Category: Blog

Getting ahead of the curve: how the regulatory discourse on M-insurance is changing

Posted on by Kihingu Inc

Nearly a year ago, we joined the A2ii in Abidjan to sit down with a roomful of regulators to discuss the challenges and imperatives CIMA faces in regulating mobile insurance at the CIMA-A2ii Workshop on Mobile Insurance Regulation. In the CIMA context, as with most countries in Africa, mobile network operators (MNOs) and the technical service providers (TSPs) that support them are emerging as key players in extending the reach of insurance. The discussions at the workshop focused on how insurance regulators can broaden their focus to include these MNOs and TSPs, as well as how to cooperate across different regulatory authorities.

A year on, these considerations remain as valid as ever, but we have come to realise that there is more at stake than m-insurance. Digital technology is changing the insurance landscape as we know it by paving the way for new players and business models with the potential to rapidly expand coverage. This is causing a re-think of how insurance is traditionally delivered. In addition, while m-insurance remains important, looking beyond m-insurance to the broader insurtech field is important to truly understand the opportunities technology provides to change the game in inclusive insurance and the associated risks.

Thus far, the insurtech debate has largely focused on developed country opportunities. But the tide is turning. My colleagues and I recently scanned the use of insurtech in the developing world to see what the potential is for addressing challenges in inclusive insurance. We found more than 90 initiatives in Asia, Latin America and sub-Saharan Africa that fit the bill. What we saw is that the “insurtech effect” is happening in two ways.

Firstly, digital technology is a tool to make insurance as we know it better: it is being used as a backbone to various elements of the insurance life cycle, in an effort to streamline processes, bring down costs and enable scale. Examples include new ways of data collection, communication and analytics (think big data, smart analytics, telematics, sensor-technology, artificial intelligence – the list goes on), as well as leveraging mobile and online platforms for front and back-end digital functionality (such as roboadvisors, online broker platforms, mobile phone or online claims lodging and processing, to name a few!).

It also allows for more tailored offerings: on-demand insurance initiatives are covering consumers for specific periods where they need that cover, for example for a bus ride, on vacation or when borrowing a friend’s car for one evening, while advances in sensor technology mean that insurers can adapt cover and pricing based on usage, for example allowing customers to only pay car insurance for the kilometres they actually drive every month.

In all of the above, digital technology, including the application of blockchain for smart contracting and claims, makes the process seamless.

Secondly, digital technology is a game changer. In many ways, it is changing the way insurers do business, design and roll out their products, and, importantly, who is involved in the value chain. Peer to peer platforms (P2P) are a much-discussed example of these next generation models. They are designed to match parties seeking insurance with those willing to cover these risks. The revolutionary element lies in the ability to cover risks that insurers usually shy away from due to the lack of data to adequately price the risks – all now enabled by digital technology. But these platforms are often positioned in regulatory grey areas: if all the platform does is match people to pool their own risks, does it then need a licensed insurer involved? And if advice is provided by a robot powered by an algorithm, who is ultimately accountable?

No wonder insurance supervisors are sitting up straight when you mention the word “tech”. As Luc Noubussi, microinsurance specialist at the CIMA secretariat, said at the 12th International Microinsurance Conference in Sri Lanka late last year: “Technology can have a major impact on microinsurance, but change is happening fast and regulators need to understand it”.

So, how do they remain on the front foot in light of all of this, what different functions, systems and players do they need to take into account and what are the risks arising? In short: how can they best facilitate innovation while protecting policyholders? Front of mind is how current regulatory and supervisory frameworks should accommodate new modalities, functions and roles – many of them outside the ambit of “traditional” insurance regulatory frameworks – and what cooperation is required between regulatory authorities to achieve that.

Two weeks from now we’ll again be sitting down with regulators from sub-Saharan Africa for the Mobile Insurance Regulationconference hosted in Douala, Cameroon, from 23 – 24 February 2017 by the A2ii, the IAIS and the 14 state West-African insurance regulator, CIMA, supported by UK aid, FSD Africa and the Munich Re Foundation. This conference will delve into the opportunities that mobile insurance present and the considerations for regulators and supervisors in designing and implementing regulations to accommodate it. The imperative to find an m-insurance regulatory solution remains, but it is clear that the horizon has broadened: at play is the way that insurance is done across the product life cycle, who the players are in the value chain and, at times, the very definition of insurance.

As we suggested in an earlier blog, this could be microinsurance’s Uber moment, but then regulators need to be on-board. We look forward to taking part in the discussions to see how supervisors plan to do just that.

Five reasons why capital markets matter in Africa

Posted on by Kihingu Inc

The significance of developing domestic capital markets as a means of financing priority sectors and driving economic development is increasingly being acknowledged by policy makers in Africa.

For instance, the African Union (AU), Agenda 2063, prioritises the development of capital markets on the continent to strengthen domestic resource mobilisation and double its contribution to development financing. Similar support is found in several national visions including Nigeria (FSS2020), Zambia (Vision 2030), Rwanda (Vision 2020), Uganda (Vision 2040) and Kenya (Vision 2030). About US$1 trillion in assets are currently held by pension, insurance and collective investment vehicles across sub-Saharan Africa. These funds have a serious problem finding enough investments that meet their risk and return requirements – there just isn’t enough “product” for them.  It means that there are projects today – e.g. in infrastructure – that are not getting financed. But this also has implications for the long-term ability of pension funds to produce adequate incomes for pensioners.

While central to facilitating SSA economic development, there has been little focus on understanding precisely why capital markets matter in Africa.

So why does Africa need capital markets? This article identifies five reason reasons:

  1. Providing long-term financing for priority sectors

Africa faces huge long-term financing needs for the real and social sectors.  FSD Africa (FSDA) estimates the funding gap for SMEs, infrastructure, housingness at over US$300 billion per year. The World Bank estimates that Africa’s infrastructure deficit reduces per capita GDP growth by 2 percentage points each year, delaying poverty reduction efforts. Equally, the Centre for Affordable Housing in Africa, estimates a housing deficit of at least 25 million units in Nigeria, Kenya, Angola, Ethiopia, Cameroon and Cote d’Ivoire. Local currency capital markets can contribute to narrowing the financing gap across these sectors. Capital markets provide long-term funds to growing businesses, infrastructure and housing. Capital markets can also support the financing of social sectors, including health and education.

  1. Complementing reductions in concessional funding

About half of the countries in sub-Sahara Africa are classified as middle income according to the World Bank. In the last decade, 10 countries in sub-Saharan Africa including Kenya, Nigeria, Ghana and Zambia, have joined this middle-income rank. This implies that these countries will gradually be weaned off the World Bank Group’s concessional lending window, International Development Association (IDA). In addition, they can expect to receive less concessional funding from bilateral donors. This implies that many of these countries will need to access commercial funding sources. The Eurobond market, one of such sources, exposes countries to significant foreign currency risk, because these bonds are denominated in hard currencies, leading to higher chances of defaulting on this debt. Local currency capital markets can ideally complement external funding to meet developmental challenges.

  1. Financing global challenges

According to the African Development Bank (AfDB), the share of Africans living in urban areas is set to rise from 36% in 2010 to 50% by 2030. Urbanisation at this rate can cause significant stress to infrastructure, social services and proliferation of slums. According to the United Nations Environmental Program (UNEP), Africa is projected to bear the greatest impact of climate change with the costs of adaption being estimated between 5-10% of GDP. Capital markets can contribute to financing of climate change investments through green bonds. Capital markets can also support urban development by financing urban infrastructure and housing projects. Capital markets instruments including Real Estate Investment Trusts (REITS), incorporating so-called Social REITS, can support affordable housing finance.

  1. Managing foreign currency and re-financing risks

The income streams associated with key infrastructure and housing investments are often denominated in local currency. By funding these investments in long-term local currency instruments, governments and the private sector avoid foreign exchange and refinancing risks. The Asian financial crisis in the 1990s and the crisis in Latin America in the 1980s powerfully demonstrated the importance of developing local currency markets. In Asia, overexposure to foreign currency loans led to economic collapse in several countries. On the other hand, refinancing risk arises where short-term debt is used to fund long-term projects. Failure to roll over this debt in the short term can lead to high financing costs and potentially defaults. Numerous examples exist where this has resulted in collapsed companies and job losses.

  1. Diversifying the financial sector

The financial sector in Africa is relatively small and bank-dominated. There have been significant advances in the banking sector over the last decade with increasing access to previously excluded populations, especially using mobile technology. However, the banking sector remains characterised by high interest rate margins and high returns on equity and assets. This implies that the sector is not playing its intermediation role effectively. By developing capital markets, countries can facilitate the diversification of the financial sector, providing a useful complement to the banking sector (at times competing with the banking sector, at other times encouraging it, e.g. through risk sharing instruments, to play a bigger role in new areas) and providing the public and private sectors access to long-term financing which is so hard to come by in SSA.  Capital markets can also help create new kinds of institutions through equity investment, tus broadening the sources of supply of finance.

As a strategic response, FSDA aims to transform capital markets in Africa into a credible source of funding for the real and social sectors. The priorities over the next five years include the bond markets (both government and non-government), alternative finance (including fintech and crowd funding, REITs and Islamic Finance), and equity (public and private) market development. Support for non-government bonds will focus on green bonds and issues in both the real and social sectors.

FSDA will leverage technical assistance interventions on the regulatory front with transactions support, aimed at developing a pipeline of potential issuers, and catalytic investments through development capital (DevCap). FSDA also aims to build the information base around long term finance – databases currently are scarce and incomplete – and will work closely with institutional investors to build their capacity to invest in the newer asset classes. FSDA will actively forge perships to implement its long-term finance agenda.,

Crowdfunding in East Africa: a regulator-led approach to market development

Posted on by Kihingu Inc

Earlier in 2016, FSD Africa partnered with the Cambridge Centre for Alternative Finance (CCAF) and Anjarwalla & Khanna to conduct a regulatory review of different crowdfunding models across Kenya, Tanzania, Uganda and Rwanda. This project is now in its final stages and we look forward to publishing the report in full in December 2016. The CCAF will also be launching the inaugural Africa & Middle East Alternative Finance Report to coincide with this.  In anticipation, here are some key findings to whet your appetites.

Crowdfunding is fast taking shape across East Africa – particularly non-financial return based models such as rewards and donations crowdfunding. However, return-based equity and loan-based crowdfunding are really only starting to emerge. The recent Allied Crowds and FSD Africa report highlights these supply-side trends well. Such FinTech models require careful and considerate attention from financial regulators in East Africa to catalyse and harness their potential positive economic and social benefits whilst addressing systemic and consumer risks and challenges.

The upcoming report highlights some key priority regulatory and policy areas necessary for market development in Kenya, Uganda, Rwanda and Tanzania while drawing on insights & experience from the UK, the USA, Malaysia, New Zealand and India.

Some of the key findings include the following:

  • There is no bespoke or specific crowdfunding regulation in East Africa or South Africa.
  • Non-financial return-based models dominate market activity in East Africa.
  • Financial return-based loan and equity models are only in the very earliest stages.
  • Loan- and equity-based models dominate total global activity, and account for the majority of market activity in more established markets, while donation- and rewards account for a small percentage of total market activity.

As for next steps, new crowdfunding regulations in East Africa are not recommended at the moment. Instead, other regulator-led, market development initiatives should be considered including:

  • A living database of all, existing, regulator-acknowledged platforms in East Africa.
  • Regulator engagement opportunities – to bring together the East African crowdfunding industry, practitioners, experts, potential funders and fundraisers.
  • Develop a regional regulatory laboratoryr ‘Sandbox’ to guide crowdfunding businesses through the relevant regulatory processes and requirements.
  • Regulators should encourage the East African crowdfunding platforms to build a regionally-focused industry association to undertake self-regulation and institute guidelines and principles to foster innovation while protecting investors.

The report goes into a great deal of depth covering markets in East Africa and other more established crowdfunding markets. It also provides useful guidance for crowdfunding platforms that are seeking to establish operations in these countries as well as hopefully encouraging platforms operating elsewhere to consider East Africa as a market to provide their innovative financial crowdfunding services.

We would like to thank the large number of contributors who have made this research possible including a wide array of regulators from the Capital Market Authorities, Central Banks and Communication Authorities of Kenya, Rwanda, Uganda and Tanzania asl as the host of experts, crowdfunding platforms and other policymakers that have generously provided their expertise and insight.

The report will be made freely available in December 2016. Follow up, in-depth workshops led by CCAF will be conducted in January 2017 in Rwanda, Tanzania, Uganda and Kenya with the various regulatory bodies. FSD Africa will stand ready to support regulators beyond this process.

Getting ready for take-off?

Posted on by Kihingu Inc

What needs to be done to get Executive Coaching operating effectively in Nigeria? And why does this matter?

The executive and business coaching market in Nigeria can best be described as ‘nascent’, according to research conducted by Creative
Metier on behalf of FSD Africa on ‘Building the Market for Executive Coaching in Nigeria.’ It is estimated that there are only between 10 and 20 credible, accredited and experienced executive coaches in the country – for a population of about 174 million people. There is also no locally available coach training course that offers a route to internationally recognised accreditation. The Nigerian market includes both accredited and non-accredited coaches, but with an emphasis on life and spiritual coaching. From the research, “there are coaches coaching in the corporate space but they are life coaches…, so companies are not seeing the impact of coaching on the business side.”

Low coaching supply is also compounded by low levels of demand; with low levels of understanding the link between coaching and business results alluded to above. One coach interviewed in the study stated that, “there is confusion in understanding the three terms: coaching, mentoring and consulting.”

Business leaders also expect coaches to have knowledge appropriate to the industries where executives are being coached, as well as a strong track record and ‘gravitas’, on top of their coaching skills. A banking HR Director stated that acceptance of a coach would entail, “how successful you have been in what you have done? If the coach cannot impress me, I’ll be switched off.”

A Harvard Business Review (HBR) survey on coaching looked into the question of value and concluded that value is provided to both Executives and businesses – “As the business environment becomes more complex, [leaders] will increasingly turn to coaches for help in understanding how to act. The kind of coaches I am talking about will do more than influence behaviors; they will be an essential part of the leader’s learning process, providing knowledge, opinions, and judgment in critical areas. However, the study also cautions – A big problem that tomorrow’s professional coaching firm must resolve is the difficulty of measuring performance….”

A further study by Price Waterhouse Coopers (PWC) listed the following benefits from Executive Coaching:

  • 80% of coaching clients report a positive change in work performance, communication skills, interpersonal skills, and relationships
  • 7% of coaching clients report “very satisfied
  • 2% say they would repeat it under same circumstances
  • Individual clients have seen a median return of 3.44 times the investment.

Lack of information in the Nigerian market is the largest current barrier to the industry’s growth. This information gap can be readily addressed by:

  • Education on what coaching is, how it differs from other capacity building leadership initiatives, and what it is not;
  • Information on accredited coaches in the market and minimum accreditation requirements;
  • Information on the business case for coaching and evidence of its impact.

FSD Africa believes that coaching in Nigeria could be poised for take-off, although effective demand is currently low, there is an appreciation amongst market participants that coaching is an enabler of business success, and resolving these informational gaps will serve to catalyse the markets’ growth.

Building trust – why banking needs to be more personal

Posted on by Kihingu Inc

In Edelman’s annual study on levels of trust in industries, the Financial Services industry once again came bottom, as they have done for the last 5 years. Although the industry has been recovering from its lows in the early 2010s, only 51% of people have trust in the sector. To put that in perspective, 9% of people have more trust in the Telecommunications industry and a whopping 23% have more trust in Technology companies (who have come top the last 5 years).

This “trust gap” exists all over the world and I was reminded of it on a recent visit to Nigeria. There, as part of one of our partners product launch, I met a lady who told me that she had recently signed up to one of the banks’ new services. When asked why, she said that on three previous occasions she had trusted a local Susu[1], who had then run-off with her savings. To be clear, the “trust gap” is not only an issue for women; many men face similar issues when dealing with formal financial institutions.

That is the heart of the problem. Financial management is difficult and we often entrust our hard earned cash to someone who, we hope, has our best interest at heart. But the world is full of people whose trust has been abused on financial matters. Almost everyone knows someone who was affected by the failure of a bank, defrauded by business associate (like that Susu) or trusted the wrong family member.

In this “low-trust” environment, financial institutions are increasingly battling these stories, as well as a lack of trust in the services they offer. Nowhere is this more evident than in the continued exclusion of women from financial services in developing countries. Despite being 40% of the world’s workforce, across the world, women owned businesses are experiencing a funding gap of $260billion to $320billion per year.

This is striking and becomes even more surprising when one understands that women are better at repaying loans. Not only that, they use money more productively and use financial services more frequently. This makes women profitable and, because of the high exclusion rates, a key target demographic to expand a client base.

Nevertheless, bringing women on board is not a top priority for many CEOs in the financial space. There is a catch; women, who are much more cautious when it comes to adoption of new products, are harder to gain as clients in the first place. In our work with Women’s World Banking and Diamond Bank in Nigeria we endeavour to increase the number of female clients by changing incentive structures for on-boarding agents, employ more female agents for outreach and designing products specifically targeting women.

Although we have brought on board many new clients of both genders, women are a smaller percentage than we would like (below 50%). Which takes us back to the issue of trust. The lady in Nigeria, had to be cheated out of her money three times before she considered approaching a formal financial service provide. That tells us that the level of mistrust of formal financial institutions is much higher than we want to admit.

Organisations such as FSD Africa, whose core mission is to develop financial markets that are responsive to the broader developmental needs of African economies and people, need to find better ways to reaching women and young people who are disproportionately excluded from financial services.

Our work with Women’s World Banking and our partner institutions Diamond Bank (Nigeria) and NMB (Tanzania) is to develop new products that seek to target these groups. One of the key learnings from our work is that products need to be well communicated to the target group and this often takes time. That is why Diamond Bank’s Agent Network in Nigeria has developed specific pitches for potential female clients. These go beyond a generic sales script, which is usually sufficient to bring on board male clients. The agents are educated on how to build trust with the customer and demonstrate that access to financial services gives them better security, improves their record-keeping and gives them greater financial control.

There are a number of other factors that limit women’s financial access. For example, many African countries remain highly patriarchal and women are less likely to be literate than men. Changing these attitudes takes time but ultimately, developing women’s ability to use savings and credit products will foster greater financial independence and increase gender equality.

Overcoming the “trust gap” is hard and that is why FSD Africa seeks to create long-term financial market impact, for both men and women. We understand that increasing financial inclusion is not just about the individual customer – our Change Management interventions seek to revolutionise the way financial institutions see and interact with their potential clients.

The “trust gap” exists for both men and women and relates to almost all Financial Service Providers. Consequently, FSD Africa is always looking for new partners that share their view on developing financial systems across the continent. If you or your institution are interested in building out services, as our partners have done, please reach out to us. FSD Africa will be speaking at the MasterCard Foundation Event in Kigali on the 20th and 21st of October 2016.

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[1] Informal savings channel in West Africa, usually operated by one person for a number of market traders).

A tale of two markets

Posted on by Kihingu Inc

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

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Next thought Monday: beyond ‘Africa rising’ – the emergence of the not-quite middle class

Posted on by Kihingu Inc

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.”

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Harbingers of doom? bank failures in Africa – how to interpret these

Posted on by TIMOTHYRADIER

Yesterday, Zambia’s central bank announced it had taken over a commercial bank, Intermarket, after the latter failed to come up with the capital it needed to satisfy new minimum capital requirements. Three weeks ago, a Mozambican bank – Nosso Banco – had its licence cancelled, less than two months after another Mozambican bank, Moza Banco, was placed under emergency administration.

At the end of October, the Bank of Tanzania stepped in to replace the management at Twiga Bancorp, a government-owned financial institution which was reported to have negative capital of TSh21 billion.  A week before that, just over the border in Uganda, Crane Bank, with its estimated 500,000 customers, was taken over by the central bank, having become “seriously undercapitalised”. In DR Congo, the long-running saga of BIAC, the country’s third largest bank, continued in 2016, forced to limit cash withdrawals after the termination of a credit line from the central bank. And in Kenya, Chase Bank collapsed in April, bars after the failure of Imperial.

How are we to interpret this? It seems that 2016 is the year in which latent fragility in Africa’s banking sectors is being laid bare.  After years in which observers have favourably contrasted the relative stability of African banking with the financial sector chaos in Europe and the US, it seems that three critical perils – mismanagement, political interference and economic woes – are conspiring to transform the landscape of African banking into a decidedly treacherous place for depositors and investors.

We have had remarkably few bank failures in Africa in recent years and yet this sudden uptick in stories like Crane and Chase, against a backdrop of economic challenges in many places, raises the question as to whether there is worse to come.

Mismanagement and/or political interference have been at the root of most bank collapses over the past few decades. Martin Brownbridge’s grimly fascinating analysi”https://fsdafrica.org/knowledge-hub/blog/harbingers-of-doom-bank-failures-in-africa-how-to-interpret-these/#_ftn1″ name=”_ftnref1″>[1] on this subject from 1998 concluded that “moral hazard, with the adoption of high-risk lending strategies, in some cases involving insider lending” was behind most of the bank collapses in the 1990s. This certainly resonates today. Catastrophic lapses in governance rather than economic malaise are alleged to be behind the recent Kenyan bank failures (although their shareholders and directors vigorously refute this) – but how else can you explain why a small number of banks fail when the sector as a whole has been returning well over 20% on its equity for the past several years?

There are some excellent programmes like “http://www.centerforfinancialinclusion.org/programs-a-projects/abf” target=”_blank” rel=”noopener”>Accions’s Africa Board Fellowship Program, which aims to strengthen capacity at financial institutions because their promoters understand that weak governance undermines trust in the financial system and is therefore very bad for financial inclusion. But it is one thing to know what you’re supposed to do as a bank board director – quite another to actually do it.

Each bank failure seems to have its own special story – and we derive comfort from this. It is somehow reassuring to think that that might be the case because the prospect of a system-wide failure is so awful.

And each country context has particular features that impinge on the stability of the financial system. There are deep concerns in Kenya, for example, that the recent imposition of interest rate caps is going to result in a very messy period of bank failures and/or consolidation.

But are there common patterns that we should be taking note of?  Is there a system-wide issue that we should be facing up to?

Well, one pattern might be positive – that central banks are intervening more, and more quickly, to weed out the miscreants, less cowed by the politicians than they might have been in the past and more concerned to protect their well-earned professional reputations. Another is that central banks are finally implementing the increases in minimum capital requirements which many have been talking about for years with the inevitable intended consequence that some banks will be forced to get out of the market.

These might be two good reasons why we are seeing more collapses. You could say that’s excellent news for the future of African banking. But perhaps only to a point. There is still the risk that the cumulative effect of bank failures as a result of zealous supervisory action causes a loss of faith in the entire system resulting in mass panic and the withdrawal of deposits and credit lines.

Also, the inevitable result of this would be fewer, bigger banks which may have negative consequences for competition and access – altht worth pointing out that Tanzania, which has 55 commercial banks, still only manages to bank around 12% of its adult population (FinScope).

The more concerning issue is the impact of underlying economic weakness. Leaving aside the paradox that some of these bank failures are taking place in economies that are growing quite fast (Kenya and Tanzania forecasting 6-7% GDP growth), lower commodity prices and their pervasive impact across African economies are going to make life much tougher for banks – especially if they are poorly managed and have political skeletons in their cupboards.

One problem we have, especially when economic conditions are changing fast and for the worse (as in Mozambique), is that data is often out of date and is not sufficiently disaggregated. So, when we look at Africa as a whole, or even the banking system of one country as a whole, the averages we tend to look at create a blithely benign picture which masks dramatic variations.

So, non-performing loans (NPLs) across Africa up to014 were a little over 5% but NPLs in Ghana were more like 11-12%. NPLs in Tanzania are currently a little over 8%, yet Twiga Bancorp’s NPL’s were – unbelievably – at 34% in early 2015, according to media reports.

We think the African banking sector is in for a rocky ride in 2017 and 2018 and, in the short term, this is not good news for the real economy. However, one industry that is set to grow, surely, is central banking supervision.

“https://fsdafrica.org/knowledge-hub/blog/harbingers-of-doom-bank-failures-in-africa-how-to-interpret-these/#_ftnref1” name=”_ftn1″>[1] Brownbridge, M (1998): “Financial distress in local banks in Kenya, Nigeria, Uganda and Zambia: Causes and implications for regulatory policy” Development Policy Review, vol. 16, no.

Payroll lending in Zambia

Posted on by Kihingu Inc

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

Crowdfunding in motion: seven things we learned about P2P markets in East Africa

Posted on by TIMOTHYRADIER

Less than a month ago, on 15 June 2016, the crowdfunding industry in East Africa came together for the first time in Nairobi. This East African Crowdfunding Indaba & Marketplace was co-hosted by FSD Africa and the Kenya Capital Markets Authority, and attended by 65 representative from across the crowdfunding industry in Kenya, Rwanda, Tanzania and Uganda.

But, what did we learn? We boil it down to seven key points:

  • East African crowdfunding markets are on the move. Crowdfunding markets in East Africa remain nascent, but are growing. According to forthcoming research by Allied Crowds and FSD Africa, crowdfunding platforms (donation, rewards, debt and equity) raised $37.2 million in 2015 in Kenya, Rwanda, Tanzania and Uganda. By the end of Q1 2016, this figure reached $17.8 million – a 170% year-on-year increase. Today, there are no platforms located in Tanzania, 1 in Rwanda, 1 in Uganda, 3 in Kenya, 10 in South Africa, with a further 55 located beyond these countries, but doing business within them. Ths platform landscaping report is scheduled for publication in July 2016.
  • East Africa’s platforms report promising progress. Since its launch in September 2012, M-Changa has raised $900,000 through 46,000 donations to 6,129 fundraisers. Popular uses of M-Changa donations include: medical expenses (24%), business activities (24%), education expenses (12%), and funeral expenses (7%). The platform also reports 100% year-on-year growth rates. Since the launch of its pilot phase in December 2015, Pesa Zetu has dispersed c.1,200 loans via mobile phones to low income Kenyans – of loan sizes between $20 and $100 – to test its credit models, processes and technology platform. So far, Pesa Zetu has dispersed c.$59,275 in total. Scale-up in Kenya is planned for Q4 2016. Since its inception in March 2015, LelapaFund has screened over 350 SMEs in East Africa and beyond, and engaged over 30 in due diligence and investment readiness processes in Kenya. Pending regulatory approval, it hopes to open access to its first deals on the platform in 2016. During the event, each platform reported regional ambitions.
  • Global crowdfunding markets are growing fast but also evolving. According to primary and secondary research by CGAP, the finance raised by crowdfunding platforms worldwide increased from $2.7 billion in 2012 to an estimated $34 billion in 2015. This figure is expected to reach $96 billion by 2025 in developing countries alone. Today, there are approximately 1,250 active platforms globally. They typically fall into four typologies (donation, rewards, debt and equity), but hybrids are fast emerging. In the UK, up to 40% of the capital raised by P2P platforms is institutional in its origin.
  • East Africa’s MSMEs express a demand for alternative finance, but they’re not always investment-ready or able to locate financiers. According to LelapaFund research, c.45% of Kenyan start-ups sampled require between $10,000 and $50,000 growth capital, while c.40% require between $50,000 and $250,000 for expansion/export (22%), marketing (23%) and product development (29%). For Kenyan SMEs, c.50% of firms sampled require between $100,000 to $500,000 for expansion/export (40%), marketing (21%) and product development (29%). Both start-ups and SMEs received more capital from friends and family than banks. Vava Coffee reported difficulties locating and accessing sources of non-bank finance, especially as a female entrepreneur. The firm also highlighted the importance of data and evidence when raising finance because it demonstrates a track record. LelapaFund has committed significant resources to identify investment-ready SMEs for its platform. Of 350 Kenyan SMEs screened, less than 10% proceeded to due diligence phase. Financial literacy training for SMEs, low cost due diligence models, improved signposting of SMEs to sources of investment and the use of Company Registry data were suggested as means to address a lack of investment-ready SMEs in the region.
  • There are both commercial and development opportunities for crowdfunding platforms in East Africa. Through their use of technology, crowdfunding platforms have the potential to mobilise and allocate capital more cheaply and quickly than the banking industry and development agencies. This could lead to the disintermediation of both through increased efficiency and competition, as well as increased access to finance for low income individuals and growing companies. Where mobile phone technology is currently used to provide micro-savings and micro-credit in East Africa, interest rate spreads remain significant – c.3% p.a. for saving, and c.90% p.a. to lend. This presents a market opportunity, particularly for P2P debt finance platforms.
  • Crowdfunding risks and the regulatory environment. Globally, many crowdfunding markets are not yet regulated. The unique nature of crowdfunding models means that they straddle traditional payments, banking and securities laws. In jurisdictions where financial industry regulators are not consolidated into a single unified authority, platforms may also straddle regulating departments. In some countries, such as the New Zealand, the United Kingdom (UK), and the United States, crowdfunding is subject to special tailored regimes. In the UK, for example, the Financial Conduct Authority has developed a Regulatory Sandbox, which provides a safe space for innovative firms to test products and services with real consumers in a real environment, without incurring all of the normal regulatory consequences of engaging in this activity. In East Africa, there is no specific regime for crowdfunding regulation. Instead, sections of existing banking and securities legislation are used, but are open to interpretation. However, there is evidence of innovation. In Kenya, for example, Section 12A‪ of the Capital Markets Act provides a safe space for innovations to grow before being subject to the full regulatory regime. During the event, the Kenya Capital Markets Authority, Rwanda Capital Markets Authority, Uganda Capital Markets Authority, and CGAP’s consumer protection specialist expressed cautious optimism about the future of crowdfunding markets in East Africa, noting particularly risks around: inexperienced borrowers and investors, digital fraud, data protection and non-performing loans/investments.
  • There’s appetite to do business and to learn more from across East Africa. A total of 65 participants attended the Indaba & Marketplace from all corners of the East African market: a) supply-side (crowdfunding platforms, impact investors and micro-finance institutions such as Pesa Zetu, M-Changa, LelapaFund, Novastar Ventures, Letshego Holdings), b) demand-side (SMEs and consumer protection specialists such as Vava Coffee, EcoZoom, Burn), c) business service providers (data analytics firms, law firms, market intelligence firms and technology providers such as Anjarwalla & Khanna, IBM, Zege Technologies, Allied Crowds, Digital Data Divide, Open Capital Advisors, Genesis Analytics, Intellecap), d) rule-makers (regulators and policy makers such as the Kenya Capital Markets Authority, Rwanda Capital Markets Authority, Uganda Capital Markets Authority, UK Financial Conduct Authority), and e) donor agencies (market facilitators, think tanks and aid agencies such as Access to Finance Rwanda, CGAP,  FSD Kenya, FSD Tanzania, FSD Uganda, UN Women).

So, what’s next?

First of all, for more facts and figures, please find all the presentations delivered during the crowdfunding indaba and marketplace here.

Second, we’re keen to move beyond discussion towards new partnerships and deal-making. With this in mind, please find a full list of participants here. If you’d like specific contact details then email Fundi Ngundi (fundi@fsdafrica.org), who will ask permission from the counterpart before connecting you.

Third, through partnership, FSD Africa will continue to support the development of crowdfunding markets in East Africa. The Allied Crowds platform landscaping research is scheduled for publication in July 2016. A regulator support exercise has been launched and will conclude in September 2016. It will be led by Anjarwalla & Khanna and the Cambridge Centre for Alternative Finance. Where beneficial to the poor and the wider crowdfunding market, FSD Africa will also provide light touch support to platforms themselves. If there’s demand, there could be scope for a follow-up Indaba and Marketplace in early 2017. If you’d like to collaborate then please be in touch.

Lastly, thank you to all the speakers, panelists, facilitators and participants for your lively contributions last week. Albeit steadily, crowdfunding markets are on the move in East Africa!