Financial Inclusion Briefing paper 07072016

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<ul><li><p>Financial Inclusion in Africa </p><p>AFFORD UK - The African Foundation for Development </p><p>Chatham House July 1st 2016 </p><p>Jack Van Cooten </p></li><li><p>1 </p><p>Policy Brief July 2016 Financial Inclusion in Africa </p><p>Overview </p><p>There is direct relationship between rates of poverty and financial exclusion. Globally, approximately two billion </p><p>people, or 38% of working-age adults do not have access to regulated banking or financial services. For those </p><p>who live in poverty, the proportion who are unbanked almost doubles, with 73% financial excluded, showing the </p><p>disproportionate impact that financial inclusion has on the poor (IFAD, 2015). </p><p>Despite the impressive growth rates witnessed in many African countries over the past decade, for growth to be </p><p>sustainable and for development to be inclusive, it is imperative that all sections of society are financially </p><p>included. The data shows that Africa is falling behind other continents when it comes to inclusive financing, with </p><p>only 34% of adults having a bank account and 16% of adults having formal savings; the second lowest of any </p><p>region in the world, with only the Middle East having lower rates (World Bank, 2014). Of course, there are </p><p>disparities within Africa too, with lower rates of financial inclusion among the continents women, youth and </p><p>poor. Expanding financial services to these groups in particular will enable communities to be resilient against </p><p>shocks, allow them to both save and invest in their families, and will help grow a class of entrepreneurs who in </p><p>turn will drive development. The continents diaspora and their remittances can and will play a role in this process; </p><p>they represent a significant economic force that if properly organised can play a key role in the continents </p><p>development. </p><p>This policy brief first outlines how financial inclusion is both defined and measured, before looking at rates of </p><p>financial inclusion in Africa. It then looks at who and where in Africa is financially included and indeed, excluded, </p><p>and what the opportunities are to broaden financial systems across the continent. The role of the diaspora in </p><p>financial inclusion is then explored, with a focus on the tens of billions of dollars per year that are sent to African </p><p>countries from abroad. Finally, best practices from Womens World Banking and Rwandas Umurenge SACCO </p><p>programme are highlighted, before a number of policy recommendations to key stakeholders are put forward. </p><p>What is Financial Inclusion? </p><p>Interest in understanding and broadening financial inclusion has grown in recent years, as exemplified by multi-</p><p>country commitments such as the G-20 Financial Inclusion Action Plan (G20, 2014), and the number of individual </p><p>countries who have established their own policies in the area. Financial Inclusion refers to a state in which all </p><p>working age adults, including those currently excluded by the financial system, have effective access to the </p><p>following financial services provided by formal institutions: credit, savings (defined broadly to include current </p><p>accounts), payments, and insurance (GPFI, 2016). </p><p>Explanations and metrics of financial inclusion have progressed away from categorising people according to a </p><p>binary separation of being either included or excluded, to seeing financial inclusion as multi-dimensional. The </p><p>below table summarises how aspects such as access, usage and quality are being considered as part of a more </p><p>encompassing and accurate definition of inclusive financing (Table 1). </p></li><li><p>Table 1 The dimensions of financial inclusion. Adapted from the Financial Inclusion Data Working Group (2011) in AfDB (2013) </p><p>It is important also to understand the distinction between voluntary and involuntary financial exclusion (Young-</p><p>Park &amp; Mercado 2015). People who are voluntarily financially excluded are individuals that choose not to use </p><p>financial products and services, either because they do not feel they need them or due to cultural factors that </p><p>discourage usage. Conversely, involuntarily exclusion relates to people who cannot access financial services, even </p><p>though they may want or need to. This could be down to a number of factors, such as discrimination, lack of </p><p>income, being perceived as too risky or unprofitable by financial institutions, or due to lack of proximity, for </p><p>example those living in rural areas. </p><p>Information on financial inclusion has usually been </p><p>broken down into supply and demand-side data. </p><p>A simple way to understand this distinction is that </p><p>supply-side data is measured from the top-down, </p><p>by central banks and governments for instance. An </p><p>example of the type of information that supply-</p><p>side stakeholders produce is the number of ATMs </p><p>or bank accounts in a country or region. However, </p><p>using this information to convey levels of usage </p><p>and access to financial services is inaccurate, as it </p><p>does not show how regional, social or economic </p><p>disparities have an impact on financial inclusion. </p><p>Demand-side financial inclusion however, is </p><p>measured from the bottom-up, and attempts to capture the levels of usage based on perspectives from the </p><p>poorest households and low-income, often informal businesses (BIS 2012). </p><p>Financial Inclusion in Africa Whilst financial inclusion in Africa is growing rapidly, increasing from 24% of the population in 2011 to 34% in </p><p>2014, Sub-Saharan Africa remains the second least financially included region in the world, with only the Middle </p><p>East having a lower proportion unbanked. The World Banks Findex Database defines being banked as those </p><p>who have an account with either a financial institution, such as a bank or credit union, or alternatively with a </p><p>mobile money provider, which can be used to transact money to and from a mobile phone account (Global </p><p>Findex Database 2014). It is interesting that whereas globally, only 2% of adults have a mobile money account, </p><p>in Sub-Saharan Africa this figure climbs to 12% of the population. </p><p>In Africa, when it comes to financial inclusion, there are sharp disparities, both between and within countries. We </p><p>will come to how disparities manifest within countries below, but in the countries for which data is available </p><p>(Figure 1, above), it is those in Southern Africa that tend to have the highest levels of account ownership South </p><p>Access Usage Quality </p><p>Availability of formal, regulated </p><p>financial services: </p><p> Physical Proximity </p><p> Affordability </p><p>Actual Usage of formal financial </p><p>services and products: </p><p> Regularity </p><p> Frequency </p><p> Duration of time used </p><p> Products that are well tailored to </p><p>client needs: </p><p> With appropriate </p><p>segmentation to develop </p><p>products for all income levels </p><p>Figure 1 Account Penetration across the World (Global Findex Database 2014) </p></li><li><p>3 </p><p>Policy Brief July 2016 Financial Inclusion in Africa </p><p>Africa is the highest with 70% coverage, closely followed by Namibia (59%) and Botswana (52%). East Africa also </p><p>shows relatively high rates compared to the rest of the continent, but this is largely down to the region being </p><p>the global hub of mobile money. 75% of Kenyans have an account at some form of financial or mobile money </p><p>institution, along with 44% of Ugandans, 40% of Tanzanians, and even 39% of those in Somalia. The rise and </p><p>subsequent prevalence of mobile money will also be discussed in greater detail below. The picture is more mixed, </p><p>but generally lower in West Africa, ranging from regional highs in Nigeria (44%) and Ghana (41%), to a regional </p><p>low of 7% in Guinea. The Sahel and Central African countries also have low percentages of their populations </p><p>who are financially included, with almost every country under 20% (Global Findex Database 2014). </p><p>Who is Financially Excluded in Africa? </p><p>But percentages at the national level do not tell the complete story. For example, if 44% of the 186 million people </p><p>in Nigeria do have an account at a financial or mobile money institution, it means that over 100 million people </p><p>in Nigeria do not. Who are these people, and why is it important that efforts are made to include them financially? </p><p>African Women </p><p>African women are an extremely diverse cohort, coming from different </p><p>cultural settings, income levels, societies, marital statuses etc. (MFW4A </p><p>2013). Throughout Africa, women are less likely to hold an account at a </p><p>financial institution than men (figure 2). However, it is widely </p><p>acknowledged that the positive effects of broadening financial inclusion </p><p>among women go far beyond benefiting the individual, but subsequently </p><p>benefits their households, the wider community and ultimately, men too. </p><p>Financial products should be tailored so that they are appropriate for </p><p>womens needs and allow more flexibility. Focus also needs to be targeted </p><p>towards building knowledge on financial services, so that they can be fully </p><p>taken advantage of by women (ibid.). </p><p>African Youth </p><p>Of all of the demographic groups in Africa, African youth are some of the most marginalised. According to a </p><p>report by the UN, for African youth, that is those that are aged between 15 and 24, only 12% have a formal bank </p><p>account (UN 2013). Much of this is down to negative stereotypes of youth, legal restrictions and non-inclusive </p><p>financial policies and therefore, there is much work to be done. As the continent with highest proportion and </p><p>fastest growing population of young people, it is imperative that the financial exclusion of African youth is </p><p>addressed. In doing so, the youth should be provided with the knowledge, skills and financial products that will </p><p>allow them to build a sustainable livelihood (Braga 2009). </p><p>African Poor </p><p>Financial inclusion has been broadly recognised as critical in reducing poverty and achieving inclusive economic </p><p>growth; however, in every country in Africa, it is the poorest that are the most financially excluded. With the </p><p>wealthiest 20% of adults twice as likely to have a bank account as the poorest 20%, financial inclusion is strongly </p><p>related to wealth. Financial exclusion also perpetuates poverty, as financially excluded individuals and SMEs are </p><p>Figure 2: % Sub-Saharan Africans who </p><p>are Financial Included (Global Findex </p><p>Database 2014) </p><p>28%</p><p>30%</p><p>32%</p><p>34%</p><p>36%</p><p>38%</p><p>40%</p><p>Men Women</p></li><li><p>more likely to seek financial services such as loans through riskier, higher-interest sources (AfDB 2013). Ultimately, </p><p>for both individuals and their businesses at the poorer end of African societies, being able to access financial </p><p>services can contribute to investment in education, management of risks and a boost in economic growth (Bruhn </p><p>&amp; Love 2014). </p><p>Opportunities to Broaden Financial Inclusion </p><p>For all of the groups listed above, and indeed for other marginalised sections of society in Africa, not having the </p><p>financial infrastructure means to also not have a place to securely save or invest money, not having the ability </p><p>to insure oneself or ones business, and thus not having as much ability to build resilience against shocks (IFC </p><p>2013). However, impressive progress has been made across the continent in recent years. For example, whereas </p><p>in 2011, 76% of the continent was unbanked, only three years later that figure dropped to 66% (and as you are </p><p>reading this, that figure is lower still). But quick gains should not mask the fact that there is immense scope by </p><p>both governments and the private sector to broaden financial inclusion, particularly among these marginalised </p><p>groups. </p><p>Broadening Financial Inclusion at the Local Level </p><p>At the local level, broadening financial inclusion needs to take a tailored approach, depending on the target </p><p>group. For example, African women tend to be in a weaker position for accessing finances than African men, </p><p>partly due to discriminatory gendered land rights, meaning they lack the collateral when attempting to obtain </p><p>funding (OECD 2011). Their higher vulnerability and higher levels of poverty particularly among rural women - </p><p>also means that they are more risk averse than their male counterparts. Additionally, cultural norms placing the </p><p>responsibility of raising children in the hands of women and also a lack of financial literacy creates obstacles that </p><p>for men are less likely to exist. On the other hand, convenience and the geographic proximity of financial services </p><p>have been found to be a greater driver of usage for African women than men (MFW4A 2013). Similarly, African </p><p>women generally make smaller transactions than men, and are more reliant on cash. Therefore, gender sensitive </p><p>financial products are essential, particularly for women that face multiple-barriers, such as poor or rural women. </p><p>One such example is the utilisation of a mobile delivery van in Malawi that brings a range of financial services to </p><p>women who would otherwise not have access (Stuart, Ferguson and Cohen 2011). </p><p>Measures have been taken to increase the financial inclusion of youth too. Through a joint study of financial </p><p>inclusion programmes and accompanying financial management lessons in Togo and Ethiopia (FUCEC in Togo </p><p>and ACSI in Ethiopia), participants in both countries doubled their net average incomes (after average expenses), </p><p>compared to their respective control groups. This was in part due to their participation in financial education </p><p>sessions which taught money management strategies. In addition, participants in both groups tended to save </p><p>more and for longer periods of time following the programmes emphasis on each participant making a financial </p><p>plan (UNCDF 2016a). This highlights the importance of financial education accompanying efforts to broaden </p><p>access. </p><p>Broadening Financial Inclusion at the National Level </p><p>Some national governments are taking steps to digitalise the payment of staff wages. By providing their public </p><p>sector staff with bank accounts and paying wages into them, rather than in cash, they hope to quicken the pace </p><p>of financial inclusivity (World Bank 2015). However, we need to be careful to ensure that we do not assume that </p><p>simply providing a person with a bank account automatically means that they are financially included. For </p><p>example, a case study in a 2016 UNCDF report describes the situation of a Mozambican school teacher who was </p></li><li><p>5 </p><p>Policy Brief July 2016 Financial Inclusion in Africa </p><p>provided with a bank account into which her monthly wages were transferred. However, this was detrimental to </p><p>both her overall income and also to her students as she would have to miss one day of teaching per month to </p><p>take the long journey to collect her wages, and in doing so, incurring the additional cost of travel (UNCDF 2016b). </p><p>This is just one factor among many (such as high bank account fees) in which broadening financial inclusion </p><p>through simply providing access to financial services is insufficient. Need and usage are equally important. It is </p><p>essential therefore, to provide concrete national regulatory frameworks that are beneficial to account ownership. </p><p>This can include measures such as requiring banks to provide low or no-fee accounts, incorporating innovative </p><p>technologies such as mobile money, and introdu...</p></li></ul>


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