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| Taking financial services to Africa's poorest consumers | Taking financial services to Africa's poorest consumers |
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| The sustainable development agenda must tackle the myriad challenges that Africa faces today. These include rapid population growth, which is straining resource use, man-made and natural disasters for which most countries are ill-prepared, ineffective policies for addressing other crises. This is exacerbated by outmoded laws and the lack of capacity to enforce those laws, high dependency on primary commodities, made worse by declining (or volatile) commodity prices and unfair trade practices, as well as very poor financial inclusion for the millions of people without access to banking services. | The sustainable development agenda must tackle the myriad challenges that Africa faces today. These include rapid population growth, which is straining resource use, man-made and natural disasters for which most countries are ill-prepared, ineffective policies for addressing other crises. This is exacerbated by outmoded laws and the lack of capacity to enforce those laws, high dependency on primary commodities, made worse by declining (or volatile) commodity prices and unfair trade practices, as well as very poor financial inclusion for the millions of people without access to banking services. |
| African financial systems are among the smallest in the world, as measured by private credit to GDP and domestic revenues that are usually not adequate to meet the development requirements of a continent that is playing catch-up in a highly competitive global village. Yet, as Africa keeps growing it is important that governments mobilise and allocate more resources towards development. | African financial systems are among the smallest in the world, as measured by private credit to GDP and domestic revenues that are usually not adequate to meet the development requirements of a continent that is playing catch-up in a highly competitive global village. Yet, as Africa keeps growing it is important that governments mobilise and allocate more resources towards development. |
| Financial and technological innovation is helping Africa expand the coverage of financial services. Mobile banking is a good example of how African financial systems are providing access to basic payment services through mobile phones, even without a bank account. | Financial and technological innovation is helping Africa expand the coverage of financial services. Mobile banking is a good example of how African financial systems are providing access to basic payment services through mobile phones, even without a bank account. |
| Another example of financial innovation is tailor-making the credit assessment process to the circumstances of African entrepreneurs through the use of psychometric assessments as a low-cost, automated screening tool to identify high-potential entrepreneurs. The Standard Bank Group, for instance, has been very successful with their product, SME quick loans which makes the use of psychometric testing as opposed to financial analysis. With agriculture being a significant subsistence and commercial activity on the continent, farmers' fortunes are being supported by the creation of suitable agricultural insurance products. | Another example of financial innovation is tailor-making the credit assessment process to the circumstances of African entrepreneurs through the use of psychometric assessments as a low-cost, automated screening tool to identify high-potential entrepreneurs. The Standard Bank Group, for instance, has been very successful with their product, SME quick loans which makes the use of psychometric testing as opposed to financial analysis. With agriculture being a significant subsistence and commercial activity on the continent, farmers' fortunes are being supported by the creation of suitable agricultural insurance products. |
| Africa is making efforts to reach out to previously unbanked parts of the population. Successes have been realised through the cell phone-based M-Pesa in Kenya. Ecocash in Zimbabwe and the basic transaction accounts, such as Mzansi accounts in South Africa. | Africa is making efforts to reach out to previously unbanked parts of the population. Successes have been realised through the cell phone-based M-Pesa in Kenya. Ecocash in Zimbabwe and the basic transaction accounts, such as Mzansi accounts in South Africa. |
| With improvements in the business environment, the private sector is growing in confidence to do business in Africa, representing an important opportunity for private sector driven development. Africa has immense opportunities to ride on successful implementation of public-private partnerships in the areas of infrastructure development and social services provision. This option has been tried and tested in parts of the continent, with success stories in the water supply systems in west Africa and transportation projects in southern Africa. | With improvements in the business environment, the private sector is growing in confidence to do business in Africa, representing an important opportunity for private sector driven development. Africa has immense opportunities to ride on successful implementation of public-private partnerships in the areas of infrastructure development and social services provision. This option has been tried and tested in parts of the continent, with success stories in the water supply systems in west Africa and transportation projects in southern Africa. |
| Africa still needs to deepen the financial systems through the development and expansion of local and regional pension funds and life insurance markets; as well as local and regional bond trading markets. This will enable mobilisation of medium to long-term finance, which is seriously scarce. | Africa still needs to deepen the financial systems through the development and expansion of local and regional pension funds and life insurance markets; as well as local and regional bond trading markets. This will enable mobilisation of medium to long-term finance, which is seriously scarce. |
| Bringing in the informal sector into the development process | Bringing in the informal sector into the development process |
| There is an argument that since developed economies are not driven by informal sector activities, it is flawed to attempt to drive economic progress through the informal sector elsewhere. This argument does not recognise that in some parts of Africa this sector contributes more than 60% of employment and income. As such, there is no better development process that includes the majority of economic players. | There is an argument that since developed economies are not driven by informal sector activities, it is flawed to attempt to drive economic progress through the informal sector elsewhere. This argument does not recognise that in some parts of Africa this sector contributes more than 60% of employment and income. As such, there is no better development process that includes the majority of economic players. |
| Financial institutions often find the risk of doing business in the informal sector higher than with formal businesses. The problem is exacerbated by the lack of information for traditional credit rating tools. Innovations using alternative assessment tools such as psychometric evaluation of borrowers represent workable options to promote access to financial resources in this sector. Training programmes tailor-made for the requirements of the informal sector entrepreneurs are not readily available and affordable. This would require those who design educations systems to be responsive to this growing need. | Financial institutions often find the risk of doing business in the informal sector higher than with formal businesses. The problem is exacerbated by the lack of information for traditional credit rating tools. Innovations using alternative assessment tools such as psychometric evaluation of borrowers represent workable options to promote access to financial resources in this sector. Training programmes tailor-made for the requirements of the informal sector entrepreneurs are not readily available and affordable. This would require those who design educations systems to be responsive to this growing need. |
| Small traders, hawkers and backyard industries are often not properly regulated, leading to harassment, frequent arrest of traders, confiscation of their goods and punitive fines. In most cases these traders need assistance. For example, by designating specific zones for their activities. There are potential fiscal revenue benefits to be achieved by legalising and properly catering for the development needs of the informal sector. | Small traders, hawkers and backyard industries are often not properly regulated, leading to harassment, frequent arrest of traders, confiscation of their goods and punitive fines. In most cases these traders need assistance. For example, by designating specific zones for their activities. There are potential fiscal revenue benefits to be achieved by legalising and properly catering for the development needs of the informal sector. |
| In conclusion, the challenge of developing the financial sector in most underdeveloped countries can be summarised using one word: costs. This refers to costs of putting up infrastructure to service the majority of people previously excluded from the formal financial sector, such as buildings, telecommunications systems, or the costs related to educating the masses about formal banking structures. | In conclusion, the challenge of developing the financial sector in most underdeveloped countries can be summarised using one word: costs. This refers to costs of putting up infrastructure to service the majority of people previously excluded from the formal financial sector, such as buildings, telecommunications systems, or the costs related to educating the masses about formal banking structures. |
| This is a cost banks should not shy away from as in the long run the survival of the banks specifically, as well as the development of Africa in general, will depend on the successful implementation of financial inclusion policies and programmes. | |
| Pindie Nyandoro is the executive director of Standard Bank of Namibia Limited. A version of article was originally published in ECDPM's monthly Great Insights. | Pindie Nyandoro is the executive director of Standard Bank of Namibia Limited. A version of article was originally published in ECDPM's monthly Great Insights. |
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