Africa Finance Forum Blog
USAID recently launched the Guide to the Use of Digital Financial Services in Agriculture, a step-by-step guide to help our partners support access to and use of sustainable financial services in rural areas. This Guide is the result of an ongoing effort within USAID to understand how digital financial services (DFS) can support Feed the Future initiative's goals of increasing agricultural incomes and reducing malnutrition while simultaneously building out ultra-inclusive economic infrastructure.
We see at least four areas where DFS is making a vital impact by overcoming many of the challenges with traditional financial services that have left many rural communities unbanked or underbanked:
- Reducing the cost of delivering financial services outside of bank branches and urban areas, making these services (savings, credit, insurance, etc.) accessible and relevant to rural communities.
- Increasing the traceability of payments to reduce loss of funds and ensure proper accounting, which can potentially increase trust between various actors within the agricultural supply chain.
- Improving household resistance to financial shocks through savings and on-demand receipt of funds, which evidence shows helps to smooth consumption and maintain household nutrition.
- Creating new business models (for example, alternative credit scoring such as M-Shwari in Kenya which is providing very small, on-demand loans to customers based on savings behavior).
The approach we document in this Guide follows three broad steps for assessment:
- Identifying the value-chain challenges;
- Assessing gaps and obstacles in existing services; and
- Assessing the maturity of the digital ecosystem in your area.
The Guide encourages the reader to walk through these steps without limiting his or her thinking, initially, based on gaps in the local DFS market. Rather, once the reader identifies opportunities, they can design interventions that integrate creative solutions and market facilitation to make these opportunities a reality, even in less mature markets, using the following four high-level intervention types:
- Utilizing digital finance along the value chain, the most immediate and direct way to use DFS in our programs;
- Organizing implementing partners around DFS solutions, in order to aggregate demand for services by working together with USAID and other development partners;
- Implementing other technology-enabled services in conjunction with DFS, which encourages the reader to look at the broader digital ecosystem and to integrate with other services that are relevant to smallholder farmers (such as mobile-enabled extension services).
- Market Facilitation, which recognizes the role that USAID, along with our partners, can play to stimulate the broad DFS market when key constraints, such as regulation or lack of adequate consumer protection are holding back use of services in rural areas.
One great example of the last intervention type which has seen great process over the past year comes from our Feed the Future partners in the Somali region of Ethiopia. Mobile money, although not widely available in the region, was identified as able to improve access to finance for livestock producers. Therefore, acting as a market facilitator, USAID supported Hello Cash to extend the services of Somali Microfinance Institution into hard-to-reach areas - creating the opportunity for customers to use mobile-based payments to transact, save, and increase access to loans, all of which will support the larger Feed the Future effort to build a reliable livestock market for Somalia and the bordering regions in Ethiopia.
In keeping with the Principles for Digital Development, this Guide is a dynamic resource that will be updated and improved based on your input and experiences in the field.
Please get in touch either through the comments section below or by sending an email to digitaldevelopment[at]usaid.gov. Whether it is related case studies, specific feedback, or ways that you're able to benefit from this Guide in your own work, we'd love to hear from you and to keep pushing forward our rural development goals together.
By the end of 2020, all 110 WSBI members set an ambitious plan. They aim to reach 1.7 billion customers and 400 million new transaction accounts by then. The work really kicks off this year, starting from a base level of 1.4 billion people who seek banking services from WSBI members every day.
It's news in a way, but it's also part of an evergreen story - WSBI's longstanding commitment to provide an 'Account to Everyone'. Twenty-five focus countries under the Universal Financial Access (UFA) need to address this most. We've set out through our member savings and retails banks to tackle the issue of the unbanked and underserved in 17.
Financial inclusion matters to an increasing number of players. With support of a sponsored Programme WSBI in 2008, wanted a fundamental question answered: what would it take to boost financial inclusion through the WSBI network of postal and savings banks? Driving WSBI's member support today to achieve the next set of UFA 2020 goals means taking lessons from this work on board.
The WSBI Programme aimed to increase formal savings services for poor people at 10 WSBI member banks across the globe. Active accounts swelled within five years from 1.2 million in 2008 to 2.8 million in 2015 in six of ten selected countries generating deep insights into the drivers and barriers of account usage.
Regular active account usage turned out to be much more difficult than first thought and account dormancy remained an elephant in the room. The core of the challenge was threefold: affordable pricing and low population densities put limits to the banks for providing a sustainable and accessible solution, plus there was a growing need to offer more convenient and intuitive services. Questions arose that demanded an answer. Two especially came to mind.
1. How do we add value to the way rural people already manage money informally?
Linking formal banking to village groups and replication the way people already manage money emerged as the most successful route to meet rural peoples' financial needs and close the proximity gap in remote Eastern Africa. Most of the cash in East Africa stays in villages, in a lot of places money circulates just within one kilometer of people's home and work, a member of a group would save $5-10 per month. Linkage banking with village groups became an arena to capture these high turnarounds of financial transactions and nontrivial amounts of savings.
WSBI member Postbank Uganda (PBU) adopted linkage banking in 2012: it linked its mobile banking platform not just to village groups but also to individual group members. PBU reaches out to 28,000 village groups so far. Without distorting the group model, PBU found a way to electronically replicate and link up with the group's existing savings and loan business. The result: a growing funding base and a threefold increase in PBU's active customer base.
2. How can segmentation of client data help us to predict people's' transactional behavior and address sustaining account activity after account opening?
Having a shared meaning of what defines an active account is paramount. WSBI's definition was any account that transacted in the previous six months. The Global Findex data shows a third of all adults doing any kind of saving during one year right up the development spectrum. Could it therefore be that customer's desired savings behavior to save occurs in bursts of activity followed by a quiet period before starting again and how much time passes between these periods?
WSBI member Kenya Post Office Savings Bank (KPOSB) developed an analytical model for the better understanding of the drivers of account activity. Together we looked at the periods when clients would normally reengage with the bank after a first contact has been made and whether getting messages out to clients by using local options could nudge their behaviour.
Trust in financial services offered to the unbanked an underserved depends hugely on the ability of service providers to invest time and resources into continuously gaining insights into the financial lives of the poor and translate these into convenient services. This takes time and can be costly, and it makes small-scale savings work much easier said than done. It's a journey where learning is a continuous process. Our newly produced video report highlights what bumps and discoveries we have found along the way.
It is of no doubt that Africa is being shaken by the volcanic digital revolution. Not surprisingly, the mobile money wave has crossed the sahelian band over to West Africa from its Kenyan birthplace.
A conducive policy and regulatory framework
Zooming in the WAEMU region comprised of francophone West Africa (Bénin, Burkina Faso, Côte d'Ivoire, Guinea Bissau, Mali, Niger, Togo, Senegal), one could see it as a one-of-a-kind success story when it comes to conducive regulation triggering increased access of financial services for the poor. In 2006, the vision to foster economic growth through an improved state of access to financial services was part of the rationale for adopting an innovative regulation allowing non-bank players in the financial services market.
Building on the new regulatory framework and the integrated monetary and economic zone with regional payment systems, the regulator (BCEAO) opened consultations in 2007 with the banking sector and the member states for a "bancarisation" action plan in which every stakeholder was to implement a specific agenda aimed at improving the access and usage of bank accounts and electronic transactions.
Barriers to the upscale of mobile money
The granting of the first e-money licenses between 2007 and 2009 resulted in a timid surge of subscribers in the region. Barriers to access were still prominent and most banks were reluctant to embrace clientele with low purchasing power. In addition, very few innovative partnerships were initiated between mobile network operators, financial institutions and other private sector players. Besides, the few stand-alone e-money issuers encountered serious financial distress partly due to lack of sufficient revenue to cover the cost of building a wide network of agents.
The surge of mobile money
It is not until the end of the political unrest in Côte d'Ivoire in the year 2010 that the number of mobile money accounts started to take stride with 22 million users at the end of 2015, up from less than 3 million in 2010. At the end September 2015, users' performance revealed that 347 million transactions valued at close to 8.5 billion USD were accounted for in the region, with Côte d'Ivoire, Burkina Faso and Mali as the most dynamic markets. On average more than 1.2 million transactions were processed every day during that period.
Strikingly, digital cross border remittances are today increasingly dominating the traditional rapid money transfer services, particularly on corridors between Côte d'Ivoire and Burkina, Mali and Senegal, Togo and Benin. In addition, microfinance and government services are progressively being processed on digital wallets.
Aside from the enabling regulation, this speed of growth can be attributed to a dynamic and competitive market of over 33 deployments representing more than a quarter of the number of mobile money deployments on the continent. Overall, users are increasingly using mobile money as opposed to cash for financial transactions, which is the proof of a progressive acceptance of e-money as a means of payment.
A decade after the initial e-money regulation was adopted, access to financial services in the region has soared to 49.5%. When subtracting mobile money accounts, this rate merely reaches 30%.
Yet there is still more to do
Despite this progress, today's WAEMU market calls upon the necessity to evolve to a diversified range of financial services able to attract and retain users in the digital sphere. A large portion of the money deposited in the mobile wallets is cashed out and barely 40% of users are active. It would take sustainable and tailored service offerings that address the real demand for digital financial services for specific categories such as women, youth and rural consumers, before the WAEMU region can unlock its potential to achieve near universal financial inclusion given its assets.
The African Development Bank aims to achieve near universal access to financial services in Africa. In particular, the Financial Sector Policy and Strategy prioritizes digital solutions as the most promising approach to making those services affordable to the poor. Progress towards universal financial access in Africa requires action along a number of dimensions. These include: (i) Introduction of innovative pro-poor products and delivery mechanisms, services and business models that can deliver broad based financial services in economically viable ways; (ii) Core infrastructure that is sufficiently interoperable that these products and services can be linked not only within a country but across borders; and (c) Regulation and supervision that balance IT-enabled innovation, enhanced competition and protection of customers.
About the Author
Maimouna Gueye is a digital finance expert with over 15 years of experience in the financial sector. She has solid experience in payment systems, digital financial services policy and regulation as well as oversight. She has significantly worked on financial inclusion in developing markets. She graduated with an MBA in Finance and Economics from Saint Peters University in the United States and is a fellow of the Fletcher School Leadership Program for Financial Inclusion funded by Bill and Melinda Gates Foundation. After working for JP Morgan Chase and the Central Bank of West African States (BCEAO), Maimouna Gueye recently joined the African Development Bank as a Principal Financial Inclusion Officer in charge of funding a portfolio of projects targeting universal access to financial services for people in Africa
How should Rwanda develop its capital markets? This was the subject of a three-day roundtable discussion held last October in Rubavu, Rwanda. The roundtable was organized by the Rwanda Capital Market Authority (CMA) and the Milken Institute's Center for Financial Markets (CFM), with support from FSD Africa. Highlights from that discussion, including points of consensus and debate, are captured in the Milken Institute's new publication, "Framing the Issues: Developing Capital Markets in Rwanda."
Over the past decade, Rwanda has made considerable progress in achieving rapid economic growth and reducing poverty, supported by sound macroeconomic policies. Its business-friendly environment is now among the best in Africa. The government and its international development partners view deepening and diversifying the domestic financial system as essential to Rwanda's goal of transitioning to middle-income status.
Last year, the Rwanda Ministry of Finance and Economic Planning gave the CMA a mandate to produce a 10-year Capital-Market Master Plan (CMMP) to guide reforms to develop Rwanda's capital markets. An overarching goal will be to deepen capital markets so that they intermediate long-term finance for private-sector-led growth and meet the country's infrastructure and other socioeconomic needs.
The October strategic planning roundtable kick-started the process of mapping out capital-market reforms. The event gathered policymakers, regulators, issuers, investors, and capital-market experts from around the world, including senior officials from the government of Rwanda. The roundtable provided an off-the-record forum for frank and in-depth discussion about the opportunities and challenges Rwanda's capital-market stakeholders face, as well as how they can prioritize and sequence reforms. Participants also heard firsthand how other developing countries mapped out and launched their own capital-market reforms.
The roundtable covered core questions that will inform the drafting of Rwanda's Capital-Market Master Plan, including:
- How should Rwanda develop its investor base, both domestically and regionally? What are innovative ways to mobilize household savings?
- Can other nonbank financing sources-such as private equity, financial leasing, and even crowdfunding-help "incubate" firms for future listings?
- How can Rwanda strike the right balance in accessing needed foreign-portfolio investment while guarding against risks of overreliance on this investment?
- How can capital markets in Rwanda and its East African Community partners take a regional approach to attracting new listings?
- Should the stock exchange target small and medium-sized enterprises (SMEs) in its outreach for new listings-and, if so, how?
- What can Rwanda learn from other countries about the process of planning and implementing capital-market reforms?
Roundtable participants strongly agreed that an immediate and ongoing priority is for Rwanda to develop a pipeline of prospective listings. Targeted outreach -including education and technical assistance - is critical to increasing the number of firms willing to list. Cultivating a high-growth-potential corporate base could also serve as an incubator for future listings, as would developing the local venture capital and private equity markets.
Lessons shared by participants from other emerging markets underscored the importance of sequencing and developing capital markets to complement the banking sector, not compete with it. As an economy grows and becomes more complex, firms and households require a wider range of financial services - from banks as well as other financial intermediaries. Once larger firms begin to rely more on capital markets for longer-term financing, banks may increase lending further down the credit spectrum, to SMEs and households.
Well-functioning, appropriately regulated local and intraregional institutional investors are vital to developing a stable investor base. Several participants flagged the need to mobilize small savers across EAC markets, perhaps through a regional fund, which also would advance financial inclusion. The role of non-EAC foreign investors was more heavily debated, however - particularly the degree to which bond issuers should rely on foreign capital.
Regionalization emerged as a key cross-cutting issue. More cross-border listings and cross-border investment across the EAC's securities exchanges could help overcome local capital markets' impediments such as illiquidity, low market capitalization, and few listings. Greater cooperation across EAC capital markets in developing and sharing market infrastructure and intermediation services could unlock significant economies of scale. Throughout the roundtable, participants returned to the point that capital-market development should not be done for its own sake, but to spur growth of a diversified, inclusive economy that creates decent jobs and improves living standards. And, while best practices exist, there is no one-size-fits-all approach to developing capital markets.
This blog post was originally published on the Milken Institute's blog website.
About the Authors
Jacqueline Irving is a Director in the Center for Financial Markets at the Milken Institute. Previously, she was a senior economist at US Treasury, responsible for the migrant remittances and financial inclusion portfolio and a U.S. government delegate to the G20's technical working group on remittances.
Jim Woodsome is a Senior Associate, Program Research Analyst at the Milken Institute's Center for Financial Markets. In this role, he conducts research, organizes events and helps manage initiatives related to the Center's Capital Markets for Development (CM4D) program.
Financial inclusion is important for economic growth because it plays a dual role. While creating access especially to operators in the informal sector, it will enhance financial deepening thus embracing both breadth and depth dimensions of financial development.
In other words, financial inclusion to be relevant for economic development must focus on the core elements of financial intermediation such as savings mobilization and asset transformation, risk mitigation and enhancing efficiency in the corporate sector by monitoring management and exerting corporate control. Polices of financial inclusion that rely mainly on transactions rather than the whole gamut of intermediation while creating access may not translate into usage broadly defined to include credit and may not necessarily lead to financial deepening and hence economic growth.
Among different strategies for increasing access to finance in Africa, microfinance stands out as a mechanism with strong potential for reducing poverty and inequality and promoting entrepreneurial finance. Microfinance Institutions are critical providers of finance to small and micro enterprises that are unable to raise credit from commercial lenders due to information asymmetry and the high costs associated with lending. Micro, small and medium scale enterprises are the biggest job-creators and contributors to economic growth in many developing countries; and finding alternative ways to finance them has placed microfinance in the epicentre of the financial inclusion debate (Robinson, 2001).
With the general trend in microfinance, which places emphasis on financial sustainability, MFIs can fully recover costs and make profits. Such commercially oriented microfinance should finance their loan portfolios through savings mobilization, commercial debt, and retained earnings; and charge interest rates that will enable cost recovery from income generated "from the outstanding loan portfolio, and to reduce these costs as much as possible" (Meesters, Lensink & Hermes, 2008:2); and "generate a profit" (Robinson, 2001).
Literature supports the view that sustainable microfinance will have outreach and impact, hence the push towards sustainable, commercially oriented MFIs (Conning, 1999:51; Cull & Morduch, 2007:F107; Manos & Yaron, 2009:101; Robinson, 2001). Quayes (2012:3432) takes this argument further by concluding, "attainment of financial sustainability is not an impediment to outreach efforts, and may actually facilitate greater depth of outreach". When MFIs that leverage on deposits are regulated, they are generally sustainable and expand outreach (Bayai and Ikhide, 2015, Haiyambo and Ikhide 2015). An enabling regulatory environment not only makes MFIs sustainable but also enables them to grow.
In the African context specifically, microfinance presents a viable opportunity to drive financial inclusion for the unbanked and underserved, as most African financial systems are still nascent and incapable of addressing the more pressing challenges of rural poverty and unemployment. Microfinance broadly defined to include microloans, microsavings, microinsurance and remittances/money transfers should receive policy focus. Microfinance, so defined, has been proven to improve access and enables the poor to manage and build their asset base gradually.
Formal microfinance in Africa has increased during the last two decades through the expansion of the scope of formal institutions (downscaling, linkage programs), emergence of new formal institutions focused on microfinance, reforms of state-owned financial institutions and the introduction of new microfinance programs through governments. However the formal operations concentrate mostly on providing credit facilities. Savings mobilization has yet to receive adequate attention.
Government sponsored microloans programmes are very common in many SSA countries because of the political attractions that such schemes hold more for vote catching in elections and less for poverty reduction. Microfinance programmes that target enterprise finance rather than consumption have better chances of reducing poverty through boosting employment. This is also why the present preoccupation with mobile phone banking in many parts of Africa must now begin to migrate to the next phase involving credit creation rather than the obsession with money transfers. Many mobile money users are not otherwise included in the formal financial system-in Kenya 43% of adults who report having used mobile money in the past 12 months (2012) do not have a formal account; in Sudan 92% do not (AfDB, 2013). In the same breadth, the present preoccupation with microloans in many SSA economies might be misplaced. Microloans do not make microentrepreneurs.
Microfinance institutions have emerged in Africa largely to meet the unfulfilled financing needs of the self-employed and of micro, small and medium scale enterprises. For such endeavours to develop, fledgling entrepreneurs must have long-term access to capital. In most of the surveys on this sector, access to finance and energy feature prominently on the list of MSME's needs. MFIs have been able to fill this demand because they focus their loan analysis on clients' character, cash flow, and commitment to repay the proposed loan, rather than on collateral or business experience. In this way, MFIs take into account the special characteristics of the new private sector in this region. What this calls for is a well-articulated microfinance strategic framework in these economies to complement overall financial sector development.
*Excerpt from Inaugural lecture on "The Finance and Growth Debate in Africa: What Role for Financial Inclusion" University of Stellenbosch, Stellenbosch South Africa, November 2015.
About the Author
Sylvanus Ihenyen Ikhide is Professor of Development Finance and Head of the Doctoral programme in Develoment Finance at the University of Stellenbosch Business School, Cape Town, South Africa.