Box VI.1: Supporting Recovery of Financial Systems in Fragile States

resources. Besides, the deterioration of the legal and institutional infrastructure makes the provision of financial services more costly and risky, thus adding to the liquidity constraints.

The multitude of macro-economic issues facing fragile states negatively affects the performance of central banks as well, resulting in a lack of enforcement of legal and regulatory rules. The loss of qualified human resources due to the political or economic situation in fragile states contributes to weak regulation, limited supervision capacity, and increased systemic risk. In countries such as Rwanda where conflicts caused temporary closure of the central bank at the height of the crisis, the financial system operated with much difficulty.

Operating in tumultuous environments requires not only strong political will to bring about a better legal framework, but also the ability to provide innovative financial services in uncertain environments where people are often displaced because of political and/or economic instability. Hence, for financial inclusion to be achieved in African fragile states, sound and sustainable financial institutions are required. Obviously, development partners have an important role to play to support recovery of financial systems in fragile states (Box VI.1).

Box VI.1: Supporting Recovery of Financial Systems in Fragile States

The UN Capital Development Fund (UNCDF) launched in 2004, just after the end of a devastating civil war in Sierra Leone, the Microfinance Investment and Technical Assistance Facility (MITAF) as a multi-donor funding mechanism with the aim of providing financial services to low-income people through a sustainable, competitive and inclusive financial sector. MITAF has been successful in setting up in Sierra Leone a facilitating environment to which donors, investors and commercial banks adhered in support of a pro-poor and accessible financial sector. Some of the key achievements of MITAF, which makes it a wide success today include: “moving financial services from the government to independent institutions; providing a joint platform for a coordinated donor approach; developing the concept of microfinance from charity into sustainable services; attracting the interest of commercial banks to broaden their client outreach into both rural areas and the microfinance sector.”

Source: Costa et al. (2011).

3. The State of Financial Inclusion in African Fragile States

Despite the development of innovative mechanisms and delivery channels to reach the poor in Africa, less than a quarter of adults living on the continent have an account with a formal financial institution. The vulnerability of African fragile states restricts even further the ability