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...owth of GDP has prevented meaningful reduction in poverty as discussed below. The empirical literature shows that robust and sustained investment is a fundamental driver of long-term economic growth (=-=Barro, 1991-=-). In Burundi, gross capital formation has remained below 15 percent of GDP for most of the post-independence period, dropping below 5 percent over the war period between 1994 and 2003. Burundi’s inve...

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...o the political economy of agricultural development. Burundi's agriculture is dominated by smallholder farmers who have little political voice to lobby politicians in order to defend their interests (=-=Bates, 1981-=-; Nkurunziza and Ngaruko, 2008). Moreover, 94.5 percent of all agricultural activities in Burundi are in the informal sector which is typically cut off from modern financial services (ISTEEBU, 2008). ...

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... attention to not only outreach to the poor (both breadth and depth of outreach) but also financial sustainability of the institutions as well as impact on growth and poverty (Zeller and Meyer, 2002; =-=Robinson, 2001-=-). Burundian microfinance institutions face several constraints in their attempts to reach this triple objective. The key constraint is the lack of stable resources, forcing MFIs to both ration credit...

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...er, 2000; Khwaja and Mian, 2005). In turn, capital misallocation leads to low total factor productivity and output per worker as is typically the case in developing countries (Hsien and Klenow, 2009; =-=Bartelsman et al., 2009-=-). 5 In Burundi, as discussed in the previous sections, financial resources were allocated to SOEs on the basis of political considerations, resulting in very low productivity. The managers of the SOE...

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...y factors on economic performance. Most studies on the effect of political factors on firm and industry performance in developing countries have focused on Asia (Wurgler, 2000; Khwaja and Mian, 2005; =-=Hsien and Klenow, 2009-=-; Fisman, 2001; and Leuz and Oberholzer-Gee, 2003). 2 Faccio (2006) provides a cross-country analysis of 47 countries with only two from Africa (South Africa and Zimbabwe) and the analysis is not disa...

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...udies on the effect of political factors on firm and industry performance in developing countries have focused on Asia (Wurgler, 2000; Khwaja and Mian, 2005; Hsien and Klenow, 2009; Fisman, 2001; and =-=Leuz and Oberholzer-Gee, 2003-=-). 2 Faccio (2006) provides a cross-country analysis of 47 countries with only two from Africa (South Africa and Zimbabwe) and the analysis is not disaggregated enough to provide detailed evidence on ...

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... framework, it is the ability of MFIs to create an environment of trust between institutions and clients that determines the success of MFIs. A well known example is the case of the Grameen Bank (see =-=Yunus, 2003-=-). While increasing access to financial services for clients, such a strategy also contributes to financial sustainability of the MFIs by improving loan recovery. The success of microfinance rests on ...

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...roduction, excluding coffee, leads to a 3.5 percent increase in GDP (Lim and Rugwabiza, 2009). In general, agriculture-led growth has been shown to have the highest impact on poverty reduction (World =-=Bank, 2008-=-). Therefore, the resources allocated by the banking sector to agriculture do not reflect the economic importance of the sector, preventing Burundi from reaching its potential in terms of growth and p...

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...he lack of electricity (Table A1 in Annex II). Evidence from a detailed firm survey carried out in the 1990s also shows that access to credit is a constraint to firm growth and investment in Burundi (=-=Bigsten et al., 2003-=-). Hence, the crowding out of the private sector and inefficient use of credit by the government has negatively affected the performance of the private sector. The financing of inefficient state-owned...

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...005. By comparison, the poverty rate in Uganda declined from 69 percent to 51 percent during the same period. In terms of human development, Burundi in 2010 was ranked as 166 th out of 169 countries (=-=UNDP, 2010-=-). The development of human capital was hindered by the exclusionary policies that marginalized the majority of the population, in addition to slow growth. By keeping large 11 Agricultural value added...

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... example, an analysis covering the period 1986-2000 found that although private banks were more productive than public banks due to technical progress, the latter were more efficient than the former (=-=Sensarma, 2006-=-). 5 According to Hsien and Klenow (2009), capital misallocation could explain 30% to 50% of TFP difference between Chinese and American firms, and 40% to 60% of TFP difference between Indian and Amer...

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...xcluded segments of the population, and, ultimately, a cycle of civil wars. Hence, rather than alleged ethnic antagonisms, these wars are best characterized as the outcome of distributional conflict (=-=Ndikumana, 2005-=-). 5 Today, foreign currency allocation is mostly liberalized and the coffee sector is in the process of liberalization. As a result, in 2009 and 2010, producer prices substantially increased. 4In 19...

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...ithic regimes that have ruled the country over the past five decades used the financial sector and the economy in general for rent seeking and consolidation of power rather than economic development (=-=Ndikumana, 1998-=-, 2005; Nkurunziza and Ngaruko, 2000, 2008). As a result, the need to control economic and political power determined or influenced the ownership of banks, undermined the independence and regulatory c...

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...ountry has experienced five episodes of civil war: 1965, 1972, 1988, 1991, and from 1993 to 2003. These civil wars claimed more than half a million lives and generated more than one million refugees (=-=Nkurunziza and Ngaruko, 2005-=-). These conflicts have been characterized as opposing the country’s two main groups, the Hutu and Tutsi, despite the fact that it is difficult to objectively delineate the boundaries separating them....

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...P, it represents one-third of the average ratio for Sub-Saharan Africa (51 percent of GDP); the latter compares very poorly with the figure for high income OECD countries at 126 percent of GDP (World =-=Bank, 2010-=-). 3 These statistics suggest that even by the poor African standards, the contribution of Burundi's banking sector to economic activity in terms of credit provision is very limited. Figure 5: Ratio o...

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...1996 to 23 January 1999, this affected the portfolio of banks, as traditional bank clients, particularly those relying on import and export activities, saw their activities seriously curtailed (World =-=Bank, 1999-=-). This may explain the drop in lending interest rates during this period (Figure 1) and the decline in credit to the private sector in 1997 and 1998 (Figure 5). 9 Third, it could be argued that credi...

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...rvices, mobile banking is also a source of employment creation and income generation. The experience in Kenya suggests that mobile banking retail operators can earn up to $1,000 per month in revenue (=-=Eijkman, Kendall, and Mas, 2010-=-). With increased mobile telephony penetration, this experience can be replicated in Burundi with substantial gains in employment creation and income generation. More generally, poverty reduction in B...

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...sting banks. They include Kenya Commercial Bank (KCB), Union Bank of Nigeria (UBA), FINABANK of Kenya, Barclays Bank of the United Kingdom, and Actis, a private equity investor in emerging economies (=-=Lienart, 2010-=-). Burundi is currently going through the most important transformation of its banking industry. ATMs have been introduced for the first time and it is expected that opening the market to external ban...

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...griculture is the main source of economic growth. According to some conservative estimates, a 10 percent increase in agricultural production, excluding coffee, leads to a 3.5 percent increase in GDP (=-=Lim and Rugwabiza, 2009-=-). In general, agriculture-led growth has been shown to have the highest impact on poverty reduction (World Bank, 2008). Therefore, the resources allocated by the banking sector to agriculture do not ...

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...tate participation amounted to 20 percent of the country’s GDP. In the same year, these firms recorded a net loss equivalent to 6 percent of GDP or 14 percent of government revenue, excluding grants (=-=Ngaruko and Nkurunziza, 2006-=-). Essentially, the losses in state-owned enterprises (SOEs) represented appropriation of public resources by firm managers and their employees. Subsequent subsidies to such loss-making firms, which w...

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...ction. Factors that account for the sluggish and volatile growth range from physical constraints (e.g., Burundi is land-locked) that raise the costs of production and trade, to political instability (=-=Nkurunziza and Ngaruko, 2008-=-). The country’s political and economic instability have constrained the mobilization of public and private domestic resources, thus limiting investment, entrepreneurship, and growth in productivity. ...

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...te and semi-public companies – which are currently held as cash – were pooled to constitute an investment fund, they would provide important long-term investment resources that are currently lacking (=-=Nyamoya and Nkeshimana, 2005-=-). In 2004, for example, the combined profits of the 8 commercial banks, the 2 development banks (BNDE and FPHU), the largest insurance company (SOCABU), and two semi-public companies (BRARUDI and SOS...

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...in mixed communities across the country. 4 A deeper analysis of conflict in Burundi shows that political violence resulted from a combination of three key factors (Nkurunziza and Ngaruko, 2005, 2008; =-=Ntibazonkiza, 1993-=-; Ndikumana, 1998; Lemarchand, 1994). The first factor relates to the divisive policies instituted by the Belgian colonial authority in the 1920s and 1930s, which opposed Hutu and Tutsi, destroying a ...

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...y controlled the African market. Even if this had been the case, it is clear that the poor management of the network played an important role in precipitating the failure of all its subsidiaries (see =-=Wright, 1995-=-). This case is also evidence of weak banking regulation and supervision, especially in the case of cross-border banking. Banque de commerce et de développement (BCD) was created on 14 January 1999 as...