Financial system and social exclusion

Financial system and social exclusion

“Agricultural marketing, although it is vital for the inclusive economic growth of the country, is prevented from fulfilling its role because of the nature and characteristics of the financial system which exists in Mozambique today”. I cite, and take up here, the statement I made at the conference on marketing and industrialization held on 29 August in Nampula, to spark off a debate on policies and measures to make the Mozambican financial system something that generates social and economic inclusion.

Francisco Antonio Souto (Economist)

The dynamics of agricultural marketing give us an X-ray of the distortion of the prevailing financial system in Mozambique. This X-ray sounds a warning that the financial system is inducing inequality, by favoring the concentration of income in operators identified as “corporate”.

An indicator of how serious this problem is can be found in the fact that about 167% of the Mozambican population lives in the rural areas, but about 54% of this population produces only for its own consumption, and is thus living in a subsistence economy. Of those who make a living from farming, only  2% are commercial farmers. Thus over half the rural population has no capacity and/or no motivation to produce surpluses to be sold regularly in quantity and quality with the purpose of earning money, and thus being able to buy other goods essential for improving their living conditions.

About a third of Mozambican households live from farming or from what nature around them offers. This population is permanently vulnerable to the many adversities of nature.

Why does this situation prevail 33 years after we embraced structural adjustment programmes, and after the principles and practices of a market economy were adopted. What is this market economy in the rural areas of Mozambique? Where is it? 

One of the reasons for this anomaly is the growing mismatch between:

•             On the one hand, a financial system concentrated in banking institutions which, for their part, are increasingly focused on the segment designated as “corporate”;

•             On the other hand, we have a production and marketing system where the overwhelming majority of operators – family farmers, small and medium traders – are not corporate, although they are subordinate to market rules imposed by corporations.

Due to this mismatch, the little financing for marketing is concentrated in the hands of large companies, whose activity is focused on “export goods”. But it is not expected that the commercial banks will satisfy the demand for credit from the new small businesses, whose guarantees are relatively fragile. The commercial banks are increasingly obliged to follow rules that arise from the Basel 2 and 3 Accords, with assumptions derived from developed economies where formal financial systems are abundantly installed. These rules tie the formal financial institutions to compliance with a prudential

management matrix focused strictly on monetary policy objectives, and which do not include specific social and economic inclusion goals in societies that are still eminently informal. In Mozambique, less than 9% of adults have a professional occupation linked to the formal sector.

Thus there is some bank credit available for the large companies linked to the production and/or marketing of sugar, tobacco, cotton, cashew, timber, and pigeon peas; but there is absolutely insufficient financing for the thousands of small traders and small scale industries who buy their production of maize, sorghum, cassava, groundnuts, tomatoes, potatoes and cowpeas from about three million family farmers. 

Those who export have foreign exchange, and this is the business that interests the commercial banks and the manager of reserves for imports. Those who do not export only have access to bank credit if they have “good families” and a good history with the bank, apart from real and/or financial guarantees worth more than 100% of the credit requested.

Furthermore, in recent years, even some companies who have invested in agro-industry, stimulating production for export, have not escaped the aggressive attitude of pirate operators at the service of foreign financial interests.  The campaigns to buy cashew nuts from the peasants are a good example of how unregulated marketing can be a means of money-laundering, and very probably also a means for the illegal export of capital. 

Restrictive monetary policy measures, and some excesses of administrative and bureaucratic zeal towards formal micro-finance operators have expanded the room for manoeuvre of an informal sector which is operating with impunity and in competition with those who submit to the procedures of a regulator zealously enforcing the norms of a “one size fits all” matrix.

The recently published evaluation-study of FinScope2, focused on the about 14.2 million adult inhabitants of Mozambique, shows us that, between 2014 and 2019, the proportion of the population completely excluded from financial services fell from 60% to 46%. It is important to mention this advance. 

However, in these same five years, and despite the efforts to expand banking coverage – such as the “one district, one bank” programme – the percentage of adults with a bank account rose by only one per cent, from 20% to 21%. In this period, it was the informal sector that really made financial inclusion grow, rising from 27% to 32%, as well as the mobile money service, which grew sharply, from 10% to 41%.

It is doubtful that the growth of financial inclusion by these means is changing the persistently difficult access of rural traders and of small industries to the capital necessary for improving their storage capacities, and for buying and transporting inputs, interacting with about three million family producers. 

The mobile money operators do not give credit, they merely facilitate transaction. The informal operators, who have also grown, do not lend money ethically. Instead, they engage in loansharking or money laundering.

This is an X-ray that recommends careful reflection, since new legislation on the financial system is under preparation. The laws of 1990, amended in 2004, were a first generation of reforms in the legal framework for the financial system. In both cases, the focus was to take the state out of the financial system and demarcate the legal territory for the private commercial banks. It has been like this in almost all of Africa. 

But, also in almost all of sub-Saharan Africa, the debate has deepened on the connection between the development of the financial systems and the worsening of social inequalities. Studies produced by several academics draw attention to the need for diversification of the channels for supplying financial services and products that are able to meet the demand from different segments of society.

Today, 19 commercial banks are operating in Mozambique and they undertake more than 99% of financial activity. In developed countries, with consolidated financial systems, there is a much more relevant role for development financial companies, for credit cooperatives, for mutual aid systems and others. But today in Mozambique, these alternative channels scarcely exist. We have to ask ourselves why this is so. 

These studies note that systems which are excessively dependent on commercial banks favor the higher income social strata and commercial operators. Since these are the sectors most capable of saving, and of gaining access to highly formal institutions, they are also the ones that benefit from using the liquidity available in the system as a whole… Even though this liquidity results from the production of millions of family farmers and of small traders and artisans.

I conclude by stressing that the financial system of a country is not agnostic towards the challenges of social and economic inclusion. If a new generation of reforms to the financial system does not take this objective into account, the growing social exclusion that we are witnessing in Mozambique and, in general, throughout Africa, will continue to feed foci of political and social instability with implications for the stability and continuity of states and nations that are not yet consolidated.  

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