Financing the Frontier: Inclusive Financial Sector Development in Fragility-Affected States in Africa

The report examines the distinct challenges of financial market development in fragility-affected states in Africa (FASA), where financial exclusion is significantly higher than in non-fragile sub-Saharan African countries. It advocates for a 'market systems' or 'M4P' approach based on facilitation and adaptive management rather than direct implementation. Key priorities identified include the development of functional identification solutions, risk-based tiered KYC regulations, and the scaling of promising practices such as Islamic finance, refugee/IDP finance, and impact investing. The document emphasizes that systemic change in these volatile contexts requires long-term commitment, a high tolerance for risk, and a deep understanding of local political economy and conflict dynamics.

• Financial exclusion is significantly more severe in fragility-affected states in Africa (FASA) than in other sub-Saharan African (SSA) countries. In Cameroon, Chad, DRC, Sierra Leone, and Sudan, over 80% of the population is financially excluded, while in Burundi and Niger, this figure exceeds 90%.
• Fragility and conflict create a self-reinforcing cycle where lack of equitable access to financial services leads to underdevelopment and stagnation, which in turn exacerbates social and economic unrest.
• Financial systems in FASA are characterized by shallow credit depth and a dominance of a few banks in capital cities, with a notable absence of non-bank financial institutions, microfinance, or capital markets.
• Mobile money adoption in FASA is inconsistent and highly context-dependent. While it has thrived in Somalia (37% usage) and Zimbabwe (22%) due to infrastructure gaps and trust-based systems, it remains nascent in the DRC (9%) and is virtually non-existent in South Sudan and the Central African Republic.
• Remittances are the largest aggregate flow of funds to fragile states, with some countries seeing inflows exceeding 50% of GDP. However, these are hindered by a 'remittance super tax' where fees are at least double the global average, costing Africa at least US$1.4 billion annually.
• The report advocates for a 'market systems' approach based on facilitation and adaptive management. This requires a shift from direct implementation to catalyzing systemic change, utilizing iterative improvements and a high tolerance for risk and failure.
• Functional identification (ID) is identified as the essential foundation for financial inclusion. Currently, 56% of the SSA population does not receive a formal ID at birth, creating a major hurdle for KYC compliance and access to services.
• Islamic finance presents a significant opportunity for increasing inclusion in SSA, where religious self-exclusion is highest. It is already established in Sudan and growing in Nigeria, Senegal, and Kenya, with potential to serve the 250 million Muslims in the region.
• Impact investing in East Africa is heavily concentrated in Kenya, with very little investment reaching more transitional contexts like Somalia and Burundi. In West Africa, capital is concentrated in four countries and primarily deployed as debt by DFIs.
• Inclusive insurance, including index-based agricultural and livestock insurance, is critical for preventing low-income populations from falling into debt cycles after shocks, though it is hampered by poor infrastructure and low trust.

APA

FSD Africa (2017). Financing the Frontier: Inclusive Financial Sector Development in Fragility-Affected States in Africa. https://fsdafrica.org/wp-content/uploads/2025/05/17-02-13-Mercy-Corps-Report.pdf

Chicago

FSD Africa. Financing the Frontier: Inclusive Financial Sector Development in Fragility-Affected States in Africa. 2017. https://fsdafrica.org/wp-content/uploads/2025/05/17-02-13-Mercy-Corps-Report.pdf.

Wikipedia

{{cite report |author=FSD Africa |title=Financing the Frontier: Inclusive Financial Sector Development in Fragility-Affected States in Africa |date=February 2017 |url=https://fsdafrica.org/wp-content/uploads/2025/05/17-02-13-Mercy-Corps-Report.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{fsdafrica2017financing, author = {{FSD Africa}}, title = {{Financing the Frontier: Inclusive Financial Sector Development in Fragility-Affected States in Africa}}, institution = {FSD Africa}, year = {2017}, month = feb, url = {https://fsdafrica.org/wp-content/uploads/2025/05/17-02-13-Mercy-Corps-Report.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }