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The Financial Sector in Burundi

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  • Janvier D. Nkurunziza
  • Léonce Ndikumana
  • Prime Nyamoya

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.

Suggested Citation

  • Janvier D. Nkurunziza & Léonce Ndikumana & Prime Nyamoya, 2012. "The Financial Sector in Burundi," NBER Working Papers 18289, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18289
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    References listed on IDEAS

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    1. Zeller, Manfred & Meyer, Richard L., 2002. "The triangle of microfinance," Food policy statements 40, International Food Policy Research Institute (IFPRI).
    2. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    3. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1403-1448.
    4. Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fafchamps & Bernard Gauthier & Jan Willem Gunning & Abena Oduro & Remco Oostendorp & Cathy Patillo & Måns S–derbom & Francis Teal & Albert Zeufack, 2003. "Credit Constraints in Manufacturing Enterprises in Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(1), pages 104-125, March.
    5. Sensarma, Rudra, 2006. "Are foreign banks always the best? Comparison of state-owned, private and foreign banks in India," Economic Modelling, Elsevier, vol. 23(4), pages 717-735, July.
    6. Andrei Shleifer & Robert W. Vishny, 1994. "Politicians and Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 995-1025.
    7. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1371-1411.
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    Cited by:

    1. Léonce Ndikumana, 2013. "Overcoming Low Political Equilibrium in Africa: Institutional Changes for Inclusive Development," Working Papers wp331, Political Economy Research Institute, University of Massachusetts at Amherst.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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