Financial inclusion is a priority for many nations in Africa, and there have been strides made in recent times to provide financial services to a large number of unbanked and underbanked individuals.
The evolution of the digital ecosystem has played a key role in this.
Global Voice Group (GVG) CEO, James Claude and the Chief Technology and Innovation Officer of the Smart Africa Secretariat, Didier Nkurikiyimfura, talks about the situation.
Across Africa, there are over 400 million financially excluded adults. Data shows that only about 55 per cent of adults in developing economies could access extra funds within 30 days without much difficulty. What does this say about the continent's inclusion state?
James Claude: There has been a lot of progress made in regard to the level of inclusion on the continent. If you compare the rate of inclusion today to what it was about 15 years ago, that number has increased. This has been supported by the rise in digital financial services and the development of Neo Banks and FinTechs, which are increasing in number.
The growth of inclusion was spurred by the adoption of mobile money platforms which started off as P2P platforms for individuals to send and receive money without the need for a bank account. However, we have seen them evolve to comprise savings and lending services - transforming them into the mould of a Neo Bank.
According to data from Statista, the transaction value of Neo Banks in Kenya stood at US$75.28m as of 2021 and is projected to grow to US$301.8m by 2027. That is despite penetration still only being 0.1 per cent in 2021 and projected to rise to 0.2 per cent in 2027. Financial inclusion on the continent varies from one country to the next with some making greater strides. For example, financial inclusion in Togo is close to 82 per cent and 83.7 per cent in Kenya.
Therefore, the state of inclusion on the continent is in a much better place than it was 15 years ago, but there are still areas for improvement. With the continued development of digital financial services and the creation of policies to support them, the rate of inclusion will continue to rise.
Didier Nkurikiyimfura: This situation points to an extremely low level of economic empowerment and lack of opportunities to earn a livelihood. Considering that Africa's population has an average age of 19 years; a figure of 400m adults points to the high level of exclusion among the estimated 700m adults (Statista 2021).
The figure also points to low levels of access to finance. As well The Smart Africa Alliance published Blueprint document on e-Payments for digital trade highlighting that low penetration levels of digital enablers like electricity and the internet had a positive correlation to low access to financial services and consequently trade (economic activity).
This explains why the more we invest and successfully implement digital enablers, the more we will increase the level of digital finance inclusion on the continent.
We have made many positive strides, but gaps in financial access for typically underserved adults still exist in Africa. What are they?
Claude: It is true that barriers to financial inclusion still exist in Africa, owing to historical and economic reasons. The most impactful barrier is identification. An estimated 500 million people living in Africa do not have any form of legal identification (birth certificate or national ID). Without these key documents, it is not possible to open up an account with a financial services provider as they are crucial to the authentication of an individual and their transactions. That is why we are seeing the adoption of some form of Digital Identity by many African governments. There are at least 10 different countries that have made attempts to implement digital identity, which would help to aggregate citizens' data and documentation, allowing them to access financial services.
Gender is another major hurdle for individuals seeking to access financial services. Historically, women and the youth have been side-lined in the financial and economic development of many nations.
Therefore, they have faced challenges with accessing financial services, loans and savings facilities. For example, when it comes to accessing credit facilities, many financial institutions require some form of collateral which many women do not have access to as many assets are listed in the names of their spouses or fathers.
Additionally, despite the proliferation of mobile money and digital payments, cash remains king on the continent. Cash is still 90 to 95 per cent of payments in most African countries, whilst in Kenya, cash still accounts for 85 per cent of all transactions - mobile money is at 13 per cent and the remaining 2 per cent is cards.
Nkurikiyimfura: According to the World Bank, which was a member of Smart Africa's working group on the digital payments blueprint in 2020; there are two main hindrances to access to financial services, namely the lack of conducive legal and regulatory frameworks and the lack of an enabling digital and financial infrastructure.
Regarding the legal and regulatory frameworks, more can be done in enabling new players and approaches. Presently, the pace and process of licensing new players are extremely slow; these hampers opportunities to service the continent's currently underserved market.
These frameworks should also promote competition and a level playing field for the prevention of monopolistic and uncompetitive markets dominated largely by state-owned players or state-favoured private sector players.
In addition to the lack of a level playing field, we also see some markets controlled by the private sector and commercial bank lobbies while consumer interests are not well represented or adequately advocated for.
There are a lot of efforts are being deployed to resolve the issue of enabling digital and financial infrastructure, but some challenges are still in place. For instance, the continent is still dealing with the lack of interoperable payment systems infrastructure which hinders faster delivery of services and it slows down the efforts for inclusion.
Furthermore, despite all the efforts our continent is still dealing with low internet penetration levels, low affordability of internet services and low number of internet users that have the capacity to leverage the potential of the internet.
Different African nations are at different levels of the adoption of digital financial tools. How can we further impact digitization from a regional perspective to assist those who are lagging behind?
Claude: Policy is the silver bullet that can solve this. As different countries are on their separate journeys, they each have varying experiences which can help others to overcome certain hurdles. The creation of policies that take into account these differences will help digital financial services to operate across different geographies more effectively and cater to the needs of diverse citizens. If there are policies in place to assist different nations to grow the impact of digital financial services collectively, we will make greater strides than if individual efforts were made.
The affordability of digital financial services must also remain a key consideration. The cost has been a major barrier in the adoption of digital payments for many and ensuring that they are more affordable will also assist different geographies to make them more easily available to their populace.
Nkurikiyimfura: Advocacy and capacity-building activities toward both decision-makers and citizens can play an important role. In addition to that:
- Adoption of common regional guidelines for licensing new players such as Single License regime to ease market entry for financial services players. Among many avenues, this can be achieved by creating mutual recognition of financial service providers already registered by partner Central Banks while committing them to operate under the supervision of the host Central Bank.
- Creation of a regional digital finance network or council to facilitate or enhance greater regional collaboration.
- Adoption of regional infrastructure sharing such as credit reference bureaus and regional real-time payment switches to facilitate instant payments across the region.
- Adoption of regulatory flexibility regimes to manage access to finance such as in Kenya, Rwanda and Tanzania where a tiered level of KYC (Know your Customer/Citizen) has facilitated greater credit access to digital micro-credit.
What does the policy landscape in East Africa look like and what gaps exist if we are to boost digital and financial inclusion?
Claude: The policy landscape in East Africa is fragmented, with the different nations all having their own policies. Organisations like the Central Bank of Kenya (CBK) have their own policies in place to grow digital payments, having released their National Payments Strategy 2022-2025 earlier this year. Similar approaches are in place in other countries in East Africa.
Interoperability is also being explored to boost digital and financial inclusion within each individual country and across borders too. The ability to transact across multiple platforms without having to create multiple accounts will be key in minimizing these gaps.
Nkuriyimfura: The policy landscape in East Africa continues to evolve. While more ground has been covered with regard to the harmonization of payments regulations by central banks in the region, more challenges remain; namely:
- Lack of standardised digital financial services across member states of the EAC. As mentioned in Smart Africa Alliance blueprint for e-payments for digital trade; differences in regulatory requirements continue to delay licensing of payments services and financial services providers for cross-border operations, especially.
- Lack of common currency for transactions: Although the EAC has finalized the bill regulating the formation of the monetary union, the same is yet to be passed by respective member states parliaments. Adoption of a single currency for the region through the creation of a single monetary authority will improve cross-border interactions and trade and eventually lead to uplift of the border communities which are currently excluded from cross-border access to financial services.
- Lack of harmonisation of digital IDs across the region. While the northern corridor has made progress in freeing the movement of people and goods, the use of IDs is currently limited only to the border crossing and not access to other services such as banking.
