Digital financial inclusion in Africa (1)

Financial inclusion, access to financial services or the process of ensuring the ease of access and usage of financial services by all, is being brought about faster and quicker in Africa through digital financial services (DFS). Digital financial inclusion varies by region and country on the continent, however, with East Africa, especially Kenya, in the lead. Other regions on the continent are playing catch-up. In West Africa, Nigeria recently approved guidelines for payment service banks for the provision of mobile money-type services, albeit they would not be able to provide loans. In East Africa, Kenya specifically, where digital mobile lending has already become advanced, there are issues with predatory lending practices.

According to the World Bank, “financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.” In this regard, the World Bank is championing the Universal Financial Access by 2020 (UFA2020) initiative, which aims for all adults – a third of which do not have a basic transaction account – to have “access to a transaction account or an electronic instrument to store money, send payments and receive deposits as a basic building block to manage their financial lives” by 2020.

As they address identified challenges to financial inclusion, such as access, cost and complexity, it is believed mobile financial services (MFS), that is, the provision and usage of financial services via mobile phones, which are now ubiquitous, relatively cheap and easy to use, would bring about greater financial inclusion. However, as much of the academic literature is focused on payments & remittances and early stages of the MFS value chain, like readiness, rather than savings & loans and later value chain stages of availability, uptake and impacts, the jury is still out on that conclusion.

For instance, despite anecdotal evidence of the positive effects of mobile financial services on financial inclusion in Africa, in Kenya, say, its adoption has been found to be motivated by the same factors as traditional banking. In other words, those who use MFS tend to already have some relationship with a formal financial institution. Thus, poor people, who do not already have a bank account, may not find MFS differential for the same reason of low income. Little wonder, many MFS initiatives in several developing countries have performed below expectations.

In the article, I take a critical look at the key regional economies of Nigeria and Kenya, the former where a new policy on payments was recently enacted and the latter where there are matters arising in digital credit extension.

In this regard, I rely on the Claessens & Rojas-Suarez (2020) “Decision Tree for Digital Financial Inclusion Policymaking” (or “decision tree”) framework to assess the supply and demand factors of digital financial services in each country. An assessment of the market structure, infrastructure and returns allows insights into the supply dynamics of a particular type of DFS (payments, store of value or credit) for a specific country. Similarly, how much consumers see the benefits of DFS, the level of trust they have in the providers, and their level of income enable an assessment of what underpins demand for DFS for the same country.

In the end, a better view of the binding constraints (if any) on either side provides clarity on whether current policies are good fits for the issues weighing on greater financial inclusion in the subject country or whether new measures need to be implemented to tackle the identified binding constraints. Firms are also better able to assess DFS opportunities in the countries of interest. If already invested, they are also able to get a better view of binding constraints they may have missed or overlooked previously.

In a nutshell, I use the decision tree framework to identify binding constraints on financial inclusion in the two countries of interest, Nigeria and Kenya. For Nigeria, I assess developments up to the point that led to the licensing of payment service banks (PSBs), and thus figure out whether they would in fact overcome these constraints. For Kenya, I use the framework to similarly assess the authorities’ plans to curb the predatory practices of digital lenders.

Edited version of article was first published by Nanyang Business School’s NTU-SBF Centre for African Studies. References available via link viz. https://nbs.ntu.edu.sg/Research/ResearchCentres/CAS/Publications/Documents/NTU-SBF%20CAS%20ACI%20Vol.%202020-21.pdf