The Financial Sector in Burundi

Abstract

This study investigates the performance of the financial system in Burundi in mobilizing and allocating resources. Although the study does not presume that finance is the most binding constraint to growth and socio-economic development in Burundi, it takes the view that unlocking the financing constraint could alleviate other impediments to growth and poverty reduction. We use a blend of methodological approaches drawing from: (1) industrial organization in examining the structure of the banking sector, and the behavior and profitability of financial intermediaries; (2) macroeconomic analysis with a focus on the effect of economic performance and policy framework on the performance of the financial sector; and (3) political economy analysis highlighting the role of political governance and political instability, as well as ownership of financial institutions on allocative and distributional inefficiencies. The paper finds that the core of the financial sector that has survived the worst of the economic and political crises of the last decades is highly profitable. Bank profitability, however, hides several weaknesses of the financial sector: a high level of fragmentation; a narrow credit market that favors "insiders" who are mostly affiliated with the political elites, at the expense of "outsiders"; a severe shortage of long-term stable resources; inefficient allocation of resources relative to social returns and risk; and weak supervision and regulation which largely explain the failure of several financial institutions in the past and the fragility of the banking sector today. Access to finance remains an important challenge, especially for the "stranded middle" (middle income households and medium size firms) due to the "missing middle credit market" which is not filled by either banks or microfinance institutions. Recent developments in the financial sector, particularly the increasing penetration of foreign banks, may potentially boost competition, financial innovation, and access to finance with positive effects on growth and poverty reduction.