POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise AUGUST 2010 · Number 26 56172 Facilitating Cross-Border Mobile Banking in Southern Africa Samuel Maimbo, Tania Saranga, and Nicholas Strychacz The use of mobile banking is an increasingly important component of national and regional economic development in Southern Africa. Mobile banking can help bring the large unbanked population into the formal financial sector, and can facilitate cross-border trade by easing the difficulty for small businesses and traders to make financial transactions. For mobile banking to reach its full potential in Southern Africa, however, African governments must establish more efficient regulatory frameworks and implement well-designed pilot programs to gain more insight into the challenges facing a full rollout of mobile banking. The use of mobile banking in Southern Africa is widely rec- African countries; and it concludes with recommendations ognized as an increasingly important component of national for overcoming the constraints to developing accessible mo- and regional economic development. Mobile banking can bile banking in Africa. benefit countries in two key ways: First, mobile banking may enable faster and more efficient financial transfers, increasing Understanding the Demand for Mobile the volume of trade and subsequent payments to workers Banking in Southern Africa and their families. This dynamic is especially important for informal trade, which is practiced primarily by low-income, Mobile banking in this report refers to a range of mobile unbanked international, regional, and domestic migrants. phone­based financial transactions (including actual pay- Second, mobile banking greatly increases access to finance ments made with a mobile phone and mobile phone access for a large segment of the unbanked populace in developing to banking services). The demand for mobile banking services countries. In Africa, where borders often were drawn arbi- is occasioned by the two key areas of migrant remittances and trarily, cross-border trade is an important business activity cross-border payments for trade-related transactions. for a large subset of the population. Developing mobile The first area--migrant remittances--is driven by the banking capacity offers great potential for facilitating trade strong migration patterns that exist in Southern Africa; and in both goods and financial services. migration patterns, in turn, are important for increasing the This report provides a description of the supply-side fac- demand for mobile banking services. Although determining tors influencing the development of mobile banking services-- the exact number of migrants is difficult because available remittances, informal trade, and the financial and telecom- data only capture the flow of registered migrants), estimates munications landscape. On the basis of this description, the suggest that the number of migrants sending remittances is report highlights the key regulatory issues facing Southern high. Significantly, the available data also indicate that a no- 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise table portion of migration flows are South-South, or be- Indeed, a large proportion of remittances is believed to flow tween developing countries. Research has shown that, be- through the informal financial sector. cause income differentials between these countries are From a policy perspective, it will be important to know small, geographic proximity and networks have a greater in- the size of migration and remittance flows because inaccu- fluence on migration patterns than do income levels. Other rate information or estimates could lead to policy initiatives determinants of migration patterns include civil conflict, that do not help raise the level of formal financial sector par- ecological disaster, and seasonal dynamics--factors that of- ticipation. Similarly, from an efficiency standpoint, large re- ten affect many African countries. mittance flows suggest that policies should attempt to bol- Common characteristics among migrants include low in- ster competition among formal financial services providers, come and a lack of skills or a limited formal education. These such as banks and money-transfer operators. In this case, en- characteristics are some of the causes of migration--workers gaging with the formal financial system could provide posi- tend to migrate to places where there is work that they are tive externalities through efficiency gains from transferring able to do. For example, a recent study on migrants leaving money, increasing access to credit, and raising the level of Mozambique showed that 8 percent have no education, 15 savings. These benefits will be especially helpful for those percent have secondary education, and 70 percent have ba- migrants who do not currently have access to the formal fi- sic primary education (Truen et al. 2005). However, there is nancial sector. For example, engagement with the formal sys- evidence also that a significant number of migrants from tem would provide greater physical security for many work- other African countries are highly skilled. In these cases, po- ers who would no longer have to carry cash in hand. litical upheaval or political violence is likely the primary Economically, there is limited participation in the formal cause of the migration. As one scholar notes, "The pressure financial sector simply because of the sector's high cost, of uncertain economic conditions in several countries has compared with that of informal transfer methods. This is a acted as a push factor sending skilled professionals to the primary reason why the informal financial sector is more booming economies of Botswana, Namibia, and South popular among migrants. Indeed, a 2006 study of remit- Africa" (Waller 2006, p. 4). In all cases, a lack of education tances in South Africa showed that 7 percent of migrants and job prospects or the presence of political unrest and eco- used a post office to send money, 1 percent used a bank in nomic uncertainty help explain why migrants are often the South Africa, and 6 percent used a bank in the migrant's most financially excluded people in a community. These mi- home country. The rest (86 percent) used informal means grants, therefore, are the people who would benefit most for remitting money (Pendleton et al. 2006). Whereas other from the opportunities presented by mobile banking. studies have shown a higher percentage of migrants using Crucially for policy makers, migration flows will continue banks, a significant number still use informal methods for or even intensify in the future. Instead of futilely attempting transferring remittances. Although current estimates of in- to control these flows, policy makers are better off seeking formal sector participation are imprecise,1 economist are in to regulate these flows more effectively by selectively easing broad agreement that migrants who are engaged with the barriers to migration, including barriers to cross-border mo- formal financial sector are a small minority. bility. One key way in which cross-border mobility can be There are several reasons why many migrants choose to facilitated and regulated is through more effective regional use informal channels rather that the formal financial sector integration. Although some efforts at regional integration are to remit payments: under way in Southern Africa, closer integration of labor markets through increased cross-border mobility could bring · Ease of use--Migrants prefer methods with less paper- significant efficiency gains to the region. work. · Familiarity--Informal channels have been used or rec- Remittance Flows ommended by family and friends. · Cost--Higher costs in the formal financial sector drive In the formal financial sector, remittances generally are sent away migrants. Fees in informal networks tend to be by migrants through banks, post offices, or money-transfer lower than at banks or with money-transfer operators. operators; and by carrying cash personally or sending it Studies have shown that the cost of formal transfers through a friend or relative. As with the size of migration can be up to six times as great as those of informal flows, gauging the true magnitude of remittance flows is dif- transfers, with fees exceeding 50 percent of the remit- ficult. What is certain, though, is that the true size of remit- tance value (Pendleton et al. 2006; Truen et al. 2005). tance flows is larger than the officially recorded numbers, · Risk tolerance--There is a perception among migrants because the official figures do not take into account the un- that banks are untrustworthy and may lose or steal mi- recorded flows through both formal and informal channels. grants' money. 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise · Access--It can be difficult for the recipient to reach the timates put the average monthly value of goods traded at point of delivery. $2,506 per trader (although profit margins may be substan- · Source of remittances--Many migrants are working in tially lower) (Matorofa 2008). the informal labor sector in South Africa, so their re- Despite the magnitude and importance of informal cross- mittances are, by definition, the result of illegal em- border trade, especially with regard to income generation ployment. among poor people, government policies have tended to fo- cus on formal trade activities. More recently, though, this Given this context, it is not surprising that banks gener- trend has begun to change. For example, Zimbabwe signed ally are unable to provide services to unbanked migrants. a memorandum of understanding with the government of Finally, in some countries there are regulatory restrictions Malawi to facilitate informal trade, specifically between that prevent the entry of financial institutions into the re- small and medium-size enterprises. In Southern Africa, ne- mittance market--even those institutions that may have a gotiations are under way for the signing of similar memoran- greater geographic reach or are closer to migrants. All of da with Namibia, South Africa, and Zambia. these reasons explain migrants' disincentives for engaging with the formal financial sector. Financial and Telecommunications Landscape Trade Patterns in Southern Africa-- In an environment characterized by international, regional, Implications for Cross-Border Payments and national migration and significant levels of cross-border trade, the financial and telecommunications sectors play an Besides migrants, the other key source of demand for mobile important role in the development of mobile banking serv- banking is informal cross-border trade, generally defined as ices in the region. an economic activity that is legal but unregulated. The un- regulated nature of this cross-border trade means that most Financial Sectors informal trade is undocumented, unregistered, and unac- Despite some recent developments increasing competitive- counted for in countries' national accounts and official trade ness in financial markets, the number of financial operators statistics. However, many cross-border traders pay duties and and instruments remains low in many countries. In general, taxes; and studies have estimated the value of informal trade financial sectors in migrant-sending countries may be char- within Southern Africa to be $17.6 billion per year (Muson- acterized by weak competitive environments (especially in da 2004). The payments system that typically supports these the remittance market), lack of access to technology-sup- various monetary exchanges is characterized as unrecorded ported payment and settlement systems, and burdensome cash-to-cash transactions. regulatory and compliance requirements for banks. Devel- A 2008 study on the topic (Matorofa 2008) described in- oping a strong financial sector and efficient payment systems formal cross-border traders as including the following: is essential for economic development and for support of in- creasing cross-border financial flows. Among other factors, · traders or merchants who under-declare their import- this includes developing the commercial banking sector and ed goods or wares, other financial institutions, strengthening the domestic pay- · traders or merchants who declare nothing (smugglers), ments system, developing foreign trade financing instru- · traders or merchants who do not declare through ments, and creating correspondent banking relationships be- clearing agents, tween countries in the region.2 · traders or merchants who sell directly to the final cus- Countries face a number of challenges in reforming do- tomer, and mestic financial sectors and creating regional financial mar- · agents of established wholesalers and retailers. kets. In some countries, such as Angola, conflict has left weak institutions and governance, degraded infrastructure and The study also noted that informal traders crossing the public service systems, high inflation and unemployment borders tend to be predominantly female (70 percent). In rates, and a shortage of human and technical capacity. All of this way, informal cross-border trade can be seen as closely these factors make more difficult a country's complex linked to the feminization of migration--an emerging trend process of establishing a sound and efficient financial system in Africa. This link makes sense because low-income women that can support economic growth and job creation for its may be more likely to be unemployed, and unemployed population. Mobile banking provides an efficient mode of fi- women seek other--often informal--trade opportunities for nancial access while the components of more traditional fi- generating income. And, by African standards, cross-border nancial systems are being built. In some countries with in- traders may generate relatively large amounts of revenue: es- complete financial markets, several innovative initiatives for 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise expanding access to mobile banking have been implement- Developing such regulatory frameworks, however, can be ed, but they remain nascent. a difficult and time-consuming task. Therefore, it would be useful to implement pilot programs to test various regula- Telecommunication Sectors tions. This has been done in countries such as Kenya and the As with financial sectors, the telecommunications sectors of Philippines, and is generally regarded as a positive step in Southern Africa are at different levels of development. Coun- crafting strong and efficient regulation. These pilot programs tries such as Namibia and South Africa have telecommuni- have several benefits, such as encouraging innovative regula- cations sectors that are relatively more developed; but in tory solutions to difficult problems and demonstrating for countries such as, Angola, Malawi, and Zambia, the telecom- governments how regulation can yield tangible outcomes for munications sectors are characterized by the monopoly of economic development. Similarly, the pilot projects can help state-owned operators and service providers. Furthermore, identify and overcome problems with proposed regulation. few countries in the region have extensive telecommunica- The final result is regulation that is more effective at ex- tions infrastructure in place. Although Namibia and South panding access to banking services, while it limits negative Africa have achieved relatively significant fiber-optic deploy- externalities. ments, the international bandwidth available in general to In terms of specific regulatory prescriptions, policy makers Southern African countries is extremely poor, compared with should consider permitting the use of retail agents for cash- those of Asia, Europe, or North America. in/cash-out, perhaps first developed through a pilot program. Regionally, there are several key issues facing Southern They should also consider developing a risk-based, commu- Africa. Some of the countries (Malawi and Zambia ) are nity-driven development approach with the flexibility to in- landlocked, so they do not have no option to connect direct- corporate small-value accounts and transactions. Good regu- ly to a submarine fiber-optic cable. These countries will have lation also includes a legal basis; and policy makers should to rely on expensive satellite links for their international traf- develop directives to provide legal clarity on outsourcing, fic, and they may be unable to afford or access high-band- branchless banking, and electronic transactions. Finally, as width links. There are plans to link Southern Africa with a previously mentioned, policy makers should ensure that the submarine cable, and progress (which has been slow) could financial system expands permitted points of service and re- be expedited if a regional solution can be found. duces reporting requirements for small-value cross-border transactions. Taken together, these regulations can help ex- Policy Recommendations for Regulation to pand access to financial services while creating an environ- Promote Development ment in which banks and other stakeholders may benefit. Faced with migrant populations, informal markets, and un- Recommendations for a Proposed Action Plan derdeveloped financial and telecommunications networks, policy makers must take on a broad reform agenda if they Following the policy recommendations described above, are to strengthen their opportunities to develop mobile there are four key elements of a strategy for a follow-up ac- banking. tion plan. This plan is designed to ensure that the initiatives African countries' first and perhaps most important ac- and pilot projects outlined above are given the greatest tion is continuing to improve the regulatory framework for chance to succeed. domestic branchless banking. Regulation is essential for both First, provide policy support for branchless banking ini- national and international financial transactions, and a robust tiatives that target the unbanked population. This note has and efficient regulatory framework must be in place to en- discussed the variety of constraints that prevent many poor able branchless and mobile banking to flourish. For all and migrant workers from using formal financial services; Southern African countries, it is important to develop clear and overcoming these constraints will require direct stake- and easily followed guidelines for implementing branchless holder support for branchless banking. For example, provid- banking. Because the overarching goal is to expand financial ing matching grants or other financial assistance to financial services to the currently unbanked population, specific poli- service providers who would like to offer services to the un- cies include expanding permitted points of service for small- banked but are wary of taking on excess risk could help ex- value, cross-border transactions; eliminating the requirement pand the market. In addition, the World Bank and other to prove legal residence so one may set up a bank account; donors could assist pro-poor branchless banking initiatives and expanding the scope of Exemption 17 to cover money by providing technical assistance and sharing start-up costs. transfers among countries in the Southern African Develop- Second, African countries can learn from branchless ment Community (SADC).3 banking leaders around the world. Although branchless 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise banking is still a relatively new phenomenon, some countries 2. Correspondent banking refers to banks that agree to per- have developed regulatory frameworks that provide space form reciprocal financial services for each other--for exam- for innovation while minimizing risks. In the Philippines, for ple, accepting deposits from or transferring funds for each example, the Central Bank has worked with mobile opera- other's customers. Correspondent banking enables a bank to tors to permit branchless banking to flourish; and Brazil has serve its migrant clients without having to set up a branch in nearly a decade of experience in the branchless banking another country. space. In Africa, regulators and financial service providers 3. Exemption 17 of the Financial Intelligence Centre Act could benefit from learning how branchless banking oper- allows "first-time" customers in South Africa to open certain ates and how it is regulated in other countries. The World types of bank accounts without having to provide a proof of Bank, in association with the Alliance for Financial Inclusion, residential address document. could take a lead role in organizing and funding study tours, regional conferences, and workshops to disseminate this in- About the Authors formation. Third, the World Bank could play an important role in fa- Samuel Maimbo is senior financial sector specialist in the cilitating and supporting opportunities for extensive stake- Africa Financial and Private Sector Development Unit of the holder collaboration. By providing training, capacity building, World Bank. Tania Saranga is a consultant in the Africa Finan- and other assistance at the regional level, donors can help cre- cial and Private Sector Development Unit. Nicholas Strychacz ate a cadre of expert stakeholders who ultimately can sup- is a consultant in the Africa Poverty Reduction and Economic port the growth of the entire sector. Similarly, the World Management Unit of the World Bank. Bank could support training and the creation of formal mech- This work is funded by the Multi-Donor Trust Fund for anisms for collaboration among branchless banking stake- Trade and Development, supported by the governments of Fin- holders, including policy makers, regulators, banks, mobile land, Norway, Sweden, and the United Kingdom. The views ex- network operators, payment-service providers, and other in- pressed in this paper reflect solely those of the authors and not terested parties. For example, regional institutions such as the necessarily the views of the funders, the World Bank Group, or SADC or the Common Market for Eastern and Southern its executive directors. Africa could provide a forum for cross-country discussion and sharing of experiences. Such a forum also could define References best practice for regulatory frameworks and future policy ac- Matorofa, E. A. 2008. "Optimising Regional Integration in Southern Africa: tion. Regionally accepted regulatory frameworks would be of Assessing Informal Cross-Border Trade in SADC." Presentation pre- great help in facilitating cross-border mobile banking. pared for the SADC International Consultative Conference on Poverty Fourth, as previously discussed, a pilot project should be and Development, Pailles, Mauritius, April 18­20. launched with the specific aim of bringing "taxi money" into Musonda, M. 2004. "Overview of Informal Trade in the SADC Region: the formal financial sector. Taxi money refers to funds trans- Where Are We Now?" Presentation prepared for the Regional Work- shop for SADC Informal Traders, Harare, Zimbabwe, February 11­12. ferred across borders via taxi drivers and similar informal Pendleton, Wade, Jonathan Crush, Eugene Campbell, Thuso Green, Hamil- mechanisms. Most small-value remittances from South ton Simelane, Daniel Tevera, and Fion de Vletter. 2006. Migration, Re- Africa are transferred in this manner. The goal of the pilot mittances and Development in Southern Africa. Southern African Migra- project would be to identify the sources of the high costs of tion Project, Migration Policy Series No. 44. Cape Town: Institute for cross-border remittances from South Africa. The initial proj- Democracy in South Africa. ect could start with in country that is an important recipient Truen, Sarah, Richard Kentley, Hennie Bester, Ben Davis, Hugh-David Hutcheson, Kofi Kawakwa, and Sydney Mogapi. 2005. Supporting Re- of small-value remittances from South Africa--Malawi and mittances in Southern Africa. Estimating Market Potential and Assessing Mozambique would be logical choices. Mozambique, in par- Regulatory Obstacles. Washington, DC: Consultative Group to Assist the ticular, has extremely high volumes of small-value remit- Poorest. tances from South Africa. Waller, Lyndith. 2006. "Migration of Skills in South Africa: Patterns, Trends and Challenges." Migration Policy Brief No. 20. Southern African Mi- Notes gration Project, Cape Town. 1. The differences among studies may result from differ- ences in the sampling method and survey timing. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. It is produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.