Africa Finance Forum Blog

Is Financial Inclusion Working in Africa? A Provocative Look into Financial Inclusion through the South African Example

07.04.2015Milford Bateman

Not so long ago the international development community felt it had found an answer to Africa's long-standing poverty problem: the microcredit model. Many microcredit programs were launched in the 1990s with the aim of reducing poverty by promoting a local microenterprise development trajectory that would transform Africa 'from below'. Sadly, this movement was getting underway in Africa just as elsewhere around the world it was becoming clear that microcredit did not work as it is supposed to do, and that almost the entire argument in favour of microcredit was actually built on 'foundations of sand'.

Most recently, a team of some of the most reputable evaluation specialists in the world reported on a number of studies they had carried out these past few years using the supposedly more accurate Randomised Control Trial (RCT) methodology, and the central finding they came to was that there is essentially no impact from microcredit. The conclusion was sobering indeed, noting "The studies do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators" (Banerjee, Karlan and Zinman 2014: 17 - italics added).

However, support for the failed microcredit model did not evaporate away completely. The microcredit industry has been kept alive by 'shifting the goalposts'. Instead of supplying microcredit to the poor in order to address poverty and under-development, developing countries - and especially African countries - were now instructed to promote microcredit programs as part of the much wider objective of achieving 'financial inclusion'. Today, the international development community claims the key to development is to provide to stakeholders easy access to a microcredit, a bank account, a credit card, a mobile phone-enabled payment facility, and so on.

The awkward problem here, however, is that the evidence base to support the effectiveness of financial inclusion, according to me, is by all accounts even thinner than the evidence base previously mobilized to support the failed microcredit model.

First, in my view, there are virtually no reputable studies that have been able to causally link financial inclusion and 'more microcredit' to positive local impact and sustainable development. Instead, most studies simply use the availability of microcredit (and other financial services) as the acid test of whether or not financial inclusion programs have been successful. This, of course, is confusing a mere operational metric with impact. Moreover, second, it is extremely worrying that in all of those countries where it is universally agreed that financial inclusion has indeed proceeded fastest and deepest - notably Mexico, Peru, Bangladesh, Bosnia - the subsequent explosion in client over-indebtedness has proven to be a hugely damaging development, and not just for the poor but for everyone.

To look into the future of financial inclusion in Africa, it helps to examine the experience of the undoubted pioneer in this area: South Africa. After the collapse of apartheid, the feeling in the international development community was that the most glaring of the many inherited problems in post-apartheid South Africa - notably very high unemployment and low incomes in Black South African communities - could be resolved by a significant extension in the supply of microcredit and a major uptick in the level of individual entrepreneurship. After a shaky start and even a minor 'meltdown' of the microcredit sector in 2002, the microcredit promotional effort had to be re-launched under the more appealing 'financial inclusion' heading. And this time an even bigger positive development impact was envisaged. So what happened? Sadly, as I have explained at length elsewhere, the exercise was pretty much a calamity for South Africa's poor.

The first problem was historical. Under the apartheid regime most genuine high-profit business opportunities were reserved for the white South African community, with black South Africans only permitted to establish a range of trivial informal sector activities supplying the simple items and services that others in their community needed to survive. This fact centrally meant, however, that there was likely to be very limited scope for many new informal microenterprises to flourish in the immediate post-apartheid period. And this is exactly what happened. A tiny number of net jobs were created thanks to newly established microcredit programs, largely because new entrants simply took business from incumbent already struggling micro-businesses, which led these incumbents to shed jobs or else to close down as a result. Many of the new entrants also failed quite quickly. Overall, the additional competition induced by microcredit led to reduced turnover and margins across the entire microenterprise sector, and also put pressure on local market prices, all of which helped lead to a massive 11 per cent real decline in self-employment incomes between 1997 and 2003.

Second, as the majority of the poor began to realise that there was no real opportunity to survive in a micro-business, they inevitably turned, cynically one might say, to using microcredit as simply a way to provide for their immediate consumption needs, perhaps hoping to repay their microcredit sometime in the future through a financial windfall or from some other means. But the microcredit institutions were only happy to oblige - at least initially - because they could set interest rates very high (60-80% annually), and the majority of microloans could be forcibly repaid through garnishee orders, pressure on borrowers, and collateral seizure. Anyway, rapid growth, which funded high salaries and bonuses in the short term, was far more important to the managers of the main microcredit institutions than their own institution's long-run survival. By 2012 as little as six per cent of the total volume of microcredit advanced in that year was actually used for business purposes. All told, this trend plunged South Africa's poorest into unimaginable levels of debt peonage which, as reported by Statistics South Africa in 2014, involved "More than 9 million South Africans - half the national labour force - (...) battling with over-indebtedness and many are taking out more credit to pay off debt, thereby digging themselves deeper into penury."

Finally, the rapid expansion of the financial inclusion project in South Africa has undoubtedly resulted in scarce financial resources being channelled out of the most important high(er) productivity uses, and into the very least productive trivial ones, such as petty retail trade. Many of the private banks 'downscaling' into microcredit openly admitted to having mobilized additional financial resources by curtailing their existing lending programs to the formal SME sector. As a result, the informal microenterprise sector has boomed of late thanks, among other things, to the (over) supply of microcredit, while the formal SME sector - the most important sector in terms of growth and the technological upgrading of the local economy - has languished because of a lack of affordable capital. Even worse, what little growth that has been registered in the formal SME sector has largely been in the no-growth quick-turnover services sector, such as security guards and cleaners.

Summing up the anti-developmental paradox that has emerged in South Africa is the current Minister of Trade and Industry, Rob Davies, who has pointed out that, "[t]he (South African) economy is characterised by extensive financialisation, but only a small percentage of investment is channelled towards the productive sectors." South Africa's experience with the financial inclusion concept has been a catastrophe. One can only hope that important lessons are learned by the many other countries in Africa heading, or being led, down the very same path, and that alternative community-based financial institutions with a very good historical record of local development success across many countries, such as credit unions, financial cooperatives, cooperative banks and local/regional state-led development banks, are much more strongly encouraged in the future.


Milford Bateman is a freelance consultant on local economic development, since 2005 a Visiting Professor of Economics at Juraj Dobrila at Pula University, Croatia, and since 2013 Adjunct Professor of Development Studies at St Marys University, Halifax, Canada. He is currently based at UNCTAD working mainly on issues of local finance and local agro-industrial policy in Ethiopia.

The views expressed in this article are those of the author and do not necessarily represent the views of Making Finance Work for Africa. 

Individually Tailored Financial Education: What Research Tells Us Is Possible

02.04.2015María José Roa Garcia

The following post was originally published on the Center for Financial Inclusion Blog Website.

In the past decade, a group of key empirical studies have argued that a lack of education and financial knowledge can lead individuals to miss opportunities to benefit from financial services. Some may fail to save enough for retirement, others may over-invest in risky assets, while still others miss out on tax advantages, fail to refinance costly mortgages, or even remain outside of the formal financial sector completely. These studies suggest that such behavior is based on the reality that making financial decisions has become increasingly complicated. At the same time, as a result of sweeping changes in the economic and demographic environments, individuals have become increasingly responsible for their own financial decisions and the consequences of such decisions over the long-term. Changes in public pension plans, an increase in life expectancy, and an increase in the cost of health insurance have placed on the individual the weight of momentous decisions such as whether to take out private retirement insurance, or how much to save. Easier access to credit, a general increase in the accessibility and complexity of products and services, and a number of other factors make a range of financial decisions more consequential - and harder.

Governments, financial services providers, and related stakeholders have responded accordingly in recent years developing financial education programs and initiatives, but the results have been mixed. The bulk of the evidence available confirms that, in general, the level of financial literacy throughout the world is very low, especially among the more vulnerable groups: those with very low education or income such as senior citizens, young women, and immigrants. The lack of financial literacy within these groups has proven to extend beyond economic effects and produce negative consequences on health, general well-being, and life satisfaction. Many of the programs that have been introduced were part of empirical studies that evaluated the impact of financial education programs on subsequent financial behavior. There are many such studies that show that financial education improves financial decision-making.

Nevertheless, a body of work has opened an intense debate over whether financial education and information can truly affect the financial behavior of individuals (see here, and here). In many cases, despite the availability of financial education, persistently high rates of debt and default, and low rates of saving and financial planning for retirement have been shown to persist. The empirical evidence obtained from surveys and experimental work often shows that individuals pay little attention to the information and that their capacity to process it is limited. Most of the empirical literature to-date indicates that traditional financial education - clients receiving information in a classroom style setting or through printed materials - does not necessarily translate into behavioral changes, especially in the short-term.

However, this research also showed opportunities in the way financial education information can be transmitted, particularly, methods that factor in psychological aspects such as individuals' cognitive biases are key to transforming financial behavior over the long-term. The existing information is often excessive and tough for individuals to process completely. These studies concluded that in order to improve individuals' financial decision-making ability, the financial decision-making process must be simplified, and barriers for processing information must be reduced. For example, this might take the form of narrowing the number of options available or delivering text messages that may influence behavior at key moments. The latter falls within a group of practices identified as behavioral "nudges" by organizations working with behavioral science, like ideas42. In short, current research indicates that with financial education, effectiveness is largely a question of taking into account the psychological makeup of individuals.

In fact, nowadays there is a broad consensus among psychological, social, and economic studies that cognitive characteristics affect social and economic behaviors. Notwithstanding this, these studies tend to conclude that cognitive characteristics only predict a small part of personal behavior. Non-cognitive or personal characteristics seem to have a role as significant as that of cognitive skills. B.W. Roberts, a leading personality psychologist, defines¹ personal characteristics as "the relatively enduring patterns of thoughts, feelings, and behaviors that reflect the tendency to respond in certain ways under certain circumstances." Psychologists have sketched a relatively commonly-accepted taxonomy of personal characteristics known as the Big Five: Openness to Experience, Conscientiousness, Extraversion, Agreeableness, and Neuroticism. The papers² of J. Heckman, T. Kautz, and their research team (2013) review the recent evidence obtained by economists and personality psychologists regarding how cognitive and personal characteristics can be used to predict educational attainment, labor market success, health, criminality, and financial decisions.

Interestingly, these studies show there is hard evidence that both personality and cognitive characteristics are not "set in stone" and can change over the life cycle. Specifically, while genetics have a significant influence, parents, education, and social environments shape individuals, especially in the early years. However, there is some evidence that personality traits are more malleable than cognitive characteristics at later ages.

Financial education intervention programs should thus be based on these results. In particular, measuring personal characteristics makes it possible to identify people who tend to show weaker financial habits - high rates of debt, high default, low rates of long-term savings, etc. - and design tailored interventions. In addition, researchers conclude that most successful intervention programs are not as effective as the most successful early childhood programs. Consequently, as changing behaviors is not simple, teaching healthy financial behaviors from an early age allows the foundations to be laid for the development of strong lifelong money management.

Given the importance of these factors in effecting change, here are a few points that the research suggests would help financial education become more effective in supporting adults and older people.

  • Personalized counseling
  • Opportunities to gain experience by putting lessons into practice A focus on small changes in financial behavior, taking into account the individual's disposition to change
  • Programs that acknowledge the individual's socioeconomic situation
  • Continuing and ongoing education, support, and motivation

As factors that influence behavior are increasingly understood, a major challenge remains to incorporate those features into the design and delivery of financial education programs.

María José Roa is Researcher in the Economics Department at the Center for Latin American Monetary Studies, CEMLA ( Her research is mainly on economic growth, financial inclusion, behavioral finance, personality psychology in economics, and financial education. She has been teaching for almost 20 years in different universities around the world. Her work has appeared in refereed international journals. She coordinates the Financial Inclusion and Education Program in Central Banks at CEMLA, and she is member of the Research Committee of the OECD/INFE. She is originally from Madrid, Spain, but she lives in Mexico City.



Gravatar: Andy Mullineux and Victor Murinde

Financial Sector Policies for Enterprise Development in Africa

23.03.2015Andy Mullineux and Victor Murinde

In most African economies, banks remain the major source of external capital for both large businesses as well as small enterprises, and indeed for the private sector and the economy as a whole. However, there remain well-documented impediments to the flow of credit, especially to micro, small and medium sized enterprises (MSMEs). The major market imperfection is 'asymmetric information'. In other words, it is costly to collect and process the information necessary to select the least risky borrowers, or to 'screen' them, and it is also costly to 'monitor' their use of the borrowed funds, which explains why banks ration the supply of credit, especially to MSMEs.

In a recent paper, we explore this issue and highlight financial sector policies for African countries to promote enterprise development at all levels, including start-ups, micro, small and medium-sized firms, and large corporates is discussed. Here, we are necessarily more selective.

Credit information sharing

Information is the key to developing an efficient financial system and most important is information on credit worthiness. The financial system as a whole will function much more effectively if all relevant credit information is shared, subject to adequate data protection procedures to assure confidentiality. National central banks, with the support national development banks, with the African Development Bank advising on best practices, would oversee the development of databases on credit scores.

Government intervention

Government intervention, in the form of regulation and supervision of the wider financial sector and in the provision of funded and risk related deposit insurance and loan guarantees and other MSME business support services, is necessary to counteract market failures caused by information asymmetry and fixed-cost problems in African countries. However, market-led 'financial reforms' are the key to the evolution of the financial sector and enterprise development. The private sector should be brought into partnership with the government to assure widespread access to finance and markets should be conditioned by 'incentive compatible' solutions, including risk-related capital adequacy requirements and deposit insurance premiums.

Capital markets

Capital markets are used by larger firms to raise debt and equity through bond and share issuance. The development of capital markets takes time as it is based on accumulation, through public reporting, of information on companies over time and the establishment of trust. A sound regulatory and supervisory framework needs to be in place and buyers and sellers in the market will not have full confidence or trust in it until it is tried and tested. As confidence gradually grows, then more and more buyers (investors) and sellers (issuers) of primary securities will come to the market and its liquidity and stability will increase as a secondary market develops and holders of portfolios of shares trade some of their shares.

Development banking

Pending the development of domestic capital markets, or access to international capital markets, development banking will remain important for funding long-term investment and infrastructural projects. Developing country governments will also continue to use development banks to tap into international capital flows by offering co-financing prior to the development of fully fledged capital markets. The national development bank, or some other agency, should also develop loan guarantee schemes and provide training and other services to managers in the MSME sector. In other words, development banks should focus on addressing market failures.

Mobile banking

In many African countries, money transfer systems (MTS), based on mobile phone networks, are well advanced and widely trusted (e.g. M-Pesa in Kenya). If African countries are to be successful in this brave new digital finance world, payments systems should be regulated as utilities to assure universal access, data protection and freedom of information, as well as the reliability of the underpinning IT infrastructure; and generally that customers are treated fairly by the providers of payments and other financial products or services, to ensure trust. The providers seem likely to include telephone companies in conjunction with banks and other financial institutions; including market makers, brokers, fund managers, and insurers. Those wanting to compete in the digital financial arena will have to invest in reliable and up to date IT equipment and governments will have to make sure the networks are regulated and supervised. There will also be a need for well-trained IT operating staff alongside staff well trained in banking and financial services, lawyers and auditors. Well trained and competitively remunerated supervisors will also be required.


This blogpost is based on the academic study Financial Sector Policies for Enterprise Development in Africa, prepared by Andy Mullineux, Professor of Financial Economics, Bournemouth University (, and Victor Murinde, Professor of Corporate Finance & Head of Department of Finance, University of Birmingham, (


Further Reading

Davis, A. (2012): Seeds of Change. London: Centre for the Study of Financial Innovation.

Napier, M. (2011): Including Africa - Beyond Microfinance. London: Centre for the study of Financial Innovation.

Mullineux, A.W. and Murinde, V. (2014) "Financial Sector Policies for Enterprise Development", Review of Development Finance, 4(2), 66-72.

Stiglitz, J.E. and Weiss, A., (1981): "Credit Rationing in Markets with Imperfect Information", American Economic Review, 71(3), pp. 393-410.

Barriers and Obstacles to Financial Integration in Africa

09.03.2015Excerpt from the African Development Report 2014

The following is an Excerpt from the African Development Report 2014, a flagship publication of the African Development Bank.

Regional financial integration has potential to foster financial sector development and inclusive growth. The development of cross-border banking, capital markets as well as regional financial infrastructure could expand the economies of scale, and lead to a larger pool of resources and better risk-sharing mechanisms.

The potential for reaping the benefits of regional financial integration are likely to be greater in Africa than elsewhere, given that financial markets on the continent are still small and shallow.

However, (...) there are many obstacles preventing countries from reaping such benefits. They include the fact that key financial inclusion principles, such as commitment and compliance to a single and acceptable set of rules, equal access to financial instruments and/or services as well as equal treatment in the use of financial services or instruments were seriously undermined in the process of regional financial integration. Moreover, there seems to be a tendency to mimic existing behavior and intermediation techniques, which in the past led to the concentration of bank lending to a few clients, while excluding the underserved at both micro (e.g. small firms, households and underserved sectors) and macro (fragile or post-conflict and poor African countries) levels.

The Report identifies as important challenges weak entry conditions (e.g. inadequate institutions, poor governance in both public and private sectors and underdeveloped financial markets) and the general lack of national financial inclusion policies that are consistent with an inclusive financial integration agenda.

The Report also argues that it is important for African countries to upgrade their regulatory and supervision frameworks for cross-border banking, harmonize them at the regional level and adopt international standards for financial sector stability and confidence building. This would entail a reduction in transaction costs and raise efficiency benefits for all market players. Most importantly, the strengthening of regulations should not undermine financial institutions' capacity to innovate and serve the low end markets and underserved sectors.

Besides, the Report argues that making available long-term funding at regional level is a precondition for inclusive regional financial integration. This could be achieved through a variety of ways, including efforts to enhance the dynamism and liquidity of stock exchanges, encouraging regional rather than national platforms; helping regional economic communities set up harmonized regional payment and information systems as well as credit registries, developing regional bond markets, and building capacity in local currency funding and infrastructure bond issuance.

* If you find value in this Excerpt, you may enjoy reading the full report, particularly the Chapter 5 on "Harnessing Regional Financial Integration".

Gravatar: Enrique Gelbard, Mumtaz Hussain, Rodolfo Maino, Yibin Mu, and Etienne B. Yehoue

Status and Development of Islamic Finance in Sub-Saharan Africa

09.03.2015Enrique Gelbard, Mumtaz Hussain, Rodolfo Maino, Yibin Mu, and Etienne B. Yehoue

The Islamic finance industry has been growing rapidly in various regions, and its banking segment has become systemic in some countries, with implications for macroeconomic and financial stability. While not yet significant in Sub-Saharan Africa (SSA), several features make Islamic finance instruments relevant to the region, in particular the ability to foster SMEs and micro-credit activities. In a recent paper, we provide a survey on Islamic Finance in SSA where on-going activities include Islamic banking, sukuk issuances (to finance infrastructure projects), Takaful (insurance), and microfinance. Should they wish to develop the market, policy makers could introduce Islamic financing windows within the conventional system and facilitate sukuk issuance to tap foreign investors. The entrance of full-fledged Islamic banks would require addressing systemic issues and adapting crisis management and resolution frameworks.

The financial sector in SSA has been growing rapidly in the past two decades. New products have been introduced and financial institutions are playing an increasing role in financial intermediation, including cross-border financial intermediation.

However, Islamic finance remains small, although it has potential given the region's demographic structure and potential for further financial deepening. As of end-2012, about 38 Islamic finance institutions-comprising commercial banks, investment banks, and takaful (insurance) operators-were operating in Africa. Out of this, 21 operated in North Africa, Mauritania and Sudan, and 17 in Sub-Saharan Africa.

Botswana, Kenya, Gambia, Guinea, Liberia, Niger, Nigeria, South Africa, Mauritius, Senegal and Tanzania have Islamic banking activities. There is also scope for development in Zambia, Uganda, Malawi, Ghana and Ethiopia, as all but Zambia has relatively large Muslim populations-Zambia is interested in using Islamic finance instruments to fund investment in the mining sector. In Uganda, the central bank has started the process of amending its banking regulations to allow for the establishment of Islamic banks and three Islamic banks have applied for a license.

Islamic finance is still at a nascent stage of development in SSA. The share of Islamic banks is small, and Islamic capital markets are virtually non-existent (there were small Sukuk issuances in Gambia and Nigeria). At the same time, the demand for Islamic finance products is likely to increase in coming years. At present, about half of the region's total population remains to be banked. Furthermore, the SSA Muslim population, currently at nearly 250 million people, is projected to reach 386 million in 2030 and financial activities are expected to rise as a share of GDP. Many countries are expected to introduce Islamic finance activities side-by-side conventional banking. Opportunities for the development of Islamic finance are expected to comprise retail products to small and medium-sized enterprises. The sub-continent's growing middle class, combined with its young population is an opportunity for Islamic finance to expand its services. SSA's large infrastructure needs will also provide an opportunity for Sukuk issuance to channel funds from the Middle-East, Malaysia, and Indonesia. For example, recent issuance of a Shari'ah-compliant bond by Osun state in Nigeria and South Africa could start a trend in favour of sukuk, especially if planned sukuk by Senegal.

Developing Islamic Finance in Sub-Saharan Africa

The development of Islamic Finance could increase the depth and breadth of intermediation, extending the reach of the system (e.g. extension of maturities and facilitation of hedging and risk diversification). At the same time, the much larger non-Muslim population could find Islamic financial instruments attractive in broadening the range of available options, particularly for SMEs and micro-credit. Moreover, financial deepening and inclusion could be further enhanced if new instruments are inspired from Islamic finance, but without necessarily being Shari'ah certified. The development of partial risk guarantees, as in Mauritius, could be seen as an example.

In addition, SSA countries could tap into growing Islamic financial markets to meet infrastructure financing needs. By opening doors to Islamic finance, SSA can seek to attract capital from Muslim countries whose savings rates are high and projected to grow. In particular, sukuk financing, which is expanding in other countries, could be a useful tool to finance infrastructure investments.

Lastly, Islamic financing can help develop small and medium enterprises and microfinance activities, given those African households and firms have less access to credit from conventional banks compared to other developing regions. Islamic banks can tap a segment of depositors that do not participate in interest-based banking. They can also promote SMEs' access to credit through expanding acceptable collaterals by extending funds on a participatory basis in which collateral is either not necessary or includes intangible assets.

Through its different forms-windows, full-fledged banking, investment banking, and Insurance-Islamic finance activities ensure appropriate leverage and help limit speculation and moral hazard. It should be noted, however, that they are also subject to constraints and risks, most notably the difficulties and costs involved in supervising and monitoring and the reputational risk implicit in some products that are not properly certified as compliant with Islamic principles.

For countries that want to develop Islamic finance in their jurisdictions, a strategy could contemplate the following steps: launching a public awareness campaign, providing the needed infrastructure (i.e. amending as needed laws and accounting and prudential frameworks), building capacity at the central bank (especially on supervision), and considering the need to set up an appropriate liquidity management framework and introduce adequate monetary operations instruments.

This blogpost is based on the academic study "Islamic Finance in Sub-Saharan Africa: Status and Prospects", prepared by Enrique Gelbard, Mumtaz Hussain, Rodolfo Maino, Yibin Mu and Etienne B. Yehoue.


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