Imagine Johannesburg, with its highways, traffic signals, shopping malls, chain restaurants and supermarkets. Now picture Nakuru, a small Kenyan town, filled with old, narrow roads clogged with tuk-tuks and street vendors, pushing themselves shoe-less into the traffic and hauling heavy hand-drawn carts stacked with goods that will fill the small, owner-operated shops and kiosks, 10 on every block. If you were getting by on $5 per day, where would you rather live?
Reproduced from CGAP
The past five years or so have seen a number of exuberant studies and predictions that Africa’s rapid growth was creating a new middle class. This new group of consumers, it was argued, would become an engine of domestic demand, reducing reliance on exports and sustaining economic growth in the same way as they have in China. There were even predictions that this new middle class would transform governance and politics. This was the hopeful and optimistic story of “Africa Rising.”
In March 2016, the Zambian government approved proposals to redesign the royalty regime for mining companies. This involved introducing a new methodology for calculating Mineral Royalty Tax (MRT), linked to the prevailing copper price. Because mines can take several years to become profitable and start paying tax on those profits, MRT is an effective way for the government to get some tax revenue up front, rather than having to wait for mining operations to turn a profit. The lack of clarity around MRT had been another major problem for an industry which had been battling to adjust to a collapse in global commodity prices and which had had to lay thousands of workers off.
For the 900,000 Zambians in formal employment, many of whom are mine workers, having a job also means having access to credit. Banks like lending to salaried workers especially when they can do a bulk deal with the employer to make loans available to an entire workforce and collect the repayments through the payroll. It’s efficien for the banks, more secure.
In fact, as FSD Africa research now shows, payroll lending now accounts for a third of all loans in the Zambian banking system and has emerged as the largest contributor to commercial bank loan portfolio growth every year since 2011. For several banks, payroll loans account for well over half of their total loan book. Government employees are responsible for nearly three quarters of outstanding loan schemes in mid-2014 and had the highest incidence of multiple borrowing.
Always controversial, payroll lending undoubtedly fuels consumer spending but, for those who have a payslip, it also provides financial access and a measure of economic empowerment. For example, spending on housing in Zambia rose by 117% from 2006 to 2010, and much of this can be attributed to the availability of payroll loans. But the reality is that lenders pay little attention to the reasons for borrowing. They make credit decisions based on the creditworthiness of the employer rather than of the borrow And so an environment develops in which in which the credit assessment process is relatively simple and there are strong incentives to over-lend.
Getting the right regulatory balance is therefore a big challenge. Easy credit in an unfettered environment sees consumers “dance with the devil”, and with little protection. Stifle access to credit and consumers are denied the opportunity to, quite literally, put a roof on their house.
Take, for example, the case of Mopani Copper Mines. Mopani is the biggest mining employer in Zambia according to Bloomberg, Africa’s second-largest copper producer, with 20,000 workers. At the end of 2015, the Lusaka Times reported that 3,051 workers were being laid off in response to the fall in the price of copper as part a debt reduction strategy by Glencore, Mopani’s owner. Many of those laid off had loans outstanding to commercial banks. These banks, it was alleged, had prior access to the retrenchment compensation that the workers were entitled to, with the rorkers received far less cash compensation than they were expecting.
The devil is the detail but it is the detail that can create disastrous outcomes for people in living in vulnerable circumstances. Events like Mopani shine a spotlight on the relationship between labour markets and financial markets (is Mopani a story about workers’ rights or consumers’ rights?) and on the effectiveness of the contractual arrangements behind these loans. What did the loan agreements actually say? When the mine worker signed the loan agreement confirming that he understood all the terms and conditions (T&Cs), did he really understand them? Did anyone test that? Who actually explained the T&Cs to him – the bank? The employer? – and how much time did anyone actually take to explain the T&Cs?
The Zambian authorities have moved to deal with the threats posed by payroll lending. The Banking and Financial Services Act limits the total amount of debt repayments and other deductions to 60% of gross i a minimum of 40% of gross pay as take-home or disposable pay. Interest rate caps were imposed on micro-lenders in January 2013 in a well-meant attempt to keep the lid on the cost of borrowing for consumers: the caps have, rightly, been removed now because they seemed to be having no dampening effect on the payroll lending industry and were even encouraging lenders to pursue lending strategies that were introducing systemic risk into the market.
Now, the Bank of Zambia, with support from FSD Africa, has launched a Market Monitoring System that will regularly gather much more granular data on credit market developments and trends so that problems can be picked up at an early stage.
It goes without saying that consumer protection is vital but so too is access to finance and we must strive to put in place a framework which allows credit markets to develop responsibly but which also safeguards borrowers’ legitimate interests and rights.
What is critical is that there should be proactive and well-informedulation of credit markets with appropriate weight given to market conduct regulation, alongside the traditional approach of supervising the soundness of financial institutions. Today, too few financial market regulators in Africa have the right institutional structure or capacity to manage the development of credit markets effectively. Central banks should not think they can do this in their spare time. This is a significant problem at a time when there is a need for more responsible credit in Africa and when digital finance is introducing all sorts of opportunities but also threats
In March 2016, the Zambian government approved proposals to redesign the royalty regime for mining companies. This involved introducing a new methodology for calculating Mineral Royalty Tax (MRT), linked to the prevailing copper price. Because mines can take several years to become profitable and start paying tax on those profits, MRT is an effective way for the government to get some tax revenue up front, rather than having to wait for mining operations to turn a profit. The lack of clarity around MRT had been another major problem for an industry which had been battling to adjust to a collapse in global commodity prices and which had had to lay thousands of workers off.
For the 900,000 Zambians in formal employment, many of whom are mineworkers, having a job also means having access to credit. Banks like lending to salaried workers especially when they can do a bulk deal with the employer to make loans available to an entire workforce and collect the repayments through the payroll. It’s efficientfor the banks, more secure.
In fact, as FSD Africa research now shows, payroll lending now accounts for a third of all loans in the Zambian banking system and has emerged as the largest contributor to commercial bank loan portfolio growth every year since 2011. For several banks, payroll loans account for well over half of their total loan book. Government employees are responsible for nearly three quarters of outstanding loan schemes in mid-2014 and had the highest incidence of multiple borrowing.
Always controversial, payroll lending undoubtedly fuels consumer spending but, for those who have a payslip, it also provides financial access and a measure of economic empowerment. For example, spending on housing in Zambia rose by 117% from 2006 to 2010, and much of this can be attributed to the availability of payroll loans. But the reality is that lenders pay little attention to the reasons for borrowing. They make credit decisions based on the creditworthiness of the employer rather than of the borrower. And so an environment develops iich in which the credit assessment process is relatively simple and there are strong incentives to over-lend.
Getting the right regulatory balance is therefore a big challenge. Easy credit in an unfettered environment sees consumers “dance with the devil”, and with little protection. Stifle access to credit and consumers are denied the opportunity to, quite literally, put a roof on their house.
Take, for example, the case of Mopani Copper Mines. Mopani is the biggest mining employer in Zambia according to Bloomberg, Africa’s second-largest copper producer, with 20,000 workers. At the end of 2015, the Lusaka Times reported that 3,051 workers were being laid off in response to the fall in the price of copper as part a debt reduction strategy by Glencore, Mopani’s owner. Many of those laid off had loans outstanding to commercial banks. These banks, it was alleged, had prior access to the retrenchment compensation that the workers were entitled to, with the result that workers received far less ation than they were expecting.
The devil is the detail but it is the detail that can create disastrous outcomes for people in living in vulnerable circumstances. Events like Mopani shine a spotlight on the relationship between labour markets and financial markets (is Mopani a story about workers’ rights or consumers’ rights?) and on the effectiveness of the contractual arrangements behind these loans. What did the loan agreements actually say? When the mineworker signed the loan agreement confirming that he understood all the terms and conditions (T&Cs), did he really understand them? Did anyone test that? Who actually explained the T&Cs to him – the bank? The employer? – and how much time did anyone actually take to explain the T&Cs?
The Zambian authorities have moved to deal with the threats posed by payroll lending. The Banking and Financial Services Act limits the total amount of debt repayments and other deductions to 60% of gross income, leaving a minimum of 40% of gro-home or disposable pay. Interest rate caps were imposed on micro-lenders in January 2013 in a well-meant attempt to keep the lid on the cost of borrowing for consumers: the caps have, rightly, been removed now because they seemed to be having no dampening effect on the payroll lending industry and were even encouraging lenders to pursue lending strategies that were introducing systemic risk into the market.
Now, the Bank of Zambia, with support from FSD Africa, has launched a Market Monitoring System that will regularly gather much more granular data on credit market developments and trends so that problems can be picked up at an early stage.
It goes without saying that consumer protection is vital but so too is access to finance and we must strive to put in place a framework which allows credit markets to develop responsibly but which also safeguards borrowers’ legitimate interests and rights.
What is critical is that there should be proactive and well-informed regulation of credit markets with appiate weight given to market conduct regulation, alongside the traditional approach of supervising the soundness of financial institutions. Today, too few financial market regulators in Africa have the right institutional structure or capacity to manage the development of credit markets effectively. Central banks should not think they can do this in their spare time. This is a significant problem at a time when there is a need for more responsible credit in Africa and when digital finance is introducing all sorts of opportunities but also threats
I pay taxes in Kenya. I am happy to pay my fair share. It’s a shame more of us in Kenya who should be paying taxes are not. But that’s another challenge and there are other battles to fight.
Interesting, by the way, to read about the Addis Tax Initiative, launched earlier this month, in which over 30 countries (including Kenya) and international organisations have now teamed up to strengthen international cooperation around tax systems reform. Development can’t really happen sustainably without a proper tax collection system.
So, back to Kenya. The least the Kenya Revenue Authority can do is to make it easy for people to pay their taxes. And the reason I am happy tax payer is that the KRA has made is super easy to pay with its new i-Tax payment system. Here’s how it worked for me.
With great foreboding, expecting hours of electronic misery, I registered with the KRA’s i-Tax Online Service because KRA no longer accepts manual tax returns. I registered, like thousands of other people, at the last minute and, sure, the system on that day lurched and creaked but soon spat out my return. I filled this in and I managed to get the system to accept it without too much trouble.
Within a day I was told what I owed, which was a tiny amount so I decided to ignore it. Then, I got a fiercer message a couple of weeks later to say that I owed a slightly larger amount. The increase seemed pretty random to me (and was unexplained) but still within tolerance limits and so I decide that KRA would keep pestering me with annoying emails unless I paid up.
The payment option of choice, for anyone wanting to avoid the inconvenience of going to a bank or queueing up in person with a cheque, is of course M-Pesa, Safaricom’s mobile payment engine, which the UK government helped get going back in the mid 2000s with a grant to Vodafone.
Again, more foreboding. Would it work? I call KRA’s call centre for advice. A completely charming person took my call pretty after perhaps two minutes on hold. She rightly assumed I was tech-phobic, and possibly just stupid, and gently took me through every step I needed to make to register to pay my tax bill through M-Pesa.
It sounded complicated. But actually it turned out to be totally straightforward and very quick. Registering online meant that I was sent (immediately) a Payment Slip. This had a unique identifier on it (a 16-digit number) which I would then proceed to use, along with the KRA’s M-Pesa Business Number (which, by the way, is 572572) to pay using my phone. So, just two numbers needed.
So I did. And not only did I get the usual M-Pesa confirmation say the payment had gone through, giving that certainty which is partly what makes M-Pesa such an attractive service to use, but, within seconds, KRA also sent a message to say they had received my payment. So I now know they are off my back.
E-government, when it works, is fantastic. Hats off to KRA for making my (admittedly simple) problem go away. And kudos to organisations like Better than Cash Alliance for getting governments around the world to sign up to “cash lite” strategies in the interests of less waste, more accountability and more inclusive and efficient financial systems.
BTCA have also been doing interesting research on the cost benefits to businesses of digitising payments – how many businesses realise how much it costs them to keep paying wages in cash?
We, at FSD Africa are going to be providing training and support to policymakers and others on the ground here in Africa to help them think through their digital strategies and improve services for their citizens. We are hoping to work with at least two countries on intensive programmes in this area. It’s undeniably complicated, and will take time, but we are happy to walk the journey with some countries that are serious about wanting to make progress in this area.
By the way, I was also very happy my tax bill was so low. But I’d still like to know why it mysteriously went up…
Tomorrow, President Obama will come home to Kenya. He is likely to get calls from relatives asking for him to ‘chip in’. He will be expecting them. These types of calls are not uncommon in Kenya.
Only the other day, I got a text message while I was a work: “Uncle Matata is very sick and is seeing a doctor. The money we had budgeted is not enough. Can you help?” In Kenya, social obligations dictate that you ‘chip in’.
For me, it was just an ordinary day in the office and so I had left my debit card at home. My car had enough fuel to last three days so I took just a little cash for lunch. When I got the message, I checked”https://en.wikipedia.org/wiki/M-Pesa”>M-Pesa e-wallet and found it had half of the amount being asked for. So I sent a text back asking them to hold on as I waited for my meeting to end. After the meeting I stepped out and asked a colleague if he had some money in his M-Pesa e-wallet which I could borrow and refund that evening. I was able to send the money via M-Pesa.
According to the Central Bank of Kenya there are about 124,000 mobile money agents, serving 25 million customers, who made over 900 million transactions worth over KES 2.4 trillion (around USD $24 billion). This compared to about 12 million debit cards with 18 million transactions worth only KES 108 billion (approx. USD $1.1 billion) during the same period.
A growing number of banks and other financial institutions are looking to leverage the existing digital financial service infrastructure. But many are struggling to understand the key elements of these: from strategy to product delivery as well as how to drive uptake and usage, while managing risk and fraud. They need help.
FSD Africa recognises the important role that mobile money plays in facilitating payments. We have provided financial support to MicroSave Helix Institute for Digital Finance to research, design and train digital finance professionals across Sub-Saharan Africa.
When Obama visits Kenya he is likely to get calls from relatives. Some of those might be appeals for him to play his part in building social capital of Kogelo (the village where he comes from). Others might be from African leaders urging him to cement his legacy before he leaves office. For that, he may use a USAID grant from the State Department or a communique at the end of a global summit. But for family and friends in need of a just few shillings to tide them over, he will need his M-Pesa mobile money account. Because even he is expected to chip in
Between August 2014 and December 2014, the Uganda Institute of Banking and Financial Services (UIBFS) led a project to embed the Bank of Uganda’s (BOU) Financial Consumer Protection Guidelines (FCPG) in the day-to-day operations of the 31 Supervised Financial Institutions (SFI) in Uganda.
The project aimed to increase the capacity of Ugandan training firms and SFI Human Resource teams beyond a critical minimum threshold to enable the delivery of financial consumer protection (FCP) training to SFIs in Uganda on a lasting basis. This would then lead to long-term implementation of the FCPGs in all branches of SFIs to consumers across Uganda.
To support this process, Financial Sector Deepening Africa (FSDA) competitively procured UIBFS for £105,000 to lead a consortium of five FCP-enabled Ugandan training firms (Corporate Concepts, Demis, Komunda Investments Ltd, Sonamoney and UIBFS).
In total, 12 FCP qualified Ugandan trainers used bespoke FCPg materials to train 1,038 staff at 575 branches of 31 SFIs in all regions of Uganda. A total of 1,004 (96.7%) participants were awarded certificates for successful completion of the course. The training was delivered on time, reached 86.5% of the intended 1,200 participants, and was highly rated by SFI staff participants, SFI Human Resource Managers and BOU.
Significantly, a review in February 2015 (three months after the delivery of the training) indicated initial, positive signs of market-system change. For example, all five participating training firms intend to provide an FCP training module on a commercial basis as a result of this project. A total of 4 of the 12 surveyed SFIs indicated they plan to pay for the outsourcing of FCP training to local Uganda training providers. Finally, BOU expressed confidence that supervisory and public pressure would increase the demand for FCP training among SFIs into the future.
Looking beyond Uganda, this project has thePtrong>potential to provide a model for replication in other sub-Saharan African (SSA) countries. It demonstrates how donor-funded market facilitators (GIZ & FSD Africa) can build on new Central Bank FCP regulations by putting in place the critical building blocks for the development of a local FCP training market.
Looking towards next steps, a repeat evaluation is planned for December 2015 to determine whether lasting market-system change is likely to be achieved. In the meantime, FSD Africa is working with BOU, GIZ and a Ugandan communications firm to deliver a public awareness raising campaign around financial consumer protection. The aim is to increase demand for high quality SFI customer service, which will likely lead to increased demand by SFIs for FCP training. FSD Africa will also work with GIZ and BOU to disseminate lessons learned across SSA and identify opportunities for enhanced supervision to catalyse the development of the training market in Uganda. Finally, the conversion of learning materials into an e-learning module is also under discussion.
According to GIZ Uganda: “the FCP training programme has beenshining example of what a committed regulator can achieve in the financial inclusion space. Working with like-minded development partners such as FSD Africa and local implementers such as UIBFS, this project has developed and implemented a carefully designed, sustainable approach to the long-term mainstreaming FCP within the Ugandan financial sector. FSD Africa’s support has been invaluable as a catalyst to scale-up and ensure the project has lasting outcomes. Without FSD Africa building on progress made by BOU and GIZ, the necessary momentum to support Uganda’s financial sector to deliver better financial services to consumers in a fairer and more transparent way may not have been achieve
Between August 2014 and December 2014, the Uganda Institute of Banking and Financial Services (UIBFS) led a project to embed the Bank of Uganda’s (BOU) Financial Consumer Protection Guidelines (FCPG) in the day-to-day operations of the 31 Supervised Financial Institutions (SFI) in Uganda.
The project aimed to increase the capacity of Ugandan training firms and SFI Human Resource teams beyond a critical minimum threshold to enable the delivery of financial consumer protection (FCP) training to SFIs in Uganda on a lasting basis. This would then lead to long-term implementation of the FCPGs in all branches of SFIs to consumers across Uganda.
To support this process, Financial Sector Deepening Africa (FSDA) competitively procured UIBFS for £105,000 to lead a consortium of five FCP-enabled Ugandan training firms (Corporate Concepts, Demis, Komunda Investments Ltd, Sonamoney and UIBFS).
In total, 12 FCP qualified Ugandan trainers used bespoke FCPg materials to train 1,038 staff at 575 branches of 31 SFIs in all regions of Uganda. A total of 1,004 (96.7%) participants were awarded certificates for successful completion of the course. The training was delivered on time, reached 86.5% of the intended 1,200 participants, and was highly rated by SFI staff participants, SFI Human Resource Managers and BOU.
Significantly, a review in February 2015 (three months after the delivery of the training) indicated initial, positive signs of market-system change. For example, all five participating training firms intend to provide an FCP training module on a commercial basis as a result of this project. A total of 4 of the 12 surveyed SFIs indicated they plan to pay for the outsourcing of FCP training to local Uganda training providers. Finally, BOU expressed confidence that supervisory and public pressure would increase the demand for FCP training among SFIs into the future.
Looking beyond Uganda, this project has thePtrong>potential to provide a model for replication in other sub-Saharan African (SSA) countries. It demonstrates how donor-funded market facilitators (GIZ & FSDA) can build on new Central Bank FCP regulations by putting in place the critical building blocks for the development of a local FCP training market.
Looking towards next steps, a repeat evaluation is planned for December 2015 to determine whether lasting market-system change is likely to be achieved. In the meantime, FSDA is working with BOU, GIZ and a Ugandan communications firm to deliver a public awareness raising campaign around financial consumer protection. The aim is to increase demand for high quality SFI customer service, which will likely lead to increased demand by SFIs for FCP training. FSDA will also work with GIZ and BOU to disseminate lessons learned across SSA and identify opportunities for enhanced supervision to catalyse the development of the training market in Uganda. Finally, the cversion of learning materials into an e-learning module is also under discussion.
According to GIZ Uganda: “the FCP training programme has been a shining example of what a committed regulator can achieve in the financial inclusion space. Working with like-minded development partners such as FSDA and local implementers such as UIBFS, this project has developed and implemented a carefully designed, sustainable approach to the long-term mainstreaming FCP within the Ugandan financial sector. FSDA’s support has been invaluable as a catalyst to scale-up and ensure the project has lasting outcomes.Without FSDA building on progress made by BOU and GIZ, the necessary momentum to support Uganda’s financial sector to deliver better financial services to consumers in a fairer and more transparent way may not have been ach
Micro-mortgages are defined as “housing loans of long duration (generally ten years or more) that exhibit all characteristics of traditional mortgage loans (long repayment period, house as collateral for the loan, ability to foreclose and sell the house in case of default) and are small enough that they can be afforded by poor and very poor households”. The term is often wrongly used interchangeably with HMF, although from the definition above, it is clearly not HMF. But precisely what it is can also be unclear, as a brief look at products on the continent will show.
UGAFODE, a micro-finance bank in Uganda for example started off with HMF lending, but according to them, they then proceeded, to offer “micro-mortgages” because the HMF loans offered were not large enough to purchase land, or erect buildings for commercial and larger residential houses. Its micro-mortgage ranges from US 1,200 – 10,000 as opposed to its HMF loans which average US$ 105. The term of the micro-mortgage can be surprisingly short, as little as only 36 months, very similar to HMF. Real People across the border in Kenya also a micro-financier offers a micro-mortgage for up to 9 years for “home construction”, basically development of a home from ground up. Loan amounts range from US$ 1,845 – 46,125. Housing Finance Kenya, a more traditional mortgage bank similarly has a product of a relatively short period of time, 5 years, for purchase of a residential plot. Besides this relatively short period however, it is very much a mortgage, requiring monthly salary deductions, land as collateral, property life insurance and so on. The same company also has an interesting product whereby plot owners choose from 50 different plans offered by the bank, obtain finance, and then let the bank project manage construction of the house from scratch to delivery within 3-9 months. This innovation presumably bridges the problem of poor market supply, but does not detract from the fact that the ensuing loan is a mortgage with amounts varying from US$ 18,465 – 312,000. KCB in the same country has interestingly a “group micro-finance loan” targeting savings groups. It however uses monthly salary deductions and land title as collateral, and is also very mortgage-like. Equity Bank in Tanzania has a 10 year individual mortgage loan for house or plot purchase for salaried individuals. In Zambia,Cavmont Bank has a mortgage for individuals for 10 years.
From this, it is clear that traditional mortgages are being redesigned constantly to create greater affordability, and what is emerging is an interesting array of products with different adaptations and innovations. The product that results from this re-design is then sometimes, but not always called a micro-mortgage. Sometimes a loan for a shorter period is called a micro-mortgage, for example the UGAFODE micro-mortgage for 36 months. Yet, Housing Finance Kenya has a equally short 5 year loan, this time called a mortgage. Loan size and the target of the loan is sometimes used to distinguish them, but again, the distinction is not very clear. Some micro-mortgages make reference to targeting affordability by “poor and very poor households”. However, the loan, in this case for US$ 1,200 ,may not be for the poor, at least not on this continent. In fact, the difference and distinction between mortgages and micro mortgages is blurred when mortgages are so diverse and may not be that useful. The much more important and distinguishable product is HMF. Not only does is serve lower income people, with much smaller loans but also, and very importantly the lending methodology is very different as formal title as collateral is not essential as it is in both type of mortgages. Rather, other forms of collateral such as group peer pressure are used. There lies the important difference.
With support from FSD Tanzania, FSD Africa worked with the London Stock Exchange (LSEG) Academy in 2014 to build capacity within Tanzania’s capital markets through targeted skills development.
Starting in January 2014, three phases of training were delivered to 103 professionals from the Dar Es Salaam Stock Exchange (DSE), Capital Markets & Securities Association (CMSA), Office of the Prime Minister, Ministry of Finance and a range of local brokers. To help achieve a lasting impact, LSEG Academy trainers also trained 14 Tanzanian trainers from local institutions such as the University of Dar Es Salaam and the University of Dodoma.
The training rated well, scoring an average of 4.8/5 on overall satisfaction. Evidence indicates that knowledge and expertise has increased. In Phase 2 and 3, practitioner test scores increased from 58% and 69% on entry to 84% and 77% on exit respectively.
A more detailed evaluation shows promising signs of s on the wider capital market system. In September 2014, the CMSA signed an MoU with London-based Chartered Institute for Securities & Investment (CISI), which will accelerate the development of a new capital market qualification for East Africa. There are also signs of replication. Again in September 2014, the LSEG Academy was separately contracted by a Tanzanian broker to deliver a training course to 15 participants on the post trade environment.
Between January and December 2014, the DSE reported an increase in total market capitalisation of 30%, 2 listings and an increase in market liquidity. According to the DSE CEO, Moremi Marwa: ‘our partnership with the UK is now moving away from aid towards trade and investment
