Yomi is a semi-educated, middle-aged man living in the bustling city of Lagos, Nigeria. As a real estate agent, Yomi often closes the sale of properties, whereupon every transaction, he returns to his home with a huge amount of cash. One fateful day, his apartment catches fire and he loses N2m in the inferno.
Why did he choose to hoard cash at home rather than deposit it in a bank for safekeeping? We can only hazard a guess. What Yomi’s unfortunate tale underscores is the fundamental need for financial inclusion as it is crucial to improving the quality of life, not just for the poor and disadvantaged but also for the ignorant.
According to the World Bank’s Global Findex financial inclusion data, there are more than 1.6 billion unbanked in the world. Sub-Saharan Africa has about 350 million unbanked adults, accounting for 17 per cent of the global total. To whom does the term “unbanked” refer?
The Oxford English Dictionary defines such a person or entity as one “not having access to the services of a bank or similar financial organisation.” They have no checking, savings, or mobile money provider accounts, no protection for their money from theft or loss as we see in the opening illustration. Unfortunately, this group of people – a greater number of them are female and those with disabilities – are more likely to be poor and to remain poor.
In a recently released report by the British research platform, Merchant Machine, Morocco, Vietnam, Egypt, Philippines and Mexico emerged as the top five countries with the largest number of the unbanked population. Unsurprisingly, the regions with the highest proportion of developing economies top the list on a global level; in the Middle East and Africa, 50 per cent of the population is financially excluded.
Giving people access to financial products and services, such as mobile money, peer-to-peer lending, savings and insurance, empowers and enables them to manage their financial obligations and build better futures for their families, ultimately supporting broad economic growth and development.
As far back as 2010, the World Bank has been calling for financial inclusion in developing countries as a panacea to alleviate poverty and facilitate economic growth.
In many parts of Africa, a number of factors hamper this movement, such as lack of trust in the financial institutions, lack of money, distance to financial institutions, and religious and socio-cultural barriers, among others.
Rising to the occasion to address these challenges is financial technology, popularly known as fintech. Its simplest definition is the application of technology in finance. It does not only encapsulates the transformation of finance through digitally-driven financial services, but also the digitisation of financial markets across the globe.
Over the last decade, the impact of financial technology on Africa’s financial sector has been nothing short of phenomenal. As a key driver of growth in the region, fintech is a preferred option to traditional banking in urban and rural areas.
In Africa, fintech creates an enabling environment that paves the way to accessing the financial sector’s value chain and promotes efficiency gains. Although in many countries in sub-Saharan Africa, there is a large proportion of low-income households, yet we see great strides as fintech companies continue to improve digital financial inclusion and stimulate innovation and productivity in major sectors, including the small and medium-sized enterprises and the agriculture sector.
Numerous examples abound to prove this development. The establishment of fintech companies such as Kenya’s M-Pesa, Ghana’s OZÉ, and Nigeria’s Paga has seen to it that communities previously unable to experience its benefits are now able to explore reliable, affordable, and sustainable financial services.
The ongoing financial technology innovations have occasioned a huge shift in traditional financial services models, forcing large financial institutions to re-evaluate how they do business. Interestingly, the outbreak of the COVID-19 pandemic opened our eyes to this fact: we cannot take basic access to financial services for granted. How so?
With relatively little information about the coronavirus available then, avoiding crowds in shops and marketplaces became a matter of life and death. Bank branches shut down and the operations of mobile money agents were halted in compliance with safety guidelines.
Government officials and health workers encouraged the use of cashless and contactless methods of payment to mitigate the risk of exposure to the virus through the handling of cash. To cope with these restrictions, people had to rely on digital payments to have essential products and other purchases brought to their homes.
On the bright side, however, current circumstances indicate that the COVID-19 pandemic could turn into a powerful catalyst for financial inclusion all over the world. Going by the Global Finance Journal, over the past year, a record number of new accounts have been opened worldwide by firms providing mobile money, fintech, and online banking services.
Despite the proliferation of mobile devices and the increase in digital financial services, financial inclusion in Africa is still beset with a few other challenges. What strategies can we adopt to address these needs? Let’s discuss three.
Digital literacy campaign
Awareness programmes should be organised across all media platforms to promote digital financial literacy to the elderly and uneducated population at the grassroots. They should also be enlightened on the intricacies of using digital financial services. Users of fintech services could also be taught how they can derive maximum benefits.
Regulatory policies that foster financial stability and inclusion
Policymakers should enact mandates that will not only mitigate cyber fraud but ensure the effective regulation of activities in the fintech landscape. An enabling environment that is proportional, flexible and risk-based should be created for fintechs to ensure that the cost of their compliance to regulations is not excessive.
Since the fintech industry provides a wide array of services, such as payments, lending, investments, insurance, and digital currency, that overlap, disrupt and even compete with traditional banking operations, banks may feel threatened. As such, regulators need to be pro-technology and pro-innovation while remaining technologically neutral.
Partnerships for mutual benefit
True, innovative fintech products are challenging the status quo within the financial services sector and will continue to level the playing field within the industry. However, fintech startups don’t have to spell doom for banks
On the contrary, when fintech and banks collaborate, they can create impactful new financial products and channels that better serve existing clients and help expand reach those that would otherwise have been unreached.
Understanding that KYC documentation is pivotal to achieving financial inclusion, especially for the finally excluded, the government could work with financial institutions to provide simple and easy means of identification for all citizens in an efficient and cost-effective manner.
ICT Clinic by CFA is published weekly in the Sunday Punch