Even though there has been positive development in recent years, less than 50 percent of people in Nigeria and other sub-Saharan countries have access to a bank account, according to a new report by a digital financial firm with headquarters in Switzerland, Banking Payment Context (BPC).
This is despite having a population of more than 1.1 billion people, with sub-Saharan Africa making up a significant share of the global population and also representing the world’s youngest overall population, with a median age of under 19 years.
About 360 million adults in the region do not have access to any form of a bank account. This translates into approximately 17 percent of the total global unbanked population that does not have access to formal financial services, according to the report.
According to the World Bank, 18 of the top 20 global countries that are below the poverty line are located in Sub-Saharan Africa. The bank has also estimated that youth unemployment rates are also increasing and by 2030, it is expected that nearly one third of the global youth labour force will be coming from the continent.
Despite the challenges in the region, there are opportunities for new entrants who want to solve these challenges, especially for the huge unbanked population.
Some countries have recorded drastic improvement in banking penetration with Mauritius, Kenya and South Africa rates amongst adults at 90 percent, 82 percent and 69 percent respectively.
However, countries such as Nigeria, Ethiopia, Angola and the Democratic Republic of Congo (DRC) continuously hold a low banking penetration at 40 percent, 35 percent, 29 percent and 26 percent.
The report pointed out that low urbanization rates throughout Sub-Saharan Africa is one of the major problems facing financial inclusion in the region.
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According to the World Bank, the region has an average of 41 percent of people living in urban areas. Ethiopia and Rwanda record some of the lowest levels of urbanization with rates as low as 21 percent and 17 percent respectively.
Another reason for slowing financial inclusion in Sub-Saharan Africa is that the region is cash-dominant. According to the report, about 90 percent of all payments and transactions are made via cash and the region has one of the lowest credit and debit card penetration rates in the world with 3 percent and 18 percent respectively.
Mauritius has a credit card penetration of 24 percent and 90 percent card penetration. This is a wide gap when compared to countries like Rwanda with 5 percent and 1 percent credit and debit card penetration and Senegal with 2 percent debit card penetration and 1 percent credit card penetration rates.
Opportunities for new entrants
According to the report, Sub-Saharan Africa’s challenges hold opportunities for new entrants.
The young and underserved
Looking at the demographics of the unbanked population of Sub-Saharan Africa, most of them are young which presents a huge opportunity for change.
“Young Africans are eager to make the leap and adopt digital banking solutions beyond the major banking hubs of South Africa or Mauritius,” the report stated.
The report further stated that this is an opportunity for potential new market entrants as the region seems to be at the brink of digital banking revolution allowing for the introduction of new and innovative solutions. This involves providing transparent, affordable, and simple solutions.
However, there are existing challenges that new digital competitors must be able overcome. The report recommended that competitors must also be able to onboard customers seamlessly from anywhere, regardless of infrastructure and in a matter of minutes.
High costs of cross-border transfers
The huge cost of cross-border transfer is another opportunity that the situation in Sub-Saharan Africa has presented. There has been an increase in the closure of borders and the remittances market of Sub-Saharan Africa is progressively shifting from informal to formal channels.
Although the use of formal channels has its advantages, it has become more challenging for Africans to send money. According to the World Bank, Sub-Saharan Africa continuously remains the most expensive region to transfer money to from abroad. For instance, in the fourth quarter of 2020, sending N83,000 or ($200) cost an average of 8.2 percent of the total transfer.
When compared to other developing regions, the rates of transfer are much lower. According to the report, in Latin America and the Caribbean, costs are estimated to be about 5.6 percent while South Asia even comes down to approximately 4.9 percent.
Sub-Saharan Africa also experiences high intra-regional migration. For instance, Africans sending money from South Africa to Botswana are charged with a staggering 19.6 percent.
In 2020, the region’s overall remittance stood at $42 billion in 2020, this signals an opportunity to solve the issues of cross-border transfers.
Financing for SMES and MSMES
According to the International Finance Corporation (IFC), it is estimated that approximately 40 percent of all formal MSMEs in developing countries suffer under unmet financing needs, equaling $5.2 trillion every year.
According to the report, of the 44 million formal MSMEs in Sub-Saharan Africa, roughly 52 percent are credit constrained and lack the necessary financing to adequately sustain their business. This translates into a gap between demand ($404 billion) and supply ($70 billion) of $328 billion needed in financing excluding a potential demand from informal MSMEs of an additional $312 billion.
“For traditional banks, strict collateral requirements and rigid credit checks make it almost impossible to meet the needs of SMEs and MSMEs who usually require lower amounts of capital and lack an extensive credit history or the ability to pledge collateral,” the report stated.
According to the report, one way for digital banks to tackle this issue would be to make use of technology to find solutions to lend unsecured capital in a profitable way to higher-risk candidates even in more remote areas.
Key success factors
BPC has stated that there are key factors that would help new entrants to successfully enter the market and scale their operations.
First, it is vital to have a precise idea of what customer segments and geographical markets to serve. “Whether you choose to serve the unbanked, SMEs and MSMEs or African migrant workers abroad, new challengers need to critically identify all major concerns of their ideal target customers in an exhaustive manner,” the report noted.
Also, to serve a region that is plagued by poverty and low urbanisation rates, accessibility and affordability of services are essential to the successful adoption by a sufficient number of customers.
“Being both customer and technology-centric allows digital banks to operate at a lower cost of infrastructure while being attractive to new types of users that search for easy access and affordable banking solutions to meet their needs.”
Lastly, the new entrants must be able to quickly adapt to change.
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