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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.

Information sharing, credit booms, and financial stability

11.10.2016F.Leon, University of Luxembourg & S. Guérineau, Université d'Auvergne

The global financial crisis has highlighted the vulnerability of financial systems and stressed the need for improving the management of financial vulnerability. The financial stability issue in low-income countries (LICs henceforth) has received less attention in recent years, insofar as they have been less impacted by the global financial crisis than emerging economies. However, a better understanding of financial fragility mechanisms in LICs is crucial. The experience of LICs shows that they could suffer sharp increases in non-performing loans and banking crises, and that the cost of banking crises is high, even if the banking sector is small.

In a recent paper, we investigate the determinants of financial fragility in advanced and developing countries, focusing on the interaction between credit booms and credit information sharing systems. A large number of studies have shown that excessive credit booms are one of the main drivers of financial crises. The development of credit information sharing (CIS) institutions may attenuate the negative effect of credit booms and/or limit the occurrence of such booms.

First, CIS can mitigate the negative effect of credit booms. A rapid growth of credits can weaken the quality of credit screening. During credit booms, credit officers cannot devote sufficient time to correctly screen new projects and bad projects have a higher probability of being financed. The presence of efficient CIS institutions could attenuate the negative effect of credit booms with screening. In addition, credit booms often fuel a rapid rise in asset prices (real estate and equity bubbles). Since assets may be used as collateral, the price rise will itself help an acceleration of credit growth ("financial accelerator") and reinforce the deterioration of screening. The presence of information sharing mechanisms may allow banks to diversify their portfolio. This diversification can limit the increase of asset prices induced by rapid credit growth, and therefore limit the detrimental impact of such episodes.

Second, CIS might affect the occurrence of credit booms, even if its effect is theoretically unknown. On the one hand, information sharing may curb credit growth by avoiding some customers borrowing from several banks. On the other hand, a reduction in the information asymmetries across banks may lead to an easing of lending standards and, in turn, an increase in the volume of lending (lending boom). Mechanisms through which CIS alleviates the detrimental and occurrence of credit booms can differ between developing countries and industrialized economies.

In order to identify the impact of information sharing and its transmission channel, we built a dataset combining a bank-level and country-level database. The sample included 159 countries with 79 developing countries and 80 emerging and developed countries over the period 2008-2014. To study whether developing countries differ from other countries, two groups of countries were distinguished: countries with a GNI per capita below US$ 4,125 in 2014 (n=79, called developing countries) and countries with a GNI per capita exceeding US$ 4,125 (n=80, called developed and emerging countries). Financial fragility was assessed by scrutinizing annual changes in the ratio of NPL to total loans. Episodes of financial fragility were identified every time this ratio jumped by at least 3%. This measure enabled capturing all episodes of financial distress and not only the extreme ones (banking crisis). The development of CIS was assessed by the depth index and the coverage of CIS. Both were extracted from Doing Business.

Estimations confirmed findings from other papers by highlighting the stabilizing impact of CIS. The paper also documented that this result held for both less developed countries (GNI per capita below US$ 4,125) and other countries (advanced and emerging). In a second step, the complex relationships between CIS, credit booms and financial fragility were analyzed. Econometric estimations pointed out several important results: (i) information sharing development had a direct effect on financial stability, even when the impact of credit booms was taken into account; (ii) the higher the scope of information collected, the lower the likelihood to observe a credit boom (but the coverage of CIS did not matter); this effect was smaller and less significant in developing countries; (iii) CIS mitigated the detrimental effect of credit boom but this result held only for advanced and emerging countries; and (iv) credit booms were strong predictors of financial vulnerability, especially in advanced and emerging countries.

These results have several policy implications. First, credit growth is a key variable for macro-prudential policies in low and middle income countries. Second, current efforts to develop CIS schemes should be strengthened, since the latter allow for credit expansion without excessive increase in the overall credit risk. Third, CIS has little impact on credit booms in developing countries, which justifies the extension of other tools - such as macro-prudential policies - to prevent excessive credit growth. Finally, extending the coverage of information sharing systems is not enough, since depth of information sharing is more efficient in avoiding credit booms.

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About the Authors

Florian Léon is currently a postdoctoral research fellow at CREA (University of Luxembourg). Samuel Guérineau is an Associate Professor at the Université d'Auvergne.

This work is part of a research project which received financial support from the DFID-ESRC Growth Research Programme (Grant No. ES/L012022/1). Other project's contributions focus on the implications of capital flows (FDI, aid, remittances) on long-term growth. All contributions are available and can be commented on the blog dedicated to the project.

What we learned from the Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 1

19.07.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

Last month, 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 first instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at some of the major takeaways of the conference.

What is fragility?

Using a "harmonized definition," the African Development Bank (AfDB), the Asian Development Bank, and the World Bank classify states as being fragile when they exhibit poor governance or when they face an unstable security situation. For practical purposes, governance is measured by the quality of policies and institutions (states with a CPIA score less than or equal to 3.2) and insecurity is assessed by the presence of United Nations or regional peace keeping operations (PKO). In sub-Saharan Africa most fragile states are also low-income countries (LICs).

While the focus of the "harmonized definition" is on institutions and insecurity, participants stressed that fragility is a multi-faceted concept. In particular, fragility implies weak state institutions, poor implementation capacity, underdeveloped legal and financial infrastructure as well as low social cohesion and the exclusion of a large share of the population from financial and other services. The nature of fragility is also fluid and fragile states face situations ranging from violent conflicts to post-conflict economic recovery. The sources of fragility go beyond poor governance, low GDP per capita, and conflicts to include vulnerability to commodity shocks and other macroeconomic shocks, and exposure to the risk of pandemics.

The need to broaden the definition of fragility was further explored with reference to a quote from President Ellen Johnson Sirleaf of Liberia "fragility is not a category of states, but a risk inherent in the development process itself". Mr. Sibry Tapsoba, Director of the Transition Support Department of the AfDB argued for a multidimensional approach, which applies a fragility lens to (i) look beyond conflict and violence; (ii) focus on inclusiveness and institutions; (iii) recognize the importance of the private sector; and (iv) recognize the presence of asymmetries in resources, policy, and capacity.

Participants also insisted on the need to go beyond the negative connotation of fragility and recognize instead that fragile states are in transition and present opportunities for human and financial sector development.

What role for financial sector development (FSD) in fragile countries?

Empirical evidence points to the positive role that financial sector development (FSD) can play in fragile countries. There is a positive correlation between financial sector and economic growth, poverty reduction, and inequality reduction. FSD can be a driver of growth through increased job creation and it can help mitigate risks through increased savings, loans, and insurance.

A key finding stressed by Ms. Emiko Todoroki, Senior Financial Sector Specialist at FIRST Initiative is that fragile countries fare worst in all macro and financial metrics, except one: the share of adults with mobile accounts. Digital financial services are offering solutions in fragile states and there is a need to understand better their role.

In the same vein, Ms. Thea Anderson, Director at Mercy Corps argued for the need to focus in on micro issues such as the role of delivery channels, payments infrastructure, insurance, and blended finance (including impact investment), and Islamic finance. As she noted, FSD is relevant even in the more volatile security situations. For instance, refugees and internally displaced persons (IDPs) can be viewed as a market segment and their financial inclusion can be kick-started with the use of functional identification (which also help comply with Know Your Customer (KYC) requirements). Mr. Paul Musoke, Director of Change Management at FSD Africa also highlighted the role of markets and market building in a difficult context. He noted the need to look for scale, sustainability, and systemic change. As markets are dynamic and not predictable, taking a systems approach can be useful. Such an approach includes asking questions such as what factors are going to play a role in the future? Who is going to pay for infrastructure? What level of development should we target?

Lastly, Mr. Cedric Mousset, Lead Financial Sector Specialist, World Bank reminded the audience that governance remains a key dimension of fragility. Weak governance in fragile countries exposes them to a higher risk of non-compliance with regulations such as anti-money laundering and combating the financing of terrorism (AML-CFT) regulation. Improving governance, although it may be a slow process, is needed to support FSD. Measures to support political stability, improve the business and macroeconomic environment, ensure legal security, and build capacity remain important.

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You can download all the presentations on the conference website.

You can also view a selection of photos here.

For more information, please contact:

Pierre Valere Nketcha Nana
Email :p.nketcha-nana[at]afdb.org

Abdelkader Benbrahim
Email: a.benbrahim[at]afdb.org

Gravatar: Weselina Angelow, WSBI

Boosting access to formal financial services for village groups: A case study on linkage banking in Uganda

08.06.2016Weselina Angelow, WSBI

How do we reach out when 85% of the unserved population lives outside recognized urban centers? Many Ugandan banks now offer mobile money links to group accounts, and many offer credit facilities too. The WSBI Programme and PostBank Uganda (PBU) wanted to sustainably offer both: encourage active individual savings for group members and provide efficiency gains through an attractive loan offer to the entire group.

The WSBI- PBU Programme was set out to capture the big bulk of money moving around in small amounts in Ugandan villages. We were looking for something less expensive than mobile money for very local, extremely low value domestic transaction activities and from small balance, but regular savers.

WSBI's own calculations suggested that roughly $10 million per day must be moving around in small villages of Uganda. What a fortune for a bank's deposit base if it was able to tie up with village groups! The amounts being saved are not trivial. Up to $10 per group member per month are possible in Uganda. Moreover, the frequency of transacting is relatively high, given that 40% of users of informal groups transact weekly or daily.

PBU in 2012 started to put in place a dedicated team for promoting the idea of linkage banking for village groups. That team included a chief executive with a vision and a good deal of gut feeling, an experienced linkage banking manager, dedicated village banking field officers, motorcyclists to get out regularly to the groups, motivated regional branch managers and tailored savings and loan products. PBU's Java- enabled software used for mobile banking was adapted to replicate the triple lock on the cash-boxes village groups normally use to control access.

A "zero" tariff was introduced to provide free weekly deposits and withdrawals matching the group meeting cycle. It contributed to keeping value in a closed loop (member to group, group to member and member to member) and earning the bank a significant margin. The monthly ledger fee was dropped, although aggregator push-and-pull charges continued putting some financial burden on group members, currently at 7 U.S. cents per session for a max of USD2.50 per transfer from e-wallet to mobile account. Sub-accounts were created electronically for the different savings goals of a group. PBU's low-cost VSLA Group Account was born.

Findings

The impact was startling. Within a year 5000 groups with almost 150,000 members had signed up and group accounts were staying 95% active. Something interesting was happening: PostBank's retail customer base was growing and the active portion was growing fastest. At the same time, PostBank's funding base was growing with the bottom-end driven by individual accounts and the top-end by group accounts. The growing funding base led to an imputed income of more than USD 400,000 by end of 2014.

By late 2015, the bank had signed up 28,000 groups[1] with more than 500,000 members. By then, PBU also had an active overall customer base of almost half a million accounts with 60% of these active, small-balance accounts with an average balance of around $35 increased six-fold since PBU started working with the groups. The big number of small-scale savings coming from the groups brought in valuable funding and a reduction in fixed costs per client.

PBU's goal is to have groups and their individual members constitute 50% of the bank's business by 2018. The bank's journey towards customer centricity will continue to depend on channel and product innovation. With the Central Bank of Uganda's approval of the new agent banking regulation, the groups are becoming potential agents, multiplying PBU's customer acquisition points for serving the mass market and generating additional income for the groups and their members with a particular focus on youth and women. With a redesigned, technology-driven youth product in place, PBU has just started stretching its linkage offer to other 475 youth groups under a newly established partnership between PBU, Airtel and Care Uganda. The most recent product innovation encourages female household members to join the bank by offering an individual "women in progress" account attached to the group account.

 

[1] PBU works with CARE (40% of the PBU group base), IRC, NUDIPU, AVSI, IFDC as well as several local self-help and farmer groups.

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About the Authors

Weselina Angelow is part of WSBI (World Savings and Retail Banking Institute)'s global efforts to providing an account for everyone and making a contribution to universal financial access. She manages the WSBI Programme for making small scale savings work, a Programme run with WSBI member banks worldwide.

Esther Mututta Ssenoga is a Senior Manager for Linkage Banking & Special Segments at Post Bank Uganda (PBU). She's currently supporting PBU's relationship-based banking and group-based models to achieve a wide customer base and customer numbers.

Gravatar: Weselina Angelow, WSBI

A journey in making small scale savings work

18.04.2016Weselina Angelow, WSBI

By the end of 2020, all 110 WSBI members set an ambitious plan. They aim to reach 1.7 billion customers and 400 million new transaction accounts by then. The work really kicks off this year, starting from a base level of 1.4 billion people who seek banking services from WSBI members every day.

It's news in a way, but it's also part of an evergreen story - WSBI's longstanding commitment to provide an 'Account to Everyone'. Twenty-five focus countries under the Universal Financial Access (UFA) need to address this most. We've set out through our member savings and retails banks to tackle the issue of the unbanked and underserved in 17.

Financial inclusion matters to an increasing number of players. With support of a sponsored Programme WSBI in 2008, wanted a fundamental question answered: what would it take to boost financial inclusion through the WSBI network of postal and savings banks? Driving WSBI's member support today to achieve the next set of UFA 2020 goals means taking lessons from this work on board.

The WSBI Programme aimed to increase formal savings services for poor people at 10 WSBI member banks across the globe. Active accounts swelled within five years from 1.2 million in 2008 to 2.8 million in 2015 in six of ten selected countries generating deep insights into the drivers and barriers of account usage.

Regular active account usage turned out to be much more difficult than first thought and account dormancy remained an elephant in the room. The core of the challenge was threefold: affordable pricing and low population densities put limits to the banks for providing a sustainable and accessible solution, plus there was a growing need to offer more convenient and intuitive services. Questions arose that demanded an answer. Two especially came to mind.

1. How do we add value to the way rural people already manage money informally?

Linking formal banking to village groups and replication the way people already manage money emerged as the most successful route to meet rural peoples' financial needs and close the proximity gap in remote Eastern Africa. Most of the cash in East Africa stays in villages, in a lot of places money circulates just within one kilometer of people's home and work, a member of a group would save $5-10 per month. Linkage banking with village groups became an arena to capture these high turnarounds of financial transactions and nontrivial amounts of savings.

WSBI member Postbank Uganda (PBU) adopted linkage banking in 2012: it linked its mobile banking platform not just to village groups but also to individual group members. PBU reaches out to 28,000 village groups so far. Without distorting the group model, PBU found a way to electronically replicate and link up with the group's existing savings and loan business. The result: a growing funding base and a threefold increase in PBU's active customer base.

2. How can segmentation of client data help us to predict people's' transactional behavior and address sustaining account activity after account opening?

Having a shared meaning of what defines an active account is paramount. WSBI's definition was any account that transacted in the previous six months. The Global Findex data shows a third of all adults doing any kind of saving during one year right up the development spectrum. Could it therefore be that customer's desired savings behavior to save occurs in bursts of activity followed by a quiet period before starting again and how much time passes between these periods?

WSBI member Kenya Post Office Savings Bank (KPOSB) developed an analytical model for the better understanding of the drivers of account activity. Together we looked at the periods when clients would normally reengage with the bank after a first contact has been made and whether getting messages out to clients by using local options could nudge their behaviour.

Trust in financial services offered to the unbanked an underserved depends hugely on the ability of service providers to invest time and resources into continuously gaining insights into the financial lives of the poor and translate these into convenient services. This takes time and can be costly, and it makes small-scale savings work much easier said than done. It's a journey where learning is a continuous process. Our newly produced video report highlights what bumps and discoveries we have found along the way.

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