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4. Promoting Financial Inclusion

Author(s):
Montfort Mlachila, Ahmat Jidoud, Monique Newiak, Bozena Radzewicz-Bak, and Misa Takebe
Published Date:
September 2016
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Access to traditional financial services in sub-Saharan Africa remains low relative to other regions, in particular for the poor, the uneducated, and women. Closing gaps in financial inclusion, in particular along gender lines, could reduce income inequality. Novel financial services, such as mobile payment systems and mobile banking, have compensated for these shortcomings to some extent. But while the region, in particular East Africa, has led the world in the expansion of mobile financial services, there is still room to expand them to a larger share of the population and the region more generally. Similarly, microfinance institutions play an important role by providing services to low-income populations, smoothing their income and consumption expenditure.

Overview

Access to traditional financial services in sub-Saharan African countries remains low, in particular, for certain demographic groups (Figure 12). The share of the population having an account at, or borrowing from, a financial institution is low compared with other regions, with only the region’s middle-income countries coming close to peers’ levels. Insufficient information on borrowers (such as credit history and credit risk), the lack of collateral registries, and difficult contract enforcement constrain bank lending to the private sector in many cases. In fragile countries, access to financial services is particularly limited because of the scarce provision of financial infrastructure—as evidenced by less than seven ATMs and less than three financial branches per 100,000 persons (Central African Republic, Comoros, Guinea-Bissau). In all of the region’s country groups, access to financial services is higher by large margins for the more educated, the top 60 percent earners, and men. Access is particularly low in rural areas because branches are mostly concentrated in urban centers (Mlachila, Park, and Yabara 2013). The region suffers from considerable gender inequality in various aspects of financial inclusion. Indeed, the next section shows that greater financial inclusion for women is associated with lower income inequality (see also Sahay and others 2015a).

Figure 12.Sub-Saharan Africa: Indicators of Financial Inclusion

Sources: World Bank 2014b, Global Findex 2014; and IMF staff estimates.

Note: EMDE Asia = emerging market and developing Asia; LAC = Latin America and the Caribbean; LIC = low-income countries; MENA = Middle East and North Africa region; SSA = sub-Saharan Africa.

Novel innovative financial services have started compensating for some of these shortcomings in a number of countries. The development of mobile payment systems has helped to incorporate large shares of the population into the financial system, especially in East Africa. The fast spread of systems such as M-Pesa, M-Shwari, and M-Kopa in Kenya has helped reduce transaction costs, facilitated personal transactions, and contributed to the use of financial intermediation services (IMF 2012b). 15 The successful experience in East Africa provides a useful model that could be adapted by other countries in sub-Saharan Africa—as shown in the next section of this chapter. An important lesson from East Africa is the need to have a flexible, enabling regulatory environment while taking into account supervisory challenges.

Microfinance offers an important avenue that can complement mobile banking to foster financial inclusion. Microfinance has grown rapidly, providing services to customers at the lower end of the income distribution. It is particularly well adapted to the poor with little or no collateral, including in rural areas, thereby significantly enhancing financial inclusion, through savings mobilization and, to a lesser extent, credit provision. While individual services in mobile payments and microfinance are expanding, both types of financial services so far have been complementary, with mobile payment systems facilitating mainly payment transactions, while microfinance has been relaxing financial constraints for poorer households—as shown in the following chapters.

Figure 13.Sub-Saharan African Countries: Financial Inclusion

Source: Finmark Trust, Finscope Survey.

The Cost of Unequal Financial Access16

Gender inequality in various aspects of financial inclusion is high in sub-Saharan Africa, and it is highly associated higher income inequality, as shown in this section. That said, the empirical results should be interpreted with caution: the associations among different gender gaps, and between gender gaps and economic outcomes, are complex and further work, as well as more data on financial inclusion over time, would be needed to make more definitive statements about the direction of causality at the macroeconomic level.

Access to financial services is generally lower in sub-Saharan Africa, in particular in the region’s fragile and low-income countries, compared with other developing regions. In addition, access is particularly low for women, with gender gaps in most of the region’s country groups being higher than in emerging and developing Asia or Latin America and the Caribbean (Figure 14). The region’s fragile states are an exception, but only because access levels are (equally) low for both genders. The gender gap is lower for informal activities, with more women than men saving in a savings club or with a person outside the family, and men and women appear equally likely to borrow from their family and friends.

Figure 14.Sub-Saharan Africa: Indicators of Financial Inclusion by Gender, 2014

(Percent of male and female population, age 15+)

Source: World Bank 2014b, Global Findex 2014.

Note: EMDE Asia = emerging market and developing Asia; HIC = high-income country; LIC = low-income country; MIC = middle-income country; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; SSA = sub-Saharan Africa.

Narrower gender gaps in financial inclusion are associated with higher development, as well as more equitable outcomes (Figure 15). Specifically:

  • More equal access of women and men to financial services, defined here as having an account at a formal financial institution, is closely correlated with higher economic development, as measured by higher GDP per capita or lower poverty rates.
  • It implies more equal opportunities for men and women, and is therefore associated with a more equal income distribution (lower net Gini coefficient).
  • Finally, it is also associated with more equal labor force participation rates between men and women. More equal labor force participation rates, in turn, have been previously associated with higher growth (Cuberes and Teignier 2015) and a more equal income distribution (Gonzales and others 2015).

Figure 15.Gender Equality in Financial Inclusion and Macroeconomic Outcomes

Sources: Solt 2014; World Bank 2014b, Global Findex 2014; and World Bank (2015), World Development Indicators. Note: SSA = sub-Saharan Africa.

We show that more equality in financial inclusion for men and women is significantly associated with lower income inequality, even when accounting for other determinants of inequality (Table 5). Lower financial access among different groups of the population distorts the allocation of resources, as it restricts investment in human and physical capital to the wealthier parts of the population (Galor and Zeira 1993; Honohan 2008). Using a broader index of formal financial inclusion in a cross-section of countries,17 we find that higher gender equality in financial inclusion is associated with lower income inequality. This effect comes on top of standard drivers of income inequality such as the structure of the economy; for example, government expenditure appears to have a generally redistributive effect and is therefore associated with lower income inequality. At lower stages of development, when access to financial services is restricted to smaller parts of the population, financial depth is associated with increases in income inequality, but this effect disappears for more advanced economies. Due to its labor intensity, a larger agricultural sector is associated with lower income inequality.

Table 5.Explaining Income Inequality
Variables(1)(2)(3)(4)(5)
Financial inclusion gap−16.038 ***−15.874 ***−12.577 **−12.628 **−9.828**
(5.52)(5.56)(5.02)(4.96)(4.81)
GDP per capita−4.065 ***−5.043 ***−3.801 ***−6.923 ***−7.994***
(0.75)(1.18)(1.1)(2.22)(2.14)
Financial depth4.44915.149 ***14.029 ***14.461***
(4.77)(4.96)(4.95)(4.7)
Financial depth * advanced−13.615 ***−11.488 ***−7.248**
economies(3.24)(3.46)(3.62)
Agriculture share of GDP−0.359−0.529**
(0.22)(0.22)
Government consumption−0.524***
expenditure(0.19)
Constant89.459 ***96.596 ***80.421 ***113.097 ***129.694***
(7.58)(10.04)(9.75)(22.45)(22.12)
Observations7069696969
R-squared0.420.430.550.570.62
Source: IMF staff estimates.Note: Global sample, restricted through availability of data on income inequality. Standard errors in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1.
Source: IMF staff estimates.Note: Global sample, restricted through availability of data on income inequality. Standard errors in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1.

Gender equality in financial inclusion may be influencing income inequality through its effect on female labor force participation. Theoretically, financial inclusion can empower women economically and therefore contribute to higher female labor force participation. An account at a financial institution provides women with a place outside the home to store money safely (CGAP 2015), and access to borrowing can allow women to start a business, thus contributing to increases in entrepreneurship and self-employment. These channels are particularly important in sub-Saharan Africa where women are overrepresented in the informal sector, with a large part of the population in nonwage employment.

Indeed, the results from an empirical cross-country analysis suggest that greater gender equality in financial inclusion is significantly and positively associated with equality in labor force participation rates (Table 6).

Table 6.Determinants of Female Labor Force Participation
Variables(1)(2)(3)(4)(5)(6)(7)(8)
Financial inclusion0.491*** 0.399*** 0.319*** 0.220***0.235***0.241***0.260***0.211***
gap(0.068)(0.075)(0.078)(0.077)(0.078)(0.078)(0.070)(0.075)
−0.483*** -0.67*** -0.489*** -0.708***−0.736***−0.678***−0.468***−0.529***
GDP pel capita(0.15)(0.159)(0.157)(0.166)(0.171)(0.191)(0.177)(0.188)
GDP per capita0.025*** 0.034*** 0.023*** 0.036***0.037***0.034***0.023**0.026***
squared(0.008)(0.009)(0.009)(0.009)(0.009)(0.01)(0.01)(0.01)
0.324*** 0.1680.219**0.202*0.206**0.0130.087
Education gap(0.1)(0.104)(0.101)(0.102)(0.103)(0.101)(0.105)
Marriage age−0.044*** -0.022−0.031**−0.033**−0.042***−0.04***
differential(0.013)(0.014)(0.014)(0.015)(0.013)(0.014)
Equal rights to get a0.177***
job (dummy)(0.047)
Female legal rights0.045***0.049***0.033**0.039**
index(0.013)(0.014)(0.013)(0.014)
Fertility rate0.014−0.05**−0.029**
(0.02)(0.022)(0.023)
SSA (dummy)0.266 (0.055)
SSA * Financial0.223***
inclusion gap(0.071)
Constant2.564*** 3.339*** 3.003*** 3.719***3.663***3.292***2.765***2.936***
(0.662)(0.7)(0.692)(0.713)(0.72)(0.902)(0.816)(0.868)
Observations1371221079999999999
R-squared0.340.400.400.440.430.430.540.49
Sources: IMF staff estimates.Notes: Global sample. The dependent variable is the ratio of female to male labor force participation, averaged over 2012-14. All explanatory variables are lagged and represent averages over 2007-10. Standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.
Sources: IMF staff estimates.Notes: Global sample. The dependent variable is the ratio of female to male labor force participation, averaged over 2012-14. All explanatory variables are lagged and represent averages over 2007-10. Standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.
  • In particular, narrowing the gender gap in financial inclusion by 10 percentage points is associated with a decrease in gender gaps in labor force participation by 2 to 3 percentage points globally. This finding holds after controlling for previously identified determinants of female labor force participation, such as the level of development (Duflo 2012; Tsani and others 2012), the gender gap in education (Eckstein and Lifshitz 2011; Steinberg and Nakane 2012), the fertility rate (Bloom and others 2009; Mishra and Smyth 2010), the male–female age differential at the time of first marriage (a proxy for a society’s attitude toward women), and an index of women’s rights (Gonzales and others 2015; IMF 2015b).
  • Likely driven by the region’s labor market structure, the relationship between financial inclusion and labor force participation is stronger in sub-Saharan Africa than for the global sample—as evidenced by the positive and significant interaction of the regional dummy with the financial inclusion gap in column (8) of Table 6—with 10 percentage point reductions in female labor force participation being associated with decreases of more than 4 percentage points in labor force participation gaps.

This evidence suggests that policies targeted at improving women’s financial inclusion would help enhance both gender equality in labor force participation and income inequality. In turn, more equal labor force participation rates would unlock growth benefits and contribute to reducing income inequality.

Supporting Financial Development and Inclusion through Mobile Payments and Banking Services

With a sizable but sparse population, sub-Saharan Africa leads the world in the adoption of mobile banking. In the context of a predominantly rural population, it is important to note that traditional bank intermediaries do not reach remote areas, while the costs of their services are frequently prohibitive for low-income households and small businesses. The recent surge in mobile money observed in many sub-Saharan African countries has been facilitated by a strong increase in mobile phone subscriptions, supported by the expansion of network coverage, and technological adaptation to support financial services. Moreover, the declining prices of mobile devices and a growing variety of mobile payments and banking innovations have also contributed to this trend. As a result, in 2014, 11 percent of the population in sub-Saharan Africa held mobile banking accounts, compared with less than 6.5 percent in other regions (Figure 16). As shown by empirical studies, mobile banking is used by households over a wide range of economic, demographic, and educational backgrounds (Jack 2011).

Figure 16.Mobile Payments

Mobile banking services help to bridge the financial inclusion gap and compensate for shortcomings in access to financial services offered by traditional banking intermediaries. In East Africa, the use of cell phones to access mobile payments and banking accounted for half of all mobile connections in 2014 (GSMA 2015). Out of 28 countries in sub-Saharan Africa for which information is available, in six countries, holders of mobile accounts exceeded 20 percent of the adult population (ages 15+). Kenya leads the region, with almost 60 percent of the population holding mobile accounts. But mobile money transactions are also growing rapidly in Uganda and Tanzania, doubling in terms of broad money in both countries, reaching about 30 percent in mid-2015. Nevertheless, access to mobile banking services remains uneven in Africa, with coverage of the population with mobile banking services being minuscule in many countries.

The developments in mobile money have complemented traditional bank services, but also challenged the way traditional banks operate in Africa and caused some positive spill-backs to traditional bank intermediation. The key benefits of mobile money are reduced costs and time required to access the financial services and, of course, convenience. The impact of mobile banking is impressive in some countries, with financial inclusion indicators doubling in just a few years and the number of mobile accounts exceeding traditional bank accounts (Côte d’Ivoire, Kenya, Niger, Tanzania, Uganda, Zimbabwe).

However, some studies also point out that mobile banking has helped to expand demand for traditional bank products (Mbiti and Weil 2011). Banks in Kenya, seeing the benefits of broadening their deposit base by tapping into low-income households, have found another effective way of collecting small deposits by establishing agent banking. Others deploy mobile-and web-based technologies to reach out to new clients. This has allowed a reduction in the costs charged to high-risk potential customers, because the real-time settlement platform (offered by mobile operators) does not require traditional risk assessment. There is increasing evidence that these developments encourage micro-savers to deposit even more in the commercial banks.

The successful experience of mobile operators in introducing payment and banking services (particularly in Kenya) provides some insight into the potential being created by the leveraging of mobile phone technology in fostering financial inclusion. M-Pesa—created in 2006 as the Kenyan Vodafone subsidiary (Safaricom)—launched its first mobile phone application to facilitate microcredit repayments. Because the company was involved in microfinancing services, it developed a new framework for payments and savings. The new payments and savings schemes expanded quickly, and the number of payments exceeded those made by Western Union and payment cards. Building on the M-Pesa experience, new products were launched—M-Shwari and M-Kesho (which are using the M-Pesa platform), and more recently M-Kopa. Although the average value of mobile payments in Kenya remains relatively small (at US$24), the system currently allows for transactions at over 123,700 agents. This compares with only 1,440 bank branches and 2,700 ATMs (as of end-2014). Interestingly, the value of mobile money transactions (at 62 percent of GDP) increased commercial banks’ deposits (which stood at 60 percent of GDP).

M-Pesa’s innovative approach to the provision of payments, microcredits, and savings services to the previously unbanked population had broader implications, as these services spread out over time to other related areas. A number of factors have facilitated this expansion (IMF 2012b): (1) the rapid increase in the use of mobile phones, (2) the flexible approach to technology, (3) the willingness to penetrate new markets, and (4) the design of government policies, which allowed for operations of M-Pesa as a parallel payment system while securing customers’ funds (as deposits) in regulated and supervised commercial banks, backed by the availability of deposit insurance schemes. The legal framework was sufficiently flexible, permitting the introduction of new products while limiting operational risks related to the security of deposits. Over time, building on convenience, confidence, and further technological innovations, other financial products started to be offered to low-income households and small businesses, products from which in the past they had been virtually excluded.

As a result, the variety of mobile financial products and services has expanded considerably. Utility bills, tax payments, savings vehicles, and credit and insurance products are only some examples of products and services gaining momentum via mobile services in countries such as Côte d’Ivoire, Uganda, Nigeria, Mauritius, and Tanzania. There are also products that target specific mobile users. For example, in Uganda, Orange Money provides farmers with an application that allows them to buy farming supplies and receive payments for their harvest, while in Côte d’Ivoire, a few companies (Orange, MTN, Moov, and Celpaid) have developed an application that allows for the payment of school fees. More recently, in an interesting innovation, M-Kopa Solar, a company that sells small solar panels to low-income houses, became a provider of an innovative financial service, allowing customers to acquire a solar panel kit by making daily micropayments (less than 50 cents) after an initial down-payment of about US$35. This allows the low-income population to acquire assets with their micro-savings, while using the customers’ repayment records as a way of assessing their creditworthiness for future lending.

Increasingly, the customers can also make international money transfers. In Tanzania and Côte d’Ivoire, mobile operators have started offering interconnected mobile money services among several countries, including in Asia. Similarly, cross-border remittances via mobile phones are gaining importance. It is estimated that such flows already generate up to 20 percent of all cross-border transactions (GMSA 2015).

Empirical studies on the development of mobile banking in East Africa show that an enabling regulatory environment is essential for supporting growth in mobile money services and financial inclusion (IMF 2012b). But there are also risks related to rapidly spreading mobile financial transactions, as they add to complexity and may pose a threat of abusive practices if conducted by unlicensed operators. Therefore, there are five key areas of risks that need to be considered and addressed by supervisors: the legal framework, financial integrity, fund safeguarding, and operational and payment risks (Khiaonarong 2014). To mitigate these risks, policymakers should decide on institutional arrangements for the oversight of mobile payments, a collaboration framework for domestic and international mobile transfers, capital requirements for nonbanks involved in mobile banking, and reporting requirements (Klein and Mayer 2011).

The Roles of Microfinance in Promoting Financial Inclusion

Microfinance has been growing rapidly in sub-Saharan Africa. Microfinance institutions (MFIs) typically provide small loans and saving services to the poor and near poor; some also provide micro-insurance and money transfer services. Following an average growth rate of about 20 percent per year in the number of borrowers and depositors since 2005, microfinance in the region served about 45 million clients in 2014 (Figures 17, panels 1 and 2), with the highest growth of MFI assets in East and Southern Africa (Figure 17, panel 3). In 2015–16, the region’s microfinance market is estimated to grow by 15–20 percent, second only to Asia, which can further support access to finance for the 350 million unbanked adults in the region (ResponsAbility 2014; Demirguc-Kunt and others 2015).

Figure 17.Key Features of Microfinance Institutions in Developing Countries

Microfinance has been associated with the improvement of a variety of development indicators. While microfinance activities remain small relative to banks, their better reach to the poor with little or no collateral, including in rural areas, has significantly enhanced financial inclusion. It has also had a positive impact on the poor, including through savings and credit (Ghana, Uganda), investment of microfirms (Kenya, Malawi), and income and consumption (Kenya, Madagascar, Malawi), although the jury is still out on its sustained poverty-reduction. MFIs also enhance gender equality, as microcredits typically rely on women group guarantees to overcome the lack of collateral and missing financial market infrastructure. In 2014, about 60 percent of MFI borrowers were women in sub-Saharan Africa, and this share is almost twice as large as women’s share of formal bank accounts. But this ratio still lags behind that of the best-performing region, Asia, and varies among the sub-regions, led by East Africa. Studies also find that microcredits by women have stronger positive economic impact than those by men.

Saving mobilization has outpaced credit services of MFIs. Over the past decade, growth in the number of depositors has exceeded that of borrowers. In 2013–14, depositors outnumbered borrowers four to one, while total volume of deposits also exceeded the gross loan portfolio in all subregions. This reduces MFIs’ funding needs from borrowing (less than 10 percent in the region). In contrast, numbers of borrowers and depositors are similar in other regions on average, and the volume of gross loan portfolios exceeds that of deposits (Figure 17, panel 3). Moreover, borrowing in other developing regions is much higher—at about a quarter of total liabilities, with deposits accounting for one half. Despite favorable financing costs, MFIs in sub-Saharan Africa encounter higher operational expenses (Figure 17, panel 4), largely driven by the lack of physical and financial market infrastructure.

The declining portfolio quality of MFIs underscores emerging challenges. Despite charging higher interest rates (Figure 17, panel 5), MFIs in sub-Saharan Africa produce a portfolio quality similar to the global average. Compared with other regions, sub-Saharan Africa records a higher loan loss rate, which rose to about 5 percent in 2012–14, the highest of all regions. While the share of loans at risk is largely at par with the global average, it has risen steadily (Figure 17, panel 6). Despite their significant contribution to financial inclusion, MFIs are also subject to boom-bust cycles, and—given that their clients are mostly poor with less education—the sector is particularly vulnerable to natural disasters (e.g., India, Nicaragua) and Ponzi schemes (Benin). Although the small size of MFIs generally limits the contingent fiscal risk, any significant shock can affect confidence, undermine financial deepening, and harm the poor the most. Therefore, strong actions are needed to address the risks in light of several recent crisis episodes.

Improving financial literacy and financial market infrastructure are fundamental to strengthening MFIs. These measures help overcome critical information problems that impede access to finance. In addition, they enhance the efficiency of microfinance and smooth the transition to bank finance as microfirms grow (CGAP and MIX 2011; Roodman 2012). Furthermore, these measures help to prevent the borrower over-indebtedness that has contributed to repayment crisis episodes in some countries in Asia and Latin America. In particular, technological innovation and product diversification can inject further dynamism in microfinance and enhance its growth and poverty impact. Given its advantage in reducing operational cost by tapping into the fast-growing and high-penetration mobile network, mobile banking has become a fast-growing business for MFIs (Côte d’Ivoire, Kenya).

Strengthening supervision is key to addressing consumer protection and financial stability concerns while supporting financial inclusion. While the “test and learn” approach to supervision has supported rapid growth of the sector in many of the region’s countries, enhancing risk-based supervision and enforcement is critical to weeding out problem MFIs in order to support stability and efficiency (BIS 2010; CGAP and MIX 2011; Cui, Dieterich, and Maino 2016). Some countries made progress in regulating MFIs by activities (Democratic Republic of Congo, Kenya, Rwanda, Uganda, WAEMU), but effective enforcement against small-sized, yet often more numerous, MFIs requires stronger commitment and commensurate resources of relevant supervisors. In addition to supervisor monitoring, strengthening professionalism in the microfinance sector is important to mitigating governance risk. Finally, the high share of MFIs that take deposits in the region also require effective collaboration between supervisors of nonbank financial institutions and bank supervisors.

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