Responsible Finance Forum

In the Fast Lane: Innovations in Digital Finance

Marcia Parada and Greta Bull
01 May 2014
Source:  International Finance Corporation
 The MasterCard Foundation

Sub-Saharan Africa (SSA) poses many challenges to financial inclusion: basic infrastructure is relatively underdeveloped, populations are still very rural and therefore widely dispersed,and a large proportion of the population (48.5%) lives below the international poverty line of $1.25 per day. As a result, it is estimated that only 17.5% of adults across the continent have access to an account at a formal financial institution. And yet, poor families receive wages, run businesses, and purchase goods and services, and therefore have a need for basic financial services that help to manage economic decisions and risk. Excluded from formal finance, unbanked individuals resort to informal mechanisms such as savings groups, moneylenders, or social support networks in lieu of banking and risk management products. These informal mechanisms are imperfect and can be costly and risky substitutes. The primary obstacle to offering formal financial products to low-income customers has generally been the cost of delivery, given the relatively small transaction sizes involved. Although financial products for the poor have existed for decades in the form of microfinance, the inability to deliver these products cost-effectively has made it difficult for microfinance institutions (MFIs) to reach significant scale,particularly in SSA, where population densities remain relatively low.

Over the last few years, however, certain parts of Africa have experienced remarkable advances in financial inclusion using digital financial services, which leverage information and communication technology and agent networks as a cost-efficient distribution channel. These innovations have had a profound impact on financial inclusion in markets where they have taken root, and appear to leapfrog traditional banking and microfinance infrastructure as a means of delivering financial services to the poor. A FinScope study conducted in Tanzania in 2013 found that between 2009 and 2013, the proportion of Tanzanian adults who were completely excluded from the financial system declined from 55% to 27%, with the proportion of adults using non-bank formal financial products rising from 7% to 44%. This had a measurable knock-on effect on access to bank accounts, with the proportion of people using formal bank products rising from 9% to 14% over the same period. Data for Kenya show similar trends, with the proportion of adults using a bank account increasing from 13%to 29% between 2006 and 2013. Clearly, mobile financial services are having an impact on access to formal financial services; in fact, in nine emerging markets – all in SSA – there are now more mobile money accounts than bank accounts. As a region, SSA has 98 million registered mobile money users, representing 48% of the global user base.