than 25%. The Ghanaian banking industry can be split into two distinct areas, Commercial/ Universal Banks and Rural/ Community Banks. There are 30 registered commercial and 135 rural banks in Ghana as at August 2010 (Bank of Ghana, 2010). Barclays Bank, Standard Chartered Bank and Ghana Commercial Bank (a privatized bank) have the largest market share but healthy competition from foreign banks, mainly from Nigeria, is present. The new regulation of the central bank - the Bank of Ghana - requires banks operating in the country to have a stated capital of not less than

Graph 1: % of households with a deposit account in a formal financial institution in Africa

Abbildung in dieser Leseprobe nicht enthalten

GH¢60 million (about US$43 million) (Allen et al., 2011, p.99).

With regards to Botswana, the in regional perspective elaborate banking and insurance system is further proof of its successful escape from the resource curse. As Guide and Patillo (2006) note, generally banking in oil producers - Angola, Gabon, and Equatorial Guinea - is different from banking in other middle-income countries in a sense that lending to the private sector is limited, and branch network density and access are even lower than in most low- income SSA countries. Even though Botswana’s main natural resource consists of diamonds, the pattern could be expected to be analogous. However, nearly 50% of households with a deposit account and over 20% of households with a loan account reflect a relatively healthy and inclusive state of its banking sector. Private direct investment is also growing, as private equity is now focusing more on Africa, e.g. the firm Ariya Capital, which is UK- and Botswana-based. Barclays’ CEO describes Africa as “maybe the most exciting opportunity” worldwide (Financial Times, 2011). Yet, the sector still has tremendous growth potential, as for example domestic credit to the private sector, expressed as percentage of domestic GDP, is at 25% in Botswana, compared to nearly 150% in neighboring South Africa (World Bank Data, 2011).

As a further integral component of the financial systems, a brief analysis of the securities market confirms the trend we have seen for the two countries so far. Ghana and Botswana are leading their regions in relative terms, and the mean market capitalization (absolute and as a percentage of GDP) has been increasing steadily. The Botswana stock exchange (BSE), established in 1989, grew in terms of market capitalization from 254m pula in 1989 to 375m pula ($57m) in 2009. The number of securities (shares and fixed income) listed in the BSE rose from 5 in 1989 to 64 as of February 2010 (Botswana Stock Exchange, 2010). With the introduction of the Central Securities Depository (CSD), the settlement cycle has been reduced to T+3, which means that Investors must complete or settle their security transactions within three business days. In conforming to international standards and to reduce settlement risk, the CSD intends to commence work on implementing an Automated Trading System (ATS). This should be a positive development making it easier for both Botswana and foreign investors to invest. The primary bond issues are managed by the Bank of Botswana on behalf of the government whose first bond was issued on March 26, 2003. The main objective of the government issues is to help develop local capital markets and to establish a relatively risk-free yield curve to serve as a benchmark. However, the market is still quite illiquid (Allen, Otchere and Senbet, 2011, p.108). Derivatives activity mainly consists of over-the-counter foreign exchange forwards and currency swaps. Both forwards and currency swaps markets are liquid, with terms up to three to six months, respectively.

While its bond market is still nascent today, in 1990 Ghana’s stock market started operating and currently has 45 companies listed. Despite the limited size, its potential has been recognized internationally as it was named “Most Innovative African Stock Exchange for 2010” at the Africa investor (Ai) Index Series Awards in September 2010 (Ghana Stock Exchange, 2011). Nonetheless, the market suffers from general shortcomings, which are reinforced by significant stock concentration. Hereby, Ghana is an extreme case, where the top three companies account for 81% of the total capitalization of the stock market (Allen, Otchere and Senbet, 2011, p.100). With regards to trading activity and resulting market liquidity, as illustrated in table 1, both countries are closely aligned with regards to indicators 5, 7 and 8. However, putting this into perspective with South Africa reveals their common deficiencies which, despite considerable development over the last 20 years, continue to impede financial inclusion.

South Africa, the continent’s most advanced financial market, reports a market capitalization of listed companies as % of GDP of 247% (versus 21% and 27%), a total value of stocks traded total value of 120% of its GDP (versus 0,9% and 0,2%), and a turnover ratio of more than 11 times the Botswana and Ghana figures. In addition, foreign direct investment net inflows (FDI) are with $5.3bn for 2009 also significantly higher for South Africa (World Bank Data, 2011). Furthermore, the two countries have not automated the trading infrastructure which further impedes access for a wider range of people (Senbet and Otchere, 2006). Notwithstanding the problems, as a final point of the securities markets analysis it is important to point at the impressive returns generated in both Botswana and Ghana since stock market inception. Returns have been among the highest worldwide, and annualized stock returns with 26% and 37%, respectively, over the last ten years also dwarf the generally well performing Johannesburg Stock Exchange (15% CAGR of the ALSH index) (Powerstocks, 2011).

As final point for determining the financial markets’ inclusive characteristics, I will examine the microfinance sector. Ghana has on the one hand a long history of vibrant and active lending business for the “bottom of the pyramid” which, however, has developed in an ad-hoc way and is highly decentralized. In addition, many forms of informal finance persist in the country, often to the detriment of the borrowers. The sector is currently self-regulated quite effectively. The central bank does not have the resources to supervise the entire sector, although it is directing substantial resources toward a strengthened position (CGAP, 2010). In 2009, the Non-Banking Financial Institutions Act 774 (NBFI Act) was implemented. Its objective was to regulate all microfinance activities and to improve co-ordination in the sector. The new law expands the range of activities allowed to microfinance institutions (MFIs) to encourage innovation and development with expected positive changes. Also, all non-deposit-taking financial institutions are now subject to higher minimum capital requirements, which are likely to result in a round of consolidation among MFIs, as many of them are below that minimum rate (EIU, 2010, p. 54).

Botswana has been an intriguing case during the research process. From the mere numbers it appears that the microfinance loan rate, as shown in table 2, is basically 0%. Although CGAP reports that the rate for 2010 increased in relative terms the most in entire Africa, the penetration is still stunningly low (neighboring Zambia has 5%, Bangladesh 34%). Furthermore, Botswana has no strategy document for financial inclusion, unlike most of the countries in sub-Saharan Africa. In the most comprehensive database on microfinance institutions, mixmarket.org, Botswana does not even appear as a country. This strongly suggests that Botswana is actually a late-comer in microfinance. Although now growing rapidly, it did not seem to need it indispensably for development, as the country was doing well before microfinance even came to existence. The peculiar status of the country is further underlined by the fact that two financial institutions that devote themselves to microfinance, Blue and Letshego, are both quoted on the stock market, while Blue even has a private equity firm invested in the company. Such business structures are light years ahead of common grass-roots microfinance and reflect the different character in Botswana. Even though it also has simple, decentralized organizations such as Women’s Finance House Botswana, the general trend towards professionalization is evident.

In summary, both Ghana and Botswana are developing their financial system significantly, and directly follow South Africa at the top of financial markets’ advancement in Africa. Political and macroeconomic stability as well as acceptable inflation provide for a positive business environment in which foreigners are welcome. Overall, Botswana is slightly ahead in the realms of traditional banking and securities services. The key difference clearly pertains to the quasi non-existence of traditional microfinance in Botswana versus the deeply rooted establishment of such activities in Ghana (see also Appendix D). Yet, Botswana by numbers has a comparatively good financial access, which is consequently the result of successful inclusive developments prior to the emergence of microfinance, and outside of its scope. This African anomaly raises important questions and, hence, we will return to those empirical findings when contrasting them with theories on the role of financial inclusion for overall development in resource-rich nations. First however, in order to round off the analytical background of this paper, we shall now turn towards a brief evaluation of the existence of the resource curse in both countries. This will serve as a basis for developing meaningful hypotheses regarding the linkage between financial inclusion and resource curse prevention.


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Microfinance against the Resource Curse? Lessons for Ghana to learn from Botswana
How to Transfer National Resource Wealth into Economic Development with the Help of an Inclusive Financial Sector
IE Business School, Madrid
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microfinance, resource, curse, lessons, ghana, botswana, transfer, national, resource, wealth, economic, development, help, inclusive, financial, sector
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Anonymous, 2011, Microfinance against the Resource Curse? Lessons for Ghana to learn from Botswana, Munich, GRIN Verlag, https://www.grin.com/document/175291


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