The huge number of low-income households across Africa is still of significant concern especially because they have been completely left behind by the intermittent waves of economic progress in many parts of the continent over the past few years.
Although the root cause of their predicament is multifaceted, new thinking and innovation in financial services, which includes the provision of appropriate financing instruments targeted at this group of the population, will become critical over the next decades.
The plight of people unable to escape the poverty trap becomes really frightening when one examines the recent African Development Bank report (2016) that says that, with the exception of South Africa, Namibia and Botswana, less than 40% of the adult population in Africa has access to formal financial institutions.
It is clear that the main impediments to financial inclusion in Africa are the high cost of opening and maintaining formal bank accounts, the long distances to bank branches and the daunting list of personal information that banks require to support applications to open an account.
Sometimes, the erratic nature of Central Bank financial policies and regulations also discourages people from engaging with formal financial institutions. These constraints have stimulated a high level of demand for alternatives to the traditional banking and financing system.
A Little Help from Mobile Phones
According to the World Bank Report on Africa (2016), the use of mobile phones as an alternative to traditional banking has achieved the broadest success in sub-Saharan Africa, where 16% of new adult entrants have used a mobile phone in the last year to pay bills, receive and send money. In Kenya, where M-Pesa was launched in 2007, 68% of the adult population is using mobiles for their financial transactions.
In light of all the evidence and experiences across Africa, there is an urgent need to develop a wider range of workable alternative financial services infrastructures. These can provide multi-faced access to financial instruments for the entire African population, especially those individuals that have been previously excluded from the formal economy.
Existing financial practices are obviously in great need of reform. A far-reaching review is required on matters such as the most appropriate and enabling legal and regulatory environment for business. This has to take into account local socio-cultural traditions, the expansion of title deeds and property rights as tenable collaterals, group asset guarantees for loan requests, widespread financial education and credit schemes especially for women and girls, government guarantees on loan for vulnerable people, effective social security system for the extreme poor and flexible financial guarantees for local purchase orders.
Africa needs an efficient framework that simplifies the entry requirements to the formal financial sector and allows the integration of flexible collateral options including the use and exchange of land, paper assets, automobiles, jewellery, etc. for genuine loan requests.
A combination of reforms in the traditional banking sector and innovations in financial technology will be critical to unleashing the enormous potential for economic growth in Africa, and in so doing, help ever-growing numbers to escape the poverty trap.
The future must be about achieving an effective mix of formal banking methods alongside easy-to-use financial technologies, especially applications that focuses on the use of mobile phones – for instance, M-Pesa in Kenya or Paga in Nigeria), third party financial and insurance agencies.
Africa is far behind in terms of provision of financial services for its bulging population, and it needs to urgently deliver a robust financial infrastructure that enables prosperity for the people.