Felix Larry Essilfie’s thoughts … Financial inclusion in Africa: A review of experience

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The number of nations that committed to the Maya Declaration and the G-20 Financial Inclusion Action Plan, as well as strategies and targets set by individual governments, attest to the renewed interest in promoting financial inclusion in recent years.

The Centre for Financial Inclusion at Accion (CFI) defines full financial inclusion as a state in which all people who can use financial services have access to a full suite of quality services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial inclusion refers to all initiatives that make formal financial services available, accessible and affordable to all segments of the population.

These include technology-induced and enabled innovations, such as (i) mobile banking, i.e. access to basic payment services through mobile phones, even without having to have a bank account, (ii) ATMs, (iii) and e-banking as well as (iv) agricultural insurance based on objective rainfall data, and (v) new players in the financial systems, such as micro-deposit taking institutions (MDI), and cooperation between formal and informal financial institutions.

Other examples include agency agreements between banks and non-financial corporations (supermarkets, post offices, etc.) to deliver financial services to remote and low-income areas, joint platforms for banks to provide factoring services to small enterprises, and private–public partnerships for infrastructure, often supported by international risk mitigation mechanisms.

They include provision of appropriate and quality financing that is both accessible and affordable to low-income and other vulnerable households. Notably they target groups traditionally excluded from the formal financial sector.

A report by UNDP indicates that an estimated 4 per cent of the population in Africa have access to bank accounts, and the number of bank deposits per person is far below other regions. In addition, only 1 per cent of Africans have obtained a loan or other forms of credit from a formal financial institution, and again the number of loans per person is well below the number in other areas.

Although recent surveys by FinScope suggest some improvement in access by enterprises and households to reasonably priced and appropriate formal financial services are still limited. Indicators describing the use of different financial services are available in the 2012 Global Findex database, for 148 economies that include 42 economies from Africa.

The surveys further show that even with new innovations such as mobile money, a significant proportion of the African population remain excluded from formal financial systems. These are mainly disadvantaged groups such as the poor, women, and youth who lack access to savings and payment products.

Evidence from the 2012 Global Findex database shows that less than a quarter of adults in Africa have an account with a formal financial institution. Instead, many adults in Africa use informal institutions to save such as Rotating Savings and Credit Associations (ROSCAs), tontines, chit funds, burial societies and borrow from friends, family members, and informal private lenders. Within Africa itself, there are wide variations; number of individuals who own bank account vary from 42% in Southern Africa to 7% in Central Africa.

Within the region, some countries have fared badly; for example, in the Democratic Republic of Congo and Central African Republic, more than 95% of adults are “unbanked” i.e., do not have an account at a formal financial institution.

In North Africa, account ownership at a formal financial institution ranged from 39% in Morocco to 10% in Arab Republic of Egypt. Similarly, firms in African countries, compared to other developing economies, lack proper access to bank credit regardless of their size group although the financing constraint is more acute for SMEs.

In recent years, technological advances such as mobile money and innovation are helping to improve access to financial services. How much this is changing lives remains a debated question. Similar advances include the creation of new delivery channels such as “mobile branches” or banking services through third-party agents e.g. supermarkets. Even then, the picture is still gloomy as only 14% of adults we randomly interviewed in our recent study reported having used mobile money in the past 12 months.

Lack of enough revenue to use is the most cited reason for not having a formal account (by 80% of adults without formal accounts surveyed). Cost, distance, and documentation are among the other reasons cited for not having an account in formal financial institutions (cited by more than 25% of non- account-holders in our recent survey in Ghana). Cost is the second most frequently cited reason in East Africa at 46% and distance is the third.

Documentation is also a very important barrier to formal account ownership with 36% of adults in the Eastern and Western regions of Ghana giving this as a reason. High costs of maintaining accounts (bank management fees/charges) seem to be hindering account ownership in Ghana. A recent study finds that maintaining a checking account in Uganda costs the equivalent of 25% of GDP per capita annually.

Global Findex indicators show that the majority of adults with a formal account in Africa make deposits or withdrawals only once to twice a month. About 40 percent of adults in North Africa would a month without depositing into their accounts and 29% would take a whole month without withdrawing any money from their accounts. The indicators single out ATMs as the main mode of withdrawal for the majority of account holders in East and Southern Africa.

Only 14% of adults (and 63% of account holders) in Africa have a debit card. Up to 41 percent of account holders and 10 percent of adults in Africa use their account to receive remittances (with the highest remittances reported in Southern Africa). This far exceeds the global average of 14% of account holders (and 7% of adults) who use their account to receive remittances.

Some empirical studies find the use of accounts to receive money from family members living elsewhere to be particularly common in fragile states such as Somalia where 66 percent of account holders report using their account to receive remittances, in Zimbabwe with 55 percent, and Sierra Leone with 45 percent.

The rapid spread of mobile phones a growing number of Africans using mobile money as alternative to traditional banking. In Sub-Saharan Africa, 16 percent of adults report having used a mobile phone in the past 12 months to pay bills, send or receive money. In Kenya where the M-Pesa is a popular mobile money service since it was first launched in 2007, 68% of adults report using mobile money. On a similar scale, more than half of adults in Sudan used mobile money. Mobile money users are likely to be those excluded from formal financial services. For example, 43% of adults in Kenya and 92% in Sudan who report having used mobile money in the past 12 months do not have a formal account.

Slightly more than 35% of adults in East Africa report using mobile money. Apart from Algeria where 44% of adults report having used a mobile phone to pay bills or send/receive money), North Africa lags behind other regions in use of mobile money (only 3% of adults used mobile money) perhaps due to regulatory constraints imposed on the mobile money operators and banks. With limited interaction between mobile users and formal financial system, integration of the financial system and progress in achieving financial depth remains slow.

The 2012 Global Findex data further shows that 50% of adults in West Africa and 16% in North Africa have ever saved money although it still provides no clue how much money they saved or how many times they saved. Thirteen percent (13%) of adults in Africa (and 35% of savers) report having saved at a formal financial institution in the past year. A wide variation exists across countries, with more than 16% of adults (and 50% of savers) in Southern Africa and 35% in West Africa report having saved at a financial institution, while only 4% of adults (and 27% of savers) report having formally saved in North Africa.

The Global Findex data puts Nigeria, South Africa and Kenya as having the largest formal savings practices among the countries studied. Close to 100 million adults in Sub-Saharan Africa saved with informal financial institutions such as ROSCAs. About 30% of adults (and 59% of savers) in West Africa saved in informal financial institutions. In general, people tend to use both formal and informal financial systems although a large share of the individuals use only informal system.

More than 30% of those who save in Sub-Saharan Africa report having only saved with informal system in the past 12 months. Forty-six percent (46%) of the respondents in West Africa and 37% in Central Africa saved in informal financial institutions. Surprisingly, more than 50% of all respondents in North Africa and about 50% in Central Africa who indicated to have saved some money used neither the formal nor informal financial system such ROSCAs, or a person outside the family.

While the Global Findex data provides no information on these alternative savings methods, they might include traditional systems such as livestock or other forms of assets and saving in the houses (in a box or under the mattress).

A World Bank report also finds evidence, which suggests existence of a weak linkage between financial service usage and financial depth (measured by credit to the private sector as a share of GDP). This weak relationship raises questions regarding the drivers of cross-country differences in financial use and access.

This ambiguity also suggests that while there might be room for policy reforms to increase the level of financial inclusion in Africa, it would require policymakers to go beyond financial deepening, for solutions that build inclusive financial systems. What we know is that access to finance do not necessarily depend on financial deepening, implying that financial systems can become deep without delivering access to the majority.

>>>the author is the Executive Director of the Institute of Development and Economic Research (IDER), and a consultant with the University of California, Los Angeles (UCLA) Capacity Building Center (CBC). He is a member of the African Evaluation Association (AfrEA), International Association of Impact Assessment (IAIA), and International Society for Development and Sustainability (ISDS). As a Development Economist whose aim is to undertake research works that drive evidence-based policy decisions, Felix’ research interest covers areas including Health, Education, Agriculture, Political Economy, Behavioural Economics, etc. Email: [email protected]

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