This paper examines financial inclusion and development in the CEMAC. We explore the level of financial inclusion in the CEMAC through a benchmarking exercise. We construct a measure of the financial development gap and analyze its determinants. Using panel data regressions, we find that inflation, income, and natural resources explain most of the financial development level but that better financial sector governance and stronger economic governance are positively associated with financial sector development. Richer and poorer countries can be equally far from their expected financial development levels. Finally, we use a benchmarking exercise to identify countries that have successfully reduced the financial development gap and propose policy measures that CEMAC countries could use to boost financial inclusion. Financial development in Sub-Saharan Africa (SSA) is uneven and on average less advanced than in other low-income regions, despite recent progress and reforms. 2 Within SSA, the Central African Economic and Monetary Community (CEMAC) region lags further behind. As the literature has extensively illustrated, financial development impacts economic growth and can play a critical role in reducing poverty and inequality. The importance of fostering the financial sector and promoting access to financial services is thus vital to development efforts for the CEMAC.

The contribution of this paper is twofold. First we examine the level of financial development in the CEMAC comparing it with peers from SSA and identifying where the region stands once structural characteristics have been accounted for. We show that all CEMAC countries have a less developed and less inclusive financial sector relative to their peers and relative to their expected development given their structural characteristics. These results support those of Singh et al. (2009); while they found that Zone Franc countries had more shallow financial sectors, we show they are also less inclusive. Second, we then turn to factors that could cause this relative underdevelopment. We widen our sample to all SSA countries, construct a “financial development gap” measured as the gap between the actual level of development of the sample countries and their expected development level or “benchmark” and adopt an explanatory model based on macroeconomic factors, institutional variables, and banking sector characteristics. The identification of our CEMAC countries is linked to their membership of the currency union, the CFA franc. Our results confirm that countries with higher income levels tend to have more developed financial sectors and that inflation adversely affects financial sector development. However, we also find that better credit information and rule of law is positively associated with financial sector development and higher cost ratios are negatively related to financial sector development. Better general economic governance is positively associated with financial sector development in CEMAC countries.

Finally, as our evidence suggests that there is scope for policy to boost financial development, we identify “best performers” in Africa and focus on policy measures that help to boost financial inclusion. Our paper is also related to the financial benchmarking literature. Using cross-country financial data, Beck, et al. (2008) propose a methodology to benchmark the policy component of financial development. Čihák, et al. (2012) introduce the Global Financial Development Database (GFDD) which documents the characteristics of the financial sector from over 200 countries. In this paper, we use their benchmarking approach both to assess financial development in the CEMAC and to construct a measure of the financial development “gap” for countries in our entire sample.