88228 ICTs for financial services in Africa 0 1 2 3 4 5 6 7 8 9 eTransform AFRICA AFRICAN UNION This document, on the use of ICTs for Financial Services in Africa, is the summary of the full sector study which was carried out by a team from Vital Wave Consulting led by Scott Stefanski and supported by Muhammad Muhammad, Andrea Bohnstedt and Brendan Smith. The full report is available at www.eTransformAfrica.org. This document forms chapter five of the publication edited by Enock Yonazi, Tim Kelly, Naomi Halewood and Colin Blackman (2012) “eTransform Africa: The Transformational Use of ICTs in Africa.” Funding for the publication came from the AfDB Korean Trust Fund, the WB Pfizer Trust Fund and the WB Africa regional department. eTransform AFRICA AFRICAN UNION ICTs for financial services in Africa Information and communication technologies (ICTs) have the potential to transform business and government in Africa, driving entrepreneurship, innovation and economic growth. A new flagship report – eTransform Africa – produced by the World Bank and the African Development Bank, with the support of the African Union, identifies best practice in the use of ICTs in key sectors of the African economy. Under the theme “Transformation-Ready”, the growing contribution of ICTs to Agriculture, Climate Change Adaptation, Education, Financial Services, Government Services and Health is explored. In addition, the report highlights the role of ICTs in enhancing African regional trade and integration as well as the need to build a competitive ICT industry to promote innovation, job creation and the export potential of African companies. introduction ICTs for financial services in Africa 1 3 The second most populous continent However, the financial services sec- in the world and with abundant natural tor has distinct developmental chal- resources, Africa continues to grow as lenges. Issues of trust, consumer pro- the world’s economy currently stands tection, and network systemic risks on shaky ground. However, steady that can slow the pace of progress GDP gains are sometimes obscured by require clear and strong regulations. the continent’s economic, political and The need for policy and regulatory social problems. As Africa grows and development is made more difficult becomes more tightly integrated with by the speed of technological change. the global economy, its citizens and Nevertheless, strategic intervention businesses increasingly need access to through policy or public investment financial services tools that will allow can play a critical role in addressing them to compete. ICT is one avenue for the challenges faced by the financial increasing that access as ICT and finan- services sector. And the rapid pace cial services complement each other. of technological change can motivate ICTs allow for greater financial inclu- leaders to accelerate policy delibera- sion, and the financial services sector tions, providing this does not lead to is a primary driver of communications regulatory over-reach. and network technology. landscape analysis ICTs for financial services in Africa 2 � Opportunities and challenges p6 5 It is striking to see the role that ICT attention to both the challenges and and innovative business models have opportunities in Africa’s financial played in the explosive growth of services sector. Here we focus on financial inclusion. In Africa, the the prime objectives of improving fi- most visible case is Kenya, where ac- nancial inclusion and nurturing the tive bank accounts have grown more growth of micro and small businesses. than fourfold between 2007 and Attention is also given to those opera- 2012. This process has been aided tional and supporting systems neces- by M-PESA which had created some sary for improved service provision 17 million mobile money accounts for these markets. by early 2012. Transactions through mobile banking service M-PESA ex- According to Making Finance Work for ceed US$375 million each month and Africa: account for up to 20 per cent of the nation’s GDP. In Africa, on average, less than 20 per­ cent of households have access to formal But Kenya only provides the introduc- financial services, with low population tion to a longer story. It took bold think- densities, poor transport and limited ing and several years for M-PESA to communications infrastructure contri­ build internal support to get it started. buting to a lack of supply in extensive With M-PESA and others now as proof regions of the continent. points to reduce risk, new players are entering the market in Kenya and else- There are several methods to monitor where, and the time-to-market is re- national progress on improving finan- duced. While the pace of adoption may cial inclusion. Among these, one can be different from nation to nation, the assess to what extent financial services opportunity is no longer debated; it is are available to a population by quanti- just a matter of making it happen. fying points of access, generally defined as the density of financial institution Summarizing the state of the financial branches within a country. Alternative- services sector for an entire continent ly, analysis examines the percentage of is a daunting task, compounded by the adult population that has deposit or rapid advancements that are underway, credit accounts. The data indicate that many made possible by ICT. Literature compared to countries in other regions, on this subject is abundant and use- African nations and their citizens have ful thanks to concerted efforts at na- less access to formal financial services tional and international levels to bring and tools. 6 Opportunities and challenges Advances in ICT present unique op- 1. build upon consumer acceptance of portunities for financial services sector these new models, and development in Africa. These advances touch all facets of the financial services 2. leverage the transactional capa- sector ecosystem, from innovations and bilities to introduce a more diverse cost reductions for user access to devic- portfolio of financial services. es and transmission technology (includ- ing the revolution in mobile communi- Governing and regulatory challenges: cations and the growth of broadband Governance and regulatory demands internet access), data storage and shar- for developing Africa’s financial servic- ing, security, and analytical processing. es sector are in many respects the start- All of these will be critical enablers to ing point for advances in the sector. a thriving financial services sector in Without transparent roles and respon- Africa. These developments can accel- sibilities, commercial interests may de- erate the drive towards development cide the unknown risks are too high to goals and allow African nations, histori- make the sizable investments needed cally in the lower ranks of financial sec- for building out networks. In the inno- tor indices, a way to leapfrog challenges vative models of mobile financial ser- that have afflicted other nations. vices, lack of clarity regarding the roles for financial institutions and mobile Challenges to greater use of ICT in fi- operators can cause market fracture or nancial services can be broadly grouped lead to redundant investments that are into three major categories: consumer transferred as costs to the consumer. challenges, governing and regulatory challenges, and market maturity chal- Market maturity challenges: Finan- lenges. These categories, and the major cial inclusion may be limited by a poor issues that comprise them, are illustrat- competitive environment or a lack of ed in Figure 1: supporting infrastructure. Low levels of interest or understanding by finan- Consumer challenges: Many of the ef- cial institutions in serving low-income forts to address consumer challenges in populations, the unsuitability of con- financial services have focused on ex- ventional practices (such as brick-and- panding access to the most fundamental mortar locations), the relatively weak services – transactional capabilities and voice of financial inclusion advocates, simple market information services that and the weakness of credit bureaus and can utilize the growing penetration of collateral registries all contribute to the mobile phones. As these core capabilities relative paucity of financial services are rolled out, innovators are trying to: products for unbanked populations. 7 Figure 1 Challenges to greater ICT use in financial services Customer/End User Challenges Governing/Regulatory Challenges Liquidity Management Lack of ID documents Consumer Protection Moveable assets Identification Intersystem agreements Fragmented collateral data Fraud Corruption Limited products SME access to capital credit collateral bureaus registry Fear of Redundancy Market Maturity Challenges Institutional Opacity Customer Services Security Discrepant data Fortunately, there are initiatives under- Some of these initiatives and their ap- way that seek to address these funda- plicability to African countries are mental challenges. Seven major ini- further analysed in the case studies on tiative areas are identified in Table 1. Senegal and Kenya. Table 1 next page l 8 Table 1 Major initiatives to address challenges in financial services Challenge area Key initiatives • Transactional friction and retail payments: Methods for making regular payments or deposits in ways that can reduce complexities such as physical proximity to financial institution branches or the identification requirements, such as mobile payment systems Consumer challenges • New product development: New products such as savings, lending, and eBanking that appeal to underserved consumers • SME access to capital: Easing access to capital for small busi- nesses through tools like electronic cash registers • Identification: Initiatives to allow registration and identification Governing and regulatory through mobile or other electronic means challenges • Collateral registry: Integrated collateral registry databases that allow for verification of property and other assets • SaaS for MFIs: Cloud-based IT services that reduce the need for physical financial services infrastructure Market maturity challenges • Credit bureaus: Use of mobile or other transaction data to estab- lish creditworthiness case studies ICTs for financial services in Africa 3 � Senegal p10 � Kenya p12 10 Senegal Senegal’s economy is strengthened by mobile telephony with over 68 per cent a relatively good infrastructure, open- coverage in 2010. The figure for finan- ness, the nation’s ability to attract in- cial services, although improving, is vestment and ambitious development much lower (16%). However, the bar- projects. For a mobile society with a riers to increased financial inclusion large migrant population, the impor- in Senegal are quickly disappearing as tance of telecommunication and fi- technology innovations and mobile nancial services cannot be overstated. payment services spread across Africa Senegal’s ICT sector, in particular, (see Table 2). enjoys a steady growth in the area of Table 2 Senegal’s challenges and opportunities for ICT and financial services Readiness (regulations, Drivers of growth Challenges Opportunities infrastructure, demand) • Diversification of products/ • Multiple regulators services offered on existing ICTs High • Bureaucracy platforms (mobile) • Slow mobile money services • Linking to financial and non- financial services • Up-market focus • Low-cost, down-market banking • Inefficient MFIs • Leveraging excessive tech- Financial services Low-Medium • Lack of credit to SMEs and nological capacity the informal sector • Diversification of products • Technology limitations and delivery platforms • Limited knowledge of market • Demand-driven product Market players Medium • Competition not aggressive offering enough • More competition • Bureaucracy 11 Some of the factors that have delayed Senegal’s public sector has not yet of- the expansion of financial services in fered strong incentives for telcos and Senegal are limited products, low-risk banks to form partnerships that prof- behaviour, and the lack of interest by itably serve lower-income markets us- banks to serve SMEs and the informal ing mobile platforms. Relatively simple economy. Although there are more incentives include reducing the layers than 200 microfinance institutions of bureaucracy. Although MFIs would (MFIs), they suffer from inadequate be natural choices for financial inclu- capital, a narrow menu of products, a sion because of their footprint in un- lack of professionalism, and limited derserved areas, they are not attractive technological resources. to risk-averse lenders. In order to meet its financial inclusion hopes, Senegal Telcos in Senegal could make financial would have to transform the financial services accessible without the geo- landscape by aligning policy and regu- graphic and time limitations that char- latory frameworks. The country should acterize branch banking. A more ag- remove barriers to scale by reducing gressive drive to deliver new services, duplicate efforts by MFIs, donors, and such as the recently launched Orange the private sector players that offer dif- Money, could transform the landscape ferent mobile financial services. if matched by trusted, demand-driven products and flexible customer identi- Significant opportunities exist in Senegal fication requirements. for mobile network operators (MNOs) to expand financial services. Recently Most of the necessary pieces are present launched mobile money transfer ser- in Senegal for significant expansion of vices, notably by Orange, are steps in the financial inclusion. A solid infrastruc- right direction. Speed to scale, however, ture, steady economic growth, favour- remains an issue that challenges mobile able regulations, and a robust private payment services, mainly caused by a sector together with high-level gov- gap between demand and the types of ernment backing of ICT access would products offered. With a well-coordi- help Senegal leverage mobile technol- nated strategy and policies that favour ogy for financial services. In a country the poor, Senegal has the potential to where remittances play a significant become an exemplary performer in fi- role, matching the penetration of mo- nancial inclusion. Overall, Senegal is at bile phones with financial services ca- the tipping point to become one of the pable of capturing small transactions is top performers in financial services in technically possible, but operationally Africa. Success in Senegal is likely to cre- challenging. ate a model that can be transferred to the rest of Francophone Africa. 12 Kenya Despite the political and ethnic tur- which meant that the service was eas- moil that it has experienced in the past ily accessible throughout the country. few years, Kenya’s economy is still the In addition, Safaricom’s management largest and most diversified in the East have devoted a lot of effort and com- African Community (EAC) and the mitment to the basic issues of the busi- wider East Africa/Horn of Africa region. ness, in particular on agent training, Compared to its neighbours, aid only branding, marketing and security of plays a limited role, and Kenya’s private the system. sector is known for its resilience. The country serves as a communications Since its launch, a range of payment hub for the region, and Kenyan firms services have been added: subscrib- increasingly aim for a regional foot- ers can now pay at retail outlets, pur- print. Kenya’s labour force is better ed- chase airline tickets, make school fee ucated than that of its neighbours, and payments and pay utility bills with Kenyan professionals are often hired their mobile money account. In addi- throughout the region. tion, the service has become increas- ingly integrated with the banking sec- Kenya’s ICT sector has benefited from tor: subscribers can pick up cash from these conditions and a relatively ad- PesaPoint ATMs, and Equity Bank was vanced telecommunications sector, the first commercial bank to offer a link strengthened by three undersea fibre between M-PESA mobile money ac- optic cables. The ICT sector was also counts and traditional bank accounts. identified as one of the key sectors to promote by the government in its Vision Agency banking allows commercial 2030 development plan. On the other banks to use retail outlets and other hand, Kenya still had a large unbanked agents to conduct a limited range of population, dependent on remittances, banking services through them. Agents which made it ripe for mobile money may therefore need to be given some solutions, unlike, say, South Africa limited access to core banking func- where bank accounts and credit card tions. Given the infrastructural chal- ownership were already well entrenched. lenges, the banks currently rolling out this service use GSM technology as well. The focus of extensive media cover- age, Safaricom’s mobile money service The example of Kenya offers lessons M-PESA (‘pesa’ is Kiswahili for money) to policy makers on both the condi- has been hugely successful for several tions and policies that have allowed reasons. First, the company already an innovative ICT-based financial had a widespread agent network, service to scale, with positive effects 13 on the rest of the financial services the reassurance that they would find a system. Kenya’s market-oriented busi- Safaricom outlet everywhere in the ness environment and its innovative country where they could retrieve telecommunications sector have en- their cash. In some ways, Safaricom’s abled competition to respond to the current dominance has actually been new entry, and ICT remains a gov- strengthened by its early success with ernment priority. These conditions mobile money, which increases cus- and policies support the development tomer loyalty as it has important of other services that use mobile money lock-in effects for users. In addition, (e.g. micro-insurance), giving an ad- consumers are so familiar with the ditional boost to mobile money pro- ubiquitous brand that they feel safe en- viders. Policy makers have also been trusting it with their funds; an impor- relatively flexible in their approach to tant factor given the political turmoil in experimentation. The Central Bank of Kenya following the 2007/08 election. Kenya (CBK) was willing to support Safaricom also treated mobile money as a mobile money pilot and find a bal- a profitable service, not a CSR project, ance between regulations, oversight, and therefore invested the necessary re- and flexibility for the mobile operator sources to develop it. This is something to experiment. Finally, due to M-PESA, that policy makers in other countries the banking sector has recognized that should consider when studying ways to there is money to be made by offering allow room for innovation. The com- services to lower-income consumers. pany also invested heavily in brand- There is both competition and co- ing, marketing, a simple user interface, operation between mobile money and and system safety and security, while the banking industry, but banks have also constantly expanding its offerings recognized that it is useful for clients (e.g. merchant and bill payments, re- to connect their mobile money account ceipt of remittances, and introduction to their bank account, and the potential of a prepaid Visa card). Finally, the to increase their revenues has helped company has engaged in regular, pro- to reduce their opposition to mobile active conversation with regulators like money as an immediate competitor, the CBK. That has allowed Safaricom, while increasing the offerings available and others, to expand their service of- to consumers. ferings to customers while reassuring regulators that appropriate safeguards The competitive impact of Safaricom’s are in place. Thus, the Kenyan exam- market dominance may not make for ple offers guidance to both public and an ideal market structure but, in the private-sector actors, and illustrates the case of mobile money, it gave clients importance of a multi-sector approach. 14 Table 3 Kenya’s challenges and opportunities for ICT and financial services Readiness (regulations, Drivers of growth Challenges Opportunities infrastructure, demand) • Build on mobile money • Address interoperability success by allowing greater challenges to allow operator- ICTs High functionality for other independent platforms to savings, payment and compete insurance products • Create competitive environ- ment for additional mobile • Overcome relatively high or ICT-based savings and transaction costs by ad- payments services to thrive dressing market competition issues • Improve and clarify regula- Financial services Medium tory structure to encourage • Address international cross-sector participation by payments issues (such as telcos and banks/MFIs remittances) • Diversification of products and delivery platforms • Mitigate dominant market Market players Medium • Encourage greater competition position of one carrier recommendations ICTs for financial services in Africa 4 � Recommendations for policy makers p16 � Recommendations for donors p19 16 For both national policy makers (in- state. The financial services sector is a cluding regulators) and international complex ecosystem. No single part of donors, recommendations address the sector can easily be addressed in consumer, public sector and market is- isolation, and there is no “one size fits sues, taking into account the different all” solution for all countries. From that stage of maturity in African countries. point of view, each nation will view the No two countries in Africa start from recommendations offered here through the same point when it comes to finan- their own lens when determining their cial services. Those beginning to pur- priorities. Some areas justify greater at- sue the opportunity are at a formative tention owing to the degree of maturity stage while others are in a better posi- of the existing financial services sec- tion to scale endeavours already under- tor and the existing policy/regulatory way. All are working towards a desired environment. Recommendations for policy makers Recommendation 1 Commit to financial inclusion through mobile banking Commitment to poverty reduction Interoperability should be encouraged and development on a national level by developing data and process stan- form the basis of a commitment to fi- dards specific to new areas of financial nancial inclusion. Policies and regula- services, such as mobile financial ser- tions should encourage market entry vices. Scaling states should coordinate (e.g. permit mobile operators to accept awareness-raising with third-party or- deposits on behalf of licensed financial ganizations with target markets (e.g. institutions where depositors could agribusiness, healthcare). The more earn interest) and prevent monopolies advanced states should consider intro- (e.g. disallow exclusive agreements for ducing a real-time mobile transaction cash in/out points). Experimentation clearing/settlement switch in order to should be encouraged by easing pro- remove the bottleneck when shifting to cedures for testing new approaches. an open network. 17 Recommendation 2 Support diversification in mobile financial services Generic single products or constricted to consumers. Cash-in/cash-out, bill services leave latent and explicit de- payments, deposits, savings, remit- mands unmet or even discourage up- tances, insurance, provident funds, and take and participation. Socio-economic loans are examples of products that can conditions specific to a country’s envi- be offered, and national policies should ronment should be taken into account provide incentives to institutions and in the kinds of products offered (e.g. agents to offer these and other diversi- Islamic finance), rather than regula- fied services. tions determining the choices offered Recommendation 3 Encourage access to capital for SMEs Promoting growth and fostering SME fear of risk among bankers by provid- success requires transformative poli- ing measured loan guarantees, similar cies that pay particular attention to the to the Small Business Administration ripple effects that SME capital access in the United States. Such programmes has on the overall economy. These ef- can also be complemented by mak- fects include increased employment, ing training available to SMEs in fi- asset building and more tax revenue. nancial management, innovation and Governments should help to lower the marketing. Recommendation 4 Promote appropriate and flexible identification policies Absence of, or limited proximity to, considered. Incentives aimed at mak- financial institutions is not the only ing services widely available should barrier that keeps poor customers come before mandates to obtain iden- from accessing financial services. tity documents such as a national ID, Identification flexibility for small driving licence, proof of residence, transactions is a crucial policy com- or passport. National identification ponent that should be seriously initiatives should be undertaken that 18 use low-cost services to register and or by requiring linking to activa- identify users, with feasibility studies tion of SIMs. Risk-based methods of of biometric options. Citizen partici- identification should be used for es- pation in identification enrolment tablishing new financial accounts so should be encouraged through a that risks may be mitigated by lim- mix of incentives and requirements, iting balance and transfer amounts e.g. by pairing with useful services and providing increasing capabilities (G2P payments and advertising), with greater evidence of identity. Recommendation 5 Provide guidance for streamlining back-end systems Detailed guidelines rather than man- could assess and audit technologies datory rules would be most helpful to that enable financial inclusion. Such streamline the back-end systems that a body could monitor and outline the should be installed and managed across latest and most strategically relevant institutions. A banking technology co- back-end systems, including mobile ordinating group within central banks, banking components, and interface ministries of finance/development, with technologies used by different or independently operating offices institutions. Recommendation 6 Develop data standards and practices for credit data Policies should aim to address the and practices should be developed for problems presented by fragmented, generating and aggregating credit data. standalone or non-existent credit Alternative forms of data for discerning bureaus that complicate lending for credit-worthiness should be examined. institutions as well as beneficiaries. An obligation should be considered for A database system should be estab- national utilities to make payment data lished to provide transparency for both available to credit bureau services. lenders and borrowers. Data standards 19 Recommendations for donors Recommendation 7 Reduce private sector risks by underwriting “first movers” Donors have an important role to efforts to address inclusion goals play in underwriting the risks of first through the availability of mobile bank- movers thereby encouraging private ing (Gates Foundation incentive fund sector involvement and innovation. for Haiti is an example). Incubator ef- For instance, private sector involve- forts for product designs and concepts ment could be induced through goal- tailored to consumer needs should be oriented awards for early and successful supported. Recommendation 8 Reduce shared costs by underwriting common supporting systems The selection of back-end systems log- make a positive impact by supporting ically falls to the private sector, since the systems necessary for interconnec- it affects competitive positioning and tion (real-time switches for mobile pay- costs considerations. However, do- ment interoperability) and systems that nors might consider underwriting a pre-condition infrastructure for ser- “minimum-feature” service available vice delivery (identification registries). via the cloud so that even the small- Such investments work with rather est MFIs and banks would be able to than against the private sector, enabling manage accounts. Donors would also more market participation. Recommendation 9 Leverage limited resources to drive private and consumer action Donors have an essential role in re- small business support efforts and do- ducing the risks of lending to small, nor funds could be leveraged for this unknown businesses. Loan guarantee purpose. In areas where traditional programmes are an important part of credit bureaus are failing to serve SMEs 20 (or do not exist), donors could also sup- (Prosper.com) lending models to de- port alternative methods for assessing termine donor allocation of funds. and sharing risks. Such scenarios might Donors should support efforts to raise include leveraging crowd-based vot- consumer awareness, and back solution ing mechanics combined with donor- incubators and heavy experimentation to-peer (Kiva.org) and peer-to-peer to translate needs into products. 21 Further reading Alliance for Financial Inclusion (2010) The AFI Survey on Financial Inclusion Policy in Developing Countries: Preliminary Findings http://www.g24.org/Workshops/afisur.pdf Deloitte (2011) Mobile Value Added Services (MVAS): A Vehicle to Usher in Inclusive Growth and Bridge the Digital Divide Deloitte Touche Tohmatsu https://www.deloitte.com/assets/Dcom-India/Local%20Assets/Documents/Deloitte_ASSOCHAM_ MVAS_Study.pdf Kendall, J., Mylenko, N. and Ponce, A. (2010) Measuring Financial Access around the World Policy Research Working Paper No 5253, The World Bank, Finance and Private Sector Development http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2010/03/30/000158349_2010 0330164126/Rendered/PDF/WPS5253.pdf Mylenko, N. et al (2010) Financial Access 2010: The State of Financial Inclusion through the Crisis The Consultative Group to Assist the Poor, The World Bank http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/07/19/0003561 61_20110719015018/Rendered/PDF/633320WP0Finan00Box0361513B0PUBLIC0.pdf Stein, P., Goland, T. and Schiff, R. (2010) Two Trillion and Counting, Assessing the Credit Gap for Micro, Small, and Medium Sized Enterprises in the Developing World IFC and McKinsey Consulting http://www.mckinseyonsociety.com/downloads/reports/Economic-Development/Two_trillion_and_ counting.pdf Stork, Christoph (2011) mBanking the Unbanked http://www.mobileactive.org/files/file_uploads/mBankingTheUnbanked.pdf World Economic Forum (2011) The Mobile Financial Services Development Report 2011 http://www3.weforum.org/docs/WEF_MFSD_Report_2011.pdf www.eTransformAfrica.org Publications for eTransform Africa include the Summary Report, Main Report which includes an overview chapter and summary chapters of the full reports, and the full reports themselves covering the following sectors and cross-cutting themes: Sectors themes: Agriculture Climate Change Adaptation Education Financial Services Modernizing Government Health Cross-cutting themes: Regional Trade and Integration ICT Competitiveness For a more detailed presentation on the role of ICT in financial services in Africa, see the full eTransform Africa sector report: http://www.etransformafrica.org. Graphic design by Marie-Anne Chambonnier eTransform AFRICA AFRICAN UNION