Stephen Mwaura Nduati, Central Bank of Kenya / FinTech consultant
Digital finance has been described as a key socio-economic catalyst of Africa’s developmental agenda that results in inclusive economic growth. It is a proven observation that technology and specifically digital finance have the potential of alleviating extreme poverty. A large body of evidence shows that access to financial services, and indeed overall financial development, is crucial to economic growth and poverty reduction. Yet in Sub-Saharan Africa, only one in five households have access to financial services.
In the past, mainstream financial institutions in developing countries operated on the premise that low-income populations do not save and are bad borrowers, and therefore that institutions which provide services to the poor are essentially unsustainable. However, the last ten to fifteen years has seen a paradigm shift as a lot of innovations across the continent have leveraged the use of technology to enhance access to finance. Technological innovations have now made it possible to extend financial services to millions of poor people at a relatively low cost.
According to IFC’s 2018 Digital Access report, the continent is now home to more digital financial services deployments than any other region in the world, harbouring almost half of nearly 700 million individual users worldwide. Mobile money solutions and agent banking now offer affordable, instant, and reliable transactions, savings, credit, and even insurance opportunities in rural villages and urban neighborhoods where no bank had ever established a branch.
Where does Africa’s future lie? Africa’s future lies in the innovative deployment of products that have the capability of changing the lives of the largest number of Africans. One such product is Safaricom’s M-Pesa product that has revolutionized access to and the usage of digital financial services in Kenya.
In 2007, over 70 percent of Kenyan households did not have bank accounts, and relied on informal sources of finance. Presently, more than 25 million Kenyans have mobile money accounts, constituting a penetration level of approximately 79 percent. Currently, millions of Kenyans use M-Pesa to make payments, send remittances, and store funds for short periods. What started as a mobile money transfer system became a success story of financial services development built on a technological platform that makes it cost-effective and safe.
Unique challenges facing Africa include the lack of an enabling environment for the private sector; a lack of capacity and appropriate financial products by providers; a need for regulatory authorities to strike a balance between financial stability and access to financial services, policy coherence and co-ordination across various government initiatives; and a lack of political goodwill. Although technology has the potential to reach those without bank accounts at low cost, it is also associated with various risks, with the potential to destabilise the financial system.
Once the abovementioned hurdles are overcome, the private sector can proactively pursue the development of products and services that would have a developmental impact. In essence, expanding access need not result in instability if the requisite regulatory and supervisory safeguards are in place. It has therefore become important for researchers to focus on how different countries have addressed the respective challenges in a bid to create an enabling environment for the provision of financial services to the poor.