Country: Sub-Saharan Africa

FSD Africa completes its investment in African local currency bond fund (ALCBF)

Posted on by Kihingu Inc

FSD Africa announces the completion of its £15.3 million ($20.3 million) investment in the African Local Currency Bond Fund (“ALCBF”).

Since FSD Africa announced its intention to invest in the fund in May this year, ALCBF has continued making good progress.

It has invested a total of approximately $10 million in four more bonds – including in Nigeria and Lesotho, extending its geographic reach and its financial support for developmentally important sectors, such as agriculture and housing.  ALCBF entered Côte d’Ivoire with a $ 3.1 million bond investment in Alios, a regional leasing company. The bond proceeds will benefit the company’s operations in Burkina Faso and Mali, demonstrating that there are opportunities for bond financing even in fragile and conflict affected markets.

ALCBF has also received funding commitments from lenders totaling $40 million – including the International Finance Corporation ($20 million), Calvert Foundation ($10 million) and the Dutch development bank, FMO ($1s additional funding has enabled the fund to establish a permanent presence in West Africa, where it has now opened an office in Lagos, Nigeria.

As such, with invested capital of $40 million and a total fund size of over $100 million, ALCBF is strongly positioned to fulfill its objective of developing capital markets across Africa, by helping companies issue bonds in local currencies and by building technical capacity in the markets where those bonds are being issued.

As an equity investor in the fund, FSD Africa will join the Board of ALCBF.  Completion is subject to satisfaction of certain conditions precedent, expected shortly.

Cheaper international money transfer at our fingertips (or eyeballs)

Posted on by Kihingu Inc

If you’ve ever been to Africa (or even the United States), chances are that you’ve had your finger prints taken on a scanner on the desk at immigration. If you’ve tried to skip the queue at Heathrow, you’ve probably tried to use the facial recognition scanners, which always seem to have a shorter line. None of us try to travel across borders without our passports but we probably don’t give the biometric databases they connect to a second thought.

But one of the biggest challenges in sending and receiving money in developing countries stems from the need to be able to identify yourself at both ends of the transaction. The world over, millions of people do not possess any form of formal identification. But biometric technology could be an important part of the solution.

Banks, money transfer operators and other, all need to comply with so called ‘know-your-customer’ regulations. But the World Bankestimates that more than half the people in sub-Saharan Africa have no official identification record. That’s more than half a billion people. This issue is key to the broader agenda of financial exclusion since it prevents an estimated 375 million adults around the world from obtaining a bank account.

And it is not just banks but prepaid SIM cards in many countries also require proof of identity to register. So people without ID fall at the first hurdle of being eligible for mobile money wallets. Using biometric technology to identify people and assign them an identity for life, is key to improving financial inclusion; improving access to bank accounts and mobile wallets, and the uptake and use of digital financial services. It is literally the first step on the journey to formal financial inclusion.

Biometric-based ID cards can be used for multiple purposes apart from identifying people who are sending and receiving money across international borders. They can also enable the distribution of government services and social security benefits, and act as an electronic passport, voter identity document, and offer identification for healthcare and welfare service distribution. As a result, various governments, including Nigeria, Ghana, Kenya, Egypt, DRC and Malawi in Africa, are recognising the value of electronic IDs that utilise biometric technology. Investment has begun and the benefits being seen.

When it comes to moving money, the widespread lack of formalised ID in sub-Saharan Africa, combined with the largely cash-based economies makes the traceability of funds difficult and makes financial service providers nervous. Each party involved in processing a money transfer from the UK into Africa is accountable for ensuring that funds not are being used for money laundering or terrorist financing. And it is this perceived risk that is at the root of many UK banks’ decision to ‘de-risk’ money transfer operators. In fragile and conflict affected states, meeting know-your-customer regulations can be particularly difficult, especially where there are international sanctions in place and the risk is higher due to known or suspected terrorist activity.

A national electronic ID scheme, with biometrics used to authenticate and verify money transfer beneficiaries, could help to sustain formal remittance services to these markets. The difficulty of cheating or defrauding such a system should help reassure money transfer operators and in turn, international banks, that the recipient is who they claim to be. This is of crucial importance in economies like Somalia, Eritrea, Liberia, Libya and the Democratic Republic of Congo, where international remittances make up between a fifth and half of the entire national GDP.

In a few countries, biometric electronic IDs are actually being directly linked to digital payment instruments (such as a bank account, credit or debit card, or mobile wallet). The Aadhaarscheme in India is undoubtedly the largest and most advanced. By April 2016 the Indian government had captured the fingerprints and iris scans of 1 billion people (93% of the population) which have been stored on an open platform so that they can be seeded to bank accounts and digital payment instruments. In Africa, the National Identity Management Commission in Nigeria has also started its electronic ID scheme, collecting ten fingerprints, a facial image and a digital signature which are stored in a central database. The new electronic ID cards offer MasterCard payment functionality to help drive financial inclusion.

It will, however, be some time before a biometric electronic ID system can become reality for everyone across Africa. Its roll out requires significant commitment and coordination, both human and financial, at a national level, and then there is still the thorny question as to who owns the data and how it will be used.

Biometric electronic identification technology will certainly have a key role to play in improving access to, and the security of, remittances into Africa. Biometric ID will also have a key role to play in moving remittances from cash to digital, which ultimately, is the only way to significantly reduce the cost of sending money.

 A new report on remittances from the UK to Africa was published in June 2017 by Financial Sector Deepening Africa. For more details see:https://fsdafrica.org/uktoafricaremittances/

The art of market facilitation: learning from the FSD network

Posted on by Kihingu Inc

When taking a market systems approach, development organisations such as those in the FSD network act as facilitators of market development—external change agents whose role is to develop actors in the market system to increase financial inclusion.

While facilitators work in a variety of ways, their primary role is to address constraints, in order to allow and facilitate the market system to function more effectively and inclusively. Facilitation is therefore a public role (not a commercial one); it is a temporary role (it is time-bound); and it requires understanding of the market system and the capacity to intervene with appropriate resources (financial, human and political).

The purpose of this paper is to provide guidelines on some key, practical questions facing facilitators, based on synthesised learnings from the FSD Network as captured in seven case studies written by the Springfield Centre. This document explores the art of market facilitation in action through the lens of the FSD network  to bu understanding around the M4P approach. The paper examines the wider lessons and challenges that emerge for organisations addressing the dilemmas of developing financial markets for the poor, and how they differ significantly from other conventional approaches.

We hope that you find the learnings in this synthesis paper useful and that they shed some light on your path to effective market facilitation.,

Reaching the mass insurance market: where to start when going digital

Posted on by Kihingu Inc

For insurers to serve a new type of client at scale they must change their modus operandi. The high costs associated with conventional insurance cannot be absorbed by low premium products. This means that existing structures need to be adapted to serve the low to middle-income mass market.

One key to success lies in digitization, which can be used to automate existing (often paper-based) processes. Going digital has obvious benefits: minimising expenses, reducing the scope of human error, improving efficiency and achieving scale. But, how can insurers begin to make this shift?

Working with our partner Britam in Kenya, we have seen one route to becoming a digitally-driven insurer: start with strategic process mapping.

So what does a strategic approach to process mapping look like? Process mapping involves creating a flow chart to capture every step in a process. This is then analysed to see how the process could be redesigned. Process mapping can both reveal opportunities for automation and help manage the internal change required to put it into action.

The strategic element of process mapping lies in identifying how new processes can achieve greater efficiency and also help improve the client’s experience. The ILO’s Impact Insurance Facility advocates human-centred design, which focuses on integrating the experience of the target group into product design and delivery. To improve the client’s experience, we have found that careful analysis is needed both of client interactions and back-end processes.

To illustrate, let’s take a simple example. At Britam, one of the team’s many tasks was to redesign the member information gathering process at enrolment to cut data entry and courier costs. The team started by looking at the systems and resources in place to capture data, and the experience of internal and external stakeholders interacting with the system. Careful analysis from both “outside-in” and “inside-out” uncovered pitfalls and opportunities for automation of members’ enrolment data gathering, such as customers processing their own data through an automated platform.

However, there are limits to automation, including limited client access to internet and smart phones. This problem extends to partner organisations, who are in many for automated processes. For example, the mission hospitals who work with Britam prefer paper claims submission.

Furthermore, there may be initial teething problems with automation, especially when it is only partial and still relies on a degree of human intervention. For example and as illustrated by the graph, after making significant reductions in claims processing times through process automation, Britam found that the processing time started to increase again due to staff constraints. This highlighted the need to support process changes with training or new staffing structures.

Our change management projects have repeatedly shown that digitization success does not lie solely in introducing technology, but in how people are placed to handle this change. Understanding what it takes to encourage and sustain behavioural change, both internally and externally, is key to change management and to reaping the rewards of going digital.

This blog is part of a joint series between the ILO’s Impact Insurance Facility and FSD Africa. The series explores practical solutions to manage change within insurance providers.

10th consultative forum on “scaling up agricultural index insurance in Africa: building disaster resilience of smallholder farmer

Posted on by TIMOTHYRADIER

On 24 and 25 May 2017, insurance supervisory authorities, insurance practitioners, policymakers and development partners gathered in Kampala, Uganda, for the 10th Consultative Forum to discuss how to scale up agricultural index insurance for smallholder farmers. The event was co-organised by African Insurance Organisation, the International Association of Insurance Supervisors (IAIS), the Access to Insurance Initiative (A2ii) and the Microinsurance Network (MIN); and live streaming of the event was provided by FSD Africa in partnership with Cenfri under their risk, remittance and integrity (RRI) programme.

Index insurance is recognised by policymakers as an important tool to build resilience among smallholder farmers, who dominate the agricultural landscape in Africa, as it overcomes some of the traditional microinsurance insurance challenges to reaching lower-income, rural individuals.

The forum focused on the limitations of index insurance as a stand-alone solution to agricultural related risks and the move to using it as part of a broader portfolio of risk management interventions to mitigate agricultural risks and improve food security.

The potential of index-based insurance is derived from its innovative business model, which relies on parameters set by existing weather or yield data to trigger claim pay-outs, rather than indemnity payments. If effectively implemented, this can reduce moral hazard, limit adverse selection and reduce the cost of distribution, as no risk assessment is required. However, to date, index insurance has not lived up to this promise and is struggling to achieve scale. Where some scale has been achieved, government or donors have largely been involved – by subsidising premiums, providing grants to cover operational costs or forming risk-sharing agreements to cap losses.

Speakers and participants at the Consultative Forum noted several constraints to the development and implementation of index insurance, which have hindered its progress. For instance, Mr Protazio Sande from the Insurance Regulatory Authority of Uganda and Isaac Magina from Swiss Re noted the need for more available, reliable data that can be used to accurately predict risk.

The lack of appropriate data increases the likelihood that there will be a mismatch between the loss experienced by smallholder farmers from the event and the claim pay-out to the smallholder farmer triggered by the index (commonly known as “basis risk”).

If basis risk is too large, there is a lower likelihood that the smallholder farmers will receive a pay-out. Miguel Solana from the ILO’s Impact Insurance Facility has likened this to a lottery where farmers are betting on a risk they are worried they may experience. If basis risk is too large, then this creates more uncertainty and risk for farmers about whether they will be covered if an event occurs. This undermines their ability to manage the risk, in turn limiting the value of the insurance.

Further, these technical details are complicated and make an already difficult task of explaining insurance to farmers even more difficult. While these details are important for providers and regulators to understand, it is critical that we “don’t lose sight of the customer in technical details,” according to Joseph Owuor from the Insurance Regulatory Authority of Kenya, who also spoke at the event.

Index insurance also remains relatively expensive to provide, reaching as high as 12% to 20% of the insured value in some cases, averaging out at around 5% for most schemes. One of the main drivers of these costs is the upfront investment needed to:

  • Coordinate different stakeholders
  • Develop channels to effectively reach rural and low-income farmers
  • Build sufficient awareness and understanding among the target market to ensure take-up

At the same time, the lack of known market demand and the need to prove the value of the concept to farmers create uncertainty for claim pay-outs, leading to high claim ratios. These are critical obstacles to address.

Most schemes thus require donor or government support (in the form of upfront investment, subsidies or risk-sharing agreements) to get off the ground, but long-term government support and buy-in is often uncertain.

This requires many stakeholders from an array of fields to collaborate, with Peter Wrede from the World Bank likening it to an “orchestra” to make it work.

It also leaves some unanswered questions. For instance:

  • Does agricultural index insurance deliver value to clients? Under which circumstances does it do so?
  • Can certain segments of clients be more sustainably served through index insurance?

Whether these challenges are addressed, it is important to note that index insurance is only one of a range of tools that can support a broader agricultural risk management strategy. For instance, index insurance may only be viable for certain farming segments; and other segments will need other tools to help build their resilience. Further, such a strategy could also target other actors in the space with insurance, such as value chain providers like MFIs or agro-processors who extend credit to farmers.

Going forward, FSD Africa – in partnership with Cenfri – will conduct research to establish a knowledge base on how index insurance fits within a broader risk management strategy and convene the FSD network’s  Community of Practice to help market actors address challenges.

If you’re interested in learning more about the work under the FSD Africa and Cenfri partnership, please contact:

Mia Thom

Technical Director

Cenfri

miathom@cenfri.org

Twitter: @thommia

Website: cenfri.org

Juliet Munro

Director – Inclusive Finance

FSD Africa

juliet@fsdafrica.org

Twitter: @juliet_munro

Website: fsdafrica.org

FSD Africa invests £15.3 million in the African local currency bond fun

Posted on by TIMOTHYRADIER

PRESS RELEASE – FOR IMMEDIATE PUBLICATION

Nairobi, 9th May 2017 – Financial Sector Deepening Africa (FSD Africa) and KfW Development Bank announce that they have agreed terms under which FSD Africa will invest £15.3 million in the African Local Currency Bond Fund (ALCBF). When fully subscribed, this fresh injection of capital will take ALCBF’s total equity to £53m, substantially increasing the fund’s investment firepower and thus enabling it to step up its engagement with developmentally important industry sectors such as green energy and housing and take on investments in fragile and conflict affected states.

ALCBF was established by KfW on behalf of the German Ministry for Economic Cooperation and Development (BMZ) in 2012 to support the development of African bond markets and improve private sector access to long-term and local currency financing.

Alongside this investment in the equity of the fund, FSD Africa has also agreed to contribute £500,000 towards ALCBF’s Technical Assistance Facility. FSD Africa’s investment is part of a comprehensive and continuing strategy by ALCBF to increase significantly its capital base through equity and debt, and diversify its funding sources.

Mark Napier, Director of FSD Africa, said: “We are proud to become the African Local Currency Bond Fund’s second shareholder. The lack of long term, local currency funding is one of the most serious problems in Africa’s financial markets.  It means that good projects don’t get funded and much-needed jobs don’t get created.  We were attracted by the African Local Currency Bond Fund because of its pan-African reach, its ability to generate solid financial returns from good quality investments, and because of its energetic commitment to supporting the development of capital markets by providing technical assistance alongside investment capital.”

Capital markets are an important medium for channelling savings into investment in local economies, but in most African countries they are not yet playing a significant role. Where domestic capital markets do not work and long-term local currency finance is not available, companies are forced to rely on hard currency loans. Foreign currency loans expose borrowers and sometimes an entire financial system to exchange rate risk: when local currencies weaken, foreign currency loans can quickly become very expensive to repay and when the borrower is a financial institution, that can create risks for the financial system as a whole. Low income households and small businesses are often among those most affected by systemic financial crises.

Bond issuance not only means that companies gain access to investment capital. It also means that local investors – typically, pension funds and insurance companies – get the opportunity to invest for the long term in their own currency, thus ensuring that their long-term liabilities, such as pension pay-outs, can be matched.

ALCBF has been investing in Africa for four years, during which it has played a key role in bringing 19 issuances to market for 13 companies in 7 countries, investing a total of £33m. The current outstanding portfolio is £24m.  All investments to date have been in the financial sector, including micro-lenders, Micro, Small and Medium Enterprises (MSME) lenders, leasing companies and lenders into the health, education and housing finance sectors.

ALCBF is managed by Lion’s Head Global Partners (LHGP) Asset Management LLP (LHGP AM), an investment and advisory firm regulated by the UK Financial Conduct Authority with offices in London and Nairobi.  LHGP AM was appointed as Fund Manager to ALCBF in May 2015.  Bim Hundal, Chairman of LHGP AM, says: “We are pleased and excited to work with KfW and FSD Africa on this ground-breaking initiative. Providing local currency financing to African companies and institutions puts ALCBF at the forefront of capital markets innovation.”

FSD Africa’s investment is expected to increase the number and size of bond issuances in SSA and reduce the cost of capital for borrowers. Because the fund never buys more than 50% of a bond, the investment should mobilise (or crowd in) significant amounts of domestic capital from local institutions: in 2016, for every £1 invested by the fund in local currency bonds, £10.6 was invested by third parties.

FSD Africa’s investment will also help ALCBF to continue its work of strengthening technical capacity in the market, supporting local issuers with advice and building the skill set, standards and practices of market intermediaries such as placement agents and investment banks.

This marks FSD Africa’s largest deployment of investment capital to date and is consistent with its objective of driving financial market transformation through capital investment as well as through grant funding.

Johannes Feist, Head of Division – Financial Systems Development, Southern Africa and Regional Funds for KfW, said: “We are delighted to welcome FSD Africa’s participation in the African Local Currency Bond Fund.  FSD Africa’s equity investment, alongside KfW’s, can be leveraged with senior debt which means the fund can deliver capital market development impact more quickly and in more markets across Africa.”

Ends.

Note to editors

About KfW

KfW Development Bank has been helping the German Federal Government to achieve its goals in development policy and international development cooperation for more than 50 years. In this regard, KfW Development Bank is both an experienced bank and a development institution with financing expertise, an expert knowledge of development policy and many years of national and international experience. On behalf of the German Federal Government, and primarily the Federal Ministry for Economic Cooperation and Development (BMZ), KfW Development Bank finance and support programmes and projects that mainly involve public sector players in developing countries and emerging economies – from their conception and execution to monitoring their success.

Contact: Johannes Feist, KfW, +49-69-7431-3519 or Johannes.Feist@kfw.de.

For more information about KfW Development Bank’s activities and current updates follow:

Twitter: @KfW

Website: www.kfw-entwicklungsbank.de.

About FSD Africa

FSD Africa is a non-profit company which aims to increase prosperity, create jobs and reduce poverty by bringing about a transformation in financial markets in SSA and in the economies, they serve. It provides know-how and capital to champions of change whose ideas, influence and actions will make finance more useful to African businesses and households. It is funded by the UK aid from the UK Government.

Contact: Mark Napier, FSD Africa, +245 701 773 028 or mark@fsdafrica.org.

For more information about FSD Africa’s activities and current updates follow our social media platforms:

Twitter: @FSDAfrica

Linkedin: Financial Sector Deepening Africa (FSD Africa)

Website: www.fsdafrica.org

FSD Africa, cenfri and the FSD network commit to collaborating on insurance market development

Posted on by TIMOTHYRADIER

In sub-Saharan Africa (SSA), insurance markets are yet to fully develop. Despite a population of over 1 billion people, there are only an estimated 60 million risks covered and total premiums for life and non-life insurance accounted for only 1.4% of the global insurance market in 2015. The contribution of the insurance sector to the economy in sub-Saharan Africa, in terms of premiums to GDP, is amongst the lowest in the world at 2.9%. If South Africa is excluded, it drops below 1%.

The lack of market development within the region undermines the contribution of insurance to a range of poverty alleviation and economic growth outcomes. As a risk transfer tool, insurance not only assists economic actors to protect the economic and social assets they accumulate, but also unlock new opportunities for economic activity. As a mechanism for intermediation, it directly supports economic growth, and indirectly aids the development of capital markets.

However, developing a well-functioning insurance market is not a quick and easy process. Several financial sector development programmes (FSDs) across SSA have been making substantive gains over the last decade. Nevertheless, gaps still exist in recognising the potential of insurance market development to contribute fully to poverty alleviation and economic growth.

FSD Africa, in partnership with Cenfri, is working with the network of FSDs across SSA to derive key learnings, as well as identify and suppo new opportunities and approaches to insurance market development. This new collaboration kick-offed at the first FSD Insurance Market Development Workshop which was held in Nairobi, Kenya on March 27th and 28th. In attendance was FSD Kenya, FSD Mozambique, FSD Tanzania, FSD Uganda, FSD Zambia and Access to Finance Rwanda.

There were two key objectives for the workshop. The first was to share strategies, approaches, challenges and successes in insurance market development. The second was to identify opportunities for cross-country learnings and future collaboration.

The workshop was structured around the insurance market development curve and the four stages of insurance market development it introduces. The discussions revealed that while insurance market development is a key focus for many FSDs, many of their approaches differ. The stages provide the FSDs with a tool to inform their approach and there was interest in how their interventions could be shaped per the stages of market development.

The workshop emphasised the need to learn from common successes and challenges. Challenges identified by the FSDs included:

  • Limited awareness and use of insurance;
  • Limited incentives for business to serve low-income people;
  • Questionable sustainability of certain agriculture and health products;
  • Lengthy regulatory change processes; and
  • Limited skills, capacity and data available on the benefit and impact of insurance for poverty alleviation and growth.

Successes highlighted focused on:

  • Creation of local working groups t promote and support inclusive insurance and microinsurance;
  • Innovations in product design such as index insurance and mobile microinsurance; and
  • Capacity Building for regulators and providers.

The FSDs also identified the importance of on-going and sustained engagement with regulators and the private sector. They noted that this engagement has led to increased provider and stakeholder interest; and support for inclusive insurance and microinsurance, as well as positive regulatory relationships and influence.

Going forward, FSD Africa, Cenfri and the FSD network have agreed to collaborate on insurance market development to address these challenges and amplify successes through a Community of Practice to be established for this purpose.

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.,

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).