Research Africa

Innovation Runs Underwater

, by Nicola Limodio - professore associato di Finanza
The impact of highspeed internet deployment on African financial markets and the banks pursuing submarine fiber optic cables

In recent years, high-speed internet has emerged as a transformative force in Africa, ushering in a new era of progress and opportunity across the continent. This technological advancement has induced a profound political and economic revolution, empowering individuals and communities, while also redefining the landscape of finance and commerce. As the digital connectivity landscape in Africa evolves, it has played a pivotal role in emancipating participation, promoting mobile money usage, and stimulating a plethora of employment opportunities. The impact of high-speed internet is particularly evident in its ability to disrupt traditional financial markets, with African banks undergoing remarkable transformations in response to this technological upgrade.

This wave of digital transformation, as highlighted by McKinsey and Company (2018), has prompted African banks to re-evaluate their business models. The availability of fast internet has catalyzed a shift toward innovative financial technology, commonly known as FinTech. In doing so, it offers a unique opportunity to reduce financial frictions and mitigate information asymmetries, thereby making financial services more accessible and efficient for the continent's diverse and growing population. The impact of high-speed internet on Africa is far-reaching, making it a catalyst for progress and a symbol of the boundless possibilities that lie ahead in an increasingly interconnected world.

Angelo D'Andrea and I investigated the relationship between high-speed internet, financial technology, and banking. To explore the role of high-speed internet in the development of the financial system, we exploited a unique natural experiment: the staggered arrival of fiber-optic submarine cables in Africa, which introduced significant and enduring reductions in telecommunication costs. African banks responded to the emergence of fast internet by restructuring their businesses and adopting novel financial technology (FinTech) solutions, which offered an opportunity to reduce financial frictions and information asymmetries.
There were three main steps. First, we examined the influence of fast internet availability on crucial banking variables, disentangling the role of supply and demand factors. Second, we explored a specific mechanism through which the arrival of cables may lower the marginal cost of bank funding and increase the credit supply. Third, we investigated the relationship between high-speed internet and firms.

For this project, the empirical strategy was based on a staggered difference-in-difference specification, complemented by an event-study design that considers a five-year window around the arrival of high-speed internet. For the analysis, we have integrated bank-level data with information on the arrival of fiber-optic submarine cables. Our final dataset includes 629 banks located in more than 90 cities, spread across 37 coastal countries in Africa, during the period 1997–2018. In addition, we have compiled a dataset focusing on the adoption of the real-time gross settlement system (RTGS), which is of particular interest due to its capacity to reduce transaction costs on interbank exchanges. Finally, for the last segment of our analysis, we gathered data following 32,761 African firms over time, including indicators related to firm credit and performance.

We began the empirical analysis by quantifying the effects of fast internet on lending, government bonds, deposits, and equity. We classified a bank as 'treated' when its country of operation gains access to a submarine cable. Our findings reveal substantial increases in lending and deposits after the connection to high-speed internet, with growth rates of 36% and 25%, respectively. To isolate supply effects and ensure that the observed changes are driven by reduced marginal costs of banks and not solely by a boost in credit demand, we leveraged the presence of multi-country banks and defined a bank as connected if its headquarter is in a connected country. The estimates confirmed a positive and significant effect, suggesting that 62% of the total effect on lending comes from supply-related factors.

A second important result is that high-speed internet fosters the adoption of the RTGS. As cheaper and more reliable connections become available, the probability of adoption increases by 16 and 5.4 percentage points at the country and bank level, respectively. Simultaneously, the local interbank markets grow significantly, with loans and deposits increasing by 30% and 63%, respectively.

Finally, we observe that firms benefit from the new technology and exhibit an improvement in their financial variables. Specifically, there is a 26 percentage point increase in firms' access to finance, a 20 percentage point higher likelihood of receiving a loan, and a doubling in loan maturities.

By analyzing the arrival of fiber-optic submarine cables in African countries, this research underscores the role of high-speed internet in fostering the productivity of the banking sector. It facilitates the adoption of effective FinTech solutions and benefits local businesses. Thus, this project highlights the importance of investing in financial infrastructures in developing economies, as they can enhance banking efficiency and contribute to overall economic growth.

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