Country: Sub-Saharan Africa

Biometrics and financial inclusion

The World Bank (2017) estimates that the lives of 1.1 billion people who live without proof of identity could be improved by if they gain access to digital identity. Identity can help vulnerable people to gain access to critical services, such as health services, governments grants, education and financial services such as bank accounts. Lack of legal means of identification is a problem across SSA, with varying degrees of severity. In Nigeria, 78% of the population (149 million) do not have a legal means to prove their identity, while in South Africa 12 million individuals (22%) are excluded from the formal identity system of the country (World Bank, 2017). This translates to 454 million individuals (48% of the population) across the entire SSA.

Lack of identity is a barrier to accessing a multitude of important services, particularly financial services. In response to Anti- money-laundering initiatives spearheaded by the Financial Action Task Force (FATF) (specifically Recommendation 10 on customer due diligence [CDD]), banks are required to have strong proof of identity of their customers in order to do business with them. This varies but generally includes identity documents and Proof of Address (PoA). Without such documents, consumers are excluded from accessing formal financial services. In Angola, 41% of individuals cited a lack of documents as the reason for being financially excluded, while in South Africa and Nigeria this figure was 14% and 12% respectively. Lack of identity documentation varies in its severity as a barrier to exclusion depending on the country, but overall indicates a significant problem (Findex, 2014).

Biometrics pose a possible solution to the identity problem in SSA and especially financial exclusion due to lack of identity.

Building concrete markets: the role of insurance in property markets in Africa

In principle, insurers as institutional investors should also play a role in investment into the property market, either directly or by mobilising and catalysing capital markets.

Outside of direct property investments, however, there is a lack of feasible investment-ready opportunities in the sub-Saharan Africa property market.

From the findings, it is clear that the development community can promote the role of the insurance market in the property market (or other relevant economic sectors) by entrenching a holistic value chain lens in dialogues between the insurance sector, regulators and stakeholders from the real economy. This requires an understanding of the multifaceted ecosystem of the particular industry, including the actors in its value chain, and the incentives, risks and barriers faced by these actors at each segment of the value chain. There is also a need to (further) promote the development of investment vehicles that would allow efficient and aggregated investments into property markets at scale, and to rethink insurance products that meet the needs and limitations of property owners.

Agricultural leasing market scoping study for sub-Saharan Africa

Leasing sectors in sub-Saharan Africa (SSA) are active, but rarely offer products to farmers or small and medium enterprises involved in agriculture, according to a new report published today by Financial Sector Deepening Africa (FSD Africa) in partnership with Nathan Associates. To promote leasing for agriculture, the report recommends addressing market failures at the core of the market (supply and demand) and linking this core with supporting market functions, predominantly through partnerships with relevant market actors.

The report identifies constraints at different levels in the market system contributing to the slow development of leasing for agriculture in SSA. It highlights why leasing can help improve agricultural productivity and income across the continent. Investigation across eight SSA countries finds Ghana, Kenya and Zambia in particular offer good potential for targeted intervention to support agricultural leasing. In most of the countries explored, current technology initiatives do not seem to be working well, leasing regulatory environments are still weak and farmers and SMEs lack financing options as financiers continue to see agriculture as a risky sector.

Commenting on the report, Juliet Munro, Director of Inclusive Finance at FSD Africa says:

Agriculture is at the core of many African economies, yet, in order for the sector to improve livelihoods, financial services need to support it much better.

Ashley Olson Onyango, Agricultural Finance Programme Manager at FSD Africa adds: “Credit is an important tool for any business that wants to grow and this is certainly true for many farmers across Africa. However, credit remains a challenge and limits the opportunities farmers have to grow their businesses, further restricting their potential and creating an ongoing cycle of poverty and food insecurity.”

To overcome market failures within the agricultural leasing sector, the report proposes mutually reinforcing interventions, which include providing technical advice to financial institutions, introducing schemes that increase awareness of financial leasing among farmers, supporting technological innovation to make leasing operations more efficient and creating financing facilities that help decrease the down payment requirements for farmers.

As a strategic response, FSD Africa has identified commercial agriculture as an area of interest for its future development capital work and will be exploring potential collaboration with interested partners in this space.

Refugees and their money: assessing the business case for providing financial services to refugees

Refugees have a strong need for comprehensive financial services to support their livelihoods. Refugees, like other relatively low-income segments, need: savings or transaction accounts to safely store their income and minimise the risk of theft; loan products to support business ventures and meet other personal needs; insurance to minimise the financial impact of unpredictable events; and convenient access to financial services channels to receive remittances. The refugees’ need for financial services has become even more apparent as the World Food Programme continues to shift its humanitarian support from food assistance to cash-based transfers.

Rwanda has been hosting refugees for over 20 years. In this context of long-term displacement, governments, humanitarian agencies, the development sector and other stakeholders must provide long-term solutions for refugees, such as financial services, which can support market-based livelihoods. FSDA, UNHCR and AFR partnered on this study to assess both the demand for financial services in refugee populations and the business case for Rwandan financial institutions to provide these services.

The study had two objectives: first, to provide market intelligence to build a sound business case for financial institutions to profitably serve the forcibly displaced persons (FDPs) population; and second, to better understand the financial needs of the FDP population in Rwanda to enable financial service providers (FSPs) to effectively target the segment.

This report is the result of a triangulation of four different research activities:  segmenting and sizing refugees as a market for financial services; translating the segments into business cases to assess potential for serving this market; creating profiles of segments based on field research in refugee camps; and assessing the regulatory environment to provide financial services for refugees.

Some of the key findings from the report are:

  1. At the moment, six of the seven camps in Rwanda have cash and the last camp Mahama is likely to
    become cash before the end of the year    .
  2. Contrary to expectations, refugees in Rwanda have enough income to be strong potential customers for FSPs.
  3. The report estimates that extending financial services to the refugee population of Rwanda would expand the market for financial services by approximately 44,000 individuals.
  4. Many refugees have used financial services before and want to use them again, perhaps even more urgently than Rwandan nationals.
  5. BFA’s dynamic business case model suggests the refugee population has as much potential to generate profit for FSPs as the traditional Rwandan population.
  6. One of the biggest challenges refugees face in accessing financial services relates to satisfying the ID requirement for ‘know your customer’ (KYC) purposes.

Is cash no longer king? A surge in the use of online remittance services

Posted on by TIMOTHYRADIER

Remittances are a pivotal, though often unseen, driver of economic growth across Africa, in particular having a positive pro-poor effect on health, education and human capital development. The continent’s remittance economy has grown quietly and organically, taking up an essential role not just as a safety net, but also as a catalyst for entrepreneurship. Why is this so important? Because it changes how we should think about remittances: these flows are international development finance by another name, with the potential to be highly targeted, efficient and effective.

Remittances are an efficient, impactful and resilient form of development capital. FSD Africa has supported research by Cenfri which shows that the value of remittances in sub-Saharan Africa (SSA) is almost equal to that of “traditional” foreign capital flows such as overseas development assistance (ODA) and foreign direct investment (FDI). And their impact is potentially greater – especially in areas like health and education. In 2015, the region received USD39 billion in FDI and USD37.1 billion in ODA, compared to USD34.6 billion in remittances. However, between 2012 and 2015, formal flows of remittances grew at a higher growth rate than both FDI and ODA. If we isolate the UK as a source of capital, between 2015 and 2016 remittance flows actually overtook the value of ODA and FDI combined. Cenfri’s most recent case study, Remittances in Uganda, tells us that remittances from the UK to Uganda amounted to USD275 million annually – more than double the amount of foreign aid from the UK.

Yet the cost to send money home remains high. The average cost of remittances to SSA is over 9% of the value of the transaction, compared to a global average of 7% (we dig deeper into this in our infographic on the cost of remitting money from the UK). We want to bring these costs down. Signatories to the UN’s Sustainable Development Goals have pledged to reduce the average transaction costs of remittances to less than 3% of the amount transferred by 2030, with no remittance corridor costing more than 5%.

Our new research, Moving Money and Mindsets, shows an exciting new trend towards transferring money online. In 2016, 90% of remittances from the UK were being paid in cash at an agent. Fast forward two years, and we found that roughly half of focus group members now use online services – a significant and rapid switch in behaviour. Online remittances providers – like WorldRemit, Wave and TransferWise – not only provide transparency, security and convenience but are also significantly cheaper. It costs almost £16 to send £120 from the UK to Ethiopia in cash using an agent. The same amount costs only £6 to send online. Switching online clearly makes economic sense, so why stick to cash?

Some remittance markets are simply “stickier” than others. In countries with underdeveloped payment systems – like Zimbabwe, Sierra Leone and the DRC – cash is still king. For example, in the DRC, less than 10% of people have a bank account, and mobile money is virtually non-existent. Other barriers to switching to online services include the registration process, perceived security issues and technological barriers for older people. The solutions range from relatively easy quick fixes like simplifying the registration process and marketing online services to customers to longer-term interventions designed to develop digital payment infrastructures in Africa. Our Risk, Remittances and Integrity (RRI) Programme is working at the individual, regional and global levels to remove these barriers to switching to online, and to bring the transfer costs down. Cash may still be king in some countries in Africa, but cash is costly and with digital alternatives on the rise, its reign may be nearing its end.

Read FSD Africa’s new research, “Moving Money and Mindsets” here.

FSDA and ADB presented the long-term finance scoreboard

Posted on by TIMOTHYRADIER

Today at the Africa Investment Forum, FSD Africa and the African Development Bank launched the Long-Term Finance Scoreboard, a first-of-its-kind tool designed to provide investors, policy-makers and donors with a centralised, comprehensive source of market-intelligence on the continent’s long-term finance markets.

At FSD Africa we believe that long-term finance – capital provided for over one year – is vital to driving Africa’s economic growth and development. Africa currently faces significant long-term finance gaps and we estimate that the funding gap for SMEs, infrastructure, housing and agri-business is over US $300bn per year.

The scoreboard, developed by the Africa Long-Term Finance Initiative, centralises continent-wide data on the strength of Africa’s capital markets for the first time. By bringing together a range of previously disparate sources of data, on one accessible and easy to use platform, it aims to close historic information gaps and provide investors, policy-makers and donors with the ights required to develop and deepen domestic long-term finance markets.

FSD Africa partners with African crowdfunding association to build crowdfunding ecosystem in SSA

Posted on by TIMOTHYRADIER

FSD Africa is proud to announce a 2 year programme of support to  the African Crowdfunding Association (ACfA) through a £230,000 grant. This programme is a market-building project that allows FSD Africa to give industry-wide support to the development of alternative lending and capital raising platforms that help connect diverse sources of capital, both debt and equity, to early stage and growth companies.

Mark Napier, Director of FSD Africa, said: “We are excited at the level of ambition that ACfA has shown in wanting to give a serious boost to the development of the crowdfunding industry in Africa.  We need innovative approaches to SME finance in Africa. Crowdfunding has the scope to become a much bigger part of the funding landscape in Africa, linking pools of domestic and international capital to job-creating investment opportunities. ”

Kevin Allen, Chairperson at ACfA, said: “The team at ACfA is excited to start work on what is set to be a game-changer for the crowdfunding industry in Africa, and a welcome boost for early-finance in general. Thanks to support from FSD Africa, ACfA will be strengthened as a private sector-led institution committed to innovation in African capital markets. We will engage African regulators in the design of a label which will be granted by ACfA to securities-based crowdfunding platforms that fulfil requirements on investor protection, risk awareness, issuer disclosure and other criteria. This label will build trust and transparency between investors, platforms and SMEs, while creating a critical feedback loop between the industry and regulators.”

This project continues FSD Africa’s work to encourage innovation in Africa’s financial markets, especially through the use of technology-led models of distribution.  FSD Africa has actively encouraged regulators across the region to support innovation through the use of regulatory sandboxes to establish systematic communications channels between innovative service providers and regulators in the lead up to formal regulation as markets evolve. FSD believes that a strong industry association can play a critical role in helping this emerging industry gather momentum, building investor confidence by putting in place industry-led standards and encouraging innovation and competition through knowledge-sharing activities.

For more information relating to this project, contact Fundi Ngundi via fundi@fsdafrica.org or Elizabeth Howard via elizabeth@africancrowd.org.

Giving credit to Africa’s financial markets and why we need to step up refo

Posted on by TIMOTHYRADIER

If you open the World Bank’s Global Financial Development Database and compare the data on private credit against total population, it is instructive to note the markedly different growth rates. In the developing economies of sub-Saharan Africa, credit extension has grown fairly impressively in the last 10 years albeit off a low base—from 10 percent to 18 percent. However, the total population of the region has grown by nearly a third, and now stands at 1 billion people. These disparate numbers suggest that credit is not growing fast enough to build the infrastructure and create the jobs needed to support this rapidly growing, young population.

THE IMPORTANCE OF CREDIT

For the majority who live on the continent, especially those living in cities contending with rising food and fuel prices, their ability to build or acquire assets is extremely constrained. For most people, access to credit is not about investing in buildings or businesses.  It’s about managing daily challenges.  In shor is a necessity, the means by which people can “stay in the game.”

For sure, easier access to credit—through, for example, credit and store cards as well as mobile-based loan product innovations like M-Shwari, Branch, and Tala—helps with consumption smoothing.  But in Africa today there is not much that credit markets can offer the economically active “near poor” to help them build capital in a meaningful sense.

In developed economies, housing finance has allowed countless millions over the decades to build household wealth.  Yet in Africa, mortgage markets are extremely thin. In Uganda, there are an estimated 5,000 mortgages for a population of 41 million while in Tanzania, there are only 3,500 mortgages in a country with a population of 55 million.  Market dysfunction like this means that people without land or buildings do not benefit from the asset-price inflation that creates unearned wealth for those who already have capital, and so we see societies becoming dangerously divided and unequal.

Credit extension in Africa lags behind other regions of tha dramatic extent.  While the ratio of credit to GDP is only 18 percent in sub-Saharan Africa, comparable figures in South Asia and Latin America are 37 percent and 47 percent, respectively.  Across sub-Saharan Africa, central bankers and policymakers now realise that much bigger and better-functioning credit markets should be a priority outcome for their financial market reform strategies.

In the financial inclusion world, credit raises concerns because of the risks of over-indebtedness. Indeed, this is a worry in contexts such as in Kenya, where there has been a proliferation of different apps for online credit, and evidence is emerging that online credit is being used for unproductive activities, like online gambling. But we should not let this get in the way of the reality that Africa needs a lot more credit if economic development is keep pace with population growth.

Despite the importance of credit markets, we have not yet, collectively, made them a serious enough object of inquiry—and the consequs of not doing so are profound.

CREDIT MARKET REFORM

Credit market reform poses a challenge because credit straddles the entire financial market—from microcredit at the one end, through to capital markets, including project and bond finance, at the other. Credit also involves banks as well as non-bank financial institutions, including now fintechs and even telcos—so whose job is it to regulate credit markets? Central banks only? Or market conduct authorities with mandates that go beyond consumer credit into areas such as investor protection? Or dedicated credit regulators, such as South Africa’s National Credit Regulator? It is not always clear who should be responsible and so reform processes often lack leadership.

We also see credit market reform being promulgated in a fragmentary way.  For example, strengthening credit market infrastructure tends to be the preserve of those interested in the development of small and medium enterprise finance, while consumer protection tend looked at through a responsible finance lens—when in fact the different elements interrelate.  Credit market reform strategies should be much more joined up than they are.

There is currently no single African “observatory” monitoring the evolution of credit markets in Africa and no single Africa-based resource dedicated to combating credit market dysfunction. The past decade has seen numerous policy mis-steps in relation to credit markets, well-intended initiatives that have not been grounded in good evidence.  Better information exchange might have prevented these mistakes.  In Africa we lack effective mechanisms for knowledge sharing and peer learning around credit, a marked contrast to the plentiful knowledge sharing around related areas such as bank supervision and digital financial services.

There is also a vital need for African credit markets to take advantage of the increasing availability of concessional capital as donor organisations shift their funding towards returnable capital and awaant finance. Blended finance capital structures, with their ability to de-risk and pump prime lending, should encourage banks and other lenders to explore new markets in a sustainable way, in which risks are appropriately shared.

In addition, there is a fundamental need for much better data on credit markets.  Without much more granular data by sector or by gender, it is going to be difficult for policymakers to implement effective strategies aimed at driving investment into essential industry sectors such as agriculture, housing, and infrastructure.

The Bank of Zambia, with support from FSD Africa, has been piloting an innovative scheme to improve data on credit markets. Under the scheme, all regulated financial institutions submit supplemental quarterly returns on their loan books to the central bank in return for which they get to see, in aggregate and by sector, trend data on the evolution of credit markets in Zambia.  In this way, they can benchmark their own performance against the performance of tentire industry. We think this will spur competition and innovation by private credit providers. The Zambian authorities, meanwhile, now have the information with which they can make informed choices about where to take credit markets in Zambia, and how to manage risks but also, crucially, how to foster innovation and where to target support.

Note: The Africa Growth Initiative at The Brookings Institute first posted this blog on 1 August 2018. This is a reproduction from the original with AGI’s permission. 

Note: This blog reflects the views of the author only and does not reflect the views of the Africa Growth Initiative.<

Lessons from the field: twelve months of refugee finance in East Africa

Posted on by Kihingu Inc
Setting the scene…

Blink and you might have missed it. But as dusk gave way to darkness on a sunny afternoon in Kigali, UNHCR Livelihoods, Access to Finance Rwanda (AFR) and FSD Africa received a brief but deeply significant email from Equity Bank Rwanda…

“This is to confirm that Equity Bank Rwanda will honor either proof of registration or refugee IDs as valid identification documents [to open a bank account]. We will issue a memo to all our branches to this effect before the end of the week”

18:18, Thursday 22 February, 2018

Kigali, Rwanda

Equity Bank Rwanda

This email marked another milestone for FSD Africa (UK aid’s Nairobi-based platform for inclusive financial sector work in sub-Saharan Africa) almost exactly 12 months of work in a new and important area: the financial inclusion of refugees and other forcibly displaced populations (FDPs).

The recent, rapid growth of FDPs in sub-Saharan Africa has created an urgent need to respond quickly to a complex and dynamic challenge. Through this blog, we wanted to capture what we’ve learned so far so…

Demand-signals: a new way to deliver humanitarian assistance…

Perhaps our most important realisation/conclusion is that refugee settlements are not only hubs for humanitarian assistance. They’re markets, too…

There are buyers and sellers supported by rules and institutions (both formal and informal), especially in larger, older refugee settlements such as Gihembe in Rwanda. And like most markets – these places have failures and pinch-points which inhibit the ability of FDPs to access and use, for example, financial services to help manage their lives.

And while the need for food, shelter and other safety net-type activities will remain, there is now good evidence (from our work and beyond e.g. this study by the IFC, which was featured in The Financial Times) that market-shaping and building has the potential to crowd-in the private sector to profitably deliver some of the goods and services that refugees need and can pay for themselves.

As a quick data point or two from Rwanda,  primary FSD Africa and BFA research showed that 90% of refugee households earn $29+/month (the same as the median value of Rwandan bank account holders), while 43% have a secondary school education or more. Globally, 42% of all FDPs have been displaced for 5 years or more.

Identify and experience the market opportunity…

We’ve found that a lack of information is a major challenge. First, refugees are typically viewed by financial service providers as high risk (and low return) clients. Second, they are too often treated as a homogeneous, unsegmented group, dependent on humanitarian hand-outs.

This stereotyping is a tough nut to crack. It involves bridging knowledge gaps, but also long-held attitudes and behaviors. We quickly realised that market intelligence alone – on the financial lives of FDPs and business case for providing FDPs with financial access – just wasn’t enough. Financial services providers needed to see and feel the refugee market for themselves.

In November 2017, FSD Africa, AFR and UNHCR took bank decision-makers out of their offices in Kigali and into a refugee settlement for two nights to develop and test new/existing products, an approach which was replicated by colleagues at FSD Uganda in June 2018.

The transformation was remarkable, and something we started to document, in order to share with other banking decision makers in Kigali, East Africa and beyond.

“It is possible to serve the base of the pyramid, especially refugees, profitably; …I think I may have not necessarily seen the opportunity before I got here”

Patrice Kiiru, Equity Bank Kenya

The power of partnerships…

FSD Africa knew little about this space when we started out. We had theories to test, but little practical experience of accessing camps, refugee politics nor humanitarian assistance more broadly.

The only way we have been able to learn quickly is through the quality of our partners. For UNHCR Rwanda to speak with authority about the power of markets to deliver welfare enhancing outcomes to FDPs was refreshing and impressive in a space historically dominated by charitable giving and direct delivery.

“The way I see it, financial inclusion is really the key to unlocking the economic inclusion”

Jakob Oster, Livelihoods Officer, UNHCR Rwanda

We have built useful partnerships with a wide range of institutions, from commercial banks to charities, and from UN agencies to fintechs. Amongst them, UNHCR is our key humanitarian partner and, through our Innovation Competition FSD Africa and AFR are providing x5 £10,000 accelerator grants to CARE Rwanda, Equity Bank Rwanda, Tigo/Airtel Rwanda, Umutanguha and MFS Africa to develop new solutions to particular challenges faced by refugees. This commitment may be followed to larger investments (up to £150,000) to allow ideas to reach real scale. Beyond this competition, we’re continually looking for opportunities to engage interested, impactful private sector partners.

We have also built partnerships to maximise our local understanding and influence. AFR – a UK Aid, US Aid, Swedish Sida and MasterCard Foundation-funded ‘FSD’ programme for Rwanda – has been an invaluable support. Located in Kigali, with deep connections to the local banking system and regulators, the whole process has been made more effective. Within three months of beginning our work, AFR had successfully lobbied the Central Bank and MIDIMAR to add refugees to the Rwandan Financial Inclusion Strategy.

FSD Africa and AFR have also worked closely with DFID Rwanda.

“Market participation triggers wins for refugees, host communities and hosting governments. This new initiative has been a great demonstration of how to incentivise a market-driven response to a humanitarian challenge.”

Viola Dub, Private Sector Development Advisor, DFID Rwanda

This work falls within the context of a broader Government of Rwanda and DFID Rwanda approach to FDPs. In 2016, Rwanda – as an FDP host nation – signed up to the UN’s Comprehensive Refugee Response Framework, and with DFID Rwanda support is designing a plan for refugee integration.

The host community challenge/opportunity…

A crucial issue that we have struggled to grip is how to integrate host communities – ‘native’ settlements, often poor, rural and located nearby/adjacent to refugee settlements – into our programming. There are a number of stories about host community residents feeling that refugees benefit disproportionately from international aid and government agency support.

This is a difficult balance to strike. It is encouraging to see evidence that local communities benefit from hosting refugee communities, due to higher agricultural opportunities and incomes, but trickle down forces alone seem inadequate. Ensuring we work for host communities as well as FDPs means investing as much in understanding and responding to their specific needs as we do to the FDP. After all, their inclusion in our approach can only bolster the business case adding hundreds of thousands of potential clients.

“I was very surprised, because before arriving in the camps I was not expecting to find some real businesses in the camps; I was surprised to see someone with a business like other Rwandese outside of the camps.”

Theophile Nsabimana, Vision Fund Rwanda

Twelve month conclusions…

One year on, our successes (and failures) may lack the ‘flash-bang’ of a large DFI investment or a VIP launch, but we really can see the emergence of new markets.

FSD Africa and AFR are now seeding product/solution prototypes by more than five financial service providers in Rwanda. Refugees – young and old, male and female, short-term and long-term displaced – have expressed their demand for financial services to help manage their lives. The National Bank of Rwanda has incorporated refugee finance into its financial inclusion strategy, and banks now better understand that refugee IDs are eligible banking IDs (as per the introduction to this blog).

More broadly, we believe that we’re at the tipping point of genuine behaviour change within the private sector towards this group. FSD Africa and AFR received 23 applications to our refugee finance competition in December 2017, while only last week FSD Uganda and FSD Africa received more than 20 applications by MFIs, banks and fintechs just to visit camps to see the opportunity for themselves. FSD Africa is also about to start work replicating this approach in DRC, through our sister organisation ELAN RDC.

The proof is in the pudding. And we’ll be watching carefully to see: whether refugees can become long-term, profitable clients for the financial sector, but also whether finance can be genuinely useful to forcibly displaced people. But, for now at least, the market is on the move…