There is a sizeable body of research linking financial development to economic growth. A competitive financial sector is crucial for the strategic mobilization of resources in an economy. Investigations, however, have uncovered that Africa is suffering from a “financial development gap.’ This is because banking platforms in Africa operate below capacity – relative to other developing regions. A common metric to judge the efficacy of banking systems is the degree of financial depth.
Banking depth is measured by the supply of domestic credit to the private sector as a percentage of GDP and the ratio of liquid liabilities. The depth of a country’s banking system captures the extent to which economic players can utilize financial tools to shape savings and investment portfolios. One study commented that loans to the private sector as a percentage of GDP ratio is on average, just 21 percent in African countries – this paltry figure is half the ratio in non-African developing countries.
Even more startling is the reality that 65 percent of adults in sub-Saharan Africa are unbanked. But what could account for such an abysmal level of development? Researchers have examined multiple culprits – from the legacy of colonialism to institutional quality. However, some scholars are advancing the bold thesis that deficiencies in Africa’s banking sector are attributable to the legacies of the slave trade.
Combing through the data from the 2005 Afrobarometer survey to ascertain whether individuals associated with ethnic groups that were greatly exposed to historical slave trades exhibit lower trust in the future, Nunn and Wantchekon (2011) conclude that this is indeed the case. Ethnic groups with considerable exposure to past slave trades display lower levels of trust in family, neighbors, co-ethnics, and local government today.
Both the transatlantic and Indian Ocean slave trades offered opportunities for African polities and traders to profit by selling victims into slavery. In response to the demand for black slaves, kidnapping intensified and laws were modified to justify the sale of offenders. Due to the rise of unscrupulous activities enabled by the slave trade, Africans became skeptical of their peers thereby fomenting an environment of mistrust.
The findings of Nunn and Wantchekon are relevant since trust has implications for financial development. Harnessing trust is the gateway to business collaborations; therefore, if slave trades eroded trust in individuals and institutions – the result will be fewer businesses partnerships and hesitancy to engage institutions. Ross Levine and colleagues arrived at this conclusion in a 2020 study, titled “The African Slave Trade and Modern Household Finance,” published in The Economic Journal. Levine and co-authors point out that distrust limits the enthusiasm of potential lenders to avail credit to prospective clients and inhibits the propensity of households to save and invest in financial institutions.
The study revealed stark disparities in financial involvement as a result of intense exposure to historical slave trades:
- In Mauritius and South Africa, the use of credit cards was over 16%, but lower than 0.5% in Madagascar, Sudan, and Ethiopia, where there was greater exposure to slave trades
- People in countries that were less affected by slaves are also less likely to express trust in financial institutions. Only 0.3% of respondents in Mauritius indicated a lack of trust in banks, however in Niger 22% of respondents noted an unwillingness to trust banks or other financial institutions
Moreover, the legacy of low-trust has compounded the perils of conducting business in a diverse region like Africa. Ali Recayi Ogcem and co-writers in a 2021 paper on the association between trust and financial development observed that generalized trust lowers risk in diverse regions: “Our findings show that generalized trust play an important role in mitigating the adverse effects that ethnic fractionalization has on the availability of deposits or stable sources to fund loans.”
Further, other than stymying the growth of an innovative financial sector historic exposure to slave trades has impeded the potential of firms to access finance as revealed by Lamar Pierce and Jason Snyder in a 2017 article. The authors write: “Firms in high-slave-extraction countries also rely less on formal means of credit such as bank loans, lines of credit, checking accounts, and overdraft facilities. Slave extraction at the country level also correlates with a lower level of access to credit from suppliers. Although informal financial channels often act as substitutes for inaccessible formal financial channels…we find no evidence that firms in countries impacted by the slave trade are able to compensate for insufficient formal finance channels with credit from suppliers and customers.”
Notwithstanding, the evidence presented one criticism of this line of research is that low-trust countries in the Caribbean and Latin America possess superior financial institutions, so there is a possibility that the underdeveloped nature of Africa’s banking system is a consequence of weak institutional capacity, low levels of human capital, and inadequate governance. However, if we acknowledge that the performance of the banking system is a legacy of slave trades, then the only option is for African leaders to devise strategies to nurture trust and civic capital. Using the history of slave trades to create excuses for failure will not redound to the benefit of Africans.
