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Is Digital Finance Hitting its Stride in WAEMU?

15.06.2015Estelle Lahaye, Financial Sector Specialist, CGAP

This post was originally published on the CGAP website.

Thanks to the support of The MasterCard Foundation, since 2012 CGAP has been involved in the development of an ecosystem for digital financial services in the WAEMU region - a customs and monetary union between the countries of Benin, Burkina Faso, Côte d'Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo. When we started our work, we thought the conditions were right for digital finance to significantly advance financial inclusion in the region. Two years later, it is a good opportunity to reflect on the state of play.

Very early on, the regional central bank (BCEAO) understood the potential for alternative electronic delivery channels to advance financial inclusion. In 2006, the BCEAO issued a regulation on electronic money, creating opportunities for nonbanks to offer e-money solutions. Since then, the ecosystem expanded quite rapidly with currently 25 mobile money deployments registered. The BCEAO is also reviewing 30 or so requests for new e-money issuers or partnerships for the use of e-money solutions. As in other African countries, the ecosystem is dominated by mobile network operators (in partnership with banks).

However, in contrast to developments in other markets in WAEMU technology providers have emerged as an important player issuing e-money as means to offer digital payments solutions. Money transfer providers, banks and microfinance institutions (MFIs) are also getting interested. This diversity offers promising innovations and creates a dynamic market with diverse options available to customers. However, there are still important obstacles to be addressed if digital finance is to reach its full potential in WAEMU. Distribution networks are poorly developed in rural areas. Services continue to be focused on traditional offerings such as money transfers, bill payments and airtime top-ups, and are not customized enough to the needs of the low income population. Customers are not sufficiently empowered to become active players in the ecosystem. With growth and competition, new issues are also emerging such as interoperability and access to USSD channels.

While all WAEMU countries share the same regulation for e-money, the ecosystem is developing unevenly across the eight markets. Each market displays different dynamics, financial access structure, challenges, and customer needs, which open the door to different opportunities and country-specific responses. Achievements on digital finance in Cote d'Ivoire are quite impressive and it is an interesting success story in WAEMU. Take also the case of Senegal. It has the most crowded and diverse provider ecosystem for digital finance. Yet, providers have not managed to reach large scale and demand-side data confirms that mobile money usage among the low-income population is low. It will be interesting to watch how providers progress by offering a broader range of financial services and leveraging the existing distribution infrastructure offered by money transfer companies, postal networks and MFIs. But what about digital finance in a country like Niger with very low levels of financial inclusion and mobile money penetration (approximately 1% of adult population with a mobile money account)? The current challenges are probably bigger, but so is the potential upside. The question is, where do you start?

There is no doubt that some interesting strides have been made developing digital finance in WAEMU but the journey towards financial inclusion continues. By highlighting some of the recent developments, sharing lessons, and documenting aspirations for the future, we hope this blog series will contribute to further develop the digital finance ecosystem.

________

Estelle Lahaye leads experimentation and research activities to help create an effective and innovative ecosystem for digital financial services in the WAEMU. Before joining CGAP, she worked as an account manager in Luxembourg at Banco Itaú Europa, the international private banking division of Banco Itaú, Brazil. Lahaye holds a master's degree in business administration from San Francisco State University and a bachelor's degree in banking, finance, and insurance from the University of Nancy 2 in France. She speaks fluent English, French, Portuguese. 

Gravatar: Excerpt from the Doing Business in the East African Community 2012

What has Worked in Credit Information Sharing?

04.05.2015Excerpt from the Doing Business in the East African Community 2012

Specific practices help increase credit coverage and encourage the use of credit information systems. Among the most common measures are 1) expanding the range of information shared, 2) collecting and distributing data from sources other than banks and 3) lowering or eliminating minimum-loan thresholds (figure 7.8).

Reporting positive as well as negative information

Credit information can be broadly divided into 2 categories: negative and positive. Negative information covers defaults and late payments. Positive information includes, for example, on-time loan repayments and the original and outstanding amounts of loans.

A credit information system that reports only negative information penalizes borrowers who default on payments-but it fails to reward diligent borrowers who pay on time. Sharing information on reliable repayment allows customers to establish a positive credit history and improves the ability of lenders to distinguish good borrowers from bad ones. Sharing more than just negative information also ensures that a credit information system will include high-risk borrowers that have accumulated significant debt exposure without yet defaulting on any loans.

Sharing full information makes a difference for lenders. A study in the United States simulated individual credit scores using only negative information and then using both negative and positive information. The negative-only model produced a 3.35% default rate among approved applicants while the use of both positive and negative information led to a 1.9% default rate[16].

A study of Latin American economies suggests that where private credit bureaus distribute both positive and negative information and have 100% participation from banks, lending to the private sector is greater-at least 47.5% greater[17].

Collecting and distributing data from retailers and utility companies

One effective way to expand the range of information distributed by credit registries is to include credit information from retailers and utility companies-such as electricity providers and mobile phone companies. Providing information on the payment of electricity and phone bills can help establish a good credit history for those without previous bank loans or credit cards. This represents an important opportunity for including people without traditional banking relationships. A recent study across 8 global mobile money operators found that 37% of their customers lacked a bank account[18].

But including this information can be challenging. Utilities and retailers are regulated by different institutions than financial companies are. They also might have to be convinced that the benefits of reporting bill payment outweigh the costs.

A utility in the United States has clearly benefited. In August 2006, DTE Energy, an electricity and natural gas company, began full reporting of customer payment data to credit bureaus. DTE customers with no prior credit history-8.1% of the total, according to a recent study-gained either a credit file or a credit score. And customers began to make payments to DTE a priority. Within 6 months, DTE had 80,000 fewer accounts in arrears[19].

A study in Italy looked at the effect of providing a credit bureau with payment information from a water supply company[20]. The credit bureau, CRIF, set up a credit scoring model, the "water score," which took up to 3 years of payment of water bills into consideration. More than 83% of water customers who previously had no credit history now have a positive one thanks to paying their water bills. This has made it easier for them to obtain credit. Those benefiting most include young entrepreneurs and families with only one income-2 of the groups that tend to lack bank accounts in Italy.

Today, credit bureaus or registries include credit information from sources other than banks in 6 economies in the Sub-Saharan Africa region (...). In these 6 economies, coverage of borrowers is 24 percentage points higher than in those where credit bureaus or registries do not include information from retailers or utility companies.

After 1 year of operation, Rwanda's first private credit bureau expanded the range of credit information distributed and included data from 3 non-financial companies. In April 2011, 2 mobile phone companies (MTN and Tigo) and an electricity and gas company (EWSA) started providing credit information to the private credit bureau. The results were rewarding: after just a couple months collecting the data from new sources, the credit bureau's coverage increased by 2%.

Lowering or eliminating minimum loan thresholds

Where the thresholds for loans included in a credit bureau's database are high, retail and small business loans are more likely to be excluded. This can hurt those that could benefit the most from credit information systems-namely, female entrepreneurs and small enterprises, whose loan values are typically lower. Because women make up 76% of all borrowers from microfinance institutions[21], credit bureaus and registries that collect and distribute data on microfinance (typically low value) loans are more likely to support female entrepreneurship. Note that public credit registries usually set relatively high thresholds for loans-$34,260 on average- since their primary purpose is to support bank supervision and the monitoring of systemic risks. Private credit bureaus tend to have lower minimum loan thresholds-$418 on average.

Today, 19 Sub-Saharan African economies (...) have minimum-loan thresholds below 1% of income per capita. Over the past 7 years, 5 economies in the region eliminated their minimum loan threshold (...). Rwanda's public credit registry eliminated its minimum loan threshold to open itself up to more credit information. The minimum loan reported was 500.000 FRW ($1,400) in 2010; now all loans are reported to the registry. Other EAC economies could follow suit.

 

* If you find value in this Excerpt, you may enjoy reading the full publication, Doing Business in the Eastern African Community 2012

Doing Business in the Eastern African Community 2012.© The International Bank for Reconstruction and Development / World Bank. http://hdl.handle.net/10986/5907 License: Creative Commons Attribution license (CC BY 3.0 IGO license)

 

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[16] Barron and Staten. 2003

[17] Turner and Varghese. 2007

[18] CGAP and World Bank. 2010

[19] Turner and others. 2009. Turner. 2011

[20] Preliminary findings of an ongoing internal study at the credit information services firm CRIF SpA, Italy.

[21] World Bank. 2010.

Barriers and Obstacles to Financial Integration in Africa

09.03.2015Excerpt from the African Development Report 2014

The following is an Excerpt from the African Development Report 2014, a flagship publication of the African Development Bank.

Regional financial integration has potential to foster financial sector development and inclusive growth. The development of cross-border banking, capital markets as well as regional financial infrastructure could expand the economies of scale, and lead to a larger pool of resources and better risk-sharing mechanisms.

The potential for reaping the benefits of regional financial integration are likely to be greater in Africa than elsewhere, given that financial markets on the continent are still small and shallow.

However, (...) there are many obstacles preventing countries from reaping such benefits. They include the fact that key financial inclusion principles, such as commitment and compliance to a single and acceptable set of rules, equal access to financial instruments and/or services as well as equal treatment in the use of financial services or instruments were seriously undermined in the process of regional financial integration. Moreover, there seems to be a tendency to mimic existing behavior and intermediation techniques, which in the past led to the concentration of bank lending to a few clients, while excluding the underserved at both micro (e.g. small firms, households and underserved sectors) and macro (fragile or post-conflict and poor African countries) levels.

The Report identifies as important challenges weak entry conditions (e.g. inadequate institutions, poor governance in both public and private sectors and underdeveloped financial markets) and the general lack of national financial inclusion policies that are consistent with an inclusive financial integration agenda.

The Report also argues that it is important for African countries to upgrade their regulatory and supervision frameworks for cross-border banking, harmonize them at the regional level and adopt international standards for financial sector stability and confidence building. This would entail a reduction in transaction costs and raise efficiency benefits for all market players. Most importantly, the strengthening of regulations should not undermine financial institutions' capacity to innovate and serve the low end markets and underserved sectors.

Besides, the Report argues that making available long-term funding at regional level is a precondition for inclusive regional financial integration. This could be achieved through a variety of ways, including efforts to enhance the dynamism and liquidity of stock exchanges, encouraging regional rather than national platforms; helping regional economic communities set up harmonized regional payment and information systems as well as credit registries, developing regional bond markets, and building capacity in local currency funding and infrastructure bond issuance.

* If you find value in this Excerpt, you may enjoy reading the full report, particularly the Chapter 5 on "Harnessing Regional Financial Integration".

Challenges of Integrating Payment Systems in Africa

07.07.2014Charles Augustine Abuka and Belinda Baah

When Alan Greenspan, the then Chairman of the United States Federal Reserve, heard of the terrorist attacks on September 11, 2001, his immediate reaction to the event's potential effects on the financial system was the impact it could have on the payment systems in America, and the knock on affects this would have on the rest of the world. He stated, "We'd always thought that if you wanted to cripple the US economy, you'd take out the payment systems. Banks would be forced to fall back on inefficient physical transfers of money. Businesses would resort to barter and IOUs; the level of economic activity across the country could drop like a rock."[1]

Payment systems form an integral part in any society; by facilitating the payment of goods and services, payment systems' increase the pace of economic expansion, improve the functioning of regional integrated financial markets and contribute to the pursuit of sound macroeconomic policies. Thus, African governments have, like the rest of the world, begun to recognise the sheer importance of sound payment systems and the benefits that could be accrued with their successful integration. Integration of African payment systems has lagged that of the rest of the world partly due to the culture of cash use and technological deficiencies. The original European regional Real-Time Gross Settlement System (RTGS), the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET), started operations in January 1999, more than 15 years ago. In order to be a real force in the expanding global economy, consumers, small and medium-sized enterprises and large corporations alike, must be able to make payments efficiently and safely. Thus, African governments need to improve their payment systems' capabilities to enhance domestic, regional and international trade.

The challenge posed by technical and technological deficiencies in many African nations is one of the greatest obstacles to full integration of payment systems in Africa. This challenge creates obstacles when attempting to link regional payment systems at vastly different stages of development across the continent. The East African Payment System (EAPS), a regional payment system linking the five member countries of the East African Community (EAC) namely; Kenya, Uganda, Tanzania, Burundi and Rwanda, has adopted a phased integration process due to the differing level of advancement with regards to the Real Time Gross Settlement (RTGS) systems in each country. Currently, Burundi and Rwanda are yet to join EAPS. The COMESA Regional Payment and Settlement System (REPSS), has also adopted a phased integration approach, with only 5 of its 19 member states currently linked to the system. The regional payment system to cater for South Africa; the Southern African Development Community Integrated Regional Settlement System (SIRESS), has so far linked the SADC Common Monetary Area (CMA), namely, South Africa, Namibia, Lesotho and Swaziland, to SIRESS (July 2013), with the aim of the rest of the SADC, non-CMA member countries to join in due time.

It is evident that a large number of regional payment systems in Africa have had to adopt a two-stage, or more, implementation programme to ensure integration can take place sooner rather than later. Furthermore, many banks in Africa do not have adequate infrastructure to cater to growing technology requirements. In Uganda, only three (3) out of twenty six (26) commercial banks use Straight Through Processing (STP)[2] technology for processing RTGS transactions, often preventing very quick settlement of transactions due to manual intervention in the processing of transactions.

To combat these challenges, there is a need to put in place harmonised technological standards, regulations and policies that ensure adequate supporting pillars for the payment and settlement systems to be integrated throughout the region and in order to protect payment flows. Additionally, assistance should be provided so that banks are better placed and incentivised to upgrade their systems and keep abreast of the improvements being made within the payment systems sector. There is also need for a drive for greater private sector involvement in payment systems, once the basics have been implemented, such as the implementation of an RTGS system in countries where they do not exist. Private sector involvement will encourage competition and innovations and thus induce competitively priced services, efficiency and hopefully greater accessibility. Moreover regulation that not only ensures adequate oversight of payment systems and their associated instruments, but also promotes an enabling environment for positive change, innovation and safe and efficient practices, must be implemented.

There are a number of fully integrated regional payment systems in Africa that demonstrate that the effective implementation can be achieved. In the West African Economic and Monetary Union (WAEMU), payment system reform saw the Central Bank of West African States (BCEAO) implement a 3-way plan to establish an RTGS system, an automated multilateral clearing system and the development of regional inter-bank card based system, in its member states where these features were lagging. The Economic and Monetary Community of Central Africa (EMCCA) member states are fully integrated in terms of monetary policy, laws and trade rules, partly due to their use of the same currency, the CFA Franc. In 2003, BEAC, the regions Central Bank, launched a reform project for their payment and settlement systems'. EMCCA now has two regional payment systems; SYGMA, operational in all member states since November 2007, is EMCCA's high value RTGS system and the Central African Tele-clearing System (SYSTAC) is an automated deferred net settlement system for retail payments comprised of national clearing centres installed in each of the EMCCA member states.

In our forever-expanding and forever-advancing global society, Africa must ensure that it keeps abreast of all the advances and improvements being made within the payment systems arena to ensure it does not get left behind, and thus fully benefits from being truly connected to the rest of the world. As aforementioned, African nations understand the necessity of sound, interconnected payment systems and in May 2014, the Association of African Central Banks (AACB) committed to strengthening the process of integration of African payment systems by agreeing to a number of initiatives to facilitate the process of regional and eventual continental, integration. The technical staff from AACB member countries have proposed to work together by commissioning a continental body to accelerate integration by, for instance, establishing working groups that will, but are not limited to, ensuring all existing deficiencies in technology, technical capacity, legislative and regulatory frameworks are identified and addressed with strategic plans devised and eventually implemented. Strengthening the legal and regulatory environment will clarify the role of the regulator, the users and the operators of payment systems, improving confidence and thus increasing the use of non-cash payment systems. In addition, the successful implementation of the necessary components of a multilateral clearing mechanism and institutional framework for the development and interconnection of African payment systems will speed up the process of integration. By improving payment systems, barriers to trade are reduced whilst links and networks are strengthened and thus trade and exchange of capital, goods, services and labour across the region will be expanded, promoting economic activities and growth.

[1] Excerpt from, ' The Age of Turbulence by Alan Greenspan,' www.ft.com/cms/s/2/4ff4c5f0-6c33-11dc-a0cf-0000779fd2ac.html

[2] 'Ability to receive and process financial transactions from start to finish utilizing an electronic system and without intervention of any sort.' www.investorwords.com/8422/straight_through_processing.html

 

Charles Augustine Abuka is the Director Financial Stability Department at the Bank of Uganda. He has been involved in the implementation of Uganda's macroeconomic policies since 1998. 
Belinda Baah is an Economist and Principal Banking Officer working in the Bank of Uganda's Financial Stability Department, in the Financial Market Infrastructure Oversight Division.

 

References

  • Geva, B., 'Payment System Modernisation and Law Reform in Developing Nations: Lessons from Cambodia and Sri Lanka ', The Banking Law Journal, 2009. papers.ssrn.com/sol3/papers.cfm
  • 'Payment Systems and Intra African Trade', UNECA, September 2010. www.uneca.org/sites/default/files/publications/atpcpolicybriefs11.pdf
  • 'EAPS Project Appraisal Report', AfDB, October 2012.· 'The Evolution of Payment Systems', the European Financial Review, February 2012.
  • 'The Southern African Development Community Integrated Regional Settlement System (SIRESS): What? How? And Why?', Central Bank of Lesotho, Economic Review, July 2013.
  • TARGET Europe: www.ecb.europa.eu/pub/pdf/other/targetfffen.pdf
  • Wentworth, L., 'SADC Payment Integration System', European Centre for Development Policy Management, August 2013
  • 'Electronic Payments in Africa', the Economist, September 2013.
  • 'Wamz Payments System Development Project in the Gambia, Guinea and Sierra Leone: Progress Report', West African Monetary Institute, November 2013. wormholedev.net/qwamz/

Movable collateral registries and firms’ access to finance

06.01.2014Maria Soledad Martinez Peria

To reduce asymmetric information problems associated with extending credit and increase the chances of loan repayment, banks typically require collateral from their borrowers. Movable assets - assets that are not affixed permanently to a building (e.g., equipment, receivables)- often account for most of the capital stock of private firms and comprise an especially large share for micro, small and medium-size enterprises. Hence, movable assets are the main type of collateral that firms, especially those in developing countries, can pledge to obtain bank financing. While a sound legal and regulatory framework is essential to allow movable assets to be used as collateral, without a well-functioning registry for movable assets, even the best secured transactions laws could be ineffective or even useless.

Given the importance of collateral registries for moveable assets, 18 countries have established such registries in the past decade. However, to my knowledge there is no systematic empirical evidence on whether such reforms have been effective in fulfilling their primary goal: improving firms' access to bank finance.

In a recent paper, Inessa Love, Sandeep Singh and I explore the impact of introducing collateral registries for movable assets on firms' access to bank finance using firm-level surveys for 73 countries. Following a difference-in-difference approach, we compare access to bank finance pre and post the introduction of movable collateral registries in seven countries (Bosnia, Croatia, Guatemala, Peru, Rwanda, Serbia, and Ukraine) against three different "control" groups: a) firms in all countries that did not implement collateral reforms during our sample frame (59 countries), b) firms in a sample of countries matched by location and income per capita to the countries that introduced movable collateral registries (7 countries), and c) firms in countries that undertook collateral legal reforms but did not set up registries for movable assets (7 countries). This difference-in-difference approach controlling for fixed country and time effects allows us to isolate the impact of the introduction of movable collateral registries on firms' access to bank finance.

Overall, we find that introducing movable collateral registries increases firms' access to bank finance. In particular, our baseline estimations indicate that the introduction of registries for movable assets is associated with an increase in the likelihood that a firm has a bank loan, line of credit or overdraft, a rise in the share of the firm's working capital and fixed assets financed by banks, a reduction in the interest rates paid on loans, and an increase in the maturity of bank loans.

The impact of the introduction of movable collateral registries is economically significant: registry reform increases access to bank finance by almost 8 percentage points and access to loans by 7 percentage points. These are sizeable effects considering that in our sample, about 60 percent of firms have access to finance and 47 percent have a loan. There is also some evidence that the impact of the introduction of registries for movable assets on firms' access to bank finance is larger among smaller firms, who also report a reduction in a subjective, perception-based measure of finance obstacles.

Our findings suggest that policymakers in Africa would be wise to adopt movable collateral registries to facilitate firms' access to finance. Currently, in the region, only 8 countries (Ghana, Kenya, Mauritius, Nigeria, Rwanda, Seychelles, South Africa, and Tanzania) have such registries. Clearly, there is scope for reform throughout the continent in this area.

MARIA SOLEDAD MARTINEZ PERIA is the Research Manager of the Finance and Private Sector Development Team of the Development Economics Research Group at The World Bank. Her published work has focused on currency and banking crises, depositor market discipline, foreign bank participation in developing countries, bank financing to SMEs, the impact of remittances on financial development and the spread of the recent financial crisis. Prior to joining The World Bank, Sole worked at the Brookings Institution, the Central Bank of Argentina, the Federal Reserve Board, and the International Monetary Fund. She holds a Ph.D. in economics from the University of California, Berkeley and a B.A. from Stanford University.

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