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Why financial inclusion still matters to Africa
Financial exclusion is hurting Africa’s prosperity hopes. Currently, 40% of the continent’s population remains unbanked, while around 90% of financial transactions are cash-based. Advancing digital financial services and identity infrastructure can help transform financial inclusion and governance; and strengthen resilience for the 1.4 billion citizens.
The clamor for financial inclusion in Africa began in the early 2000s with the introduction of the United Nation’s Sustainable Development Goals (SDGs). Since that period, many countries have taken big strides in fintech, contributing to increased access to financial services, particularly in rural and underserved communities. According to the World Bank, account ownership in developing countries has grown from 63% in 2017 to 73% in 2022, driven by services like mobile money. Global consulting firm McKinsey indicates that nearly half of the 5,200 tech startups formed in Africa in 2021 focused on financial technology. Of the total startup funding granted by investors, fintech garnered 48.3% in 2021 and 43.3% in 2022.
Overall, the African fintech sector secured $1.45 billion in funding for 2022, an increase of 39.3% from the previous year. But when this progress is measured against population increase, it becomes clear that it is marginal, and millions of Africans remain locked out of financial services. There’s also a gender component in play as women are disproportionately excluded, to the detriment of the economy. A 2015 McKinsey report shows that increasing women’s labor market participation may boost global GDP by more than $12 trillion per year.
For Africa to address its development needs, it must slash by half the number of people financially excluded. Solutions such as investing in identity infrastructure, strong regulatory frameworks, mobile money services, and payment innovations could be explored, especially as technology advances, more segments of the population get access to mobile phones, and data costs drop across the board. Moreover, the COVID-19 pandemic has inadvertently done a good job of mainstreaming digitalization initiatives and forcing customers and sellers to fully adopt digital payment systems.
Payment solutions
The rise of mobile money service platforms like Kenya’s M-PESA has rapidly increased financial inclusion in Africa. Since launching in 2007, the platform has accrued more than 55 million monthly active customers spread out across seven African countries. What started as a payment solution now incorporates lending and savings. Notably, in this same period, financial inclusion in Kenya grew nearly four times, from roughly 25% in 2006 to 85% in 2021.
Emerging fintechs in Africa are predominantly focused on payments due to their huge potential. Since most of the population works in the informal sector, they are most likely not to own bank accounts. Thus platforms that provide an alternative to pay for goods and services, and send money from one person to another, will be taken up en mass. The failure of traditional banking systems to shed their status as products for the middle-class, white-collar worker who lives in cities has resulted in many people outside these environments shying away from opening bank accounts. Moreover, it is quite tedious to transact through banks which require large amounts of paperwork.
“The payments segment is huge. It can be digital payments or payment rails. Anything that supports elements around payments in Africa is a market leader. A lot of the payment-related fintechs are getting a lot of traction in the market because of ease of use, as well as the accessibility they provide,” Kelly Parkhurst, Head of Design and New Digital at Absa Bank, said.
Barriers
The increasing uptick of digital financial services has cropped new challenges concerning identity infrastructures. According to the State of KYC (Know Your Customer) in Africa report released in June, nearly 500 million Africans still lack legal identity documentation, meaning these individuals remain locked out of the brighter future created by the tech innovation in the continent. The African Development Bank (AfDB) projects Africa’s digital economy will reach $180 billion by 2025, but secure digital identities are necessary for the fulfillment of that potential.
A recent expose in May by Al Jazeera’s Investigative Unit on money laundering in South Africa and Zimbabwe exposed how criminal enterprises abuse digital payment systems for nefarious purposes. The ease with which these groups could create numerous fake identities with stolen or lost IDs raises the issue of fraud as financial services become more and more accessible to the general public. Regulatory agencies, therefore, face the challenge of either enacting stronger regulations that would hinder financial inclusion as millions of Africans lack access to identity documents or leaving the status quo as it is with increasing cases of fraudsters abusing the system.
Regulatory solutions
Cognizant of the importance of financial inclusion to development in Africa, governments are embarking on regulatory reforms across all sectors. Ethiopia, Lesotho, Mozambique, Tanzania, Uganda, Zambia, and Zimbabwe have all introduced national biometric digital identity cards to increase access to these documents among their citizens. Nigeria is also piloting a Digital ID for Development (DI4D), geared towards more inclusion of pastoralist communities.
The rollout of the African Continental Free Trade Area (AfCFTA), which is set to create the largest free trade area in the world, and the planned establishment of the Pan-African Payment and Settlement System, should open new avenues for financial inclusion through increasing cross-border payments and trade. More fintechs are likely to sprout, offering traders and dealers payment solution platforms that are easier to use, unlike traditional banking systems.
While still at a nascent stage, the recent proposal to trade in local currencies is likely to spur greater financial inclusion for underserved communities living in border regions.
In conclusion, financial inclusion is critical for development in Africa. Despite progress over the last twenty years, policymakers and authorities must continue to create avenues for increased bank account ownership and access to financial services in rural areas and informal settlements.
Citations
Ayang Macdonald. India supports AfDB’s digital financial inclusion drive in Africa with $2M. Biometric Update. Retrieved August 9th 2023 from https://www.biometricupdate.com/202308/india-supports-afdbs-digital-financial-inclusion-drive-in-africa-with-2m
Evans, Olaniyi. “Determinants of financial inclusion in Africa: A dynamic panel data approach.” (2016):310-336.
Rekha Menon. Payments innovation the key to financial inclusion in Africa. The Banker. Retrieved August 9th 2023 from
https://www.thebanker.com/Payments-innovation-the-key-to-financialinclusion-in-Africa-1681890717