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Interoperability of Digital Financial Services in Tanzania

10.04.2017Kennedy Komba, Head of Strategy and Member Relations, AFI

This post was originally posted on the Alliance for Financial Inclusion (AFI) website.

In Tanzania, access to financial services for the unbanked expanded drastically when convenient and relatively cheaper options became available to receive and send money through simple feature mobile phones.

Four mobile network providers were in stiff competition in a market of 39 million registered mobile wallets (this registered wallet number does not include multiple wallet holders nor some of the dormant wallets from providers that did not exclude them after recycling their mobile numbers), 13 million of which were active ("active wallets" refers to the use of a mobile money account at least once in 90 days. This is the total number of all active accounts in the referenced month). This was in October 2014, when three of the four mobile money providers signed on to interoperability and made Tanzania the first country to successfully develop and implement standard business rules for interoperability (Source IFC: Achieving Interoperability in Mobile Financial Services: Tanzania Case Study).

By February 2016, the fourth provider had signed on and Tanzania was a global leader in the interoperability of digital financial services delivered by mobile network providers. How did this happen? This article highlights the key factors contributing to DFS interoperability in Tanzania.

Establishing an enabling environment

A regulatory environment nurturing competition and cooperation provided a foundation for dialogue and engagement around interoperability. The Bank of Tanzania, the country's central bank, played a monitoring role, ensuring that DFS providers offered services in compliance with risk mitigation frameworks (guidelines were issued that emphasized the use of international standards) that supported the dual objectives of financial stability and financial inclusion. This led to policies advocating for non-exclusivity in the use of mobile money agents and ultimately to agent interoperability. However, as the market continued to grow and mature, some market players demanded interoperability to kickstart client uptake, which had not seen rapid growth. Comprehensive interoperability was a clear need.

The Bank had to assume a leadership role in the push for sustainable interoperability. It opted for a market-based approach to interoperability, which was backed by evidence, and began to coordinate the process. It approved a neutral market facilitator, the International Finance Company (IFC) and the Financial Sector Deepening Trust (FSDT) of Tanzania, to facilitate engagement with DFS providers and reach agreement on an interoperable solution.

A market approach works

The IFC facilitated the industry-led interoperability project, with financial support from The Bill & Melinda Gates Foundation and the FSDT. This involved coordinating industry meetings to develop and reach consensus among mobile money providers on business rules and commercial agreements for interoperability and submit them to the Bank of Tanzania for consideration. This exercise began in September 2013 and, after several meetings in which participants reached a greater understanding of the regulatory framework, market demand, payment systems and rule development, consensus was reached. A year later, in September 2014, two of the four mobile network operators (MNOs) signed off on the wallet-to-wallet operating rules, which led to technical arrangements to initiate interoperability. In December 2014, the third MNO came on board. It took another year for the fourth to sign on, and by February 2016, Tanzania was one of the first markets in the world to have full interoperability of mobile money services (Figure 1).

Figure 1: Key Milestones for Mobile Money Interoperability in Tanzania

Other markets could learn lessons from Tanzania's journey. It is worth noting that although Tanzania was well-suited to a market-based approach to interoperability, with its supportive central bank, conducive regulatory framework, and a sufficient level of market competition and maturity, two other factors played an important role: (i) the value proposition for the private sector was taken into account; and (ii) private and public sector dialogue was enhanced through the public policy lens of financial stability and financial inclusion. This helped the regulator balance its dual mandate and ensure financial inclusion initiatives do not compromise financial stability.

The next frontier

Tanzania's interoperability journey is still underway: the market is currently expanding the use case for interoperable services through merchant payments and extending interoperable services beyond MNOs to banks and other players. This will also involve improving the clearing and settlement process, shifting from bilateral arrangements to a multilateral process that includes a switching process. The Bank of Tanzania is continuing to play a monitoring role and provides guidance and direction on a process that is efficient and creates value not only for market players, but also for users and other stakeholders. In the end, this will ensure the best solutions are implemented and satisfy both private sector and public policy objectives-a task guided by the same principles that led to interoperability in the first place.

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About the Author

Kennedy Komba is currently Head of Strategy and Member Relations of Alliance for Financial Inclusion. Prior to this new role which he assumed in April 2016, he was the Senior Advisor of the National Payment System in the Bank of Tanzania. He is an Accredited Fellow of Macro-economic and Financial Management Institute of Eastern and Southern Africa (MEFMI) and a Fellow of Fletcher Leadership School for Financial Inclusion of Turf University, USA. He has experiences in financial inclusion policy, strategies and regulatory frameworks. He was instrumental in leading the development of the Tanzania regulatory framework for the National Payment Systems including electronic money regulations. He also was involved in the development of the Tanzania National Financial Inclusion Framework.

Expanding access to finance for smallholders one lease at a time

27.03.2017Ashley Olson Onyango, Programme Manager, Agricultural Finance

This post was originally posted on the Rural & Agricultural Finance Learning Lab website.

In rural sub-Saharan Africa, working in agriculture tends to be an extremely labor-intensive job with high risk and low payoff. As a result, new generations of farmers and other entrepreneurs are often deterred from pursuing a career in agriculture. This leaves the agricultural industry with ageing farmers and declining agricultural production. One potential solution, however, is the mechanization of farming which can help decrease the need for hard, manual labor, while also improving production, household incomes, and livelihoods. A shift to tractors and other machine-powered equipment is part of a broader strategy to improve rural livelihoods and make agriculture attractive for new generation of farmers.

Although this shift may seem easy, the challenge is that tractors and machine-powered equipment are expensive - and access to finance is frequently cited as a key barrier to increased investment and productivity for smallholder farmers in sub-Saharan Africa. Farmers struggle to mobilize the resources required to effectively invest in their land without additional financial support, but at the same time, lack adequate collateral to access credit from financial institutions.

Financial Sector Deepening Africa (FSDA) and Nathan Associates recently published the Agricultural leasing market scoping study for sub-Saharan Africa, which directly tackles the barrier of adequate collateral. In fact, a key advantage of leasing is that it doesn't require collateral, since the lessor retains ownership of the asset for the duration of the lease contract. That being said, lessors still need to mitigate their risk by taking an initial down payment from lessees. Specifically, "in agricultural leasing, concerns around willingness to pay, crop failure, and asset depreciation all drive up the size of the initial payment required by financial institutions."

The required down payment on agriculture equipment typically varies by region and product. For example, in developed countries the required down payment is generally in the range of 10% to 20%. Compare this to developing countries, where the FSDA study found that in the eight reviewed - Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia - downpayments generally range between 20% to 40% of the value of the asset. This is a threshold that is above what most smallholder farmers can pay - creating a significant barrier to accessing leasing products, which ultimately holds back demand.

One recommendation to overcome this challenge is to establish a fund that would increase market access for financial leasing by reducing the credit risk of leasing companies. For instance, a fund could bridge the gap between what potential lessees are able to pay and what lessor's risk policy deems an acceptable down payment. If the lessee (farmer) can make a 10% down payment, but the lessor requires a 30% down payment, the fund could make up the difference by paying the 20% differential. The 20% would be paid directly to the lessor, so the lessor receives their full 30%. The lessee ends up only paying the ten percent that he or she is able to afford at that time. The 20% paid by the fund becomes a separate loan and with every lease payment from the lessee to the lessor, a percentage of that amount is paid back to the fund to cover the 20% loan.

A potential fund to make lease finance more accessible, as FSDA's report recommends, could address customers' needs for an innovative product that tackles the issue of adequate collateral for financial access. Furthermore, it could address the challenges that suppliers of such financing face by buying down some of the risk and making an entry into this sector more attractive. We might call this a "smart subsidy" that could be transformative if well designed and executed by strong partners (see Inflection Point for context on "smart subsidy").

To bridge the gap of finance and improve rural livelihoods, development financial institutions should ask themselves what role they can play in making this new form of finance accessible to the agricultural sector - promoting growth and mechanization for improved livelihoods through the fund. While leasing finance is just one piece of the puzzle, the country scoping sheds light on how to enter this space given the current state and where are the risks and opportunities.

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About the Author

Ashley Olson Onyango is the Programme Manager, Agricultural Finance at FSD Africa. Ashley has been working in the agricultural finance development sector across sub-Saharan Africa. Ashley previously spearheaded the development of a new lending portfolio with Root Capital, focused on domestic value chains and food security crops. After the launch, she managed the start-up of the portfolio and integration of the new portfolio into Root Capital's lending operations. More recently, Ashley has been consulting in the agricultural finance development sector with a number of clients and has joined the FSDA as a long-term consultant to manage its Agricultural Finance Programme. 

Digital Finance in WAEMU: What’s New?

13.03.2017Estelle Lahaye, Financial Sector Specialist, CGAP

This post was originally published on the CGAP website.

The journey toward financial inclusion in the West African Economic and Monetary Union (WAEMU) has made some interesting strides with digital financial services (DFS), even if the journey continues to be long.

According to the regional Central Bank (BCEAO), during the first nine months of 2015, DFS users made 346.9 million transactions worth $8.5 billion, increasing by 33% and 36%, respectively, compared to 2014. Last year, BCEAO updated its regulation for e-money issuance and distribution that will significantly influence the evolution of the DFS market in WAEMU moving forward.

However, let's not lose sight of the fact that only 13% of the adult population in WAEMU has an account at a formal financial institution, and that when mobile money is added, the rate goes up to 18%. Despite its impressive growth, uptake of DFS across WAEMU has been relatively limited compared to its potential, and mobile money activity remains relatively low. For example, in Côte d'Ivoire, over 50% of registered clients report not having used their accounts within the past 90 days; in Senegal, while at least 80% of people are aware of mobile money, only 8% have used such a service.

Over the past several months, CGAP interviewed representatives of 100-plus organizations in Benin, Côte d'Ivoire, Senegal, Mali and Niger to better understand the market system for DFS in WAEMU. A new CGAP report provides an analysis of key actors in supply and demand, rules (e.g., regulations for e-money, telecommunications, competition) and supporting functions (e.g., agent networks, information providers). It also identifies root causes that explain why the DFS market is currently not serving the needs of low-income populations and opportunities for triggering systems-level change.

So what have we learned?

Regulatory environment. The 2006 regulation for e-money has been an enabling factor for the development of DFS, allowing banks and nonbanks to issue e-money. And so far, most mobile network operators (MNOs) have partnered with banks. With the updated 2015 e-money guidelines, the pathway for MNOs to create e-money-issuing subsidiaries is clearer, and some MNOs are embarking on that path. MNOs are expected to become more independent from banks and flexible in developing their mobile money offerings; as such, the partnerships are expected to focus more on developing second-generation DFS, such as credit, savings and insurance.

That said, some regulatory aspects remain unclear or incomplete, including know-your-customer (KYC) requirements, identification, agent banking regulation and access to the USSD channel. Some of these "gaps" are not just the domain of BCEAO; national telecom authorities, national identification offices and other national authorities are also involved. This will require further consultation and dialogue, as well as careful consideration of market specifics for each of the eight WAEMU countries.

Private sector. A key constraint identified by this study is that many banks, MFIs and even some MNOs are simply not convinced of the "business case" of growing their DFS offerings - they view it as too risky and not profitable enough. Distrust between MNOs and financial institutions (i.e., banks and microfinance institutions) is also impeding "deeper" partnerships that would offer DFS beyond cash-in/cash-out, person-to-person transfer and bill payments. While these are starting to develop in some of the more advanced WAEMU markets, it is still rare for financial institutions and MNOs to view each other as valued partners whom they trust and prioritize in their future growth strategies.

We hope that donors and policy makers, to some extent, will play a stronger role in encouraging providers to adopt a long-term approach to developing DFS as well as develop DFS channels and offerings suited for low-income customers.

Agent networks. Current agent networks without a doubt need to be expanded, both in number and location (in rural areas especially). However, this growth needs to be sustainable to ensure that agents remain active, provide good quality of service and are sufficiently liquid. That requires developing supporting infrastructure, such as telecom network coverage, and partnerships between MNOs and actors that can provide financial services to agents. It is also critical to provide training to help agents grow their businesses (and remain active) and monitoring to ensure their compliance with KYC and Anti-Money Laundering/Combating the Financing of Terrorism requirements.

Information. Up-to-date, publicly available information on both demand and supply of DFS in WAEMU is relatively limited, as is knowledge on what DFS offers have worked (or not) and why. A rapidly evolving market and an unwillingness by some actors to share data are at play. Limited resources and the capacity of actors to conduct, analyze and publish such research also contribute to this lack of information. Furthermore, even when such information is available, it may not always be widely communicated or presented in useful forms.

Some efforts are underway in a few countries to remedy to this challenge. Future information collection and knowledge-sharing initiatives should consider presentation and communication aspects as early on as possible, and as equally important to the actual content.

Political will. Lack of sufficient infrastructure and education in general are some of the most commonly cited constraints to greater DFS uptake. However, the root cause of many of these seems to be national political will and capacity to build the needed infrastructure (and to incentivize MNOs to deploy telecommunications infrastructure in rural areas), operate an educational system that ensures at least a minimum level of schooling and literacy of the entire population, and incentivize digital payments.

We hope to see national governments, in collaboration with BCEAO, prioritize these issues. The regional financial inclusion strategy developed by BCEAO offers a good framework for such efforts. Donors and development actors can support the implementation of this strategy through funding, technical assistance and encouragement to government partners to prioritize this work.

We need to push the boundaries for DFS to sustainably develop and continue to advance financial inclusion WAEMU. This report (in English and French) provides detailed information and analysis for market actors and donors to take on and work toward achieving this goal.

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About the Author

Estelle Lahaye is a Financial Sector Specialist for CGAP, and leads experimentation and research activities to help create an effective and innovative ecosystem for digital financial services in WAEMU. She also contributes to CGAP's research agenda on how donors and investors can facilitate the development of inclusive financial markets.

Message from the MFW4A Partnership Coordinator

30.01.2017David Ashiagbor

Dear Readers,

Let me begin by wishing you all a very happy and prosperous 2017, on behalf of all of us at the MFW4A Secretariat.

2016 was a rewarding year for MFW4A. We were proud to host the first Regional Conference on Financial Sector Development in African States Facing Fragile Situations (FCAS) in Abidjan, Cote d'Ivoire, jointly with the African Development Bank, FSD Africa, and FIRST Initiative. The conference attracted some 140 policy makers, business leaders, academics and development partners from over 30 countries, to discuss the role of the financial sector in addressing fragility. The conference has already led to several initiatives by MFW4A and our partners in the Democratic Republic of Congo, Liberia, Sierra Leone and Somalia. We expect to build on this work in 2017.

Our support to the Conférence Interafricaine des Marchés d'Assurances (CIMA), the insurance regulator for francophone Africa, helped them to secure financing of EUR 2.5 million from the Agence Française de Développement. The funding will help to expand access to insurance in a region where penetration rates are less than 2% - well below the average for the continent. We worked closely with a number of our funding partners to help define their strategies in Digital Finance and Long Term Finance. These results are a clear demonstration of how the Partnership can directly support the operations of its membership.

With the support of our Supervisory Committee, we took steps to ensure the long term sustainability of the Partnership. The approval of a revised governance structure which fully integrates African financial sector stakeholders, public and private, was a first critical step. The ultimate objective is to expand membership and build a true partnership of all stakeholders in Africa's financial sector.

2017 will be a year of transition for the Partnership. It marks the end of MFW4A's third phase, and the beginning of its transformation into a new, more inclusive partnership, with an expanded membership. We will focus on revamping our value proposition to provide more focused, needs based services with the potential to directly impact our current and potential membership. In so doing, we hope to consolidate MFW4A's position as the leading platform for knowledge, advocacy and networking on financial sector development in Africa.

In closing, I must, on behalf of all of us at the MFW4A Secretariat, thank all our funding partners, stakeholders and supporters, for your constant support and encouragement over the years. We look forward to working together to strengthen our Partnership.

With our best wishes for a happy and prosperous 2017,

David Ashiagbor
MFW4A Partnership Coordinator

What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 6

08.11.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

In June 2016, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the Making Finance Work for Africa Secretariat (MFW4A), the African Development Bank (through its Transition Support Department, Financial Sector Department and the Initiative for Risk Mitigation), FSD Africa and FIRST Initiative also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this last instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at the different innovative solutions, instruments and other opportunities to strengthen the capacity of financial institutions operating in fragile contexts in Africa.

In case you missed it, you can read parts One, Two, Three, Four, and Five.

Strengthening Capacity

Mr. Cedric Mousset of the World Bank stressed that capacity is a big constraint in fragile countries and there are no easy solutions. Capacity building should be done when there are incentives for financial institutions to reform such as incentives to leverage market opportunities and improve markets. The supervisory and regulatory framework is key as it allows for adequate competition, restructuring, and the adoption of international standards such as the Basel standards.

Mr. Paul Musoke of FSD Africa stressed the importance of developing scale and sustainability in the financial system in Africa. To do so, his institution favours a catalytic strategy. In particular, FSD's Market Building Approach assesses the environment, looks at the core where demand is meeting supply, assesses the market failures in the supply side and builds capacity within the supply side. Such an approach requires stakeholders to look at support functions such as information, infrastructure, and skills development. It also requires a good grasp of rules such as informal norms, standards, laws, and regulations. Its goal is to build a sustainable market that continues to operate once FSD exits and that crowds-in other players.

Instruments available from development partners

Ms. Kilonzo of the African Development Bank (AfDB) noted that the landscape of African finance is dominated by small and fragmented financial systems with limited access to basic financial services. The AfDB's priorities include not only broadening access to finance but also supporting "green" growth, infrastructure development, regional financial integration, governance, entrepreneurship and innovation, and financial skills development. These priorities can be articulated in the Bank's new "High Fives" areas-Light up and power Africa, Feed Africa, Integrate Africa, Industrialize Africa, and Improve quality of life for the people of Africa.

Finance is an integral part of the Bank's strategy and is based on two pillars: access to the underserved, youth and women (Pillar I) and broadening and deepening Africa's financial systems (Pillar II). The Bank's operations and products cater to a diverse set of financing priorities, including financial institutions, trade finance, and financial markets.

Mr. Nikolaos Milianitis of the European Investment Bank (EIB) shared that the EIB has EUR1 billion per year in new activity in Africa, covering both the public and private sectors through a range of instruments such as loans, equity, guarantees, and technical assistance. The EIB brings best practices from its worldwide operations and a particularity of its operations is that they all include a sectoral expert and a banking expert.

Mr. Musoke discussed FSD's Market Systems Approach which focuses on building services that are critically missing: (i) executive coaching so as to assess environment and respond to environment; (ii) e-learning as a cost effective education tool and as a way to tap experts, working with content providers and platform deliverers, and learning for financial institutions; (iii) data analytics so as to use information that is available e.g. financial diaries in Kenya. FSD tries to develop local supply so banks can tap into these services and hopefully think differently about their markets.

Change management is critical for financial sector development and FSD Africa identifies banks that are ambitious about serving the under-banked and helps them assess existing constraints and solve them. To make the change, it offers funding, research, and technical assistance over a 4-5 years period. For instance, FSD is working on establishing a Financial Frontiers Challenge Funds to identify 23 financial institutions, including in fragile states, so as to support an analysis of the environment, help them develop proposals that can be funded for GBP 500,000.

Finally, Mr. Mousset flagged the Conflicted Affected States in Africa (CASA) initiative through which the IFC provides assistance to fragile African states to rebuild their financial sector and improve the business environment.

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You can download all presentations on the conference website.

You can view a selection of photos here.

You can watch the conference in our YouTube channel here.

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