Africa Finance Forum Blog

Unlocking infrastructure potential in Africa: The role of sovereign wealth funds

29.06.2017Seedwell Hove, Senior Macroeconomist, Quantum Global Research Lab

This post was originally published on the Quantum Global Group website.

Sovereign wealth funds (SWFs) are increasingly becoming major sources of finance in many countries. Commonly established from balance of payments surpluses, foreign currency reserves and fiscal surpluses, global SWF assets under management have grown rapidly in recent years, topping US$7.2 trillion in 2015, more than double the asset base in 2008. African countries have joined the international trend in establishing SWF in recent years, with assets under management now over US$159 billion (6.4 percent of Africa's GDP). The rapid growth of SWFs in Africa has been catalysed by high commodity prices from the early 2000s till 2014, coupled with the recent discoveries of oil, gas and solid minerals in countries like Ghana, Kenya and Tanzania. Despite the plunge in commodity prices since 2014, SWFs continue to increase both in number and in assets under management.

At the same time, Africa has huge infrastructure gaps which are constraining growth. The World Bank estimates that about US$93 billion is required annually to meet the continent's infrastructure needs, but only half of that amount is currently being met. Booming population growth and increasing life expectancy across the continent is pushing up demand for utilities such as water, power, roads and telecommunications, which few countries are providing in sufficient quantities. About 19 percent of roads in Sub-Saharan Africa are paved, compared with 27 percent in Latin America and 43 percent in South Asia. Some 57 percent of the population in Africa lack access to electricity and about 30 countries face regular baseload power shortages, resulting in the payment of high premiums for emergency power. The proportion of people with access to improved water sources is 68 percent in SSA compared with 94 percent in East Asia and 95 percent in Latin America. Inadequate infrastructure is raising the cost of doing business, hindering trade integration and constraining growth. The poor state of infrastructure is estimated to reduce growth by two percentage points every year and cut business productivity by as much as 40 percent. Africa's firms lose five percent of their sales due to power outages and this figure rises to 20 percent for firms in the informal sector.

Accelerating Africa's growth hinges on closing the infrastructure gap, yet mobilizing finance for infrastructure development remains a daunting challenge.

The scope for financing infrastructure from traditional sources such as public revenues, banks and debt markets is limited, especially after the global financial crisis. Thus Africa needs new sources of finance for infrastructure, and sovereign wealth funds can contribute significantly in financing infrastructure.

SWFs are well positioned to finance infrastructure, for several reasons. First, they have a long-term investment horizon, and can provide long-term capital which is necessary for infrastructure financing. Second, they usually have limited or sometimes no explicit liabilities (since they are usually drawn from the fiscus), in contrast to other institutional investors such as pension funds. Third, infrastructure provides reasonably higher and inflation-protected yields, coupled with lower correlation to other financial assets, which implies lower risk. Fourth, once constructed, infrastructure assets are less vulnerable to economic downturns compared with other assets which are pro cyclical. Given Africa's demographics and infrastructure financing gaps, channeling SWF resources towards infrastructure is a positive step towards building above-ground assets for future generations.

Asset allocation of African SWFs is largely determined by their mandates, which include economic stabilization, intergenerational savings accumulation, buffers against economic shocks, wealth diversification and economic development (e.g. infrastructure and industrial development). In addition, economic outlook, fiscal situation, market trends, investment beliefs, regulations, risk appetite and liability considerations also influence investment decisions of SWFs. Our analysis suggests that allocating about 20 percent of the current African sovereign wealth funds could cover Africa's annual infrastructure financing gap atleast for a year, assuming no inefficiencies. Allocating about 15 percent of African SWFs could close the energy financing gap while the water and sanitation financing gap could be covered by an allocation of 8.4 percent of Africa sovereign wealth funds. For a sample of countries which have established SWF, there is positive correlation between SWF assets and access to electricity, suggesting that SWF can make a difference in infrastructure development.

There are many opportunities for investing in Africa's infrastructure. Africa has abundant natural resources (10 percent of world reserves of oil, 40 percent of gold, 80-90 percent of chromium and the platinum group of minerals and agriculture resources which provide opportunities for infrastructure investments in resources and industrial beneficiation sectors. The continent is also undergoing rapid urbanization, with relatively young labour force and growing middle class which provide opportunities in real estate, telecommunications, energy and water and sanitation sectors. Africa's population will more than double to about 2.4 billion by 2050, representing growing future demand for infrastructure. Estimates suggest that demand for energy in Africa will grow at 6 percent per year to 3 100 terawatt hours (TWh), while transport volumes will increase by 6-8 times the current amount by 2040. Returns on investments in Africa have been considered to be higher than in other developing regions, which could be the case for infrastructure investments, considering existing infrastructure funding gaps, especially in energy, transport and water and sanitation. While opportunities for infrastructure investments in Africa are immense, there are also some risks to consider. For instance, political risks (e.g. arising from change of governments), currency fluctuations, commodity price fluctuations, financing risks and lack of high quality data to measure and manage risks.

SWF can certainly play an important role in financing infrastructure development in Africa. For this to be possible, African SWFs need to have clear objectives and ensure that their investment strategies are consistent with their set mandates. SWF can make efforts to allocate a sizeable portion of assets towards infrastructure investments or create a sub-entity with a specified mandate towards infrastructure investment, as exemplified by Ghana, Nigeria and Angola. African governments can also promote infrastructure investment by demonstrating commitment to investor protection in terms of property rights, stable legal systems, zero tolerance on corruption and upholding of legitimate projects after political transitions. This is important specially to attract other SWFs outside Africa or private investors. Institutional investors often raise concerns of liquidity and risks in infrastructure investments. As such, there is need to design financial instruments which are liquid and credit enhanced, with investment grade ratings to incentivise SWF to invest their huge resources in infrastructure. Improving infrastructure project preparation and packaging could also be helpful in attracting SWF into infrastructure investments. It is also important to address data gaps to help improve the measurement and management of risks in infrastructure investments and unlock more funding into infrastructure in Africa.

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About the Author

Seedwell Hove  is currently Senior Economist at Quantum Global Research Lab, a research center specialized in the delivery of bottom-up econometric models of African economies and macro-economic policy analysis  that support the development of innovative economic policy and sustainable investments. Seedwell and the Research Lab's global office are based in Zurich, Switzerland. Prior to joining this position, he worked at the World Bank between 2012 and 2015, and before this assignment, he taught Economics for nearly 2 years at the University of Capetown. Early in his career, Seedwell worked as treasury dealer at Infrastructure Development Bank (formerly Zimbabwe Development Bank) and then at Reserve Bank of Zimbabwe. Relatively to his academic background, Seedwell Hove holds a Ph.D. in Economics from Cape Town University and a Master's degree from the University of Zimbabwe.

Growth and financial inclusion: Where is Tanzania today?

29.06.2017Bella Bird, Country Director, The World Bank

This post was originally published on the World Bank blogs website.

Two Tanzanian entrepreneurs: Hadiya and Mzuzi. Hadiya has built a successful micro-business taking advantage of mobile money services, including money transfers and savings products that are low cost and safe, as well as short term micro-loans. But Mzuzi, the owner of a small, 10-person enterprise, is facing a financial crisis despite huge personal drive and inventiveness because of his inability to access credit to expand.

The stories of these two entrepreneurs embody the experiences of real-life Tanzanians seeking opportunities for themselves and their families. Their need for financial products and services opens the second section of the 9th Edition of the Tanzania Economic Update series which, in addition to providing the World Bank's regular overview of the economy, puts a special focus on an issue of strategic significance to the country.

The broad story of Tanzania's growth and poverty reduction over the past decade is now well known: With strong and consistent growth rates of 6%-7%, Tanzania has performed very well by regional standards. But while the poverty level in Tanzania has declined significantly, roughly 12 million Tanzanians still live on less than Sh1,300 (58 US cents) per day, with many others living just above the poverty line and at risk of falling back into extreme poverty in the event of an economic shock.

A key challenge for Tanzania's economy is the estimated 800,000 young women and men who enter the job market annually with only limited opportunities to find a productive job.

Maintaining and accelerating growth requires the right policies. Tanzania's impressive growth to date has been driven by the decisions of the past. Future growth will be driven by the decisions of today's leaders. The Government of Tanzania is clear that it is focused on achieving an annual 10% rate of growth by 2020 but, to build on the current momentum, it needs to pay attention to three key areas. These are the subject of this latest economic update.

Firstly, the government should maintain its prudent macroeconomic policy management. Secondly, there should be effective management of public investment. Thirdly, Tanzania needs to unlock the growth potential of the private sector. There is no alternative to private sector-led growth to reach the levels of investment, employment and poverty reduction that will fulfil the aspirations of the Tanzanian people.

As Tanzania enjoyed a decade of stable growth, the country also made very impressive progress towards creating an efficient, low-cost mobile money infrastructure. This helped to extend financial inclusion for the benefit of many. However, the much larger formal financial system, which is critical for the growth of the business sector, continues to lag behind. Additional steps are therefore needed to further improve the mobilization of savings, whilst providing access to affordable credit to the real economy. Interest rates remain high and access to credit very restricted, resulting in a lower ratio of credit to the private sector relative to Tanzania's GDP, compared to regional and global comparators.

Three directions are suggested to secure the prospects of citizens like Hadiya and Mzuzi and many more like them.

Firstly, undertake measures to expand access to those still not participating in financial services: almost one out of three adults lacks access to financial services, with women and citizens in rural areas still strongly disadvantaged. A complete and swift roll out of an efficient and inclusive National ID system, coupled with the shift towards electronic payments for government-related transactions, including for social transfers such as TASAF, could facilitate the expansion and deepening of financial inclusion.

Secondly, deepening inclusion by broadening the use of more advanced financial products and services could help Tanzania move towards a more formalized, transparent, and dynamic economy. This can be achieved through measures that foster competition between banks and other financial service providers.

Last but not least, Tanzanians' access to affordable long-term credit needs to be improved. Reducing the pressure of public borrowing would reduce the disincentives for lending to the private sector, which would in turn improve the availability of long-term credit.

Tanzania holds great potential for accelerating its growth for the benefit of all citizens. Taking measures to bring money within reach of enterprising citizens will help to harness their latent talent, energy and drive. This will not only contribute to growth of the economy, but widen opportunities for men and women, the Hadiyas and Mzuzi's, to benefit and play their part.

With these needs in mind, Tanzania is among the 25 priority countries within the World Bank Group's Universal Financial Access 2020 initiative, whose goal is to enable access to transaction accounts as a first step toward broader financial inclusion.

We hope that this Ninth Edition of the Tanzania Economic Update will contribute to the debate.

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About the Author

Bella Bird became the Country Director for Tanzania, Burundi, Malawi and Somalia in July 2015. She is based in Dar es Salaam, Tanzania. Prior to taking up this role, Bella was the World Bank Country Director for Sudan, South Sudan and Somalia, based in Nairobi, Kenya from 2011 to 2015. Before joining the Bank in 2011, Bella served in various leadership positions in the UK Department for International Development (DFID). From 2009 - 2011, she was Head of Governance Policy in DFID. She provided leadership to a number of international policy processes at the OECD, as well as leading policy development on governance and fragile states policy within DFID. Bella also previously served in the roles of Head of DFID Nepal and of DFID Vietnam. Prior to these positions, she spent seven years with DFID as an adviser on poverty and social issues in Kenya, Tanzania and Uganda. She played a leadership role for the UK government and internationally on policies to promote state-building and peace building, championing aid effectiveness and south-south collaboration.

Pension funds can play a pivotal role in African aspirations for 2063

19.06.2017Gerald Gondo, Business Development Executive, RisCura Africa

African equities have recently faced strong headwinds, despite the positive fundamental growth prospects presented by the continent, writes RisCura Africa's Business Development Executive, Gerald Gondo.

If one considers the negative return profiles of a number of the African equity indices over the last two years, it would not be surprising if investors questioned the much-vaunted tag-lines of "Africa rising" and "demographic dividend". Should they retain their confidence that Africa will master its short-term challenges and look to the long-term prospects?

An important element of the African investment case is the oft-cited demographic dividend - referring to a period where a country's workforce is young, willing and able to be integrated into the economy and thus continue its economic growth. But, other elements such as rising disposable income, urbanisation, untapped resources and agriculture also reinforce the need to look beyond short-term challenges and rather to calibrate one's expectations towards the long-term. These drivers are set to continue to develop and arguably present the prospect of compelling organic growth waiting to be unlocked.

The questions investors should be asking are who and how will Africa unlock this growth?

African governments and policy-makers appear quite clear and resolute in their outlook. Evidence of this is the 28th African Union (AU) Summit held in Addis Ababa, Ethiopia in January 2017 whose theme was, "Harnessing the Demographic Dividend through Investments in Youth".

This was perhaps a clarion call by Africa's leadership to revisit its investment case by focussing on possibly its most durable and resilient growth proponent - its youth.

Turning to the AU's "African Aspirations for 2063" - six aspirations aimed at realising the continent's potential by 2063 - Aspiration 1 reads as follows:"A prosperous Africa based on inclusive growth and sustainable development. We are determined to eradicate poverty in one generation and build shared prosperity through social and economic transformation of the continent."

Critical to making in-roads in achieving this aspiration requires African governments, policy-makers, and regulators to undertake a critical review of inhibitors to effective inclusive growth and sustainable development. Deepening, integrating and developing African capital markets is an obvious and immediate area to target.

According to a Milken Institute - Centre for Financial Markets study, "Capital Markets in the East African Community - Developing the Buyside", these markets are fundamental to economic growth because they help to channel domestic savings in a more productive way. Thereby enabling the private sector to invest, produce and create jobs. African pension funds have been cited as a growing pool of assets that can and should be channelled towards deepening capital markets.

At RisCura, we continue to observe and record the growing asset bases of African pension funds due to rising incomes, with emphasis on the need for these funds to look to diversify their investments away from traditional investments. Particular focus is given to the continued elevated levels of exposure that many African pension funds still have to government fixed income securities, which could largely be attributed to static regulation.

A separate Milken institute study in East African pension funds found that "preferential treatment generally given to government securities through regulatory approaches - specifically, relatively high portfolio ceilings - may induce funds to over allocate to this asset class at the expense of others."

If Africa is to progress towards achieving Aspiration 1, alongside the remaining six and equally important Aspirations, the pace of capital market reforms needs to be accelerated. RisCura has previously noted several major African countries have revised pension regulations in recent years, with many either considering or actually revising rules around investments such as allowing investments into private equity and non-traditional asset classes. However, the pace of revision remains slow.

Deepening of capital markets may take time, but the channelling of savings towards productive sectors of the economy is not limited only to listed capital markets. Allocations to private equity and infrastructure as alternative assets classes through the burgeoning African private equity and infrastructure funds, will serve as critical interventions to accelerating economic development in Africa.

Regulatory reform will serve as a powerful driver for increased investment that deepen and develop African capital markets. African pension funds and institutional investors have an important and critical role to play in assisting Africa (through prudent channelling of savings) with projects and initiatives that can accelerate the fulfilment of Aspiration 1.

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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.

Understanding investment and financial flows in Africa

19.06.2017Kudzai Goremusandu, Financial Consultant, Africa Leadership Insights Institute

This post was originally posted on the NewsDay website.

According to the African Economic report 2016, Africa attracted an estimated $208,3 billion of external finance - foreign investment, trade, aid, remittances and other sources in 2015, the figure was 1,8% lower than the previous year. Falling commodity prices, particularly for oil and metals, were one of the key causes for the 2015 fall.

The total sum was projected to rise again to $226,5 billion in 2016. Portfolio equity and commercial bank credit flows dried up, reflecting tightening global liquidity and a market sentiment wary of risks. Rising remittances and increased official development assistance largely kept the figure up. African governments have to stabilise financial inflows in the short term and use them for sustained economic diversification for the longer term.

Flows of finance into Africa - foreign direct investment, portfolio equity and bonds, commercial bank, bilateral and multilateral bank credit, official development assistance and public domestic revenues - have remained broadly stable despite weak conditions in other parts of the world. Foreign Direct Investment (FDI) into Africa grew steadily from 2007 to 2013. In 2014, however, FDI fell back to $49,4 billion, but increased to $57,5 billion in 2015, according to International Monetary Fund (IMF) report 2015 estimates. Africa has attracted investment from industrialised countries such as France, the United Kingdom and the United States and emerging economies such as China, India, South Africa, and United Arab Emirates. Investment is still mainly directed at resource-rich countries, but non-resource-rich countries are becoming more attractive. The extractive sector, infrastructure and consumer-oriented industries are the main draws for investment.

Africa's pattern in foreign direct investment (FDI) inflows

While the European Union countries and the United States remain the largest investors in Africa, the emerging economies are a vital source too. Foreign investment into Africa increased by 16% from to $57,5 billion in 2015, according to IMF figures. Flows to North Africa reversed a downward trend, as investment increased by 20% from $17,2 billion in 2014 to $20,7 billion in 2015. East Africa has seen higher FDI since 2010. In 2015, the figure rose 16% to $8,9 billion in 2015 from $7,7 billion the previous year. For West Africa investment rose from $9,3 billion to $9,7 billion.

Central Africa saw a decline from $6,6 billion in 2014 to $5,4 billion. Southern Africa received $12,9 billion of FDI in 2015 against $8,7 billion in 2014, and $11,4 billion in 2013.

The leading African investment destinations in 2015 were: Egypt ($10,2 billion), Mozambique ($4,7 billion), Morocco ($4,2 billion), South Africa ($3,6 billion), Ghana ($2,5 billion), the Democratic Republic of the Congo ($2,5 billion), Zambia ($2,4 billion), Tanzania ($2,3 billion), Ethiopia ($2,1 billion), Guinea ($1,9 billion), and Kenya ($1,9 billion).

Without Egypt, investment to North Africa would have dropped. FDI to Egypt increased from $5,5 billion in 2014 to $10,2 billion in 2015. United Arab Emirates investors have played an important role in Egypt's recovery. Flows into Morocco fell to $4,2 billion in 2015 from $4,7 billion in 2014. But Morocco became the third largest recipient of foreign investment in Africa in 2015.

Potential growth areas of foreign direct investment (FDI) in africa

Consumer-oriented sectors in Africa attract growing foreign investment

Resource-rich countries still get the most foreign investment, but countries with no major commodities to rely on are taking a larger share of FDI. Countries that are not resource-rich received an estimated 37% of Africa's FDI in 2015, compared to 30% in 2010. Several countries without significant resources are attracting investors, including Kenya, Tanzania and Uganda, reflecting the shift towards consumer goods. Kenya is becoming an East African business hub for manufacturing, transport, services and information and communications technology (ICT). Investment is starting to diversify into consumer-market oriented industries, including ICT, retail, food and financial services.

African cities are future hubs of investment

With urbanisation, African cities are growing consumer markets increasingly targeted by foreign investors.

Disposable income and spending power in Africa's major cities will grow according to Oxford Economics, 2015, Future Trends and Market Opportunities in the World's Largest 750 Cities. Forecasts show that the gross domestic product of major cities is increasing. The most important ones will be Cairo, Cape Town, Johannesburg, Lagos and Luanda. This ranking reflects the quality of the business climate, infrastructure and logistics, and availability of skilled workers.

A recent surge in infrastructure investment indicates that states are investing in transport corridors to connect urban agglomerations and transform them into urban clusters. Examples include the Greater Ibadan-Lagos-Accra urban corridor, the Maputo Development Corridor, and the Northern Corridor between East and Central Africa. These investments will surge with deeper market integration through reduced transport and trade costs. They will also foster competition and productivity, which will make African hubs more attractive for foreign investors.

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About the Author

Kudzai Goremusandu is a strategic, innovative, dynamic, goal getter, enterprising management and financial consultant. He is the founder of Africa Leadership Insights Institute. Kudzai holds an award for effective media communication from the University of Zimbabwe. Kudzai is based in Harare, Zimbabwe. He can be contacted at kgoremusandu[at]gmail.com.

The Supervisory Challenges of Financial Inclusion

06.06.2017Dr. Bryan Barnett, Banking Advisor US Treasury, Office of Technical Assistance

This post was originally posted on the AFI website.

In pursuit of their mission to ensure the integrity of financial systems, regulators have two distinct tasks. The first is developing the rules and regulations that govern the authorization and operations of financial institutions. The second is supervising those institutions to ensure that regulations are followed and risks are identified and addressed.

Over the last several decades, the drive to include populations formerly excluded from the formal financial system has introduced new kinds of financial products, service providers and digital technologies that have improved the lives of millions, but pose challenges for regulators on both the policy and supervision fronts. Though these developments have generated a significant amount of interest in regulatory policy, the impact of new policies on the task of actual supervision has received relatively little attention. And while there is still work to be done on the policy front, there is now an urgent need to address the practical impact of these policies on actual supervision of financial service providers (FSPs). In a rapidly changing environment, a definitive account of these impacts may not be possible, but it's not too early to consider some of the major issues and the resulting need for capacity building among financial supervisors.

Most apparent among these issues is the dramatic expansion of the number and types of financial institutions that regulators are required to supervise. Once responsible for supervising a limited number of banks, they are now increasingly expected to supervise an array of non-bank financial institutions (NBFIs), including microfinance institutions, cooperatives, SACCOs, mobile money issuers, and others. In contrast to traditional banks which are relatively few and relatively large, NBFIs are for the most part numerous and small. A supervisor formerly responsible for at most a couple of dozen institutions may now be responsible for hundreds. And whereas all banks are broadly similar, there is now much greater heterogeneity among the types of institutions and products subject to oversight.

At the same time, the increasing use of agents that may number in the tens of thousands poses special challenges. Though it is widely accepted that principals are responsible for oversight of their own agents, the task of ensuring that principals are fulfilling this requirement adequately is generally a new and different responsibility for many financial regulators. To this must be added rapid evolution in electronic payment systems, involving a host of new types of payment service providers and payment technologies. Gone are the days when it was enough to keep an eye on things like check clearing, cards or the ACH.

Since the global financial crisis of 2008-09, there is everywhere a heightened concern for consumer protection. It is a concern of special significance to financial inclusion programs that aspire to reach customers with limited literacy (financial or otherwise). Enhanced supervision under new consumer protection rules is for many regulators a largely new domain of responsibility, again multiplied by the large number of service providers concerned.

Related to all these issues is the requirement that license applications for new entrants be reviewed prior to approval and increasingly a requirement also that all new financial inclusion products be pre-approved by the regulator before being introduced. This process is exceedingly labor intensive, often requiring multiple iterations of a cycle of feedback and re-submission before a final decision is reached. Workloads are directly proportional to the pace of expansion and change in a financial services marketplace where innovation and expansion in the name of greater inclusion is often strongly encouraged. That means that workloads are expanding rapidly, threatening careful review or timely decisions or both.

These challenges are uniformly driven by policies that are here to stay and the major implications are now clear. First of all, there will never be enough staff to meet these challenges using traditional approaches. For many FSPs on-site examinations will necessarily be cursory, relatively rare or both. Moreover, with very limited human resources (relative to the scale of the task), the adoption of a risk-based approach to supervision will cease to be merely a desirable goal and will become an absolute condition of effective supervision. Given the need to develop risk profiles on numerous FSPs and products, it will be necessary to concentrate on the development of sound sector-based risk assessments and validated risk indicators that can be monitored remotely. This in turn suggests that the traditional separation of on-site and off-site supervision will need to be overcome and individual supervisors will have to be equipped to employ both approaches as and where indicated without regard for geographic proximity or any sort of programmed schedule.

Beyond sheer numbers, the heterogeneity among types of institutions and products suggests that greater specialization among available staff will be essential. This is especially acute in the case of payment systems which have significantly different mechanics and operating rules from one to the next. Moreover, the risks associated with these systems are generally not the credit or market risks associated with prudentially regulated institutions, but are primarily operational and liquidity risks that need special attention. In particular, this applies to the complex technology upon which all modern payment systems rely. There is no possibility of adequate supervision of these payment systems absent properly specialized expertise on the part of individual personnel.

Thinking about possible means to address some of these challenges, a few things are clear. First, regulators will have to rely much more heavily on information technology and develop the ability to effectively gather and analyze large amounts of remotely-collected data. This means careful attention to the structuring of data collected in monthly or quarterly reports. It means the end of reports submitted as spreadsheets that are manually consolidated and the universal use of web-based report submission backed by automated preprocessing to ensure accuracy and completeness. There will need to be a much greater use of statistical techniques to establish what is normal among a particular set of providers so that anomalies can be isolated and investigated quickly.

With respect to licensing and pre-authorization of products, it will be essential to develop simple efficient systems whereby applications can be entered electronically, workflow can be tracked, and routine communications can be automated. Where regulators are granted discretion to judge the appropriateness or adequacy of an applicant's proposed businesses or products, it will be necessary to articulate clear expectations and guidelines for the exercise of that discretion in order to alert applicants and reduce the volume of deficient applications that needlessly consume staff time.

For agents, the assignment of a unique ID for each agent and the creation of national agent registries will be necessary to provide principals with critical information about a prospective agent's prior history as an agent (if any) allowing them to avoid the cost of taking on agents with a questionable background. The same registry will facilitate consumer protection if each agent's ID number is displayed at its place of business, allowing customers to make complaints without having to otherwise collect identifying information on the agent in question.

Such a registry and ID system will also enable the development of apps allowing customers to easily rate agents or file complaints directly from their phone. That also means that supervisors will need to be prepared to process a potentially significant volume of customer complaints, some of which will be referred to a provider for resolution, others which may involve escalation of complaints that a provider has failed to address. Basic systems for tracking and analyzing these complaints will be necessary. Such systems are a common feature of many businesses, but will be very new to most regulators.

Finally, with regard to the rapidly evolving and ever more complex world of technology supporting financial inclusion, regulators will have to move away from the practice of directly inspecting provider's IT infrastructure using the regulator's own staff and will instead have to rely on a variety of qualified independent auditors and recognized international standards for certification of systems and the management of IT systems. At the same time, if not themselves conducting IT audits, supervisory staff will nevertheless need to be able to read and understand the recommendations contained in auditors' reports in order to ensure that recommendations are followed and issues are addressed.

These are surely not the only changes to traditional regulatory practice that will ultimately be required. And there can be no expectation that the changes required will be easy or quick to achieve. But it is vital that regulators begin to contemplate the future and start to plan for it. At the same time, it is critical that technical assistance and capacity building help regulators adapt traditional supervisory approaches to the new environment. The needed changes will take time and inevitably proceed in stages. But with careful prioritization and a commitment to continual progress it will soon enough be possible to look back and wonder what it was that originally seemed so daunting.

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About the Author

Dr. Bryan Barnett is an advisor for banking and financial services with the Office of Technical Assistance of the U.S. Department of the Treasury. He works with financial regulators in developing countries to help them modernize and strengthen their financial systems. A major focus of his work is helping regulators adapt regulations and processes to support expanded access to financial services to underserved populations.

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