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The Digital World and a Human Economy: Mobile Money and Socio-Economic Development in Africa

12.06.2018Sean Maliehe & John Sharp, Research Fellows, University of Pretoria

GSMA’s State of the Industry on Mobile Money report (2016) argues that

Mobile money has enabled financial inclusion, giving people access to transparent digital transactions and the tools to better manage their financial lives. It has also been a gateway to other financial services, such as insurance, savings, and credit. The impact of mobile money has been felt well beyond transactions and accounts: people’s lives have been enriched by greater personal security, a sense of empowerment, and more.

There is a lot to like about the report’s optimism, given that mobile money has greater potential to serve the needs of poor people in Africa and elsewhere than other forms of money that have emerged recently.

Beyond ‘data-mining’ 

Also heartening is the report’s attention to the importance of careful understanding of these needs in order to provide the poor, wherever they are, with appropriate financial services. As much literature on mobile money’s promise does, the report stresses the value of ‘mining’ the data that becomes available to fin-tech companies in consequence of people’s use of the internet.  As smartphones become cheaper and their penetration across Africa increases, data-mining will allow service providers to build profiles of individual users’ needs and preferences in order to tailor the services – including loans and insurance – offered them.

Such data-mining is clearly important, particularly as service providers move beyond mobile money’s basic, and earliest, function as facilitator of P2P money transfers.  But it is worth noting that GSMA’s report acknowledges that most mobile-money usage in Africa (by volume and value) still comprises money transfers.  Mining ‘in-system’ data is unlikely to be sufficient here, and it will also be necessary to gain information about the needs, wants and aspirations of poor people by other means.

A straightforward example is provided by Woldmariam’s first-hand, on-the-ground research in Ethiopia.  He discovered that many rural recipients of P2P mobile transfers struggle because they are illiterate.  When remittances came in cash, they could distinguish bank notes by their distinctive colours. But they find numbers on a small screen indecipherable, leading Woldmariam to ask if fin-tech innovators cannot come up with an appropriate digital solution.

His research is in line with our Human Economy approach, which starts by asking what poor people do to insert themselves into an economy which is stacked against them.  Our research shows that people in Lesotho (as in many other places) save money by forming rotating associations of various sizes. ROSCAs are meaningful to them because they are based on a longstanding local cultural logic which engenders trust.  But – as everywhere – trust is sometimes undermined by unscrupulous association members aiming to benefit at their fellows’ expense.  To counter this, people try to devise ways to inform all members quickly whenever there is movement of money out of the bank accounts in which they now commonly store their collective funds.  So the most important contribution open to the mobile money industry may not be to offer a facility for digital saving on the simple assumption that it will fill a vacuum.  Could innovators not build on what is already in place, by assisting people to make existing savings associations more secure? 

The mobile-money literature makes great play of the roll-out of exciting new innovations.  But since P2P transfers still dominate in Africa, it makes sense to pay considerable attention to those aspects of this infrastructure which could be improved.  Our research in Lesotho shows that people battle with the lack of liquidity in agent networks – they cannot ‘pay in’ or ‘pay out’ readily because the small agents in rural areas do not have sufficient float on hand to meet their requirements.  The literature talks about a shift across Africa from small, independent agents to agency banks as the principal actors in agency networks.  But whether involving the banks more closely is a good idea is an open question.  From our vantage, we are deeply aware that the big banks played no small part in killing mobile money, and its potential to serve the poor, in South Africa.

The ‘business case’ for mobile money?

Like most of the literature, the GSMA report is built on the ‘business case’ for mobile money.  There is a certain, undeniable logic to this case: if private business couldn’t profit from mobile money it would be unlikely to enter the field.  But it is worth remembering that as recently as fifty years ago, the need to make a ‘business case’ for everything, including the fight against global poverty and inequality, was by no means as pronounced.  The dominant understanding then was that the purpose of the economy, seen as so many national economies, was to improve the lives of the citizens of nation-states, and that private business, the state and the people should co-operate, and make compromises, to that end.

This vision was realised most fully in Western Europe and North America after World War II, but it found echoes behind the Iron Curtain, and also became the goal to be striven for in the newly-independent states of Asia and Africa.  But it has fallen by the wayside since the 1970s, replaced by the notion that success in attaining socio-economic goals in a global economy depends on private business retaining its position as a ‘winner’.  Hence the need for elaborate promises that initiatives such as the development of mobile money will lead to ‘win-win’ outcomes from which business will benefit as much as the poor.

But whether the poor will benefit as much as business is a moot point.  The present era produces abundant evidence that big business, in particular, does not play by the rules.  The ‘free market’ is corporate ideology, and in practice the corporations collude in all manner of ways to rig the market against the interests of competitors, states, and the people.  This is not necessarily true of all businesses: small fin-tech start-ups are bound to be more attuned to their prospective customers than large corporations which are beholden to shareholders with limited liability and no local knowledge.  South Africa had a golden opportunity to use mobile money to distribute social grants to millions of new recipients after 2012.  Instead the state contracted distribution to a large financial company which opened a bank account for every recipient, and gave its subsidiaries access to the information in each account in order to target recipients for particular services.  Small wonder that, in this case, the much-vaunted instant loan facilities simply added to the debt burden on the poor.

Conclusion

Our ‘human economy’ approach starts with an emphasis on what the billions of poor people in Africa and elsewhere do off their own bat to insert themselves into an unequal global economy.  Since they know their own circumstances better than even well-intentioned outsiders ever will, building on what they do for themselves is probably the best way to address the challenge of poverty and inequality.

On the other hand, poor people cannot solve these challenges alone.  They need the input of big bureaucracy and big money, but allies from these camps are not easy to find.  Hence the need for critical, but not dogmatic, scrutiny of the discourses by which states and corporations seek to explain their actions to address these problems.  In this regard a ‘human economy’ approach looks carefully at the ‘business case for mobile money’ and its assurances about ‘win-win’ outcomes.

Our argument is that states, and state-aligned institutions such as Central Banks, could play a positive role in the development of mobile money by taking notice of the points raised in this article.

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About the Authors

Dr. Sean Maliehe is an economic historian and ethnographer of commerce and 'mobile money'. He joined the Human Economy Research Program as a postdoctoral research fellow in January 2016 having arrived in 2012 as a PhD student. Sean's postdoctoral research is based on the emergence of 'mobile money' in southern Africa. He explores the development of 'mobile money' in Lesotho and South Africa, and uses the township of Diepsloot (north of Johannesburg) as his ethnographic site.

Prof. John Sharp is currently South Africa Director of the Human Economy Research Programme, Senior Research Fellow in the Centre for the Advancement of Scholarship, and Emeritus Professor of Social Anthropology at the University of Pretoria.

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


Natural Disaster Risk Pooling to Enhance Financial Access

08.01.2018Johannes Wissel, Financial Consultant

This blog is a summary of Johannes Wissel's Master's thesis on "International Economics and Development".

Limited financial access in times of natural disasters

In her blog of 5 June 2017 Sonja Kelly ascertains the low success of weather-indexed insurance and depicts the reasons why it is not working. She regrets that although these problems are not new, the industry has not managed to solve them.

In addition to insurance, Elodie Gouillat, Rodrigo Deiana and Arthur Minsat and Bella Bird in their blogs of 29 June 2017, 24 October 2017 and 19 December 2017 point out the limited access to finance particularly for low-income households and small enterprises.

Microfinance institutions (MFIs) fail to meet the demand of their clients, especially in times of a natural disaster. Despite the debate on the advantages and disadvantages of microfinance, financial access helps to strengthen the natural disaster resiliency of affected communities. MFIs are constrained in providing their services because in times of natural disasters they themselves lack financial access. They are generally not well diversified around the globe. A natural disaster leads to a widespread defaulting on credits in one region and consequently many credits of one MFI have to be written off. Without the access to external financial resources, this will hamper the MFI's capital ratio which is a key indicator of an MFI's solvency and subject to financial supervision. To avoid further risks, MFIs restrict their lending activities.

To improve an MFI's financial access, its natural disaster-related high unsystemic risks need to be transferred out of the region it mainly operates in. Financial investors follow the same principle by diversifying their wealth. However, the only existing opportunity for microfinancial actors to transfer their disaster risks, is looking for reinsurance or reinsurance-like solutions individually. The comparatively unknown market and a non-perfect competition in reinsurance induce an inefficient and costly risk transfer. MFIs usually do not make use of these possibilities.

Introducing a risk transfer innovation

Alternatively, MFIs can mitigate the unsystemic disaster risks by bearing them collectively. A certain extent of risks can be transferred out of a region by pooling the risks among microfinancial actors. Only a minimised remaining risk of the pool itself needs to be transferred to the global capital market, which is expected to save costs. Two decisive prerequisites are fulfilled that allow for a pooling of these risks among microfinancial actors. Firstly, natural disasters do not occur in every region of the world simultaneously. For example, the risk of El Niño floods in Peru is high between January and March and Vietnam might be affected in June and July. Secondly, the distribution of microfinancial actors among the world regions is relatively balanced.

GlobalAgRisk, a U.S.-based research and development company with linkages to the University of Kentucky, intends to implement such a risk pool in 2018. In one hypothetical example, they envisioned a 31%-reduction in funding needs to cover the risks of two microfinance networks by pooling their risks. The impact of a natural disaster on an MFI's portfolio has been modelled for different disaster types and severities based on historic data, in order to determine the extent of contributions that a pool-participating-MFI has to make and the required payouts it potentially receives. This facilitates an index-based risk pooling which enables a quick disaster response and eliminates potential mistrust problems between different participants. In GlobalAgRisk's concept, an affected MFI is projected to receive a credit payout in order to meet the rising demand for credit of its clients and a capital payout that the respective regulatory authorities classify as equity in order to restore the MFI's capital ratio.

In my thesis titled, “Natural Disaster Risk Management in Microfinance”, I evaluated GlobalAgRisk's concept and portrayed potential improvements to increase the concept's likelihood in achieving its aims and depicted certain constraints for the implementation of potential improvements. The full thesis can be found here.

Recommendations: Inclusion of insurance risks in the concept

One potential improvement is the inclusion of insurance risks in the concept. High costs are a common explanation why weather-indexed insurance does not reach scale (see e.g. Sonja Kelly's blog). Microinsurers make use of the outlined costly reinsurance possibilities. Thus, weather-indexed insurance can benefit from the cost advantages risk pooling offers.

If the risk pool contains both credit and insurance risks, its size and diversification are expected to grow and therefore realize additional cost advantages; for example, through lower fixed costs per participant and better prices for reinsuring the pool's remaining risk externally. Moreover, a higher market penetration of weather-indexed insurance improves credit access, because insured clients benefit from a higher creditworthiness.

Even reinsurers can benefit from pooling both risk types among microfinancial actors, by covering the remaining risks that the pool cannot bear by itself. As such, the extent of covered insurance risks decreases for the reinsurers in comparison to insuring full risks. However, the total reinsurance business might grow because reinsurers can incorporate credit risks in addition to insurance risks.

The consolidation of both risk types appears feasible because the pool's payout patterns are similar to those of microinsurers reinsurance. The contribution payment into the pool is equivalent to a reinsurance premium and a payout is triggered if an insurance taker suffers from a damage. The modelled impact of a natural disaster on an MFI's credit portfolio fits in the already prevalent weather-indexed insurance.

Further success factors

For a successful risk pooling, the basis risk that comes along with an index-based risk pooling should be minimised as much as possible. To achieve this, a compartmentalised model that considers the pivotal risk types (e.g. floods, storms, drought, earthquakes) is crucial.

If the risk pool operates as a for-profit company, the benefits of the concept might be endangered. In order to be attractive, the pool only needs to be slightly cheaper than the existing risk transfer possibilities and could charge much higher contributions from the participants than the payouts amount. Establishing the pool as a mutual or cooperative company eliminates these potential profit extractions. In case of profits, they can be returned to the participants. Insuring the pool's remaining risks minimises the danger of suffering from losses as a co-owner. If certain microfinancial actors are restricted because of their co-ownership possibilities, they can participate in the performance of the pool without being a formal co-owner.

Finally, some countries' legal frameworks might require that the pool acquires insurance licences in order to provide the capital payouts. To avoid the acquisition of numerous licences, fronting might be a way out. Insurance companies that already possess licences in the respective countries can insure the participants and pass the risks on to the pool.

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About the Author

Johannes Wissel recently graduated from Hochschule für Technik und Wirtschaft Berlin - University of Applied Sciences, with a Master's in International and Development Economics. He worked in sales management for Hannoversche Volksbank, a German Cooperative Bank. Prior to this, he worked with two international Christian organisations; Forum Wiedenest in Germany and Diguna in Kenya. Johannes is a licenced Corporate Bank Customer Consultant.

Innovation doesn't have to be disruptive

21.11.2017H. Miller, Associate Consultant, Nathan Associates & G. Njoroge, Advisor, KPMG

In the previous blog, we looked at what technology meant in the context of innovation and problem-solving for rural customers. In this second of three blogs, we dig deeper into the idea of innovation and what it means for the Mastercard Foundation Fund for Rural Prosperity.

                     

It is clear that technology is changing the landscape of financial services in rural Africa. From the largest banks to the smallest fintechs, financial service providers are gearing up for a world in which finance is digital first and in which anyone with access to a mobile phone can also derive benefits from formal financial services.

The rapid uptake of mobile money in many countries has sowed the seed for a thousand new innovations that could further extend inclusive financial services. An outcome of this success has been that everybody in digital finance is looking for "the new M-Pesa", in the same way that elsewhere, entrepreneurs want to be "the Uber of..." An underlying assumption here is that change is generally linear until a special company comes along with an idea that creates non-linear change, which we often call disruption.

But when you map this idea on to the landscape of unbundling that financial services are currently going through, it is not so clear that disruption is what's needed. It used to be that a bank, or a microfinance institution, or an insurance company, would aim to provide a vertically integrated service to the customer, from initial acquisition to all aspects of relationship management and back end services. This is changing. Technology, and in particular the ability for different platforms to link with each other, opens up new opportunities for collaboration. Not everyone needs to develop the next big product or service - there may be much more value and impact for a fintech company to build a business- to-business solution that works at a specific pain point for a financial institution.

For example, the Fund is supporting a partnership between Juhudi Kilimo, an asset financing company, and the Entrepreneurial Finance Lab to develop a psychometric credit scoring tool for smallholder farmer borrowers with no or limited verifiable credit information. This is a tech-enabled solution for a specific challenge - how to estimate likelihood of repayment in a data-light environment - that could reduce costs and improve efficiency of Juhudi Kilimo's credit processes.

A similar partnership in the Fund portfolio is between First Access, a fintech company, and Esoko, an agricultural information and communications company. The two will develop a rural agricultural credit-scoring platform for lending institutions from disparate data sets, from soil and weather data to mobile phone usage and farmer profiles. The solution has the potential to impact a large number of farmers who do not have traditionally accepted banking histories.

These are great innovations, that could have a real impact on micro and small business finance, but they probably won't be putting other lenders out of business. And that's fine. Innovation can be highly effective without being disruptive.

There's nothing wrong with ambition, and there is certainly scope for massive changes in Africa's rural finance markets. But if you focus too hard on the next disruption you can lose sight of the great ideas that represent an evolution, not necessarily a revolution. At the Mastercard Foundation Fund for Rural Prosperity, we love big ideas. But the most important aspect of the big idea is the impact it has on the livelihoods of rural communities in Africa, not necessarily on how it disrupts the structure of the financial system.

So if you want to apply for support from the Fund, we're not so fussed about if you're the next big disruption to African financial markets. We want a credible plan that overcomes some of the many challenges of financing rural populations, and can have a real impact on the lives of people living in or close to poverty. We want ideas that work from the bottom up, which solve real problems. Maybe you'll be disruptive. If you're not, that's fine too.

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About the Authors

Howard Miller is a Senior Consultant with Nathan Associates London, and Principal, Nathan Associates India. He specializes in financial inclusion, challenge funds and the market systems approach to development. A trained economist, Howard has extensive experience in consultancy, public policy, and investment banking. Since joining Nathan Associates in 2011, he has worked on DFID financial sector development programs in Uganda, Mozambique, Bangladesh, and Rwanda, and on the FSD Africa Program. Before joining Nathan, Howard was a fellow at the Overseas Development Institute working on macroeconomic and financial sector policy for the Government of Uganda.

8 years ago, Grace Njoroge ventured into the corporate world under a graduate trainee program with one of the top regional banks in East Africa. She expected to be a classic banker but this according to her did not happen, at least not all of it. Her typical day involved riding a motorcycle to help micro-traders and assist small-holder farmers open savings account. In a surprising twist, she fell in love with the power simple financial products had to drastically change life and businesses potential for low-income clients. At KPMG IDAS, she works with donors and funders to support financial and non-financial institutions, to better serve the unbanked and under banked segments.

Emerging Trends in Digital Delivery of Agri-finance

11.10.2017H. Miller, Associate Consultant, Nathan Associates & G. Njoroge, Advisor, KPMG

This is the first in a series of three blogs on the role of technology in the rural finance projects supported by The MasterCard Foundation Fund for Rural Prosperity (FRP). In this first blog, we explore the major trends in digital delivery that the FRP is seeing in its portfolio. In the second blog, we will dig deeper into how these technologies are being used to solve problems for the rural poor; and in the final blog of the series we will focus on what this means for the FRP and for rural development programmes more generally.

                      

Back in 2014 when we were designing the Fund for Rural Prosperity, we debated for a long time some of the terminology around the fund. One word that came up a lot was innovation. What do we mean by innovation? How do we define it, and how do we measure it?

Another word was solution. If we are talking about a financial solution for a smallholder farmer, then what is the problem? Innovation and solution are over-used words in financial inclusion, and in international development generally, and we wanted to make sure we were using them to actually mean something.

In the two years since the FRP was launched, with 11 rural finance projects up and running, it has become increasingly clear that we cannot talk about innovation and solutions for the rural poor without considering the role of technology. With 277 million registered mobile money accounts in Sub-Saharan Africa, a base level of digital finance penetration is often taken for granted, even in rural contexts, and bidders are getting more and more imaginative about how to build new structures on these digital foundations.

This, however, brings a new set of challenges. In his book "Geek Heresy", Kentaro Toyama uses a range of examples to illustrate the limitations of technology in development. Technology, he argues, can only improve on ideas, processes and institutions that are already well-designed. Apply technology to a bad system and you'll probably only make things worse. For technology to have a meaningful social impact, it needs to be used to amplify the skills and ambitions of people.

You can see Toyama's argument in some of the best examples of tech for development in recent years. M-Kopa (an FRP grantee), is such a compelling story not because its technology is so out of this world but because the technology solves specific problems for the consumer, and is delivered through an effective, well-designed mobile payment model. Technology wasn't the solution in and of itself, it was one key part of a clever business model.

We see similar trends across the FRP portfolio. These projects are using technology to not only deliver financial services, but also to solve some additional challenges in the lives of the rural poor. For example, in Ethiopia, Kifiya Financial Technology, a payment services provider, is working through large buyers (multipurpose co-operatives) to deepen market linkages in addition to acting as a rural agent for financial institutions.

In Ghana, Prepeez Technology Limited, a company focused on technology solutions for the agricultural sector, is using satellite imagery to cluster farmers into groups in order to manage risk and provide more relevant market and weather information. With the information gathered, farmers will then be eligible for agro-insurance and access other financial products.

Olam, a global agribusiness trader, is in Uganda offering input financing along with a digital platform to connect coffee farmers, and also provides information on best farming practices. Biopartenaire in Cote d'Ivoire, which specialize in sourcing cocoa beans from smallholder farmers, is looking to increase cocoa farmers' financial literacy through an app that also facilitates access to credit for the farmers.

In each of these cases, innovation doesn't mean disruption. It means a good idea, using new technology to overcome an important pain point in a system with high potential to improve outcomes for farmers. Technology is not just supporting financial inclusion; it is providing a service - information, networks, market linkages, cost savings, advice - that links financial inclusion to improved livelihoods. It is providing a solution.

In any innovation competition, you see a lot of business models that use amazing new technologies, with a high degree of innovation, to solve problems that nobody actually faces. This is innovation for innovation's sake. At the FRP, we're trying to keep the solution part front and center to ensure that the technological innovation is responding to a real challenge faced by rural African populations.

It is encouraging to see some of the great ideas coming through the Fund and how the innovation frontier is being meaningfully shifted with every group of applications. In the next blogs, we will look deeper into how those projects are impacting rural populations in Africa, and what we can learn for our future work.

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About the Authors

Howard Miller is a Senior Consultant with Nathan Associates London, and Principal, Nathan Associates India. He specializes in financial inclusion, challenge funds and the market systems approach to development. A trained economist, Howard has extensive experience in consultancy, public policy, and investment banking.Since joining Nathan Associates in 2011, he has worked on DFID financial sector development programs in Uganda, Mozambique, Bangladesh, and Rwanda, and on the FSD Africa Program. Before joining Nathan, Howard was a fellow at the Overseas Development Institute working on macroeconomic and financial sector policy for the Government of Uganda.

8 years ago, Grace Njoroge ventured into the corporate world under a graduate trainee program with one of the top regional banks in East Africa. She expected to be a classic banker but this according to her did not happen, at least not all of it. Her typical day involved riding a motorcycle to help micro-traders and assist small-holder farmers open savings account. In a surprising twist, she fell in love with the power simple financial products had to drastically change life and businesses potential for low-income clients. At KPMG IDAS, she works with donors and funders to support financial and non-financial institutions, to better serve the unbanked and under banked segments.

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