A publication by the Africa Development Bank (AfDB) on Thursday in Addis Ababa said African banks were characterised by high interest rate spreads and margins, driven by diseconomies of scale, risk, and lack of competition.

The book entitled “Making Finance Work for Africa: Through the Crises and Beyond’’ and launched in Addis Ababa said the facts presented were based on studies conducted on cross-country and individual country.

The book authored by Thorsten Beck, Samuel Maimbo, Issa Faye and Thouraya Triki stated that decompositions of interest rate spreads and margins resulting to high overhead costs was the main reason for high cost of banking in Africa.

“These high overhead costs can be explained to a large extent by the scale diseconomies suffered by African banks..

“Deficient energy and road infrastructure, as well as a lack of reliable credit information and infrastructure are also among the factors,’’ the book said.

It stated that the second reason for interest rate spreads and margins was lack of competition in many African banking markets, which was also related to scale diseconomies.

“Africa’s banking systems are mostly concentrated as few banks share the small universe of clients. Similarly, standard indicators of competition show significant market power among banks across the region.

“The final and important driver for high interest is the risk of banking, though the role of this factor may be overstated,’’ the book said.

The findings in the book showed that high cost of banking affects not only borrowers in terms of high lending interest rates, but also deposit customers in the form of high account fees and minimum balances.

It noted that measured relative to GDP per capita, African customers pay substantially higher amounts to maintain checking accounts compared to customers elsewhere in the world.

The high costs of financial services were also reflected in the costs of sending international remittances.

It attributed high costs to the small size and low income levels of African economies as a result of macroeconomic instability, high inflation rates and financial underdevelopment.

“A low, stable rate of inflation provides incentives for financial rather than non financial forms of savings. By providing monetary certainty, it is also conducive to long-term contracting and, therefore, ensuring long-term savings and investment,’’ it showed.

It stated that absence of monetary stability was directly related to the volatility undermining financial contracting.

The book also identified population density as another driver of financial depth, especially within Africa saying that a more dispersed population would be more difficult to serve, especially in the context of Africa, which has a decayed transportation infrastructure.

It explained that governance challenges loom large for African financial systems as financial contracts depend on the certainty of the legal rights of borrowers, creditors, and outside investors and the predictability and speed of fair and impartial enforcement.

For financial sector development, international comparisons have provided ample evidence of the critical role of legal system efficiency and its different elements.

It further stated that corruption could easily undermine the relationships between banks and customers, as well as between regulators and banks, while political interference may also have a negative effect on the optimal allocation of resources.

It stated that in spite of recent progress, Africa’s financial systems suffer from lack of competition and lack of diversity in providers and products, especially on the long end.

There was limited outreach, and even where customers have access, the costs were practically high.