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Better Regulations Can Spur Agent Banking in WAEMU

11.04.2018Corinne Riquet, Financial Sector Specialist, CGAP

This blog was originally published on the CGAP website.

The West African Economic and Monetary Union (WAEMU) has taken significant steps toward financial inclusion in recent years. Mobile money has driven much of this progress under the aegis of regulations that make it possible for mobile network operators to offer e-money services and expand their agent networks and the reach of their services. However, WAEMU’s regulations make it difficult for banks and microfinance institutions to expand their own agent networks and contribute fully to financial inclusion. While the number of mobile money accounts and agents in the region roughly doubled between 2014 and 2017 (to 36.4 million and 183,000, respectively), banks and microfinance institutions have lagged behind.

Even in the age of mobile money, these traditional financial institutions have an important role to play in expanding low-income customers’ access to financial services. For example, as Will Cook points out in his recent CGAP blog post, bank accounts in Kenya once again outnumber mobile money accounts – by 30 percent. Alongside partnerships with mobile money providers, a rise in agent banking has contributed to this increase. In 2016, 17 commercial banks developed agent banking and contracted over 40,000 agents. The Central Bank reported that agent banking saw 55.8 million transactions in the first quarter of that year, compared to 10.3 million in the same period the year before. Kenya’s regulators enabled this kind of growth by adopting a risk-based approach when defining the country’s agency banking regulatory framework in 2010 and integrating provisions for consumer protection.

What will it take for WAEMU regulators to similarly unlock the potential of banks and microfinance institutions to drive financial inclusion for the region’s 50 million people living in poverty?

[In November 2017] CGAP published a regulatory diagnostic of digital financial services in Côte d’Ivoire, which has the same agent regulations as the other WAEMU member countries (Benin, Burkina Faso, Guinea-Bissau, Mali, Niger, Senegal and Togo). We found that WAEMU recognizes three types of agents and that the regulations surrounding them contribute to disparities among different types of institutions (banks, nonbank e-money issuers, microfinance institutions, etc.):

  • E-money agents. E-money agents may conduct marketing activities and supply services related to e-money, including account enrollment, cash-in and cash-out and payments. Current regulations provide for a two-tier system of primary agents and subagents (or “distributors” and “subdistributors,” as they are called in the regulation), who act under the responsibility of the e-money issuer. Retailers and other registered businesses, microfinance institutions, the post office and other nonbank financial institutions are permitted to serve as primary agents. These agents may outsource to other registered businesses who act as subagents. These rules have allowed mobile network operators to deploy large agent networks in the eight WAEMU countries.

  • Rapid money transfer agents. Another regulation enables banks, nonbank financial institutions and microfinance institutions to provide over-the-counter transactions, or “rapid fund transfers,” through retail agents called “subagents.” Permitted transactions are limited to real-time transfers that are performed over the counter at an authorized provider or agent and do not involve any bank or e-money account of either the sender or recipient. These providers act under the responsibility of a financial institution and are not allowed to collect funds for deposits for any purpose other than over-the-counter transfers (unless they are microfinance institutions). The best-known of these over-the-counter providers is WARI, which has large networks of subagents in most of the WAEMU countries.

  • Banking agents. Beyond e-money and over-the-counter transfers, the scope for using agents is unclear. The rules that do exist are highly restrictive for banks, and there is no explicit framework for microfinance institutions. Banks are authorized by the banking law and a 2010 instruction from BCEAO (the common central bank for the WAEMU region) to use agents called Intermédiaires en Opérations de Banque (IOBs). An IOB acts under a mandate assigned by a bank, which may include opening accounts and taking deposits. Each IOB is required to obtain approval from the Ministry of Finance, on the advice of BCEAO. It is also subject to fit-and-proper standards – a financial guarantee whose level depends on the nature of the mandate and regular reporting requirements. The IOB model did not arise for the sake of financial inclusion but rather, as a business niche for intermediaries operating within the traditional banking sector comparable to an insurance agency. As a result, since the introduction of these rules in 2010, BCEAO has approved and registered only six IOBs, and two are authorized to just collect deposits.

While regulations on e-money agents have greatly expanded the reach of mobile money, those surrounding agent banking appear too restrictive for the banks and are nonexistent for the microfinance sector. This creates a competitive disadvantage for traditional financial services providers to make use of digital channels in expanding their reach and relevance. Uniform, or at least harmonized, rules across the board for e-money, over-the-counter transactions and banking agents would be a big step in the right direction. Any new framework should provide a comprehensive and proportionate set of risk-based rules on due diligence, supervision, internal control and subagents. And special consideration should be given to replacing or revising IOB rules to support a more flexible agent banking approach.

More harmonized rules around agent networks would ensure a level playing field for all financial services providers to seize the opportunities presented by digitization to reduce cost, increase scale and expand financial inclusion.

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About the Author

Corinne Riquet is an independent microfinance consultant and has worked in several African countries since 2001. She has advised a range of clients, especially MFIs and funders on organizational audit practices, business plan development, appraisals, designing financial service projects in rural areas, and evaluating and defining national microfinance strategies. Since 2002, she has been a resource person for CGAP's MFI Capacity Building Program in Francophone Africa (CAPAF). At CGAP, she has participated in several train-the-trainer seminars in the capacity of Supervisor. Corinne, a French national,  has been living in Côte d'Ivoire for the past 24 years. She is bilingual (French and English) and holds a Master's degree in Developmental Economics from CERDI, University of Clermont Ferrand, France.

Are Banks Necessary? And other Questions

03.04.2018Tokunboh Ishmael, Co-Founder and Managing Director, Alitheia Identity

This blog was originally published on the Medium Website.

Asking this question will no doubt raise eyebrows and much consternation, especially in Nigeria where Alitheia Identity invests in financial services and financial technology aka Fintech. The question is meant to shock banks to get off the fence and into action.

Bill Gates is famously reported by the Economist to have said ‘Banking is necessary, banks are not.’ This quote resonates with my vision of retail banking in a ‘future’ that seems to have already arrived. The retail bank of the future will be ubiquitous, contextual, social and invisible. It will provide personalised services seamlessly/invisibly, much in the same seamless way that Uber receives payments from customers today. Invisible payments will become the norm where customers will walk into certain locations (off and on-line) select or be prompted to enjoy offers on products and services, and have payments automatically deducted. In this regard, the retail banks will be entities that provide non-banking services with embedded banking services. It will be wherever and whenever. Providing payment, savings and credit services in context with the customers’ needs, wants, behaviour and footprint in the driving seat. Amazon has led the foray into this ‘future’ by opening its first checkout-free store.

Currently, entities that are at the vanguard of developing these invisible payments are not traditional banks. They are technology companies such as Amazon and Google. It is widely believed that banks have not been quick to push these technologies for fear of cannibalising their credit and debit card products. Although, this may seem to spell doom for incumbent banks as these seamless technologies enjoy wide adoption, in my view it is unlikely that entities like Google and Amazon will want to completely take over the business of banking, and its attendant regulatory and compliance headaches. Instead they may wish to partner and offer their technologies within a financial services ecosystem. Such an ecosystem would have the retail bank of the future as a platform with incumbent banks at the core providing banking ‘plumbing’ as a service and partnering with Fintech or technology challengers to provide the personalised and contextual experience that customers have come to expect.

Question: Are Nigerian banks ready or preparing for this new reality — a shift from the traditional integrated end-to-end model to a modular plug-and-play model?

It is no surprise that technology shifts will be at the heart of retail banking’s transformation over the next ten years just as it has been over the past ten when the word and concept of digital banking began to gain prominence. However, to date, the use of digital technologies has been majorly focused on automating mundane tasks, and providing shiny new interfaces on old dated banking legacy systems. The retail bank of the future will not merely layer digital interfaces on to existing systems, it will have a digital core upon which it will provide a rich customer experience. To achieve this, software developers, data scientists and design professionals will play a larger role in the management teams and boards of the banks of the future. Their skills will be essential to shift from the emphasis on automating processes to outcomes that delight with a greater focus on customer needs based on insights from treasure troves of customer data.

Question: Have banks started broadening their employee engagement strategies to attract/keep the purveyors of these new skills?

Banks that are still focused on shiny new interfaces and lacking the requisite design/data skills are not at the start line let alone in the race for retail customer growth and stickiness.

The main technologies that will play a key role in the development of the retail bank of the future are Deep Learning and Artificial Intelligence, which will enable the mining of customer data (from both non-financial and financial entities) to set rules based on insights from customer preferences and behaviours. This in turn will enable providers to make informed recommendations for products and services and take pre-determined actions with customer permissions. The winning ‘banks’ in this new world will intelligently use all the information that they have about customers to ‘make life possible and easier’…possible to employ financial services to live life to its full potential, in whatever way the customer chooses to define ‘full’. Smart banks will leverage this data and a customer’s social capital to determine its risk appetite for that customer and how best to use the customer’s social network to market its services. In other words, demand and supply for financial services will emanate from and be fuelled by a customer’s relationship with a non-financial entity and the customer’s social interactions.

On the customer side, the pervasive use of ‘wearable technologies’ and the ‘Internet of Things’ will literally turn the customer and his environment into the ‘branch’ for a personalised and contextual service. The implication of this will be a re-imagining of bank branches and their function. This is already playing out with the reduction of bank branches globally. That said, bank branches will not be completely eliminated but redesigned as places that attract customers to experience their ‘bank’ in a new and modern way.

Question: Are Banks Fintech ready? Are we all ready for this new reality?

The move is inevitable, standing still is actually walking backwards and no one can afford to do that.

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About the Author

Tokunboh Ishmael is an accomplished and experienced private equity investor with a proven track record. She is Managing Director and co-founder of Alitheia Capital (www.thealitheia.com) In 2015, she co-founded Alitheia Identity (www.alitheiaidentity.com) a fund manager that invests in high growth small and medium enterprises (SMEs) with significant opportunity to grow profitably and deliver above-market returns. The firm does this through a proactive approach to funding businesses led by female founders and co-founders towards ensuring greater participation of women at at all levels from boardroom to factory floor. Tokunboh is a CFA Charterholder, corporate financier and M&A banker historically having worked on over $5.6 billion M&A deals across the US, UK and Africa.

Solving the Puzzle of Responsible Exists in Impact Investing

26.03.2018Hannah Dithrich, Research Associate, The Global Impact Investing Network (GIIN)

This blog was originally published on the Center for Financial Inclusion (CFI) website.

A responsible exit lays the foundation for long-term impact, and requires considerations as early as due diligence

Impact investors are motivated by two primary objectives: to generate a financial return and to create positive social or environmental impact. But how do they balance these dual goals throughout the investment process, and specifically at exit? It’s no easy feat.

Investors must consider what happens to impact when they exit an investment. For example, if a company received critical capital and resources from an investor, will it still be equipped to succeed and continue its mission when that investor exits? What if an investor sells her shares to a more commercially-minded buyer who deprioritizes the company’s impactful or sustainable practices?

In financial inclusion investments, the possibility of mission drift after exit can have real implications for impact. For example, if a microfinance institution is acquired by a firm with little experience with underbanked customers, it could increase loan sizes beyond what clients are able to pay back, ultimately leading them into cycles of debt. Impact investors seek to mitigate such risks by exiting their investments responsibly.

A 2014 paper called The Art of the Responsible Exit in Microfinance Equity Sales, by CFI and the Consultative Group to Assist the Poor (CGAP), explored the topic, outlining four decisions that microfinance equity investors can consider: i) the timing of their equity sale; (ii) buyer selection; (iii) governance and the use of shareholder agreements; and (iv) how to balance social and financial factors across multiple bids for their equity. Later this spring, the authors will publish a follow-on paper with guidance for all financial inclusion investors, beyond just those of microfinance institutions.

This year, the Global Impact Investing Network (GIIN) published Lasting Impact: The Need for Responsible Exits, a study that draws insights across sectors and asset classes that can be applied to financial inclusion investments. To produce this report, my colleagues and I interviewed over 30 leading practitioners, and found that investors plan for a responsible exit even before the investment is made. They lay the foundations for long-term impact throughout all stages of the investment process, from due diligence and capital structuring to exit.

During pre-investment due diligence, investors seek out companies or projects that present few risks to mission drift down the line – such as those with inherently impactful business models and those whose founders have a strong commitment to impact. They note that companies with impact ‘baked in’ to their business models face few tradeoffs between financial and impact objectives, so are unlikely to deviate from their mission. The question of ‘whom to exit to’ is key – echoed in CGAP and CFI’s paper – and investors note that they consider this during due-diligence, looking at likely exit options, which often depend on companies’ plans for growth. Annie Roberts of Open Capital Advisors noted that “if the planned exit for a given business is to a large strategic [buyer] that might not share the same impact motives, the investor takes this into account when deciding whether to make the investment in the first place.” CGAP and CFI’s paper also notes that investors typically “plan their exits before they enter”.

Once ready to deploy capital, investors can structure investments to help the company grow sustainably, without jeopardizing impact. Return expectations and structuring aspects like repayment timelines or holding periods and ownership stake in the company can all form part of a responsible exit strategy. For example, while equity investments can allow for more active involvement, they also tend to have relatively short time horizons (a 3-4 year holding period for a typical 10-year fund, for example) and growth expectations that could lead companies to prioritize expansion over sustainable practices. Debt investments, on the other hand, can be structured with flexible repayment schedules that avoid the pressure for rapid growth. Tying some portion of payments to revenue can free up needed cash for companies with variable cashflows, while also enabling investors to participate in a company’s success.

Investors can also use shareholder agreements and other structuring documents to solidify the company’s mission. Grassroots Capital’s concept note on “’Hardwiring’ Social Mission in MFIs” shows how anti-dilution clauses, dual share structures, and golden shares can help preserve a company’s integrity or keep key decisions in the hands of mission-aligned founders. CGAP and CFI’s paper echoes this, with the example of Aavishkaar-Goodwell’s exit from Equitas. Equitas had a majority independent board (which could reject share sales resulting in over 24 percent ownership), shareholder agreements that set a cap on ROE, and commitments to donate 5 percent of its profits to charity. These governance clauses helped create a “self-selecting pool of potential investors”.

During investment, investors can instill positive practices and corporate governance policies that will last through changes in ownership. For example, investors can work with company management to improve governance policies like adhering to SPI4 standards, which assess an institution’s social performance, in the hopes that sound practices will continue through changes in ownership.

The exit itself, of course, is also key. Whether exiting through a strategic sale, to a financial buyer, or through an IPO, investors can seek to exit at a time when the company is at a stable stage in its growth, and can benefit from another investor’s capital or resources. For example, the GIIN’s paper profiles LeapFrog Investments, which felt it was time to exit its investment in a Ghanaian life insurance company called Express Life once it saw the company growing steadily and in need of growth capital beyond what LeapFrog could provide.

When it comes time to exit, though, how do investors know if they’re selling to a follow-on investor that might later take the company in a different direction? CFI and CGAP’s paper highlights the importance of buyer selection, and the GIIN report shows how investors identify buyers that are aligned with the company’s business model or mission. For example, LeapFrog seeks buyers that recognize the commercial value in serving low-income consumers, as well as the impact inherent in these business models. It sold its stake in Express Life to Prudential Plc, which sought to establish a presence in Africa and understood both the value proposition and the impact created by providing critical financial services to low-income consumers.

This research can guide investors – those focused on financial inclusion and those targeting other themes – in sourcing, structuring, managing, and exiting investments to optimize for long-term positive outcomes. As the industry continues to mature, investors will further develop strategies for responsible investments and responsible exits that result in lasting impact.

To read more on the GIIN studies about Africa, you can download the landscape of impact investing in Southern Africa, East Africa and West Africa.

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About the Author

Hannah Dithrich conducts research at the Global Impact Investing Network (GIIN) to fill critical knowledge gaps in the industry and improve practitioners’ approaches. Hannah is a former Fulbright Scholar to Malta where she worked with the United Nations Refugee Agency, and has extensive background in microfinance at Grameen America and in research at a boutique fund of funds focused on emerging markets. She holds a Bachelors of Arts degree in International Relations from Pitzer College.

Mining the gap: Financial inclusion and gender

26.02.2018Brittney Dudar, Master's Student, University of Toronto

This blog was originally published on Cenfri website

The 2014 Global Findex Report identified that in developing economies, women are 9% less likely to be formally banked than men, with 59% of men and 50% of women having bank accounts. 

The financial inclusion community is actively addressing this gap, but there is limited data available on the gender dynamics of financial inclusion that can offer insights into how to address it. However, there are some data sources that shed light on this problem and offer insight into which interventions, products and services may be particularly effective in improving women’s financial lives across the developing world, where sizable gender gaps in financial inclusion prevent women from full economic participation.

Starting with sub-Saharan Africa, this blog is the first in a series that explores financial inclusion and gender dynamics emerging from our research and the gaps that future research needs to consider.

Figure 1: Access to formal and informal financial services | Source: FinScope Kenya 2016, FinScope Rwanda 2016, FinScope Tanzania 2013, FinScope Uganda 2013

In sub-Saharan Africa (SSA), 70% of women are financially excluded. More women access informal financial services in SSA than men, with 26% of women saving informally versus 22% of men. Men access more formal services, with 13% of women saving formally compared to 18% of men.

FinScope data across Kenya, Rwanda, Tanzania and Uganda in Figure 1 below shows that women consistently have lower access to formal financial services than men. This gap is particularly pronounced in Kenya, where women’s access to informal financial services is 18 percentage points higher than men’s.

Saving informally is not necessarily a bad thing. However, there is evidence that the informal savings mechanisms that women have access to are not necessarily meeting their needs. A study in Kenya by Dupas & Robinson (2013) provided randomised access to non-interest-bearing bank accounts among two types of self-employed individuals in rural Kenya: market vendors (mostly women) and men working as bicycle taxi or boda bodas. Despite large withdrawal fees, the researchers found that a substantial share of women used the accounts, saved more and increased their productive investment and private expenditures. There was no impact for male bicycle-taxi drivers. These results suggest that extending simple banking services to women can have an impact on women’s financial inclusion at a low cost to financial service providers (FSPs), especially compared to offering credit. However, the sample size in this study was small, and more research is needed to explore beyond the two specific types of income-earners analysed in the study.

While savings and credit have been explored to some degree, there has been limited research on insurance and the difference in risk needs between women and men. One study that offers insights is from Delavallade et al. (2015). In the study, male and female farmers in Senegal and Burkina Faso were offered a choice of weather index insurance or three different savings devices:

  • An encouragement to save for agricultural inputs at home through labelling
  • A savings account for emergencies that was managed by the treasurer of a local ROSCA or farmers’ group
  • A savings account for agricultural input investments that was managed by the same treasurer

The study found a 30% stronger demand among men for weather insurance than among women, and among women a stronger demand for emergency savings. The demand for emergency savings could reflect the increased risk needs among women for health and childcare-related expenses. This, in turn, limits their demand for agricultural insurance coverage. For policymakers and/or FSPs trying to drive the uptake of weather index insurance products, a better approach for marketing may be to combine it with health or other emergency insurances.

One of the often-cited difficulties for understanding why women are less served than men is the available gender data. While more sex-disaggregated data is needed, it also needs to be relevant for the questions FSPs and policymakers have. For example, there are many studies on women, but for them to be relevant, behaviour needs to be compared across men and women to provide counterfactuals to interpret the insights.

Prioritising the collection and analysis of this data requires a behavioural change on the part of researchers and FSPs alike. Some central banks, such as the Bank of Chile, have already been focusing on collecting and analysing sex-disaggregated data to better serve clients and unlock new markets.

i2i is currently looking at what behavioural interventions are particularly effective in increasing the uptake and usage of financial services for women. Stay tuned for more on this work. 

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About the Author

Brittney Dudar is a second year student in the Master of Global Affairs program at the University of Toronto’s Munk School of Global Affairs. Prior to Munk, Brittney worked in the UK at a technology incubator where she led an educational program for female technology entrepreneurs. This past summer, Brittney spent her internship working at The Centre for Financial Regulation and Inclusion in Cape Town where she investigated gender differences in access to financial services. Her interests lie at the intersection of innovation, development and gender equity.

Message from the MFW4A Partnership Coordinator

12.01.2018David Ashiagbor

Dear Reader,

As we begin 2018, I would like to wish you all a happy and prosperous New Year on behalf of all of us at MFW4A.

2017 was a pivotal year for us. We began our transition to a more inclusive Partnership with the integration of African financial sector stakeholders into all levels of our platform.  This new phase also includes a revamped value proposition designed to deliver sharper outcomes.

Our work in 2017 strengthened MFW4A’s position as a leading and independent voice on financial sector development in Africa. Mobilising domestic capital for long term investment was a focus for us. We brought together African pension funds, regulators and development finance experts in Abidjan in November, to identify options and instruments to leverage Africa’s growing pension assets for investment in infrastructure, agriculture and affordable housing. A task force was established to follow up on the meeting’s recommendations, which will continue to guide our work in this area. 

A notable outcome in 2017, was the approval of a $3 million Line of Credit to the Union Trust Bank in Sierra Leone, by the African Development Bank (AfDB) in September 2017, following the Conference on Financial Sector Development in African States Facing Fragile Situations co-hosted by MFW4A in June 2016. Another was the resolution taken by Governors of African central banks and Senior officials of international financial institutions, to strengthen supervision and solution plans for Pan-African banks at the ‘’Cross-Border Banking and Regulatory Reforms in Africa‘’ conference, jointly organized with the International Monetary Fund (IMF) and the Basel Committee for Banking Supervision (BCBS) in Mauritius.

Our work in support of a strong and stable African financial sector will continue this year, with national and regional Financial Sector Dialogues in selected regions. These high-level events will provide a platform for African financial sector stakeholders to assess the progress of ongoing reforms in their respective regions and identify future priorities. We will also launch a new programme on Trade Finance to help fill existing knowledge and skills gaps through research, capacity building and advocacy efforts. A Long-term Finance initiative expected to lead to the establishment of a scoreboard that provides comparative indicators of the level of development of long-term finance markets in Africa, will also be launched, in collaboration with AfDB and GIZ.

We will continue to support efforts to develop and implement financial risk management solutions in the agricultural sector while promoting an enabling environment for digital finance. Other activities include research to support diaspora investments and remittances as well as capacity building programmes in our SME Finance and Housing Finance workstreams.

We look forward to your continued support and collaboration.

With our best wishes for a happy and prosperous 2018.

David Ashiagbor
MFW4A Partnership Coordinator


ABOUT THE AFF

What do renowned economists, financial sector practitioners, academics, and activists think about current issues of financial sector development in Africa? Find out on the blog - and share your point of view with us!

LATEST POSTS

Better Regulations Can Spur Agent Banking in WAEMUCorinne Riquet, Financial Sector Specialist, CGAP
Are Banks Necessary? And other QuestionsTokunboh Ishmael, Co-Founder and Managing Director, Alitheia Identity
Solving the Puzzle of Responsible Exists in Impact InvestingHannah Dithrich, Research Associate, The Global Impact Investing Network (GIIN)

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