Africa Finance Forum Blog

Do migrant remittances contribute to a decline in the level of malnutrition in Sub-Saharan Africa?

18.02.2019Hamed Sambo, PhD Researcher, Paris XIII University

Despite efforts by international organizations, governments and NGOs, malnutrition is still a major concern in most Sub-Saharan African countries. According to FAO statistics, 25% of the region's population is under-nourished, that is, one in four people. Though there are many factors responsible for this situation, poverty however remains the main determining factor.

Faced with this situation, more and more Sub-Saharan African households are adopting migration as a survival strategy. In this regard, a member of a household will therefore agree with other members of the household to migrate to a country or locality that has better employment prospects. In return, the migrant will remit funds and / or goods to the household, which will decide to either spend the remittances for consumption purposes, children's education, healthcare, or on creating a business.

In Sub-Saharan Africa, the use of migrant remittances differs from one country to another. However, studies in several countries in the region show that most households spend money on consumption, which includes purchases of food and other goods, as well as payment for services (rent, transportation, etc.). According to a study conducted by the BCEAO in 2010, more than half of the remittances received in the WAEMU zone were spent on consumption, compared with 21% for investment, and only 3.4% on education and 6.4% on health. For example, in Senegal, 70% of migrant remittances were for consumption. In the same year, the World Bank conducted a study in three East African countries - Uganda, Ethiopia and Kenya. While in Uganda and Kenya, households use a large portion of the remittances to invest in small businesses, in Ethiopia, the remittances are destined for consumption.

If greater part of migrant remittances are devoted to consumption in most Sub-Saharan African countries, do they contribute significantly to a decrease in malnutrition in the region?

The answer to this question is more complex than it seems. Migrant remittances help to improve nutrition in most receiving countries. However, the number of households who see their food situation improve remains very limited. Several reasons account for this low impact.

Migration is not for everyone. Indeed, because of the costs involved in migration (costs related to access to information, visas, transport...), people from poor families are less likely to migrate compared to those whose families belong to the middle class. As a result, poor families do not only have few migrants, they also receive less migrant remittances compared to middle-class families, whereas, it is the poor who suffer the most from malnutrition. It therefore emerges that the overall decline in malnutrition in the countries as a result of migrant remittances is limited.

It all depends on what is consumed. While studies show that in most Sub-Saharan African countries the remittances are for purchases, some households prefer to buy luxury goods or goods for weddings and ceremonies. The fact that food expenditure accounts for only part of overall purchases also limits the overall impact of remittances on the level of malnutrition. In addition, the foods provided are, for the most part, those with a better taste. These foods are purchased at the expense of foods rich in nutrients, which has the effect of further reducing the impact of remittances on food.

Cultural habits also constitute a constraint. In some localities, it is rather the cultural habits that prevent the population from getting rid of foods whose nutritional value is low. Remittances therefore have little or no impact on the diet of receiving families in these localities because they hardly change their feeding habits.

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About the Author

Hamed Sambo is currently a PhD Researcher at the University of Paris 13. His main research topics are migration, remittances, and food security in developing countries. During the first year of his PhD, he completed an internship at the African Development Bank (AfDB) during which he worked on gender issues. Hamed holds a statistics engineer’s degree at National School of Statistics and Applied Economics (ENSEA) of Abidjan, and a Master’s degree in Economics and international finance at the University of Paris 13 – Sorbonne Paris Cité.

Gravatar: Maram Ahmed, Visiting Fellow, School of Oriental and African Studies (SOAS)

How the African landscape could benefit from Islamic Finance

04.02.2019Maram Ahmed, Visiting Fellow, School of Oriental and African Studies (SOAS)

Infrastructure is one of the most important drivers of economic growth and reaps numerous socioeconomic benefits. In 2018, a report published by the Boston Consulting Group and Africa Finance Corporation estimated an annual infrastructure investment gap of US$100 billion in sub-Saharan Africa that is expected to increase. Infrastructure impacts a number of the UN's Sustainable Development Goals(SDGs) directly such as SDG 9 - "build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation" as well as indirectly such as SDG 7 "affordable and clean energy"and SDG 11 "sustainable cities and communities". Achievement of the goals requires a large amount of investment and governments alone cannot foot the bill.

In Africa, a substantial level of investment is needed for both hard infrastructure (such as bridges, roads and transportation links) as well as soft infrastructure (building of institutions such as schools and hospitals) moreover, two important challenges remain.

Firstly, rapid urbanization that is taking place throughout Africa as more citizens are moving into the cities increasing the demand for infrastructure and in particular housing. Secondly, the continent has a high number of landlocked countries making some countries increasingly dependent on the infrastructure of their neighbors.

Although commodity prices are rising, now is the time for African policymakers to prioritize attracting foreign direct investment and diversifying their sources of financing. One way the continent can do that is by tapping and leveraging the use of Islamic Finance, a market valued to reach $3 trillion in total assets by 2020.

Islamic Finance in Africa:

The continent is home to a quarter of the world's Muslims, and there are a number of Islamic banks operating throughout Africa. However, the development of Islamic finance in sub-Saharan Africa is low in comparison to other regions.

African countries such as Morocco, Senegal and South Africa have in the past funded infrastructure projects using Islamic finance through the issuance of Sukuk, a Shari'ah compliant debt capital market instrument. If mobilized well, Sukuk financing has great potential to fund much-needed infrastructure projects throughout Africa. In 2017 alone, Sukuk issuance volume reached $97.9 billion, a 45.3% increase from the year before and the continent is well positioned to attract further investment through increasing the number of Sukuk issued by Sovereigns and corporates alike.

South Africa's Sovereign Sukuk

In September 2014, the Republic of South Africa successfully issued its inaugural USD$500 million 5.75-year Sukuk with a coupon rate of 3.90%. The Sukuk was listed on the Luxembourg Stock Exchange and the proceeds raised were used to fund infrastructure development as according to the South African National Treasury, "The decision to issue an Islamic bond has been informed by a drive to broaden the investor base and to set a benchmark for state-owned companies seeking diversified sources of funding for infrastructure development."

However, in order to issue the Sukuk, the Government had to make amendments to its legislation and tax laws signifying how crucial political will is to removing obstacles and facilitating the diversification of funding sources. The debut Sukuk was more than 4 times oversubscribed demonstrating strong appetite and investor confidence in South Africa with an overwhelming 84% of investors being from the Middle East and Asia.

Three key lessons can be learnt from the South African Sukuk issue.

Firstly, the government was able to diversify its funding sources and tap a new investor base. Prior to issuing the Sukuk, the government issued a dual-tranche conventional bond in July earlier that year, the majority of the investors, 81% to be precise, were from the US and Europe unlike the Sukuk investors who were predominately from the Middle East and Asia. The government was able to tap a new pool of investors and diversify their investor base.

Secondly, the importance of creating a conducive regulatory environment. With the changes being made to domestic legislation, the government was able to issue a Sukuk in-line with the Shari'ah (Islamic law) on the international capital markets.

Lastly, showing that Sukuk are a viable funding tool for infrastructure financing. As stated by the National Treasury, one of the driving factors to issue a Sukuk was to set a benchmark for state-owned enterprises looking for infrastructure funding. As South Africa's infrastructure needs increase with its growing population, the Government needs to consider alternative financial instruments to fund the country's infrastructure needs of which Sukuk are well suited for.

Looking ahead

Sound and stable infrastructure is an important component of economic development as it helps facilitate trade, improves well-being and creates jobs.

With the tightening of government budgets, African governments cannot finance infrastructure development alone and need to explore alternative sources of financing and one way is through leveraging the use of Islamic finance, in particular Sukuk financing.

Having said that, Islamic finance is in no way a panacea but rather an underutilized tool and there is vast potential in mobilizing the industry to help develop the continents skyline. However, the nuances of the continent need to be taken into consideration given the differing financial and legal systems, therefore there is no uniform approach.

The challenge remains to attract foreign investors so policymakers need to prioritize creating an environment that both attracts and protects investors. South Africa is an example of how a Government can overcome these obstacles.

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About the Author

Maram Ahmed is an advisor and researcher with a focus on emerging markets. Maram is currently a Visiting Fellow at SOAS, University of London, a leading institution for the study of the Asia, Africa and the Middle East. At SOAS, Maram teaches Corporate Governance, Finance in the Middle East & North Africa and Islamic Banking & Finance. Maram’s current research interests include sustainable development, governance, humanitarian financing and women’s empowerment. She is recognized as an expert in Islamic Finance and has authored numerous articles in top academic journals.

Gravatar: The MFW4A Secretariat

A message from the Making Finance Work for Africa Secretariat

21.01.2019The MFW4A Secretariat

Dear readers,

On behalf of the entire Making Finance Work for Africa (MFW4A) team, we would like to wish you all a happy and prosperous new year 2019. We would like to take this opportunity to highlight our 2018 achievements, and also to present our program for this new year.

Last year was the beginning of our new triennial strategy 2018-2020. To continue to be the reference platform for advocacy, knowledge sharing and cooperation on financial sector development in Africa, we have identified three key objectives: (i)  to strengthen our value proposition and financial sustainability, (ii) to expand membership and (iii) to sharpen our focus to short, medium and long-term outcomes. Our new strategy has already started to bear fruit with Afreximbank joining the MFW4A Partnership as the first African financial institution.

Our work in supporting a strong and stable African financial sector continued in 2018. MFW4A organized a series of financial sector dialogues in collaboration with the African Development Bank (ADB), covering the five (5) regions of the continent. Those high-level events provided a a platform for the African financial sector to take stock of the progress and identify future priority actions through a common roadmap. Over 130 participants from central banks, ministries, regulators, and the private sector have been mobilized for the first two editions dedicated to West, Southern, and East Africa. Central and Northern Africa financial sector dialogues are scheduled for the first quarter of 2019.

Our work in supporting remittances and diaspora investment led to the delivery of two studies funded by the Migration and Development Fund. The first, “A Systematic Approach to Supporting Diaspora Investment in Africa” led to the design of a toolkit that can be used by a range of stakeholders to undertake develop diaspora investment projects . A second study explored “The Risks and Opportunities of Digitization on the Remittances Market in the WAEMU and CEMAC zones”. Both studies will be published in both English and French in February 2019.

Long-term finance remains a key priority for MFW4A. During the first African Investment Forum (AIF) held in Johannesburg, MFW4A participated as a Knowledge and Research Partner and co-led the Institutional Investors work stream, mobilizing local institutional investors to the forum to discuss issues of the highest relevance, including on investment strategies, de-risking and the regulatory environment.

2018 has also been a year where a new work stream has been introduced. MFW4A launched a Trade Finance initiative with the support of the African Development Bank and the German Development Agency (GIZ), with the objectives of improving market knowledge and capacities of actors, overcoming regulatory obstacles, and reducing risks related to operations with international banks, in order to stimulate trade finance on the continent. Under this initiative and in collaboration with ADB and the International Trade Finance Corporation (ITFC), we delivered a capacity building program intended for 35 African countries and over 500 specialists operating in more than 200 local banks.

Lastly, we will continue to leverage our network to support the data collection process under the Africa Long-term Finance Initiative.  A country diagnostic and a scorecard for Côte d’Ivoire are expected to be completed in 2019.

In closing, I would like to extend my sincere appreciation to all our funding partners, stakeholders and supporters for your unwavering support. We look forward to your continued collaboration.

With our best wishes for 2019.

The MFW4A Secretariat

Toward a deep transformation of the banking industry in Africa

15.01.2019Laurent Gonnet, Lead Financial Sector Specialist, FCI - World Bank Group

This blog was originally published on the World Bank Blogs website.

Newly assigned to Dakar, Senegal, I must, of course, take steps to have water, electricity, internet and a bank account.  For the latter, I chose a large bank for its reputation and its wide network of branches and ATMs.  What follows is not fiction but a reality that I thought had disappeared years ago.  Here is the story.

Arriving at the bank office, I am quickly welcomed by an agent who gives me forms to fill.  I sit in a corner of the agency and start filling the documents: last name, first name, address, phone number, passport number, annual salary, etc.  Very quickly, I realize that all the forms, 8 in total, except a few, ask more or less the same basic information.

After the amazement of such an administrative burden, I stop on a document that presents an offer to subscribe to life insurance.  Surprised, I ask the agent for further information. He explains that this insurance, in fact mandatory, will allow the bank to guarantee itself in case of my death, and there is a negative balance in my account. I propose that, instead of this insurance, my account be simply blocked in case of an insufficient balance, so that the bank is never exposed to such huge risk. I'm retorted that   the insurance will allow the bank to charge any fee after my death, even in case of insufficient balance.  Unstoppable.  Astonishment follows a slight annoyance.

I realize then that, besides the life insurance policy that claims an annual premium in the amount of $ 50, none of the documents the agent gave me indicate the fees and commissions to which I might be subject. I therefore ask what would cost me, on an annual basis, ownership of a current account with a checkbook and a visa card.  We reach very quickly the sum of 500 dollars a year, an amount that I consider totally disproportionate to my needs that would be limited, in practice, to a dozen withdrawals and checks per month.  The annoyance then gives way to a form of misunderstanding mingled with spite.  I decide, in the end, not to open a bank account in Dakar and continue to manage with my US bank account.

An extreme case will you say? Perhaps. But that tends to say it all on the relatively low financial inclusion rate in Africa.  Beyond the anecdote, this little story is a good demonstration that a banking model invented and tested for decades in the West hardly finds its place in this part of the world and that new forms of banking must be found.

The good news is that solutions seem to emerge from the banking world, thanks in particular to the concomitance of three factors:

    Competition from mobile operators.  With their sprawling network of resellers, these operators have grown considerably in the space of a few years, allowing in some countries to exceed the 100% mobile ownership rate. To the initial telephony functions were quickly added the so-called transaction accounts, providing their users with the ability to store, withdraw, transfer money and pay bills electronically, securely and in real time.  But if these new features were primarily intended to eliminate secondary network of recharge cards, they are also found to be the first serious stab in the traditional business of banks.  It seems that still few mobile operators have started moving up the value chain by offering more typical banking financial services such as remunerated savings or credit.  But many operators are thinking about it, and it could come pretty quickly.  The competition might then be particularly tough for banks.

    Regulatory innovation.  Little by little, the central banks are making a revolution.  Traditionally averse to change, however, they are now allowing foundational innovation to emerge.  Modern banking agents regulation (based on the successful agents of mobile operators’ model) or more risk-based KYC/CDD regulations are good examples.  A welcome upgrade the competitive game when one knows all the benefits that the customers could draw from a direct confrontation between banking and mobile operators, two industries with huge appetites and deep pockets.

    Technological innovation. The almost universal use of mobile phones has offered opportunities well understood by bankers. However, in practice, these same banks face particularly heavy ICT constraints, which can be explained by the entrenchment of several decades of internal developments (forming the famous Core Banking System) that makes it almost impossible for banks to design and market products and services in phase with consumers’ new expectations.  Faced with these challenges, second generation Core Banking Systems are about to emerge and with them the promise to finally see the deployment of new banks that would place digital at the heart of their mode of operation and allow a complete democratization of basic banking services (and probably also non-bank).

This conjunction is happening in Africa, in some countries like Angola. The rebirth of Banco Postal is a perfect illustration of the fact that the bank can reinvent itself and set out again to conquer the market.  Through its new offer (Xikilamoney), Banco Postal has by far the most comprehensive range of financial services (including digital financial services and traditional banking services). Thanks to its network of about 200 access points (including branches and kiosks), Banco Postal onboarded already 200,000 customers in just 18 months. In Angola, the three ingredients are present: strong competition from telecom operators, more open banking regulations on the issues of branchless banking and the adoption of a new generation CBS.

Other countries could quickly follow suit, such as Senegal (and other WAEMU countries), where agent banking regulation could change soon.

These country-led developments also align with the World Bank Group’s approach to financial inclusion, particularly its Universal Financial Access (UFA) initiative which goal is that by 2020, adults globally will be able to have access to a transaction account to store money, send and receive payments as the basic building block to manage their financial lives.

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About the Author

Laurent Gonnet joined the World Bank in 2007 as Financial Sector Specialist, after a 10-year experience at the Banque de France as on-site and off-site supervisor. He is leading the policy dialogue with several monetary and financial authorities across the region and contributing to the implementation of several reforms in the banking sectors. He is notably in charge of reforms implemented by Central Banks in West Africa, Egypt, Lebanon, Algeria and Tunisia. In those countries, M. Gonnet led several analytical works (FSAPs, real estate financing, financial stability, financial intermediation) and technical assistance (stress tests, crisis preparedness exercises, banking supervision, etc.). Laurent is graduated from the Economic Science University of Montpellier, the Political Science University of Montpellier and the Business School of Montpellier.

Why Have MFIs in the Arab World Reluctant to Transform?

07.01.2019Karen Beshay, Associate Operations Officer, IFC

This blog was originally published on the FinDev Gateway website.

Some say regulatory issues, others cite fear of mission drift. But all of these can be overcome.

Transformations in the microfinance industry, primarily from NGOs to regulated for-profit financial institutions, have been quite common globally since the late 1990s. In fact, today’s transformed MFIs transact the bulk of all microfinance operations when we measure it by number of clients and portfolio size. MFIs who have pursued transformation have done so for many reasons including improving governance and gaining legitimacy, diversifying product offering and increasing access to capital, which in turn results in greater leverage and thus increased potential outreach.

Despite the many benefits, there have been very few incidents of transformations in the Arab World and the ones we have seen have mostly involved transforming international microcredit programs into registered institutions, with many of them remaining unregulated.

So why have MFIs in the Arab World been reluctant to transform? Simply put, for many, there is little incentive to transform at this point.

We have recently seen a wave of regulatory changes that opened the door for the entry of new for-profit players, beginning in Syria (2008), Yemen (2009), and Sudan (2011), and followed by Tunisia (2011), Palestine (2011), Egypt (2014), and Jordan (2015). These new regulations brought the sector under the supervision of the central bank (Syria, Yemen, Sudan, Jordan, Palestine) or other entities (in Tunisia L’Autorité de Contrôle de la Microfinance, and in Egypt the Financial Regulatory Authority).

In some countries such as Syria, Yemen, and Sudan, the new regulations have allowed transformed MFIs to mobilize savings, a primary incentive for MFIs to consider transformation. In the rest of the region, however, regulations have only allowed institutions to continue providing credit, keeping savings mobilization off-limits. Some of these countries, such as Tunisia, Palestine, and Jordan, have tried to encourage MFIs to transform with other incentives such as increasing the ceiling on microfinance loan sizes for transformed institutions compared to NGOs. However, in other countries, new regulations did not provide any clear benefits to for-profit companies compared to NGOs, but rather – most likely unintentionally – created disincentives through higher income taxes, a doubling of supervision fees and so on, making operations costlier and placing greater limitations on the product offering.

Regulations aside, some of the larger MFIs in the region are reluctant to transform for other reasons.

Many fear the risk of mission drift; that by transforming into a for-profit company, they will be forced to behave like commercial lenders - the same lenders that ignored low-income populations and made it necessary for microfinance NGOs to serve the underserved in the first place.

Others are dissuaded by the costs associated with transformation. These include the cost of valuation, legal fees both for the incorporation into a for-profit company and for shareholders agreement negotiations, taxes on the sale of the NGO’s portfolio to the for-profit company and ongoing income taxes levied on the for-profit company.

And many have staff-related concerns. Institutions transforming into for-profit companies will likely require a different skill-set within their pool of staff and must identify ways to compensate staff for having built up the institution to the point of success where it can become a for-profit entity, and to align staff incentives with the future of the institution.

While these concerns are all of course valid, we must not forget that they can be overcome. There have been many successful cases of transformation in other parts of the world. MFIs who have been able to manage the transformation process effectively have expanded their outreach to more of the un- and under-banked - the essence of the microfinance industry - while also gaining access to capital in the forms of both debt and equity to allow for continued growth. These institutions have also been able to enjoy the benefits of improved governance and ownership structures.

We would love to hear your thoughts as well on why transformations in the Arab region have been fewer than in other parts of the world. What changes would you like to see happen for you to consider transformation of your own institution? Please provide your comments below.

IFC’s and Sanabel’s recent publication, Transforming Microfinance Institutions in the Arab World: Opportunities, Challenges and Alignment of Interest, presents an in-depth discussion of many of the issues presented here.

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About the Author

Karen Beshay is currently an Associate Operations Officer on the MENA Microfinance Advisory program which forms part of IFC's broader Financial Institution Group (FIG). Karen joined the microfinance team in 2012 and has since been working on several advisory projects across  Egypt, Lebanon and Yemen. Karen has also worked on several research pieces in collaboration with Sanabel, the regional microfinance network of Arab countries, on the topics of Risk Management, VSE Lending and transformation. Overall, Karen has five years of experience in development including in microfinance and sustainable business advisory in the Middle East region. Karen holds a Master’s degree in Development Economics from the London School of Economics and Political Science..

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Do migrant remittances contribute to a decline in the level...Hamed Sambo, PhD Researcher, Paris XIII University
How the African landscape could benefit from Islamic FinanceMaram Ahmed, Visiting Fellow, School of Oriental and African Studies (SOAS)

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