Africa Finance Forum
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Poverty. How much of it can be avoided with simple financial skills? If there is anything we have learned over the years, it is that poor financial decision-making by the average economic citizen can be the foundation of financial crises and the root of poverty. The problem is that poor decision-making seems to be inherent in everybody – at least, that is what Economics Nobel Prize winner Daniel Kahneman wrote. This is why the world needs to increase financial education and financial inclusion for individuals, when they are young and are still able to form positive financial habits. After all these youngsters are future leaders, investors, policy makers, and parents.
African Development Bank President Donald Kaberuka stressed at this year’s World Economic Forum that the prevalence of poverty is especially pertinent in African countries with a large youth population. As Africa’s projected youth will represent 75% of the total population by 2015, a large segment of the African population will be entering the labor market in the next few years and will need the education and access required for proper savings and asset building. Contrastingly, in sub-Saharan Africa for example only 16.8% of youth between the ages of 15–25 years hold accounts at formal financial institutions.
Both scholars and policymakers have started to recognize that young people need to learn about managing financial matters at the same time as they are provided with the tools to actually participate in it. The lacking national infrastructures for children and youth to partake in the financial system remains an obstacle. On the one hand, formal savings mechanisms remain unattractive for young people due to heavy document requirements, including identity cards, recommendation letters and wage slip. On the other hand, legal age restrictions and compulsory parent consent can hinder opening an account. Changing the manner in which financial institutions deal with the unbanked, financially vulnerable population of children requires a review of certain social regulations and effective collaboration.
It does appear that this change is on the way. Over 80 countries celebrated Global Money Week last month organized by Child and Youth Finance International. 20% of these were from Africa. The overwhelming success was created by the partnerships formed between national stakeholders and was a testimony to the fact that African countries were ready, willing and able to put financial access and education of youngsters on the map. Zambia set the pace for nationwide initiatives on financial capability for children and youth under the patronage of the Central Bank of Zambia and the Financial Sector Development Program. In Ghana the first local stakeholder meeting on education and access for children was held and HFC Bank opened savings account for more than 200 high school students in Accra. The Central Bank of Nigeria (CBN) and the Financial Literacy and Inclusion Forum (FLIF) jointly organized Global Money Week, creating media campaigns, financial literacy shows and school outreach programs. It was recognized that the average Nigerian child is not introduced to money early enough and is therefore prone to making bad financial decisions. The CBN has now named financial inclusion a national agenda point.
The efforts during Global Money Week are the first step to creating national strategies that will reshape financial landscapes both in Africa and across the world. It is only through collaboration and knowledge-sharing among national stakeholders that the necessary frameworks can be built that will educate and empower entire generations. In Africa, many countries are now creating their strategies for financial education and inclusion of their citizens. We must ensure that children are not forgotten in these efforts.
By reshaping the norms of financial behavior we will be able to empower the next generation and help them become the sound financial decision makers we need them to be.
Akwasi Osei is Child and Youth Finance International's (CYFI) Africa Regional Coordinator. CYFI is leading a global movement to increase financial education and financial inclusion of children and youth. It is working with over 100 partners in over 83 countries worldwide. The CYFI network has a goal of reaching 100 million children in 100 countries by 2015, as a first step to eventually reaching all children and youth across the world. The Movement has the support of the United Nations Secretary General and the G-20.
Helping low-income Africans to improve their ability to manage financial risks is a key component of sustainable development. Insurers, intermediaries and others around the continent have been working to develop and improve microinsurance products that offer both value for clients and a business case for insurers. This blog focuses on one such product offered by a microinsurance intermediary to help market vendors and others manage potential financial losses due to flooding.
In October 2011, the bustling Circle Market in Accra was devastated by a torrential flood, destroying many small businesses and bankrupting many of their owners. The MicroInsurance Centre’s MILK Project partnered with microinsurance intermediary MicroEnsure and German aid agency GIZ to explore the value of a microinsurance product in helping small business owners cope with the severe financial consequences of the flood. The “Obra Pa” product is mandatory for borrowers of certain microfinance institutions (MFIs), and offers clients two benefits: i) payment of their outstanding loan balance and one month of interest to the MFI, and ii) a cash payout of USD114.
We applied MILK’s “Client Math” methodology, which aims to address some of the open questions about the value of microinsurance, using detailed surveys of small samples of insured and uninsured groups (20-30 each) to document their responses to shocks. To explore the role insurance played in coping with the flood, we measured the full cost of the shock for the insured and the uninsured and examined the financing strategies used by each.
What did we learn? That insurance, alone, was insufficient to cover the full cost of such a large shock. When our MILK team visited clients after the flood, we found that they had still not recovered from the devastation of the event. They had not fully regained their borrowing status nor returned to pre-flood sales levels in their businesses. Coping mechanisms used by both the insured and uninsured included the same strategies - borrowing from friends and family, reducing consumption and using their limited income to slowly re-start their businesses. These findings are consistent with MILK’s studies of other property insurance programs in Colombia, Haiti and the Philippines. Insurance provided some relief, but the insured still struggled to recover from the devastating consequences of the flood, even months later.
One interesting value component of the product appeared to be that it offered some access to additional borrowing, albeit not from MFIs. The promise of a payout and the deleveraging resulting from the loan forgiveness seem to have served as a type of “guarantee”, improving clients’ creditworthiness and enabling them to borrow from friends and family to get by. We do not typically think of insurance as a “guarantee” for a loan, but we are seeing indications that beneficiaries use the promise of a payout (particularly when claims are paid slowly) as a type of collateral against new borrowing to cover immediate needs before claims are paid. Compared to the uninsured, who remained indebted and had a reduced capacity to repay that debt, this benefit proved useful, even if only necessary due to the slow payment of claims. For some clients, this access to credit seems to have been instrumental in their ability to move toward to full recovery from the shock, however slowly.
Product limitations may partly reflect client willingness to pay. The Obra-Pa product in Ghana was a mandatory product with premiums included in MFI clients' loan payments. As such, it was a low-cost product that could be included in a loan payment without burdening the borrowers with separate, likely higher premiums. In all of our studies of similar products, MFIs offered property coverage on a mandatory rather than voluntary basis to address adverse selection and potentially low demand. This suggests that a higher coverage option, which would have proved more valuable in the wake of the flood, may be difficult to sell voluntarily, especially to the poorest and most price-sensitive.
In studying the case of Ghana, we identified some of the limitations of microinsurance products that aim to help microenterprise owners cope with the effects of a weather catastrophe. These clients face uncovered risks due to the size (too small) and timing (too slow) of the insurance benefit and must therefore complement the insurance with other strategies. In contrast, MFIs can typically use these products to transfer their loan related weather risk to an insurer. Efforts to support non-insurance risk management strategies for microentrepreneurs as well as more risk-sharing between MFIs and their clients may be good next steps to helping microentrepreneurs cope with weather related risks.
You can read the full brief on property insurance in Ghana and all the other MILK documents at: http://www.microinsurancecentre.org/milk-project.html
Ms. Magnoni is President of EA Consultants and Client Value Project Manager for the MicroInsurance Centre’s MicroInsurance Learning and Knowledge (MILK) Project. She is an international development advisor with over 15 years of international finance and development experience. Much of her recent work has centered on understanding client needs and preferences and linking these to the development of products and programs to improve access to finance, markets and social protection for low income segments. She has designed microinsurance programs for various institutions, networks and government agencies. She is currently managing the collection and analysis of lessons around understanding the value for clients of microinsurance for the MILK Project. These studies have helped to further the industry understanding of the role microinsurance plays in mitigating financial risks in clients' lives. Ms. Magnoni has a Masters in International Affairs from Columbia University.
What percentage of adults in Africa use formal financial services? How do patterns in account ownership vary across regions or countries within Africa? The Global Financial Inclusion (Global Findex) database can answer these questions and more using over 40 variables that allow us to compare how adults in Africa use formal financial services to save, borrow, make payments, and manage risk. The data for Africa comes from more than 40,000 interviews across 41 economies and we can disaggregate each indicator by gender, age, education, income, and urban or rural residence.
The Global Findex data show that 23% of adults in Africa have an account with a formal financial institution as compared to 41% of adults across all developing countries. The data also highlight large disparities in account ownership within Africa. For instance, although 51% percent of adults in Southern Africa have a formal account, only 11% have one in Central Africa.
Who are the unbanked? How do they manage their daily finances and plan for the future? In Africa, men are more likely than women to have a formal account, though the gender gap is smaller than in other regions. Adults with a tertiary education and those falling in the highest 20 percent of income earners are also more than four times as likely as those with lower education levels or falling in the bottom 20 percent of income earners to have an account.
Why don’t more Sub-Saharan and North Africans use formal accounts? Well, about 30% of non-account holders cite the lack of money as the only reason why they don’t have an account. But other commonly reported reasons include cost, distance and lack of documentation. For instance, In West Africa, documentation is the second most cited reason, with 36 % of adults giving this as a reason. Fixed fees and high costs of opening and maintaining accounts seem to be particularly important hindering factors in Eastern and Southern Africa. For example, in Uganda maintaining a checking account costs the equivalent of 25% of GDP per capita annually, which might explain part of the reason why 54% of non-account holders do not have an account.
In response to these barriers to account ownership, a growing number of Africans are turning to new alternatives to traditional banking made possible by the rapid spread of mobile phones. Millions of adults use mobile money for affordable and accessible banking services, particularly in rural areas. In the region, 16% of adults used a mobile phone in the past year to pay bills or send or receive money. These individuals may otherwise be excluded from the formal financial sector. For instance, though 68% of adults in Kenya reported using a mobile phone to make payments in the past year, 43% of those who reported mobile phones to make payments or send or receive money did not have a formal account.
We are interested not only in account ownership, but also the use of accounts to save. Overall, 36% of adults in Africa report having saved or set aside any money in the past 12 months, similar to the worldwide average. Yet, in Africa only 13% of adults (and 35% of savers) report having saved at a formal financial institution in the past year and again there is a wide variation within Africa. For example, only 16% of adults (and 50% and 35% of savers, respectively) in Sothern and West Africa report having saved at a financial institution, while only 4% of adults (and 27% of savers) report having formally saved in North Africa.
Despite the low proportion of formally banked adults, the share of adults using community-based saving methods remains high. These “semi-formal” savings methods often serve as alternatives to the formal financial sector. Indeed, 19 percent of adults who reported saving in Sub-Saharan Africa said they used a community-based savings method or saved using a person outside of their family, including 44% of adults in Nigeria.
What are the key take away messages in the data? First, that despite the recent financial sector growth in Africa over the past decades, many individuals and firms are still excluded from access to financial services in African countries. The gap in financial inclusion is largest among women, the poor, the less educated and those living in rural areas.
Second, that cost, distance, and documentation requirements are important reported obstacles to the use of formal accounts. Removing physical, bureaucratic, and financial barriers to expand financial inclusion is challenging since this also requires addressing the underlying structural causes such as low income levels and weak governance. Nevertheless, measures to improve contestability of financial systems and underlying information and regulatory environment are also likely to speed up the introduction and adoption of new products, processes, and technology that may help further lessen these barriers, especially in Africa. The most evident example is the recent success of mobile money in East Africa which shows that innovations can bring about dramatic changes in how people engage in financial transactions by lowering entry barriers, reducing costs, and expanding access.
Third, data is powerful! We now know a lot more than we used to about the financial behaviors of adults worldwide. To that end, we’ve just released the complete Global Findex micro dataset through the World Bank’s Open Data website. This means easy access to over 150,000 individual-level observations, representing adults in 148 economies and 97 percent of the world’s adult population. Users can download the complete worldwide dataset, or datasets by country.
Lora Klapper is a Lead Economist in the Finance and Private Sector Research Team of the Development Research Group at the World Bank. Since joining the Bank as a Young Economist in 1998, she has published articles on entrepreneurship, access to finance, corporate governance, and risk management. Her current research focuses on household finance and measurements of financial inclusion. Prior to coming to the Bank she worked at the Board of Governors of the Federal Reserve System, the Bank of Israel, and Salomon Smith Barney. She holds a Ph.D. in financial economics from New York University Stern School of Business.
African women represent a huge untapped market as emerging business leaders, consumers and household decision-makers. According to a recent Nielsen survey, 77% of women in emerging markets believe the future will be brighter for their daughters, noting that key areas where improvements will be greatest are education, careers, financial stability and purchasing power. These changes are already evident in many African countries as socio-economic indicators show an improvement in the living conditions of every-day Africans.
When one looks at the position of African women today versus two decades ago, one can see distinct improvements in the areas of education, health, earning power and entrepreneurial activity. In Uganda 48% of all small and medium-sized enterprises (SMEs) are owned by women. In Kenya, the corresponding figure is 49%, and in South Africa 58%. Motivated by economic necessity, better education and expanding job opportunities, African women have some of the highest rates of female labour force participation in the world. Overall, 60% of women in Sub-Saharan Africa are in the workforce, with some countries such as Mozambique, Madagascar, Rwanda, Tanzania and Burundi having more than 80% female labour force participation.
With better economic opportunities women’s incomes have increased as has their spending power, fuelling the rise of the African consumer. McKinsey documents this trend in their study “Lions On The Move,” by showing that the numbers of people living in extreme poverty are falling and that there are more middle-class households in Africa today than India.
The fact that women control or strongly influence many household spending decisions means that their power as consumers will drive demand for products and services in different sectors that is not to be taken lightly. Globally, women spend close to $20 trillion as consumers and this figure is expected to reach $28 trillion by 2014.
In the banking sector - one of the sectors mentioned in the McKinsey report as poised for growth in the next decade - massive growth is taking place across the continent due to higher consumer demand and more business activity as the private sector expands. Despite enormous challenges in many countries such as inadequate banking infrastructure and high consumer costs, Africa’s banking sector has grown rapidly in the last decade with total assets of $669 billion in Sub-Saharan Africa, and $497 billion in North Africa. In Nigeria, total banking assets grew by more than 59% annually from 2004 to 2008. The downside is that levels of financial inclusion across the continent are still woefully low with the majority of Africans lacking access to formal financial services. Women are particularly excluded with as few as 21% of women having an account at a formal financial institution.
This lack of access to capital and a broad range of financial services is a big factor in restricting the growth of women-owned businesses. African women continue to face well-documented barriers in accessing finance that are gender-specific as well as those that apply to all SMEs, regardless of gender. As entrepreneurs, women struggle with issues of collateral, poor education and business training, a lack of understanding of how banks work and cultural biases which hinder their progress. This situation is made worse by legal and property regimes which often discriminate against women by preventing them from owning assets such as land, or having the right to administer marital property.
A G20 study released in 2011 estimates that the funding gap experienced by women-owned businesses around the world who lack adequate access to finance is an astonishing $300 billion per annum, with African women facing a funding gap of $15-18 billion each year. Seen in another light, however, this SME funding gap represents a huge opportunity for commercial banks and other lending institutions that are willing to take this segment of the market seriously. Some banks are already coming up with specific products geared to the female market while others are experimenting with different types of collateral requirements which are more flexible and take into account women’s realities. These innovative approaches to SME lending are to be encouraged and will hopefully see more investment in women-owned enterprises to boost their growth.
There can be no doubt that one of the factors that will drive Africa’s continued high growth is how it treats its women and how it harnesses their enormous economic potential. At the recently held African Women’s Economic Summit, which took place in Lagos, Nigeria, Dr Ngozi Okonjo-Iweala referred to women as the “third emerging market” noting the benefits of investing in women for themselves, their families and the continent, as a whole. As she rightly points out, “we are on the cusp of a very exciting phase in the life of African women. They are the new face of an Africa on an upward trajectory of growth and development.”
Nomsa Daniels is Executive Director and founding member of New Faces New Voices, a pan-African organization which advocates for the empowerment of African women through the provision of better access to finance for women entrepreneurs, skills development and training for women in business and finance, and ensuring more women occupy leadership positions in the financial sector. Ms Daniels has worked in the investment business for the past 10 years, as Executive Director of Scientific Resource Management Holdings, an investment holding company that invests in start-ups, early-stage businesses, and established companies across different sectors in South Africa. Prior to this, she worked as a Consultant in the Investment Banking Division of JP Morgan where she helped to analyze and identify new business opportunities for the bank and supervised special projects for the Managing Director. Before returning to live in South Africa in 1997, she worked for 10 years as Executive Director of the Professional Development Program, a not-for-profit organization based in New York City that provided management and leadership development training in the United States to black South African business professionals. She has a Bachelor’s Degree from the University of Toronto and a Master’s Degree in Geography and Environmental Studies from Hunter College in New York. She serves on the board of the Graҫa Machel Trust, the African Leadership Academy and several investee companies.
The International Association of Insurance Supervisors (IAIS) is the international standard setter for insurance and issues principles, standards and guidance which provide a globally accepted framework for the regulation and supervision of the insurance sector. It is committed to improve access to finance by promoting effective regulatory, supervisory and policy approaches and elaborating standards on financial access. The recent decision by its Executive Committee (ExCo) to set-up the new Financial Inclusion Subcommittee marks a new stage in its work to promote inclusive insurance.
Already since 2006, the IAIS has been addressing regulatory and supervisory issues for promoting access to insurance. In June 2007, the IAIS published its Issues paper on Regulation and Supervision of Microinsurance. This paper was followed in October 2010 by the release of the Issues Paper on the Regulation and Supervision of Mutuals, Cooperatives and other Community-based Organisations in increasing access to Insurance Markets.
In addition, in a unique public-private partnership with the Microinsurance Network (MIN) the IAIS set-up the IAIS–Microinsurance Network Joint Working Group (JWG), that is operating for almost a decade now. It includes representatives from the Microinsurance Network (MIN), donors and other development agencies, insurance and financial development experts. The JWG supports the development of regulatory and supervisory frameworks focused on policies conducive to protecting policyholders and supporting inclusive insurance markets especially for the low-income segments. The JWG's work plan contributes to strengthening the insurance financial system and fosters financial inclusion to promote economic growth.
The IAIS took its engagement in this area further by co-founding as charter sponsor the Access to Insurance Initiative (A2ii), the global partnership that supports insurance supervisors in developing a reform path in their jurisdiction so as to increase access to insurance markets for the low-income population.
The establishment of the Financial Inclusion Subcommittee (FISc) follows ExCo’s recognition that the IAIS engagement in financial inclusion issues (especially microinsurance) responds directly to the needs of many IAIS Members and to the mandate from the G20 for standard-setting bodies to engage in financial inclusion efforts. IAIS engagement also reflects the addition of financial inclusion in Mexico’s priorities under its current G20 leadership. The new FISc will address the application of insurance supervisory standards in specific circumstances - with a particular focus on emerging markets and that with regard to standard-setting. The FISc will also have continuing responsibility for the development of the applications paper on financial inclusion.
The FISc work plan will include the finalization of the Application Paper on Regulation and Supervision supporting Inclusive Insurance Markets, an engagement with the Access to Insurance Initiative (A2ii) to develop training materials and a toolkit for the application paper, and the development of an issues paper on market conduct, distribution issues and consumer protection relating to financial inclusion. The Paper proposes pathways for supervisors to advance financial inclusion in their jurisdiction, e.g. by requiring that insurance providers should be formalized, or by facilitating industry innovations. It also provides examples of how proportionality can be implemented in practice, and discusses roles and responsibilities of authorities and other stakeholders. The IAIS guidance will be discussed by specialists and supervisors from all over the world. Emerging lessons from A2ii country engagements across the globe will provide insights on how supervisors have started to implement regulatory reforms.
Part of the FISc mandate is to reach out and engage with our members active in inclusive insurance markets to provide adequate support in their efforts to establish and maintain sound regulation and supervision. For that purpose the IAIS-MIN Joint Working Group is scheduled to meet on 5 November 2012 in Tanzania. In addition, on 6 November 2012 a Policy seminar for supervisors will be organized. Both meetings will take place before the 8th International Microinsurance Conference on 6-8 November 2012 in Tanzania organized by the Munich Re Foundation, the Microinsurance Network and several other partners, such as Making Finance Work for Africa (MFW4A).
Peter van den Broeke is principal administrator with the Secretariat of the International Association of Insurance Supervisors (IAIS). He is responsible for IAIS work in the areas of supervisory cooperation – including the IAIS Multilateral Memorandum of Understanding and functioning of Supervisory Colleges – and financial inclusion as well as for supporting the IAIS Executive Committee.
He started his career in financial supervision with the insurance and pension’s supervisor and the Central Bank of the Netherlands (Nederlandsche Bank). His working experience of more than 20 years with the supervisory authority covers legal affairs, operational (prudential) supervision and anti-fraud / financial integrity as well as policy advisory work and international affairs. He was several years head of a department for insurance supervision and Chair of IAIS working groups on insurance fraud and on corporate governance. He was also appointed as deputy judge adjudicating in cases of economic crime and financial regulation.
After leaving the supervisory authority at the end of 2007 Peter worked as an independent consultant and trainer in financial regulations, compliance and integrity. Internationally he provided technical assistance in various developing countries for the IMF and World Bank.
Peter has given various presentations and has produced several publications on financial regulations, supervision and compliance.