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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.

The story of inclusive banking

25.10.2016Prof. Hans Dieter Seibel, Professor Emeritus, Cologne University

First published in the European Microfinance Platform Autumn 2016 Newsletter

In 1963 I went to Nigeria to seek the indigenous roots of what I expected, alas, to become the leading industrial nation of Africa. In my interviews with workers about their saving behavior, I found that many saved in a saving club, called esusu in Yoruba. I learned that the esusu dates back to the 16th century when it was carried by Yoruba slaves to the Caribbean where it is still widespread.

This was my first encounter with informal finance: savings-led! Later in Liberia I came across similar indigenous cooperatives in all 17 ethnic groups, including savings and credit groups and working groups as well as similar community-based arrangements. In towns, rotating savings groups predominated; in villages where regular incomes were rare people formed credit funds (ASCAs), with small, mostly weekly equity contributions - without a gender bias. They survived the civil war and are now, half a century later, to be included in an IFAD project.

With the ASCAs in Liberia I felt at home: Urmitz is everywhere. Urmitz is my home village where, in 1889, some 15 villagers formed a self-help group. During the same year a credit cooperative law was enacted, the group joined the Raiffeisen movement, kept growing, and eventually, in 1934, came under the banking law: as a Raiffeisen bank.

This experience inspired me, from my new base in Princeton NJ, to submit a proposal to USAID to help build a grassroots financial system on indigenous foundations. Unfortunately, the proposal, in 1969, was a few years early; it was only in 1973 that USAID sponsored the Spring Review on Small Farmer Credit, a scathing report of targeted credit and credit-driven agricultural development banks (AgDBs).

From microcredit to the microfinance revolution

I then watched with astonishment the rise of the microcredit movement, entering into the void left by declining support to AgDBs. For the new credit NGOs suffered from similar flaws as the AgDBs: donor dependency, credit bias, lack of self-reliance and profitability, and the absence of appropriate regulation and supervision. And they added a gender bias.

Recognizing these deficiencies led to a paradigm change around 1990, the "microfinance revolution", in which two of the authors were involved (also in coining the new term, microfinance). This paradigm shift spurred the reform of existing, and the creation of savings-led new, MFIs, among them inclusive (micro) finance banks.

Two centuries of inclusive savings and cooperative banking: the German experience

This paradigm change has a long prehistory. Since the 17th century, Europe experienced tremendous increases in poverty, creating new displacements and upheavals: traditional safety nets broke down, mass poverty spread. In Germany, preceded by pawnshops, widows'- and orphans' funds, a new breed of local institutions began to evolve around 1800: savings funds (Sparkassen) placing the poor at the center: foremost as savers. The Sparkassen offered special incentives to the poor: free doorstep collection services and stimulus savings interest rates. Their numbers and funds increased rapidly, enabling them to extend their outreach and offer credit to "the industrious and enterprising", such as craftsmen. From early on, they thus were inclusive, with services to the poor, non-poor, and eventually SMEs and the city or district for community investments. Two centuries later, Sparkassen serve >40 million customers (50% of all residents of Germany), with €1.2 trillion in assets (2015).

A different history of microfinance started around 1850 with the development of self-help groups (SHGs) - savings and credit associations, owned and governed by their members. The first urban SHG was initiated by Schulze-Delitzsch in 1850, the first self-reliant rural SHG by Raiffeisen in 1864, soon organized in separate federations of respectively Volksbanken and Raiffeisenkassen (merged only in 1974). After 160 years of evolution, they now serve >30 million customers (including 18 million members), and €800 billion in assets (2015).

The savings and cooperative banks are two of three pillars of the German banking system, providing inclusive universal banking services to all segments of society, including MSMEs. Self-organized federations, central funds and auditing apexes, and appropriate regulation and supervision, have played crucial roles in their development. Government has been kept at bay. Ultimately, their strength lies in the mobilization of local savings for the local economy: the foundation of their crisis resilience.

What role for government in cooperative banking?

The case of India and Vietnam Since around 1900, the German credit cooperative model has spread around the world. In two of our case studies, India and Vietnam, we examine the role played by the state in that process. In 1904, the British Raj, inspired by Raiffeisen, introduced the Co-operative Credit Societies Act of India. By the mid-1920s, this had given rise to some 50,000 self-reliant credit cooperatives, backed by a network of cooperative banks. But ultimately, the Indian state governments played a destructive role: by taking over the operations of the cooperatives rather than providing a regulatory operating framework. By 2006, more than half of the 106,000 credit societies were insolvent, and more than one-quarter of the 1,112 cooperative banks reported losses. Reforms are struggling: of a sector which is too big to fail and too sick to heal.

Our contrasting story of Vietnam starts with the collapse, in the 1980s, of the socialist command economy and its cooperatives. In the early 1990s, the government launched a fresh credit cooperative initiative as part of a market economy, based on the Raiffeisen model. These People's Credit Funds (PCFs) have become one of the most impressive credit cooperative movements. PCFs are prudentially regulated and supervised by the central bank (SBV), which has not shied from enforcing compliance. They now profitably serve over four million clients (2014), having successfully weathered both the Asian financial crisis of 1997/98 and the global crisis of 2008. Most importantly, in contrast to India, the PCFs have not served as a tool of political favoritism. 

Two inclusive commercial banks: Centenary and BRI

Finally, I am presenting two full-fledged inclusive commercial banks, one from Africa and one from Asia. Both are the product of transformations. Centenary Bank in Uganda started in 1985 as a "trust fund" of the Catholic Church.

Century-old Bank Rakyat Indonesia (BRI) dates back to a member-owned Volksbank (bank rakyat) in the 1890s, later transformed into a government-owned national bank. In 1969 it was commissioned to set up a network of village units, disbursing subsidized agricultural credit, in addition to BRI's main banking business. Their performance declined rapidly, and by 1982, BRI faced a choice: reform or close the units.

Technical assistance played a crucial role in transformation of both. Centenary was assisted by the German Savings Banks Foundation (SBFIC) together with IPC. They provided a highly effective cashflow-based lending methodology and MIS, combined with incentives for staff and borrowers. As microsavings continued to grow, exceeding the lending capacity of microcredit, Centenary added SME lending. It now profitably serves 1.3 million customers (2012), calling itself "Uganda's leading Microfinance Commercial Bank".

BRI was assisted by the Harvard Institute for International Development (HIID) to transform the village units into microbanking units as of 1984. Their success has rested on two products, both with commercial rates of interest: voluntary savings with positive real returns and unlimited withdrawals; and general credit, open to all and available for any purpose. These two products have made the microbanking units the largest national microfinance network in the developing world, resilient to the crises of 1997/98 and 2008. BRI, an MSME bank, currently serves 53 million customers (2015) with by far the largest outreach of any bank across the Indonesian archipelago.

The two banks, in vastly different countries, have much in common: individual lending, opportunities for graduating to SME loans, and genuine inclusiveness, excluding no one. They may be indicative of the future of inclusive finance, pointing the way to a new stage of institutional development - similar perhaps to the evolution of savings and cooperative banking in Germany.

See From Microfinance to Inclusive Banking, by R.H. Schmidt, H.D. Seibel, and P. Thomes (Wiley-VCH 2016), http://eu.wiley.com/WileyCDA/WileyTitle/productCd-3527508023.html

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About the Author

Hans Dieter Seibel is a professor emeritus at Cologne University. He is specialized on microfinance and microbanking, linkages between informal and formal finance including digital linkages of SHGs with banks/MNOs, agricultural development bank reform, SME development, M&E, and sociocultural system research. In the 1980s, he designed the linkage banking program with GTZ, FAO and APRACA and was team leader of the first pilot project in Indonesia. In 1999-2001, he was Rural Finance Advisor at IFAD and author of its Rural Finance Policy. He also is a founding board member of the European Microfinance Platform (2006-2015).

What we learned from the Regional Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 4

11.10.2016Amadou 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 African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), 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 fourth instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at the potential of digital finance to achieve broad financial sector development in countries facing fragile situations.

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

What is Special about Digital Finance?

The number of individuals with mobile accounts in fragile countries is higher than the number of individuals with bank accounts. But what explains the rapid and broader adoption of digital finance in fragile countries?

Mr. Laurent Marie Kiba of Orange Senegal noted that two preconditions are needed for the rapid adoption of mobile finance. First, that the technology is available in fragile countries. Fourth generation wireless technology (4G) is available in Guinea Bissau. Second, mobile payment is no longer a project as populations have adopted it. Mobile operators recognize that mobile payment services are a branding tool and this helps strengthen the adoption of mobile financial products. Mr. Mathieu Soglonou of UNCDF stressed that mobile technology is a unique solution because it allows fast, large scale, secure transactions in a market environment and is a resilient technology.

Comparing mobile money with traditional brick-and-mortar banking, Ms. Aurélie Soulé of GSMA identified three benefits that mobile money offer in fragile countries. First, mobile money can be deployed rapidly because the associated capital expenditure is lower. Opening a branch can cost up to $400,000 and an ATM can cost $20,000 compared to no cost for a mobile agent. Second, proximity is high as the network of agents is in the community. And third, the security costs of moving money to branches, especially in countries with a sparse population, are not as relevant.

Going forward, solutions need to be developed to go beyond mobile money and offer a broad range of services akin to what a traditional branch would offer. Regulatory constraints such as those associated with KYC can be overcome with technology such as digital fingerprints. Crowdfunding solutions including with the diaspora and equity participation are options that should be considered.

Are the promises of digital finance exaggerated? Mr. Sasha Polverini of Gates Foundation noted that there is very little scale and less coverage in rural areas. He stressed that digital finance can be an effective solution for financial inclusion and development. Its success, however, depends on the nature of the crisis we are facing. Are we facing an economic crisis, a human crisis, a migrant crisis? What are the sources of fragility? The impact of digital financial services will depend on the answers to these questions. While many participants agreed with this observation, they noted that although the two can overlap, it was important to distinguish between financial sector development in fragile countries and financial inclusion in crisis situations.

Many participants asked about policies to reach the "last mile" of cashless transactions for the poorest. Panelists noted that we are still far from the true last mile although the acceptance of digital payments is progressing. It was noted that governments are big payers and having them adopt digital payment would be a big push. Mr. Kiba mentioned the experience of an oil company that managed to have 40 percent of purchases at its gas stations paid digitally. _________________________________________________________________

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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