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This post was originally published on the CGAP website.
The journey toward financial inclusion in the West African Economic and Monetary Union (WAEMU) has made some interesting strides with digital financial services (DFS), even if the journey continues to be long.
According to the regional Central Bank (BCEAO), during the first nine months of 2015, DFS users made 346.9 million transactions worth $8.5 billion, increasing by 33% and 36%, respectively, compared to 2014. Last year, BCEAO updated its regulation for e-money issuance and distribution that will significantly influence the evolution of the DFS market in WAEMU moving forward.
However, let's not lose sight of the fact that only 13% of the adult population in WAEMU has an account at a formal financial institution, and that when mobile money is added, the rate goes up to 18%. Despite its impressive growth, uptake of DFS across WAEMU has been relatively limited compared to its potential, and mobile money activity remains relatively low. For example, in Côte d'Ivoire, over 50% of registered clients report not having used their accounts within the past 90 days; in Senegal, while at least 80% of people are aware of mobile money, only 8% have used such a service.
Over the past several months, CGAP interviewed representatives of 100-plus organizations in Benin, Côte d'Ivoire, Senegal, Mali and Niger to better understand the market system for DFS in WAEMU. A new CGAP report provides an analysis of key actors in supply and demand, rules (e.g., regulations for e-money, telecommunications, competition) and supporting functions (e.g., agent networks, information providers). It also identifies root causes that explain why the DFS market is currently not serving the needs of low-income populations and opportunities for triggering systems-level change.
So what have we learned?
Regulatory environment. The 2006 regulation for e-money has been an enabling factor for the development of DFS, allowing banks and nonbanks to issue e-money. And so far, most mobile network operators (MNOs) have partnered with banks. With the updated 2015 e-money guidelines, the pathway for MNOs to create e-money-issuing subsidiaries is clearer, and some MNOs are embarking on that path. MNOs are expected to become more independent from banks and flexible in developing their mobile money offerings; as such, the partnerships are expected to focus more on developing second-generation DFS, such as credit, savings and insurance.
That said, some regulatory aspects remain unclear or incomplete, including know-your-customer (KYC) requirements, identification, agent banking regulation and access to the USSD channel. Some of these "gaps" are not just the domain of BCEAO; national telecom authorities, national identification offices and other national authorities are also involved. This will require further consultation and dialogue, as well as careful consideration of market specifics for each of the eight WAEMU countries.
Private sector. A key constraint identified by this study is that many banks, MFIs and even some MNOs are simply not convinced of the "business case" of growing their DFS offerings - they view it as too risky and not profitable enough. Distrust between MNOs and financial institutions (i.e., banks and microfinance institutions) is also impeding "deeper" partnerships that would offer DFS beyond cash-in/cash-out, person-to-person transfer and bill payments. While these are starting to develop in some of the more advanced WAEMU markets, it is still rare for financial institutions and MNOs to view each other as valued partners whom they trust and prioritize in their future growth strategies.
We hope that donors and policy makers, to some extent, will play a stronger role in encouraging providers to adopt a long-term approach to developing DFS as well as develop DFS channels and offerings suited for low-income customers.
Agent networks. Current agent networks without a doubt need to be expanded, both in number and location (in rural areas especially). However, this growth needs to be sustainable to ensure that agents remain active, provide good quality of service and are sufficiently liquid. That requires developing supporting infrastructure, such as telecom network coverage, and partnerships between MNOs and actors that can provide financial services to agents. It is also critical to provide training to help agents grow their businesses (and remain active) and monitoring to ensure their compliance with KYC and Anti-Money Laundering/Combating the Financing of Terrorism requirements.
Information. Up-to-date, publicly available information on both demand and supply of DFS in WAEMU is relatively limited, as is knowledge on what DFS offers have worked (or not) and why. A rapidly evolving market and an unwillingness by some actors to share data are at play. Limited resources and the capacity of actors to conduct, analyze and publish such research also contribute to this lack of information. Furthermore, even when such information is available, it may not always be widely communicated or presented in useful forms.
Some efforts are underway in a few countries to remedy to this challenge. Future information collection and knowledge-sharing initiatives should consider presentation and communication aspects as early on as possible, and as equally important to the actual content.
Political will. Lack of sufficient infrastructure and education in general are some of the most commonly cited constraints to greater DFS uptake. However, the root cause of many of these seems to be national political will and capacity to build the needed infrastructure (and to incentivize MNOs to deploy telecommunications infrastructure in rural areas), operate an educational system that ensures at least a minimum level of schooling and literacy of the entire population, and incentivize digital payments.
We hope to see national governments, in collaboration with BCEAO, prioritize these issues. The regional financial inclusion strategy developed by BCEAO offers a good framework for such efforts. Donors and development actors can support the implementation of this strategy through funding, technical assistance and encouragement to government partners to prioritize this work.
We need to push the boundaries for DFS to sustainably develop and continue to advance financial inclusion WAEMU. This report (in English and French) provides detailed information and analysis for market actors and donors to take on and work toward achieving this goal.
About the Author
Estelle Lahaye is a Financial Sector Specialist for CGAP, and leads experimentation and research activities to help create an effective and innovative ecosystem for digital financial services in WAEMU. She also contributes to CGAP's research agenda on how donors and investors can facilitate the development of inclusive financial markets.
African banking sectors have witnessed significant changes in their structure over the past several decades with the penetration of regional cross-border banks. We have investigated whether these changes have led to more competition in the banking industry.
The entry of foreign banks increases the number of players and therefore, is likely to increase competition in the banking sector. Moreover, cross-border banks have a comparative advantage when entering new markets in terms of better access to capital, risk diversification, scale economies, skill and management expertise. In particular, foreign banks that originated from Africa have an additional competitive advantage in dealing with countries sharing similar institutional, cultural and economic characteristics. These banks could thus adopt more aggressive strategies to gain market shares.
Several factors, however, may limit the ability of African cross-border banks to increase competition in host markets. The effect of foreign banks entry on competition is conditional to market strategies and the degree of engagement of the regional banks in host countries. For instance, the entry of new banks can exert no effect on competition if these banks follow their clients abroad or focus on a fringe demand that is not financed by domestic banks. Thus, a foreign bank might become a dominant player and reduce contestability. In addition, the multi-market contact theory documents that firms interacting in several markets have more incentives to collude. Therefore the fact that cross-border banks interact in different national markets may reduce their willingness to compete.
To investigate how the expansion of regional banks in Africa has affected banking sector competition, we compared the evolution of competition and the market share of African cross-border banks over the period 2002-2009 in a sample of seven West African countries (Benin, Burkina-Faso, Côte d'Ivoire, Mali, Niger, Senegal, Togo). We used 3 different measures of competition: the Lerner index, the Panzar-Rosse H-statistic and the Boone indicator. Countries under consideration in this study, which are all members of the West African Economic and Monetary Union (WAEMU), have a major advantage for our purpose. Since the mid-2000s, the WAEMU banking landscape has changed dramatically with the arrival and expansion of new banks from Africa. African cross-border banks began their expansion in the WAEMU ten years ago, whereas this change has occurred very recently elsewhere in the continent.
The findings of this study reveal that the penetration of regional banks goes hand-in-hand with more competition among banks. The results show that the degree of competition has increased since the mid-2000s.
Put differently, the expansion of regional banks seems to spur competition in Africa. These preliminary results should be confirmed by a more rigorous test including more African countries. In addition, further research should analyse the consequences of the development of cross-border banks on banking efficiency, stability and inclusion in Africa.
This blogpost is based on the paper "Has competition in African banking sectors improved? Evidence from West Africa", prepared by Florian Léon from the University d'Auvergne - CERDI.
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".
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."
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) 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.
 Excerpt from, ' The Age of Turbulence by Alan Greenspan,' www.ft.com/cms/s/2/4ff4c5f0-6c33-11dc-a0cf-0000779fd2ac.html
 '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.
- 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/
While cross-border banking has been historically important in Africa, its face has changed over the past decade. African banks have not only substantially increased their geographic footprints on the continent (Figure 1), but have also become economically significant beyond their home countries and of systemic importance in a number of jurisdictions across Africa. Today, eight banks headquartered in Africa are represented through subsidiaries or branches in more than 10 African countries each and in at least 9 instances do these banks individually hold more than 30 percent of banking system assets in a host country.
Figure 1: Cross-Border Expansion of African Financial Groups over Time, 1990-2013
This growth and expansion of African banks has in recent years reduced the relative importance of traditional, mostly European, banks on the continent and has shifted the onus of managing the risks and reaping the benefits of cross-border banking from the traditional home countries in Europe towards African policymakers. Yet there continues to be a lack of comprehensive research and analysis on this topic. "Making Cross-Border Banking Work for Africa", a new policy report sponsored by the Association of African Central Banks, the German Development Corporation and the World Bank, aims to fill this gap and to contribute to the on-going conversation among regulators, donors, and policymakers on the benefits and risks of further cross-border integration of banking in Africa. Authored by Thorsten Beck, Michael Fuchs, Dorothe Singer and Makaio Witte, the report documents the emergence of cross-border banking in Africa, reviews the literature on the benefits and risks of cross-border banking, assesses regulatory frameworks and current arrangements for cross-border supervisory cooperation in Africa, and provides policy recommendations for balancing the benefits with the risks of deepening cross-border linkages across Africa.
Policymakers across Africa are faced with the challenge of pursuing two policy objectives with inherent trade-offs: leveraging the benefits from further financial integration while effectively safeguarding banking systems against fragility and cross-border contagion. In view of the low level of financial sector development in many countries, Africa stands to gain especially from further cross-border integration.
The benefits for financial systems in Africa can take the form of financial innovation, more efficient intermediation and deepening of financial markets. Given the low levels of financial intermediation in most African banking sectors, considerable upside potential lies in the transfer of know-how, IT infrastructure, and risk-management skills relating to low-income, retail banking and products suited to small savers and enterprises. Most cross-border banks are still reluctant to engage in servicing the lower end of the market, but exceptions exist. Strengthening financial infrastructure, including payment systems and credit registries, can help deepen the benefits from cross-border banking, especially if undertaken in a coordinated manner across countries. A move towards allowing more integrated banking models, whereby integration of IT and risk-management systems, transfer of human resource skills and innovation are encouraged, in contrast to the 'fortress banking' of stand-alone subsidiaries preferred by many host country regulators for stability reasons, may also help by lowering the cost of doing business and thus making service provision to the lower end of the market more cost-effective and attractive. Finally, it may also be beneficial to encourage the entry of banks that are experienced in servicing underserved market segments.
To effectively safeguard banking systems against fragility and cross-border contagion, the report calls for stronger national supervision and enhanced cross-border cooperation. The challenging, but essential task of establishing or improving frameworks for consolidated supervision tops the agenda in this respect. Improving the availability and regular exchange of relevant information is critical and can be fostered through Memoranda of Understanding and Colleges of Supervisors. While considerable progress is being made in Africa in establishing such formal structures, the true challenge is to make them effective and enable regular cooperation based on trust and mutual recognition. It is also important to look beyond these tools of cooperation in normal times towards crisis preparation. While there is again an important agenda on the national level - putting in place effective mechanisms for bank exit at the national level is a prerequisite not only for strengthening cooperation among African countries, but also for enhancing the effectiveness of banking supervision at the national level - measures to strengthen bank resolution frameworks and crisis preparation should be extended across borders and can include joint crisis simulation exercises and crisis management groups.
The policy agenda on cross-border banking issues is extensive and action will be required both on the national as well as on the regional level. Given the widely varying circumstances of African countries, including in terms of financial sector development and intensity of cross-border linkages, policy recommendations need to be adapted to the context of individual countries. But an overarching conclusion arising from the report is that information exchange needs to be strengthened considerably in the face of expanding cross-border banking activity. The report therefore recommends establishing a platform for regular information exchange that makes publicly available a basic set of data about cross-border banking activities in Africa to address the lack of timely information in this area. This will not only be an important first step in facilitating better supervision of cross-border activities and thus contribute to the safeguarding stability and preparing for bank fragility but also in fostering closer collaboration between national authorities.
The "Making Cross-Border Banking Work for Africa" report was launched at the Partnership Forum in Dakar, Senegal, on June 12, 2014. It is available for download in either PDF or eBook friendly tablet reader formats:
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