Two billion people worldwide still lack access to formal financial services, and banking in Sub-Saharan Africa remains challenging. Banks in the area face hurdles in achieving viable economies of scale (i.e. their operation costs are high) in sparsely and low-income populated rural villages. This is the main reason behind poor bank branch penetration in the region. The fact that both a receiver and a sender must have bank accounts is a particular issue in countries where large fractions of the population have no official identity documentation or are unable to provide formal living addresses. As a result, household savings rates in Sub-Saharan Africa tend to be low compared to the rest of the world. Even for those who are able to meet the cumbersome requirements of banks, it may still take hours of walking to reach the nearest bank and make a small deposit.
Just the First Step
However, technological development and growth of mobile financial services (for example, mobile payment systems and electronic wallets) may just be a way of closing the gaps in financial development. Financial inclusion is the deployment of novel methods to offer simple and affordable financial services to the poor. The developing world is unique in its use of “mobile money” – the use of mobile phones to access key financial services. While just 1% of adults globally rely solely on mobile money accounts, in Sub-Saharan Africa, 45% of the adult population only has a mobile money account. Mobile money transfers (“m-transfers”) allow unbanked people – those excluded from the formal banking system – to easily deposit and withdraw cash from their electronic accounts. A wireless mobile network and a basic mobile phone, such as Nokia 1100, is all that is needed.
Approved mobile money agents (often market stall owners or local fruit vendors) provide convenient cash-in and cash-out points in locations underserved by traditional banks. As a result, parents can save more regularly and pay their children’s school fees without losing valuable hours of work; young adults from urban cities can send small payments to family members back home. With a continuous flow of transfers, household consumption levels would rise, and the local economies would benefit.
M-Pesa Leading the Way
One should consider the successful deployment of M-Pesa (where “m” stands for mobile, and “pesa” for money in Swahili) system developed by Vodafone for the Safaricom network in Kenya and Vodacom network in Tanzania. Banks in Kenya are tightly regulated, but non-banks, including Safaricom, so far have been able to perform payment functions without much regulatory resistance. Lack of government intervention and permissive regulatory environment contributed to m-money’s growth in the region, while large unmet demand in person-to-person transfers market gave that extra push. Now operational in eleven countries, M-Pesa surpassed over 25 million users in 2016 and has already lifted over 190,000 households out of poverty within a period of six years from 2010 to 2016. Banks have benefited too. M-Pesa transfers start in one bank account and end in another, allowing these banks to reach previously untapped customers.
Admittedly, the financial sphere in Africa still faces challenges of concertation and limited competition. However, most countries have developed and more stable financial systems than in the 1970s. Mobile money provides the convenience of safekeeping and transferring money, and rewards saving. This is the key to ensuring financial freedom.
Nevertheless, when celebrating the few successful cases of the mobile money deployments, it is important to ask whether the case would hold in other countries. The relative use of mobile money depends on a variety of factors: the regulatory environment of the country, the relative demand for such services, and the level of technological infrastructure already in place. Giving everyone a mobile phone would be a cavalier move, but it will take more than that. Scaling up the rest of continent and keeping the interest of diverse stakeholders (e.g. network providers, merchants, customers, and regulators) aligned is the only way to accelerate financial inclusion. This is an ambitious, but worthy quest that will enable prosperity for the world’s poorest.
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