Africa Finance Forum Blog

Currently the posts are filtered by: Financial Capability
Reset this filter to see all posts.

"I've got your back" - the role of mutualitées in the DRC

18.07.2017Jaco Weideman, Research Associate & Renée Hunter, Research Analyst - CENFRI

This post was originally published on the CENFRI website.

The Democratic Republic of the Congo (DRC) is a country with a volatile history and topography that's tough to navigate. It's not the easiest place to live when you consider the risks that you are exposed to on a regular basis. These might include sickness, unemployment, and unexpected expenses, but also more specific and remarkable challenges, such as buffalos trampling your crops. Now consider that insurance is mostly inaccessible. How would you ensure that you and your family cope?

The people of the DRC have come up with an innovative and complex solution that is very well-suited to their specific needs, in the form of mutualitées. While community-based financial groups such as savings and credit associations or burial societies are seen in many countries in Africa, mutualitées are unique in their design. They are set apart from other co-operative groups by their complexity and broad activity span across different financial services and social functions. In many ways, mutualitées fulfil the role of insurers, investment managers, contractors of public works and public service providers. They manage to meet an entire portfolio of financial needs in one product.

Mutualitées started in the cosmopolitan city of Kinshasa. The coming together of different cultures and ethnicities created a need for groups to preserve and celebrate their heritage. Associations were set up and, over time, their goal evolved from cultural preservation to mutual self-help: supporting their kinsmen within an unfamiliar, and sometimes overwhelming, city, far from home. Marriages were celebrated, deaths were mourned, and assistance was given in times of hardship.

Nowadays, mutualitées are complex and organised social groups where the common bond is no longer limited to a shared ancestry, and the benefits are more than financial.

"The advantages (of a mutualitée) are love and mutual support. We give assistance in case of an illness. In a case of a birth we also assist. We provide support in case of bereavement."

Head of a mutualitée, Kinshasa

The members of a mutualitée convene regularly. At those meetings members contribute a certain sum, with which the management team (made up of highly-esteemed individuals) are charged with fulfilling the mutualitée's numerous aims. Examples range from a small mutualitée of young men that clears stagnant water in a certain suburb to combat malaria, to a large mutualitée that lobbies government in order to reunify the two Congos.

From interviews with members of mutualitées, it emerged that their overarching aim is to assist members in times of need. A common way to do this is via risk pooling or pooled savings. In certain cases of misfortune (such as death or illness) or celebration (such as marriage or childbirth), as the interviewee describes above, members are eligible for a pay-out. A specific amount is set for particular events, such as US$300 for a funeral or US$100 for childbirth. Members therefore know exactly what to expect.

Some mutualitées also assist members through individual savings and credit. The management will guard members' savings for them or, in exceptional cases, based on a member's merit, will provide them with a loan. Moreover, many mutualitées grow their funds by investing in assets. For instance, there's a student mutualitée that invests in fridges from which cold drinks are sold and another buys cars to run a taxi service.

There are also mutualitées that builds infrastructure and conduct activities to generate positive externalities. Examples range from mutualitées funding road improvements, to mutualitées that organise after-school activities for children, such as soccer tournaments.

Thus mutualitees therefore fulfil an important social as well as financial assistance role.

"Firstly, I am proud because I am in an association with my brothers. I lost my son and I did not have enough financial means and the President of the association assisted me with $200 for the coffin."

Staff member of a mutualitée, Kinshasa

So what does this mean for policymakers and regulators?

Given the early stages of retail financial market development in the DRC, where financial access barriers are wide-spread and only the top end of the market is served in the formal financial sector, the mutualitée provides a uniquely tailored, local solution to many. This creates a policy imperative to acknowledge and protect the role that the mutualitée plays in serving those outside the reach of the formal financial sector. It also poses the question of whether formalisation of these financial services is desirable and, if so, what would this formalisation look like. The implementation of the 2015 Insurance Act, which states that all providers of insurance, including mutual associations, are subject to new and stringent requirements relating to market entry and minimum capital criteria, may be the first warning light for the future of mutualitées. If strictly enforced, this would place most in jeopardy.

Should mutualitées come under threat, it will mean not only the loss of a broad-reaching financial services, but also a valuable social support network. So, whilst some will merely lament the cancellation of a local kids' soccer tournament, a greater hardship will come for those that have nowhere to turn when they need money for a hospital bill or worse, a funeral.

We encountered the phenomenon of mutualitées during our in-country research work for the Making Access Possible (MAP) study. MAP draws insights from both qualitative and quantitative, demand and supply-side research, with inputs from stakeholders in both the public and private sector. This feeds into a financial inclusion roadmap. The diagnostic for MAP DRC is forthcoming and will be released soon.

----------------------------------------------------------------------------------------------------------------------------

About the Authors

Jaco Weideman is a research associate at Cenfri and has been part of the team since November 2014. Since joining the team, Jaco has been involved in several projects in Mozambique and South Africa. Jaco has been part of the team conducing MAP diagnostics in Mozambique, Madagascar and DRC, responsible for FinScope data analysis, and segmentation to identifying potential target groups for financial services providers in the country. Renée Hunter is a research analyst working within i2i's Client Insights team. Her research to date has mostly focused on client centricity and data protection. Before joining i2i, Renée worked as a junior researcher at Cenfri, and before that as a junior business developer for Divitel - an independent video systems integrator.

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.

_________________________________________________________________

 

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.

Rethinking financial education for the extremely poor

16.11.2015Arnold Wentzel, Lecturer in Economics and Education, University of Johannesburg

Almost 1 billion people live on less than $1.90 per day. Most of them live in Africa, which means that more than 40% of the continent's citizens experience extreme poverty. What is wrongly assumed is that improved financial literacy and education will improve their financial situation.

The OECD measures financial literacy along four dimensions: financial control, financial planning, choosing financial products and financial knowledge. It is taken for granted that anyone who learns how to budget, knows how to maximise financial returns and borrow prudently will improve their financial position.

Unfortunately, the financial conditions under which the extremely poor live are so different from the conditions assumed by conventional financial literacy that education based on it is both impractical and harmful. It assumes that the poor have small but fairly predictable income flows and expenses and that appropriate financial products are mostly available.

But as Collins, Morduch, Rutherford and Ruthven find in their book Portfolios of the Poor, the income flows of the very poor are not only small, but also highly volatile, and available financial products are too inflexible or unreliable; and that makes all the difference. If you live on less than $2 a day and you have no idea if that $2 will even come in daily, and even minor expenses can wipe out your income on any day, you need to exhibit considerable financial sophistication just to survive.

It is this sophistication that conventional financial education does not recognise. The extremely poor cannot employ strategies to optimise financial gains, but instead have to use strategies to keep their financial options open, even at the expense of gains. This is because they live under conditions of radical uncertainty, where events are inherently unpredictable. Under such conditions it is irrational to optimise since that tends to close down options and thereby limits possible responses.

To survive, the poor employ what is called 'robust satisficing' by Schwartz, Ben-Haim and Dacso. This means sacrificing wealth in order to guarantee a satisfactory outcome (survival) under the greatest range of uncertain conditions. For example, conventionally, financially literate people would never pay to save, yet the poor do it regularly through money guards and informal group savings schemes. This is discouraged by conventional financial education even though it is most rational thing to do if you want to stay alive in poverty.

Radical uncertainty requires: (1) access to flexible cash inflows that keep your options open; and (2) structures that hinder the unpredictable forces that close down your options. Money guards may be paid to keep money, but the cash can be accessed within minutes of a life-threatening event. And interest may not be received in a group savings scheme, but members disallow withdrawals forcing commitment in the face of urgent demands on small savings. Few financial products are designed to get this delicate balance right, and this means the poor often have to develop their own range of informal solutions.

Financial educators need to understand the unpredictable and severe conditions of extreme poverty and recognise the shortcomings of their advice under such conditions. If they are to help the poor they must learn from the poor, especially their sophisticated strategies to keep cash flow options open for as long as possible.

This by no means renders financial education worthless. As cash flows increase and become more predictable, conventional ideas become progressively more relevant. Different kinds of financial literacies exist for different conditions, and instead of teaching just one kind, we should teach how to transition from one to the other as conditions change.

_________________________________________________________________

This blog post is based on the study, Why Financial Education Fails the Extreme Poor, Social Science Research Network. 

About the Author

Arnold Wentzel is a lecturer in Economics and Education at the University of Johannesburg.

Can Financial Inclusion and Financial Stability Go Hand in Hand?

15.06.2015María José Roa Garcia, Researcher, CEMLA

Financial inclusion institutions in emerging countries are increasingly important as expansive savings and investment vehicles for households and the public in general. A large part of these institutions carry out financial activities that play the part of bank credit, but within a regulatory framework that is either non-existent or much more lax than that which exists for formally-constituted banking institutions. The same thing happens with regulation of new financial inclusion instruments - such as electronic and mobile phone banking - which in many countries is limited or non-existent.

In order to guarantee the stability of the financial system, it is necessary to do more than provide greater financial access to the population. The nature and characteristics of access and use, the so-called quality dimension of financial inclusion, is a key element in ensuring that greater access and use do not endanger financial stability. This dimension is related to the change in the nature and risk levels entailed by the new financial inclusion instruments and institutions, as well as new clients. Although concrete indicators still do not exist, it is commonly accepted that the referential framework to measure this dimension ought to take into account the existence of: i) adequate regulation and supervision of new financial inclusion instruments and institutions, ii) effective financial consumer protection policies, and iii) programs of financial education. In general, this dimension takes on greater relevance in more advanced stages of financial inclusion, when the problem of access is eventually resolved.

The fundamental measures that should accompany greater access and use, in order that they not endanger stability, might seem to be related to those that were outlined after the crisis for the most advanced stages of financial development: prudential regulations, financial consumer protection policies and financial education. Nevertheless, the risks and frictions associated with financial inclusion are different to and less pronounced than those associated with financial development in its most advanced stages, as are the measures to be applied.

In this regard, it is important to specify what type of state intervention or regulation is necessary in the particular case of financial inclusion, rather than automatically applying measures derived from the financial crisis. The application of standards and other measures that guarantee financial stability might prove to be a setback to the inclusion processes, hence, a key element is the application of the principle of proportionality: the balance of risks and benefits in the face of the welfare costs of regulation and supervision of different financial inclusion instruments and institutions [1]. An example of the application of this principle is delegated supervision, which seems to be the most recommendable alternative, as in the case of federations and confederations for the supervision of cooperatives.

It seems fitting to conclude by highlighting the need to continue studying the potential links between financial stability and inclusion through the development of theoretical frameworks, evaluated with adequate empirical methodologies. The theoretical framework of traditional financial markets could be extended to give space to new, stability-endangering frictions related to greater access to and use of financial markets. In addition, there are enormous gaps in the information on financial inclusion institutions, given that a large part of them are outside the regulatory perimeter of state authority. It is also necessary that databases be developed that contain information on the nature of financial inclusion institutions and instruments, as well as regulatory and supervisory structures.


References
 

[1] Basel Committee on Banking Supervision (2015), Range of practice in the regulation and supervision of institutions relevant to financial inclusion, January. 

________

María José Roa is Researcher in the Economics Department at the Center for Latin American Monetary Studies, CEMLA (www.cemla.org). Her research is mainly on economic growth, financial inclusion, behavioral finance, personality psychology in economics, and financial education. She has been teaching for almost 20 years in different universities around the world. Her work has appeared in refereed international journals. She coordinates the Financial Inclusion and Education Program in Central Banks at CEMLA, and she is member of the Research Committee of the OECD/INFE. She is originally from Madrid, Spain, but she lives in Mexico City.

Gravatar: Excerpt from Facilitating SME Financing through Improved Credit Reporting

Constraints to SME Financing

18.05.2015Excerpt from Facilitating SME Financing through Improved Credit Reporting

Though the constraints are many, limited access to finance and the cost of credit are typically identified in SME surveys among the most important ones. (...) As a result of these constraints, SMEs (...) rely more heavily on informal sources of finance, such as borrowing from family and friends or from unregulated moneylenders.

One important element behind the SME "credit gap" is the information asymmetries between external creditors and SMEs. (...) However, it needs to be noted and recognized that there are several other micro and macro factors that also inhibit adequate external financing for SMEs (...). The most relevant of these other factors are described briefly below.

Some of the obstacles to SME financing are associated precisely to their own nature as smaller companies. This includes factors such as lack of critical economic size, and the somewhat informal and generally less sophisticated management of SMEs. In the first case, relatively small average loan volumes may not warrant the costs of targeted credit risk analyses that are required in the absence of more standardized and comprehensive credit data.

As for the second factor, from the perspective of lenders most SMEs lack the understanding of developing a coherent and acceptable business plan to underpin their credit/loan application, and if a loan is granted they often fail to provide robust updates or progress reports on the unfolding of the business plan.

Some macro factors that act as poor business enablers include lack of adequate legal and enforcement protections for creditors, like bankruptcy laws that favor debtors' rights in a non-equitable manner vis-à-vis creditor rights, weak definition of property rights that hinder pledging property as collateral, and in general weak contract enforcement. Problems like these tend to be more acute in developing countries.

Other macro factors that recently are believed to have affected the ability and/or willingness of creditors, in particular from banks, to engage with SMEs include the restructuring of many national banking sectors after the financial crises that emerged in 2008, and the bank solvency regulations in the Basel II and more recently the Basel III Capital Accords. On the latter, several studies have found that the Basel III risk weighting approach to calculate capital requirements, which is basically the same as that of Basel II, encourages portfolio concentrations in assets like government bonds, mortgages and lending between banks. It also favors lending to companies with an external credit rating of A or above, practically all of which are large companies. When these methodologies to calculate capital requirements were introduced in the early 2000s with the Basel II Capital Accord, many banks started withdrawing from SME lending and reduced overdrafts, thus driving SMEs to alternative financing like factoring, securitized receivables, leasing and trade credit.

 

* If you find value in this excerpt, you may enjoy reading the full publication, Facilitating SME Financing through Improved Credit Reporting from the Report of the International Committee on Credit Reporting chaired by the World Bank.

ABOUT THE AFF

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

LATEST POSTS

Distributed Ledger Technology: a South African financial...Langelihle Mnyandu, Associate in Banking & Fin. Services Regulatory, Bowmans
Innovation doesn't have to be disruptiveH. Miller, Associate Consultant, Nathan Associates & G. Njoroge, Advisor, KPMG
Are African leaders serious about using savings versus debt...Nthabiseng Moleko, Economics & Statistics Lecturer, Stellenbosch Business School

LATEST COMMENTS