Burundi’s Financial Sector: A Barrier to Development

The financial sector of Burundi is not aligned with development activities, despite the country’s economic structure and development priorities. A recent analysis reveals that credit allocation in the country is biased towards short-term activities with immediate gains, rather than long-term investments in sectors such as agriculture and industry.

Commercial Banks’ Profitability

The analysis shows that commercial banks in Burundi are highly profitable, with net profits ranging from 10% to 39% of equity. This has led to a lack of incentive for banks to lend to riskier borrowers, including those in the agricultural and industrial sectors.

Credit Allocation: A Problematic Trend

According to data from the Bank of Burundi, credit allocation in the country has been trending downwards over time. In 1980-1994, agriculture accounted for only 5% of total credit, while industry accounted for 2.5%. By 2003-2005, these figures had declined further, with agriculture accounting for a mere 0.68% and industry accounting for 3.8%.

Credit to Commerce: A Dominant Trend

In contrast, credit to commerce, including coffee-trading activities, has increased remarkably over the years, accounting for 72% of total domestic credit in 2003-2005.

Why Banks Shun Agriculture and Industry

The analysis identified three interrelated reasons why banks are not interested in lending towards transformative activities in the agricultural and industrial sectors:

• High political risk due to Burundi’s post-independence history marked by civil war and military rule has led to a lack of trust in long-term investments.
• The country’s history of civil war and military rule has created an environment of extreme uncertainty, making it difficult for financial institutions to lend towards long-term projects.
• The cyclical nature of civil wars has heightened uncertainty over the future, causing financial institutions to become extremely cautious and prioritizing short-term activities.

The Impact of Political Instability on Lending

The study found that medium- and long-term lending declined significantly between 1992 and 1998, while short-term lending increased. This is due to the high political risk and uncertainty caused by civil wars and military rule.

Conclusion

Burundi’s financial sector is not oriented towards development activities due to a lack of incentive for banks to lend to riskier borrowers and high political risk. To address this issue, policymakers must find ways to reduce political uncertainty and incentivize long-term investments in the agricultural and industrial sectors.