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Until recently, the drive towards financial inclusion was commonly framed in terms of access. Yet as the explosion of digital financial services and simplified account opening procedures have begun to make financial services accessible to the poor, it has become apparent that access is only part of the equation. Despite these innovations, account ownership and usage has remained stubbornly low in much of Sub-Saharan Africa. As access expands, new research suggests that similar attention should be paid to improving the quality and affordability of financial services, as well as building trust in financial institutions, if we hope to achieve broader success in banking the poor.
In 2010, a group of researchers worked with Innovations for Poverty Action (IPA) to study the low level of financial inclusion near a set of market centers in rural Kenya. In these early days of Kenya's digital financial revolution, formal savings rates were low. Despite having at least one formal banking option within walking distance, just 20 percent of households had a savings account. Instead, most households relied on informal savings groups and livestock to store their wealth. Formal lending options also went largely unused.
So why were households not taking advantage of the formal banking options available to them? One possible explanation was a lack of knowledge about the services themselves. While 60 percent of respondents knew of the bank branches in the area, almost no one knew basic details about the available accounts, such as the fee schedule. In this setting, the researchers wanted to learn what happens when people understand their options and account set-up costs are removed. To answer this question, the researchers conducted a randomized evaluation of low-cost savings and credit product offers for unbanked households.
Initially, trained IPA staff visited just over half of the unbanked households in the area. They informed them about the local banking options and gave them a voucher that effectively waived the account opening fee and minimum balance for a savings account.
The results were good: 63 percent of people opened an account. But not great: only 18 percent used the account at least twice over the next 12 months. It seems the design of the products and the quality of the services did not meet the needs of potential clients. When the researchers asked recipients why they chose not to use their account, responses tended towards three answers: fear of embezzlement, poor service, and withdrawal fees that made small transactions too expensive.
The researchers found similar results when they informed respondents about credit options and lowered the eligibility requirements for a small, collateralized loan. After six months, only three percent of people had applied for a loan. These numbers appear to be particularly low, since interest rates on the loans were considerably lower than the estimated profit that households could have made with the extra funds. Again the design of the loan did not meet the needs of the study participants, who cited fear of losing their collateral as a major reason for not taking a loan.
Clearly, access to financial services is just one piece to the financial inclusion puzzle. As the reach of formal financial services spread, the quality of services and trust in banking institutions must also improve to achieve broader success. At the same time, more rigorous research is needed to identify effective ways to improve product design to meet the needs of both financial service providers and the poor.
This blogpost is based on the academic study "Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province"
About the Study Authors:
- Pascaline Dupas is an Associate Professor of Economics at Stanford University;
- Sarah Green is a Senior Program Officer and Researcher at the High-Level Task Force for the ICPD and previously worked as a Research Manager at Innovations for Poverty Action;
- Anthony Keats is an Assistant Professor of Economics at Wesleyan University; and
- Jonathan Robinson is an Associate Professor of Economics at the University of California, Santa Cruz.
This blogpost was written by Greg Dobbels, Initiative Associate with IPA's Global Financial Inclusion Initiative, and approved by the study authors. Learn about Innovations for Poverty Action's Global Financial Inclusion Initiative here.
“Most of our problems are based on finances. Money is always an issue. I have to still provide for both my parents who are not working and make sure they are fed; I must pay their insurance policies because they no longer have the ability to pay them. I don’t earn enough money to afford all of that.” - A 35-year-old man from Lesotho, interviewed as part of the UNCDF Making Access Possible initiative
Have you ever tested your financial literacy? Read what follows and you’ll get a better sense of why this matters more than you may have thought.
Low-income consumers must make complex financial decisions even more frequently than middle or high-income consumers, given their smaller operating margins and their limited and irregular incomes. A forthcoming report by UNCDF on Lesotho and Swaziland shows that many workers forfeit up to 40% of their income because of burdensome loan repayments. Indebtedness in the informal consumer market is often an indicator not only of poverty, but also limited financial literacy.
Yet these problems are not limited to poor consumers or low-income countries. While households in advanced and emerging economies have gained increased access to a wide range of financial products, they seldom have the capacity to fully understand and master them. In response to the growing concerns about over-indebtedness, policymakers across the world are focusing on “predatory” lending, which takes advantage of financial illiteracyto push inappropriate loans to consumers who cannot repay them. Some common-sense reforms, like those implemented in France, now require lenders to include a disclaimer (“You are responsible for paying back a loan. Verify your ability to repay the loan before borrowing.”) Additionally, all marketing material must include plain-language explanations of the long-term cost of loans (interest rate, total amount due and the final cost of the credit). South Africa’s Broad-Based Black Economic Empowerment (BBBEE) legislation has specific regulations around financial education and consumer empowerment as stipulated under the Financial Sector Codes. The purpose of these types of regulations is to improve financial capability and increase financial inclusion. But while such reforms have helped improve the protection of financial consumers, they only address part of the problem.
Many people, in developed and developing countries alike, know little about basic financial concepts and do not engage in savvy financial behaviours. An OECD paper shows that in almost all of the 14 countries across 4 continents taking part in the study, at least half of the adult population failed to identify the impact of interest compounding on their savings, and revealed that fewer than one in five people would shop around when buying financial products.
Unfortunately, the picture isn’t any brighter when it comes to young consumers. The recently published OECD PISA financial literacy assessment revealed that around one in seven students in the 13 OECD countries and economies taking part in the assessment are unable to make simple decisions about everyday spending, and only one in ten can solve complex financial tasks. This result is astonishing and requires prompt action to ensure that tomorrow’s adults understand bank statements, the long-term costs of consumer credit and how insurance works, among other basic financial services and products. Indeed, improving the financial literacy of young people will help ensure that they can benefit from savings, retirement and healthcare coverage — much-needed safety nets in the absence of parents and/or social systems. And in case you wonder if you’re any better off than a 15-year-old when it comes to financial literacy, have a look at these sample questions.
To help governments design and implement policies to increase financial skills, including among young people, the OECD and its International Network on Financial Education(INFE) developed High-level Principles on National Strategies for Financial Education, which were endorsed by G20 leaders in 2012. They encourage countries to develop nationally co-ordinated frameworks for financial education policies and provide general guidance on the main elements of an efficient national financial education strategy, such as an effective mechanism to co-ordinate with civil society and the private sector.
Governments may involve financial service providers and other key stakeholders to build the financial capabilities of young people and adults through a variety of delivery channels.Rwanda’s national strategy, for instance, underlines the importance of using not only schools to deliver financial education, but also other innovative channels to reach vulnerable, out-of-school youth. Umutanguha Finance, one of the ten institutions supported by the UNCDF initiative YouthStart, empowers teenagers to deliver financial education on issues like savings to younger children. This peer-to-peer approach is particularly useful because young people tend to listen to their peers more than adults, and the participative approach helps foster youth as agents of change in their own communities.
Financial literacy programmes can play an important role in reducing economic inequalities as well as empowering citizens and decreasing information asymmetries between financial intermediaries and their customers. Public authorities have a responsibility to develop financial education policies and set up robust financial consumer protection frameworks to ensure that consumers are informed and understand the financial products available to them. Innovations such as electronic payments are tipping the economic scales in favour of those who have, for too long, been excluded from the system. But unless consumers are equipped to make sound decisions about use of financial services, no amount of innovation will bridge the gap.
This blog was originally posted on the OECD Insights website.
Africa represents a small percentage of the global investment banking business, but the activity is expected to expand in the years to come in view of already apparent economic opportunities.
According to Thomson Reuters, the commissions generated by investment banking activities in Africa amounted to $318 million in 2013, of which $232 million was in South Africa alone. This is modest when compared to the levels in the rest of the world, which generated $82.6 billion in commissions in the same year, returning to its levels of 2007. Globally, the five largest investment banks are based in the United States, and their market share increased by 2.5% in 2013. JP Morgan is the leading global investment bank, generating $6.4 billion in commission (7.8% of the total), followed by Bank of America Merrill Lynch ($5.8 billion), Goldman Sachs ($5.1 billion), Morgan Stanley ($4.7 billion) and Citi ($4.2 billion). The investment banks operate mainly with major clients (companies, investors and governments) providing advisory services (mergers and acquisitions), intermediation (loans) and long term financing operations (IPO, issuing of debt in the form of bonds). Here, we distinguish between corporate finance, global capital markets and structured finance operations.
The continent's outlook for economic growth makes it an attractive place for investment banks
The continent's economic growth quite logically feeds financing operations, the development of the capital markets, and advisory services, all areas of which investment banks are actively involved in. Many activities will require the intervention of investment banks with the arrival of multinationals, the restructuring of the banking and telecommunications sectors, the exploitation of new mining deposits and the launch of major public investment programmes.
Africa, like the rest of the world, is experiencing a change in its strategy to financing for development. Traditional donor interventions are often inadequate to meet the financing needs for infrastructure, while the traditional means of mobilising resources at the country level (taxation, etc.) face major challenges. As a result, the continent is increasingly turning towards local and global capital markets to access new financial sources.
The world leaders in corporate banking (BNPP, SGCIB, Natixis, HSBC, Citibank and Standard Chartered) as well as investment banking (Rothschild, JP Morgan, Goldman Sachs, Deutsche Bank and Crédit Suisse) are very active on the continent. Alongside them, local players such as Standard Bank, Rand Merchant Bank, Renaissance Capital, EFG Hermes and Attijari Finances Corp are well established. These are followed by new players who have recently entered the market, including United Bank for Africa (UBA), First Bank of Nigeria (FBN) and Ecobank, all of which have created their own specialised subsidiaries (UBA Capital, FBN Capital and Ecobank Capital). Currently, African banks dominate the mobilisation of funds in local currency.
In order to adapt to market changes and the new opportunities presented, many banks have announced the repositioning of their investment banking activity in markets outside South Africa. Nedbank, for example, merged its corporate and investment businesses, while Standard Chartered Bank redeployed in Africa, and Barclays Africa has announced that it has high expectations of its African markets outside of South Africa, which remains the most attractive location to date.
Today, we observe that the international banks in Africa carry out their investment banking activities in Anglophone and Francophone countries, unlike the retail-banking sector where we see a certain linguistic preference in their regional expansion strategies.
Mergers and acquisitions (M&A)
The volume of announced M&A deals in the continent increased by 30% between the first half of 2012 and 2013. According to Mergermarket Group, M&As targeting sub-Saharan African companies totalled $26.7 billion in 2013, an increase of 20% over 2012. The traditionally targeted companies in natural resources, minerals, oil, gas and infrastructure were replaced in 2014 by targets in the telecommunications, media, banking, insurance and consumer goods sectors. 2013 was marked by a record level of operations, with the sale of 28.6% of ENI East Africa to the Chinese company CNPC for $4.2 billion, and the acquisition of 20% of the Rovuma Offshore Area 1 Block (off the coast of Mozambique) by Indian company ONGC Videsh for a total of approximately $5 billion. Alongside conventional industrial investments, private equity operations are expanding through funds such as Helios, Emerging Capital Partners, Abraaj and African Infrastructure Investment Managers (AIIM). In the first eleven months of 2014, the share of M&As carried out inside the African markets reached $29.2 billion for 413 operations, whereas M&A operations targeting Africa amounted to $40.7 billion for a total 730 operations. There were some major market operations in late 2014, such as the takeover of Pepkor, a south African retailing giant, by Steinhoff for $5.7 billion, in Chad, the state bought Chevron assets ($1.3 billion), the takeover of the South African and Nigerian assets of Lafarge by Lafarge Wapco (now known as Lafarge Africa Plc) for $1.35 billion, or the sale of several oil wells to Nigeria for $5 billion by Shell.
A necessary rationalisation
According to Konrad Reuss, in charge of the sub-Saharan Africa department at Standard&Poors, "the heady days of international bonds issued by new players or from frontier markets, such as those of the African countries over the past two years, are over. The periods when we witnessed oversubscription are no longer with us". The reduction of the quantitative easing policy of the US administration is also partly responsible. The new policy is changing the bond issue conditions for countries whose economies are in difficulty, according to S&P, which is anticipating an increase in the cost of eurobonds. For Miguel Azevedo, "The Africa of the past was more a land of pioneers and adventurers. Today, the major players are returning. It is becoming much more mainstream". Recent history has shown that governmental agencies are ready to intervene in Africa (World Bank, AFD, AfDB, EIB, KfW, etc.), as the risks in Africa are not, in the end, much higher than in other places (the United States or Europe). The profitability level remains very attractive for projects to be funded on the continent.
Dr Estelle Brack Estelle Brack is an economist, specialising in banking and finance in developed and in developing countries.
The speakers were :
- Samuel Bryan, Technical Director, Nexus Carbon for Development
- Séverin Cabannes, Deputy Chief Executive Officer, Société Générale
- Christine Fedigan, climate advisor, GDF SUEZ
- Pierre Forestier, Head of the Climate Change Division, Agence Française de Développement
- Tosi MPANU-MPANU, expert in sustainable development and climate finance who served as the Chair of the African Group of Negotiators (AGN) at the Durban Summit (2011)
The challenges of climate finance
Climate finance aims to reduce the scale of future climate change. It focuses on investments that have benefits in terms of adaptation, mitigation and sequestration."Investment needs in terms of greenhouse gas reduction are estimated at some USD 1,500bn a year and at approximately USD 500bn for adaptation" in all sectors: energy, infrastructure, equipment and services (Pierre Forestier).
Despite a general increase in awareness, the needs are still far from being met, especially because it is sometimes difficult to evaluate the effectiveness of climate investments: "When investments are made in the context of climate finance, we are faced with a more qualitative than quantitative dimension" (Tosi Mpanu-Mpanu). Consequently, there is a twofold challenge: develop climate finance and strike a balance between the four financing flows - international public financing, international private financing, national public financing and national private financing.
Mechanisms to develop climate finance already in place
One of the most well known is the carbon market, which is divided into two submarkets: the regulatory market and the voluntary market. The first makes it possible to use the greenhouse gas emission reductions from virtuous projects to sell them to companies that have emission limits. To date, it has not achieved its objectives. The second was created by companies which are seeking to have responsible practices on their own initiative. This voluntary market is doing better because it is possible to measure its "very concrete development benefits" and because "the prices are very stable." (Samuel Bryan).
The CDM (Clean Development Mechanism) is another driver of action. It allows industrialized countries to finance projects that reduce or avoid emissions in developing countries and are rewarded with carbon credits. In return, the countries benefit from transfers of skills and technologies, while contributing to international efforts to reduce emissions. The number of projects - 7,000 - demonstrates the success of the CDM. Unfortunately, Western countries are pulling out of this mechanism due to the fall in the price of the ton of carbon.
Finally, the Green Fund, ratified at the Cancun Conference in 2010, should in principle be capitalized with USD 100bn a year by 2020 in order to support developing countries in the implementation of climate projects. "In the climate negotiations, the African Group considers that it would be necessary to mobilize USD 14bn in 2014. Today it has reached about USD 1bn. We are therefore far off the mark. If developing countries come to Paris in 2015 to subscribe to the agreement, the international community will need to provide financing" (Tosi Mpanu-Mpanu).
Read the rest of article here.
This blog was originally posted on Ideas for Development.