Strengthening financial inclusion is a major challenge for Africa; The expert explains how can financial inclusion be strengthened?
Kenya has made huge strides forward through the use of mobile money, but why isn’t the same approach working as well in other countries? What is the best approach to promoting financial inclusion across the continent? For those who wish to dig deeper, here’s the explanation, straight from the desk of our expert guest contributor, Samantha Seewoosurrun, a reputed professional consultant in the financial services sector.
The Brookings Financial and Digital Inclusion Project (FDIP) recently published a report which looked at financial inclusion – as measured by the proportion of the population using both formal and informal financial products and services – in 21 countries from different political and economic contexts. Results for sub-Saharan Africa were extremely mixed, with four out of the five top-scoring countries and also some of the lowest ranked countries located on the continent.
Who came out top? Kenya scored highest in the overall rankings, due to the huge strides forward it has taken in the area of digital financial services.
Kenya increased its levels of formal financial and mobile money account penetration by 33 percentage points between 2011 and 2014, and the M-Pesa system operated by Safaricom is considered as the main driver of success, with nearly 90% of Kenyan households using mobile money services as of August 2014.
If mobile money has been such a runaway success in Kenya, should the same model be used across Africa to promote financial inclusion?
A number of similar products have been launched in other African states, such as Wizzit in South Africa, Moneybox in Nigeria, M-Cash in Uganda and Paymenx in Ghana, but experts suggest that a number of factors relating to regulatory issues and business model development have led to a lesser degree of success.
So what lessons can other countries learn from Kenya? The Central Bank of Kenya (CBK) has adopted an open and forward looking approach in regulating mobile payment options as they evolve, and the mobile operator Safaricom has made it easy to subscribe to M-Pesa, by simply requiring a form of identification.
Crucially, consumers benefit from lower transaction costs by using M-Pesa compared to what they would be charged by a Kenyan bank, which makes the service all the more attractive.
So what are other governments in Africa doing to promote financial inclusion? 19 African states have made specific commitments towards improving financial inclusion by signing up to the Maya Declaration, which calls for the creation of an enabling environment to harness new technology that increases access and lowers the cost of financial services, for a proportional framework that achieves financial inclusion as well as stability, integrating consumer protection and financial literacy and collecting and using data to promote evidence-based policy making.
If we look at Nigeria, the Government is committed to reducing the percentage of adult Nigerians that are excluded from financial services from 46.3% in 2011 to 20% by 2020. It received a moderate score in the FDIP ranking, on the basis that the Central Bank of Nigeria has taken a bank-led approach to mobile money, in which banks promote their traditional services via the mobile network.
This approach has also been used in India, however, and some commentators have remarked that incentives are not strong enough for banks to expand their services to the non-banked.
Ethiopia came bottom of the class in the FDIP report, and the World Bank’s Global Financial Inclusion Index (FINDEX) showed that in 2014 only 22% of adults had a formal financial account and only 0.03% had a mobile account, which is striking compared with the World Bank’s wider finding that in Sub-Saharan Africa overall 45% of adults only have a mobile money account.
At the same time, Ethiopia is taking steps forward through the adoption of a mobile and agent banking framework and the establishment of a Financial Inclusion Council to develop policies.
So can we count on African governments, particularly those that have signed up to the Maya Declaration on financial inclusion, to effectively tackle the issue, or are other players still needed?
The African Development Bank (AfDB) has made financial inclusion one of its strategic priorities for the next ten years, and will be supporting national strategies to scale up digital financial services markets, influence policy makers through increased dialogue, spearhead data collection on market opportunities and invest in incubators and funds whose focus is on mobile solutions. The AfDB has announced a broad collaboration with Mastercard, which is developing a number of pan-African products, for example through a multi-country licencing contract with Ecobank, which they claim will introduce 60% of Africa’s entire population to debit, prepaid and credit cards in 28 countries.
So can we rely on mobile innovation to win the day? The problem is that technology alone cannot necessarily overcome cultural barriers or misperceptions about banking. At a recent event, Ismail Douiri, co-CEO of Morocco’s Attijariwafa Bank, explained that some of their customers avoided banks as they assumed they were only for the very rich, and that customers did not want to tell their neighbours if they had an account as they did not want to appear rich to others, in case they were pressurised to lend to them.
The right way forward might be a collaborative approach between different actors, such as private sector operators on the one hand and NGOs on the other, to make sure that all interests are represented, and that people are brought into the formal financial system at their own pace. An interesting project called ‘Banking on Change’, has been set up by Barclays and NGOs CARE International and Plan UK, which seeks to link informal savings groups to the formal banking sector. It is claimed that, under the project, 700,000 people have access to informal financial services and are better able to manage their money, that 35,000 informal savings groups have been formed and that each member has an average of $58 savings per year.
Overall, while technological innovation clearly has a role to play, the challenge of financial inclusion will not be solved overnight in a number of African countries, and the creative input of a range of stakeholders from governments to DFIs, mobile operators to banks and NGOs will be needed. The issue of building trust and credibility of the financial services sector should not be overlooked, and ‘softly softly’ approaches to bring the unbanked into the system may pay significant dividends for all over the longer term.