The global trade in enslaved people is directly linked to distrust in Africa’s financial system.
Nearly two-thirds of Africa is “unbanked” and has no relationship with a financial institution—one of the highest rates in the world, according to the World Bank. The rapid rise of mobile money sent through smartphones is steadily boosting financial inclusion across the continent, but the lack of access to traditional banking accounts and loans is depriving millions of Africans of the ability to save and borrow money they could use to start a business or move to a neighborhood with better schools.
This poor access to financial services has a multiplier effect far beyond savings and lending, affecting everyday life including employment options, says Berkeley Haas Prof. Ross Levine. “How well the financial system operates can shape an individual’s overall socioeconomic horizon, even if that person never takes out a loan,” he says.
Many scholars have looked at the myriad reasons for the lack of financial inclusion in Africa, ranging from poverty to the effects of colonialism. In the first study of its kind, forthcoming in The Economic Journal, Levine and two coauthors have pinpointed another important factor: The devastating impact of the global slave trade that gripped Africa most intensely from 1400 to 1900.
Broken trust
When Africans were captured from their villages and sold into lives of toil in faraway countries—often by other Africans who sold enslaved people to Europeans, Arabs, and Indians—the trust of those who remained in their neighbors and in institutions fundamentally broke down. The fact that this distrust could linger so long after slavery faded was a surprise to Levine. “I would have thought that institutions, social coherence, and trust would have had plenty of time to emerge once the slave trade ended,” he says.
To measure the connection between the African slave trade and trust in financial institutions, Levine and his colleagues analyzed data about the intensity of slave trading within 51 countries as well as within 186 ethnic groups. To isolate the effect of the slave trade, the researchers controlled for a number of factors that could have influenced the results, such as a country’s legal system and how long it has been independent, as well as individual-level factors such as education, income, and age of the population.
The study showed a strong, negative correlation between the intensity of a country’s historical exposure to the slave trade and the rate that households currently own or use an account or debit card at a bank or other formal financial institutions; save money at formal financial institutions; obtain short-term loans, credit cards, or mortgages from banks; and use the internet or mobile phones to make financial transactions. They also cross-checked the country-level results with results by ethnic group, finding that ethnicities with higher rates of enslavement also had higher rates of mistrust in the financial system.
To quantify the magnitude of the effect, the researchers examined a hypothetical scenario in which one group of countries that had a relatively higher intensity of slave trading (such as Sierra Leone, Malawi, Ethiopia, and Guinea) suddenly became much more like countries that had a relatively lower intensity of slave trading (countries such as Burundi, Zimbabwe, Niger, and South Africa). In that scenario, the probability that the average person would have saved at a bank, received a bank loan, or made a transaction with a mobile money account would have increased by 50%. In a continent with a low starting point for participation in the financial system, that represents an increase in financial inclusion of millions of Africans.
Wide variation in financial participation
Along with the high-level macroeconomic impacts, the study showed considerable variation across countries in the real world:
- Credit card use in Mauritius and South Africa—where the slave trade was less intense—was greater than 16%, while it was below 0.5% in Madagascar, Sudan, and Ethiopia, where people were sold into slavery at relatively higher rates.
- In Mauritius, where the slave trade was negligible, only 0.3% of the respondents indicated a lack of trust in banks.
- More than 16% of those surveyed had received a loan in the last year in Botswana and Mauritius, which largely escaped the slave trade, while less than 2.5% of survey respondents received a loan in the last year in Guinea, which had a much more intense slave trade. However, loan rates did not match the intensity of slave trading in several other countries (Niger had far lower loan rates than Uganda, though slave trading rates were similar).
All this data shows something else beyond the numbers. “Factors that influence culture have a very long-run, enduring effect on communities,” says Levine. “Culture exerts a first-order impact on many of the economic outcomes that people care about.”
That insight offers some hard lessons for financial services businesses and policymakers, since trust is vital for finance to work, says Levine. Putting your money in a bank involves a certain trust that the legal system and the government are going to properly safeguard your money. Similarly, financial institutions must be able to trust that a loan recipient will pay them back. Without trust, the cost of enforcing every single contract would become overwhelming and reduce the overall availability of credit, and therefore limit economic growth and opportunity.
“Establishing trust is important for financial services companies everywhere, but it is much more difficult to create that trust in countries that had a more brutal experience with slavery.”