Africa Finance Forum Blog
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Most of the discussion on financial deepening and broadening focuses on financial institutions and markets and thus on the supply side. And it is natural to start the analysis here, as that is where traditionally data have been. Similarly, regulators focus on financial institutions and markets as natural starting point. Looking at the big picture, however, we care about the users and beneficiaries of financial services. We care about enterprises that need external financing for working capital and investment. We care about households that need access to payment and deposits services. We care about risk management services for both households and enterprises. Only in a second instance do we care about who provides these services. In the recent Financing Africa flagship report, my co-authors and I therefore emphasize the need for increased focus on users, with important repercussions for both analysis and policy.
This increased focus on users is supported by recent data collection exercises for both enterprises and individuals that have allowed a closer look at users and non-users of financial services, understanding both supply and demand-side barriers and the extent of use. However, it also requires a reorientation in regulatory approaches, as I will discuss in the following. What does a closer focus on users imply? First, it implies an increased effort at financial literacy, i.e. knowledge about products and capability to make good financial decisions, both for households and enterprises. There is often a lack of awareness about available financial products, as well as a lack of capability to manage resources well, knowing to evaluate and compare different financial products and services, and demanding one’s rights if necessary.
Specific activities in this area might include the design of graphic tables with comparative information on the full pricing of financial products, community and village road shows to explain major financial concepts, training on the delivery of financial education by retail officers, financial literacy messages in m-banking systems, campaigns on new pension systems, basic brochures on financial services, the inclusion of financial literacy in school curricula, campaigns on the management of debt and the avoidance of over indebtedness, and campaigns on the economics and the benefits of the insurance market. A lot has happened in this area in recent years, but significantly more research and analysis is needed to explore what kind of program targeted of which population group can be helpful.
Second, there is a general trust issue. Overcoming households’ mistrust of financial institutions might be easier in the case of transaction services, where the inter temporal nature of financial services is reduced to a few minutes, especially in m-banking, especially in the case of mobile phone banking, in contrast to savings or credit services, where the result can only be seen after months if not years. The rapid success of m-banking services focusing on payment and remittance services in several African economies has shown the promise of using transaction services as entry point for the inclusion agenda.
Third, an increased focus on users implies more tailor-made products for the bottom of the pyramid. Transaction accounts, often linked to the use of ATMs rather than shiny banking halls, might be more attractive and cheaper for large part of the currently unbanked population. Agency banking, i.e. financial service provision through non-financial institutions, such as supermarkets or gas stations – a success in Latin America - can help overcome geographic and cultural barriers. Linking with informal financial service providers and microcredit institutions can also help barriers between banks and users.
Fourth, for enterprises, a focus on users refers mostly to the challenge of turning investment into bankable projects. Standard barriers include the lack of collateralizable assets and audited financial statements. To address the lack of collateral one has to look beyond the upgrade of property registries – part of the necessary infrastructure of any modern financial system, but a rather long-term goal; products tailored for SMEs such as leasing or factoring rely less on traditional collateral. Combining lending with extension services for entrepreneurs can be promising.
Standard accounting rules are too much of a burden for most SMEs. There might a need for the development and implementation of simplified accounting standards for microenterprises and for SMEs.
Fifth, it is important to stress that financing is only one of the many obstacles that African enterprises face in their operation and growth. African firms report greater obstacles than firms outside Africa in access to land, customs and trade regulations, transport, and, most strikingly, electricity. This points to the deteriorated physical infrastructure that African enterprises have to deal with, as well as the deficiencies in the broader regulatory environment, and thus a broader reform agenda than financial sector reforms.
While a focus on users is important in the financial deepening and broadening agenda, it is as important in the financial stability agenda. We care about stability of financial systems not for the sake of bankers and stock market traders, but for the sake of users.
This implies consumer protection, including (1) consumer disclosure that is clear, simple, easy to understand, and comparable; (2) prohibitions on business practices that are unfair, abusive, or deceptive and (3) efficient and easy-to-use recourse mechanisms.
On a more general level, it might have to imply a rethinking of supervisory focus. The decision to extend regulation and supervision to non-bank segments of the financial system has to take into account the need for protection by different users. We therefore advocate a caveat emptor approach for segments of financial markets with mostly sophisticated users, such as equity funds and over-the-counter segments of capital markets, whereby the weight of the responsibility for monitoring lies on sophisticated investors rather than supervisors. For bottom-of-the pyramid segments, on the other hand, we advocate an increased supervisory focus, especially in the case of deposit-taking institutions. Experiences from low- and middle-income countries have shown the risk that pyramid schemes and their collapse can pose for socio-economic stability. Beyond regulation and supervision of deposit-taking institutions and conduct of business regulations for non-deposit taking institutions, this implies increased consumer protection as outlined above.
The increased focus on users is thus a broad agenda. As with the rest of the financial sector agenda, one size does not fit all. While South Africa has established a multi-tiered consumer protection framework, the institutional demands for such a framework might be too large for many small low-income countries, where simpler versions, maybe based on industry self-monitoring, might be necessary. Regulation and supervision of many small microfinance institutions can be costly in many African countries with limited supervisory resources, using apex structures can be helpful in this context.