Africa Finance Forum Blog

Emerging Trends in Digital Delivery of Agri-finance

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

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

                      

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

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

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

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

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

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

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

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

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

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

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

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About the Authors

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

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

Pension provision in Africa remains low

26.09.2017Gerald Gondo, Business Development Executive, RisCura Africa

This post was originally published on the Financial Nigeria Website.

With 72% of sub-Saharan Africans employed in the informal sector, the traditional pension system is being called into question.

The traditional pension system of course works on the premise that members are formally employed, work for 40 years and contribute regularly during this period, resulting in suitable retirement savings. As more people enter the labour force and become formally employed, they are in essence able to contribute towards their future savings.

If we juxtapose the traditional model to the current African landscape, where most people are employed in the informal sector, consistent employment for one year - let alone 40 years - is a stretch. While permanent or continuous employment may not be a reality for many in Africa, these members of African society (where possible), remain economically active in the informal economy during periods of unemployment.

Pension coverage

The large numbers employed by the informal economy have historically limited the size of traditional pension funds and partially resulted in the continent’s low level of pension coverage. According to the International Labour Organisation, in sub Saharan Africa, only 8% of the labour force contributes to pension insurance and earns rights to a contributory pension, compared to 47% in North Africa.  As in most low-income countries, the low level of contributor coverage ratio can be explained by the small share of formally employed wage and salary earners, and the pervasiveness of informality, evasion, and inadequate law enforcement.

Despite higher levels of informality in labour markets, the provision of pension coverage and pay-out should remain an imperative if Africa is to make progress on its developmental agenda.

Providing pension access via African-based financial services and distribution channels such as M-Pesa, EcoCash, Leap Frog Investments and Equity Bank, which are innovative and disruptive, are natural and obvious choices.

Importantly, informing the thinking and messaging surrounding the provision of pension to potential members should be driven by simplicity.

Nigeria leads the way

Nigeria, Africa’s most populous nation, is leading the charge in making advances towards an alternative pension model for the informal sector. Its National Pension Commission (PenCom) has adapted their existing pension scheme for formally employed workers - the Contributory Pension Scheme - by making it the backbone for the rollout of the Micro Pension Plan of Nigeria.

The Micro Pension Plan is designed to cover small-to-medium enterprises, self-employed Nigerians and the broader informal sector. It is estimated that the informal sector constitutes 70% of Nigeria’s total workforce. In the absence of the Micro Pension Plan, these economically active citizens would not be covered by any form of structured pension scheme. Out of a total 59 million adults in Nigeria, there are 38 million potential contributors that will come from the informal sector by activating the micro pension scheme. As at the end of 2016, total pension scheme membership for the formal sector alone in Nigeria was almost eight million members.

Target-Dated Investing

At RisCura, we strongly advocate for pension fund fiduciaries to spend more time on objectives or goal setting. But, we are mindful that this must also take into account the nuances of Africa’s developing savings base and the differences between micro and traditional pension plans.

There may be merit for pensions and savings practitioners to look to Target-Dated Investing (TDI) for micro pension products. Under TDI, the member has a clear view of the investment strategy being undertaken on their contributions based on a set term to retirement that they have selected. TDI offers informal savers the benefit of a simplified savings programme and the goal is to ensure that the investment starts paying out at a pre-set date.

The combination of micro pension provision and TDI presents itself as an acceptable compromise for the possibility of an erratic contribution from some members. This dynamic may not offer the most elegant solution, but may serve as an important initiator of further improvements.

Echoing the sentiments of former Nigerian President Olusegun Obasanjo, “Emphasis must be placed on the urgent need for pension arrangement for the informal sector, given that it constitutes at least 61% of urban employment across the continent and will be on the rise due to population growth. We advocate for micro pensions, especially as the proportion of Sub-Saharan Africans in vulnerable employment has attained an alarming rate of 85% for women and 70% men”.

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About the Author

Gerald Gondo serves as an Executive within RisCura Africa and is responsible for Business Development. Prior to joining RisCura, Gerald was also a founding partner of a specialist investment advisory and investment management business (Atria Africa) based in Mauritius. Gerald's passion to have first-hand experience in investing in Africa led him to join a leading pan-African asset manager (Imara Asset Management) where he had dual responsibility of being lead analyst on listed equities in Egypt, Morocco, Zambia and Mauritius whilst also building the fixed income capability of Imara Asset Management in Zimbabwe. He started his career in private equity investment in Sub-Saharan Africa (Business Partners) and has also worked as a credit analyst for a highly-rated specialist institutional fixed income boutique (Futuregrowth Asset Management), where he was responsible for credit analysis for corporate credit and securitisation issuances within South Africa.

Capital requirement, bank competition and stability in Africa- Q&A Session

05.09.2017Jacob Oduor, Principal Research Economist, African Development Bank

This Q&A session highlights key insights of a study co-authored by Dr. Jacob Oduor, economist with African Development Bank. The research shows that increased capital beef-up significantly increases financial instability in Africa (except in big banks) implying that higher capital requirements did not make African banks safer.

1. Why did you choose a topic on the banking sector, precisely on regulation? Is there any subdued risk with African banking system that justifies your research?

The banking sector is important in driving economic growth through intermediation of investment resources. Its effectiveness in achieving this role can however be undermined by one-size-fit-all regulations. In Africa, where financial inclusion is still low, any regulation that increases the cost of financial services may be counterproductive in achieving the broader economic growth objectives. If increased capital requirements can achieve its core objective of financial stability without adversely affecting the cost of financial services, then it is welcome. That tradeoff is important but sometimes difficult to strike.

2. Basel I, Basel II and now Basel III have called for capital build-up over time. In your view, how will the latest reform affect African banks?

Capital build up has the consequence of creating bigger banks. There are two main problems with this. First, emerging evidence show that bigger banks are not necessarily safe. They perceive themselves to be "too big to fail" and therefore engage in more risky investments and are more vulnerable to shocks that smaller banks (Berger and Mester, 1997[1]) and such regulation may just as well increase banking sector instability in Africa. The second and more important consequence for Africa is that capital build-up concentrates the banking industry, reduces competition, has the potential to drive up costs of financial services and stifle financial inclusion. The high initial capital stringency requirements can impose entry barriers for new entrants and this would restrict competition and allow existing banks to accumulate market power (Berger et al; 1993[2]). In a continent where financial inclusion is pathetically low, such regulation may have more negative consequences than benefits.

3. Your research was centered on the impact of regulatory build-up on first financial sector stability and second competition. What did your research reveal?

The results show that increased capital beef-up significantly increases financial instability in Africa (except in big banks) implying that higher capital requirements did not make African banks safer. We also find that increased regulatory capital improves competitive pricing for foreign banks while it makes domestic banks less competitive. This is mainly attributed to the high cost of sourcing and holding extra capital for domestic banks compared to foreign banks who can source cheaper capital from parent companies. The results put to question the effectiveness of higher regulatory capital on stability and competitiveness of the African financial system.

4. Did you find in your literature review similar conclusions?

While other studies including Furlong and Keeley (1989)[3] and Keeley (1990)[4] found stabilizing effects of increased capital requirements, other studies have come to similar conclusions as our study. Boot and Greenbaum (1993)[5] for instance find that capital requirements reduce monitoring incentives, which reduces the quality of banks' portfolios increasing the risk of instability. Hakenes and Schnabel (2010)[6] on the other hand show that tighter capital requirements increases the risk of individual loans and may also increase a bank's probability of default because they relax the competition for loans and thus destabilizing the banking sector.

On increased capital requirements and competition, similar findings as ours were obtained by Bikker & Groeneveld (1998)[7] who assessed competitive structure in the banking industry in the EU and finds that concentration impairs competitiveness. Similar findings were also obtained by and Claessens and Laeven, 2004[8] among others.

5. In your research, you also test your model for reserve causality. What was the idea behind the test and what did the test show?

The potential for reverse causality emanates from the fact that banks that are viewed by the regulators to be less stable are likely to be asked to keep higher capital ratios compared to more stable banks. Instability may therefore be a cause of higher capital requirements for banks as much as higher capital requirements may be a source of instability. The results using instrumental variables approach, confirm the findings that increased capital ratio increases instability in the banking sector.

6. You mentioned that some critics argue that Basel III is too complex and allows banks to use in-house creative models to hold less capital than they should. Can you talk more about some of these techniques and how can regulators address the shortcoming? How will/should this be addressed in the context of the African continent?

Amendments to the Basel Accord in 1996 permitted regulators to accept assessments from banks' internal risk-management models in setting capital requirements for the market risk in banks' trading portfolios. Consequently, trading-book models have become increasingly common in banks. These models generally estimate value at risk (VaR). Because of the large number of traded securities, trading-book VaR models inevitably use a large number of simplifying assumptions resulting in different estimates of value at risk. It is therefore not inconceivable that some banks use these internal models to understate their risks in order to maintain less regulatory capital which exposes the whole sector to risks. To remedy such situation, regulators must ensure banks calculate their risk weightings and capital requirements on the basis of a common standardized approach. In-house models could be used to supplement but not substitute standard models. To reduce the ability of banks to hide risky assets there is need for reduced discretion of banks in calculating their risk weightings by narrowing the range of modeling choices for banks and improving public disclosure by banks. There is also need to explore regulation with varying standards based on complexity and risk.

7. In the US, the concept of "too big to fail" has emerged as a hot contentious topic between regulators, policy makers and banks. A debate between breaking up large banks or at the very least the reinstatement of some Glass-Steagall-like legislation and the status quo. You cite the example of Nigeria as evidence that consolidation is not the answer to the banking system stability. Do you see any systemic risk associated with the size of the banks operating in our continent? Have some of them reached that critical level?

While this study did not go into establishing the specific threshold beyond which inefficiency sets in, experience has shown that big banks can fail and there is a threshold size beyond which decreasing marginal returns sets in. Attempting to build resilience through indefinite increase in capital requirements may be counterproductive. In addition, capital buffers on their own without accompanying regulations are at best, inadequate. Regulation must therefore look beyond the size of the banks. Market concentration in the banking industry in Africa is high compared to the developed world and therefore the potential for systemic risk exists, but whether some African banks have reached that threshold is an area for further research. What is clear from our results is that prescriptive blanket regulations on capital buffers has not helped reduce that risk. Dealing with systemic risk should not therefore overemphasize on size, but accompanying regulations to ensure good governance and prudent risk taking irrespective of the size.

8. If capital build-up is not the answer to increase financial sector stability, what types of policy should regulators and policy makers pursue/explore in their quest for a strong, deep and liquid financial sector?

Capital build up is still important in building resilience, but it is not the only way to build resilience, not in all contexts and on its own it is inadequate. Regulators must be able to identify the sources of systemic risks and develop regulatory instruments that are able to deal with different kinds of risks. Internal governance weaknesses is turning out to be a major source of instability in the banking sector in many countries both in Africa and in more developed markets. This kind of risk cannot be cured by increasing capital buffers. Improvements in monitoring and supervision of banks may as well give the same financial stability outcome without jeopardizing financing inclusion objectives.

9. What is your opinion on the emerging rivalry between fintechs and banks and do you see this as an inevitable event to improve efficiency and increase inclusion? From the regulatory stand-point, what if need be, can be improved?

Without a doubt, fintechs have disrupted the business-as-usual way of traditional banks and helped improve financial access and efficiency beyond the boundaries that traditional banks were willing to go. From mobile money payment and transfer services, to savings and credit services through the mobile phone platforms, fintechs have proved to the banks that your can reach the low-income unbanked and still make profits. Banks are increasingly adopting the same approaches to delivery financial services in order to stay in business. However, in some instances, the pace of adoption of new technologies in the financial sector is faster than regulations. A number of regulators have not developed tools and infrastructure including state of the art reporting and analytics infrastructure to support and sufficiently regulate the fintech innovations. In most cases, fintech companies are discouraged by the time and cost of registering and complying with regulations. This is a particular problematic in the financial services sector in Africa where political interests are still intense and where intruders coming to share the profits are not welcome. In addition, regulations should be flexible and fintech companies should not be forced into the same costly regulatory mold as traditional banks, which may stifle innovative capacity of start-ups.

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[1] Berger, A. N. & L. J. Mester. 1997. Inside the black box: What Explains Differences in The Efficiencies of Financial Institutions? Journal of Banking & Finance, Vol. 21, pp. 895-947

[2] Berger A. N., W. Hunter, and S. Timme. 1993. The Efficiency of Financial Institutions: A Review and Preview of Research Past, Present, and Future, Journal of Banking and Finance, Vol.17 pp. 221-249

[3] Furlong, F. T. and M. C. Keeley. 1989. Capital Regulation and Bank Risk-Taking: A Note, Journal of Banking and Finance 13, 883-891.

[4] Keeley, M. C. 1990. Deposit Insurance, Risk and Market Power in Banking, American Economic Review, Vol. 80(5), pp. 1183-1200

[5] Boot, A.W., and S. Greenbaum. 1993. Bank Regulation, Reputation, and Rents: Theory and Policy Implications. In: Mayer, C., and Vives, X. (eds), Capital Markets andFinancial Intermediation. Cambridge, UK: Cambridge University Press, 292-318.

[6] Hakenes, H. and I. Schnabel. 2010. Capital Regulation, Bank Competition, and Financial Stability, Leibniz University of Hannover, MPI Bonn, and CEPR

[7] Bikker J.A. and J.M. Groeneveld. 1998. Competition and Concentration in the EU Banking Industry Research Series Supervision 8, Netherlands Central Bank, Directorate Supervision

[8] Claessens, Stijn, and Luc Laeven. 2004. What Drives Bank Competition? Some International Evidence. Journal of Money, Credit, and BankingVol. 36, pp. 563-583

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About the Author

Dr. Jacob Oduor is Principal Research Economist at African Development Bank (AfDB). He is a holder of Ph.D in Economics from Bielefeld University, Germany. He is also a holder of MA (Economics) and BA (Economics)- First Class Honours from Kenyatta University, Nairobi, Kenya. Prior to joining AfDB, Dr. Oduor lectured in the School of Economics at Kenyatta University and he worked with the Cooperative Bank of Kenya and the Kenya Institute for Public Policy Research and Analysis (KIPPRA). Dr. Oduor is an accomplished time series econometrician specialized in: time series, cointegration, general macroeconomic theory and policy, monetary policy and growth theory.

"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.

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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.

To the Future and Back: Financial Inclusion in the Arab World

17.07.2017Nadine Chehade, Financial Inclusion Specialist, CGAP

This post was originally published on the CGAP website.

Imagine it is 2030 and nearly everyone in the Arab world has access to financial services. Over the past two decades, legal reforms have expanded the financial market for existing and new financial service providers, spurring greater specialization and competition. People can make small payments (whether P2P, P2B, B2B, P2G, or G2P) in seconds - rendering the half-a-day trip to pay a utility bill a story from the past. Deposit amounts within the formal financial system, whether at full-fledged banks, payments banks or microfinance banks, have increased two- to five-fold. Fueled by this additional liquidity, formal lending to the private sector and to individuals has had a multiplier effect, contributing to GDP growth to an extent that has actually reduced inequalities. More private-public partnerships are soon expected to provide near-universal insurance coverage to all.

Now back to reality. In 2017, the picture is starkly different. Analysis of the available Findex data, as shown in a joint Arab Monetary Fund-CGAP report on financial inclusion measurement in the Arab world, points to a large unmet demand for financial services. Our analysis shows that 70 percent of adults in the region (168 million people) lack access to a basic account, and this figure reaches close to 80 percent in the region's developing countries. Significantly, our analysis also shows that many of the unbanked are active economic citizens, as evidenced by the fact that 92 million people report borrowing informally. Taken together, these figures suggest that financial service providers have an opportunity to address a huge unmet demand across the Arab world, including in countries with relatively more active financial markets.

At first glance, it might be hard to believe that a full 70 percent of people in the region lack access to a bank account. But the trends are identical when analyzing the supply-side figures from the International Monetary Fund's Financial Access Survey. No matter how you look at it, whether by surveying people in the streets or by aggregating data from financial service providers, the conclusion is the same: The Arab world lags behind other regions in access to formal financial services.

Source: Findex 2011 and 2014 data, except for bars in purple, computed based on the Findex data.

Note: Findex reports an average of 14% for "Middle East developing countries," including Egypt, Iraq, Jordan, Lebanon, Palestine, and Yemen. Other figures for the Arab world are calculated as averages weighted by the population aged 15+. GCC countries include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. The Arab world includes all AMF member countries, namely GCC countries and Algeria, Comoros, Djibouti, Egypt, Iraq, Jordan, Lebanon, Libya, Mauritania, Morocco, Palestine, Somalia, Sudan, Syria, Tunisia, and Yemen.

Source: Findex 2011 and 2014 data, except for Morocco (estimated by applying to the 2011 Findex data the growth rate reported by Bank Al Maghrib on the number of accounts as collected from financial service providers).

Note: Only 2011 data are presented for countries where no data for 2014 are available (Comoros, Djibouti, Morocco, Oman, Qatar, Syria).

The good news is that we are getting closer to the future I described above. The Arab world has seen tangible progress in financial inclusion over the past few years, including changes to legal and regulatory frameworks, which have historically been (and still often are) the region's main obstacles to financial inclusion. Many of the changes from 2011 to 2015 focused on microcredit, but several countries made it possible for non-bank financial institutions to offer credit services and to market insurance products on behalf of insurance companies for the first time (e.g., Tunisia law-decree n°117, Palestine regulation n°132, Egypt microfinance law n°141, and Jordan microfinance companies regulation n°5). More recently, revamped banking laws have authorized payments companies licensed and supervised by a central bank to issue transactional accounts (e.g., Morocco's 2015 banking law n°12.103 and Tunisia's 2016 banking law n°48). Upcoming executive regulations in Morocco and Tunisia are expected to make a big difference in processing small payments for the unbanked and banked alike. Jordan now allows both refugees and nationals to open e-wallets, after taking the bold bet of mandating interoperability among mobile payment service providers from the first day of operations (unlike in many other countries, where interoperability may take years). Qatar, which like many GCC countries hosts large numbers of migrant workers, made remittances through mobile easy and cheap, improving the lives of thousands throughout the region and beyond.

As a number of countries put financial inclusion strategies into place, the region is also benefiting from increased knowledge sharing. The Arab Monetary Fund's Financial Inclusion Task Force is one example where knowledge exchange among regional central banks happens. In collaboration with several partners, the task force is making more and more tools available on topics ranging from demand-side surveys and financial consumer protection to de-risking.

Of course, much more remains to be done on all fronts to meet the Arab world's large unmet demand for financial services. Access to small savings, arguably the most important financial service for low-income people, requires more enabling legal frameworks (e.g., tiered licensing of service providers and tiered customer due diligence) so that specialized providers can emerge and become sustainable. The exceptions are perhaps countries like Morocco or Tunisia, where active postal networks play a key role in offering basic services, or Yemen, where a sound microfinance banking law is already in place. Gender-disaggregated data on financial inclusion in the region is not yet available, although it would allow for more targeted policies to nudge social norms on broader women's legal and economic rights. Lastly, even where regulation and infrastructure are in place, financial inclusion stakeholders have yet to witness success stories and market gaps being truly addressed.

Hopes are nonetheless high, and arguably the biggest change to take place over the past five years is encouraging: the shift in discourse among policymakers, who now acknowledge financial exclusion realities. The emerging consensus is that there is an untapped market and a huge opportunity to bring adapted financial services to those who need them, for the benefit of all. To advance financial inclusion, we need fact-based policies, implemented and championed by a critical mass of policy-makers who are eager to improve their countries' financial systems. Now that a number of institutions are joining forces to make this happen, today's opportunities may very well become tomorrow's realities.

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About the Author

Nadine Chehade is CGAP's representative in the Arab world. She works to deepen CGAP's engagement in the region, collaborating with various partners, including regulators and policy-makers, donors and investors, and national and regional associations. She covers matters related to policy, research, and donor coordination, with the overarching goal of advancing financial inclusion. Nadine joined CGAP in 2012, bringing ten years of experience in investment banking, management consulting, and microfinance. Prior to that, she worked as Planet Rating's Business Development Manager and MENA Director. Nadine holds an MBA from ESSEC in France. She is fluent in Arabic, English, French, and conversational in Spanish.

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