Could Blockchain hold the key to financial inclusion in Africa?

Sample this: Out of 590 million adults in Sub-Saharan Africa (SSA), 350 million do not have access to an account at a bank or other financial institution. 

What’s more worrying is that a majority of these numbers are made up of women, young people and people living in rural areas. The reason being that, for traditional banks, building brick-and-mortar branches in low-population density areas is typically not economically viable. Even those who do have a current account often lack access to other basic financial services such as savings accounts, loans and insurance products. 

Bottom-line: With only 34% of adults formally banked, there is huge potential for the development of financial services in Africa to meet the needs of the unbanked. 

Mobile money matters

Credit: GSMA

At the same time, even while Africa represents the dark side of financial inclusion, digital transformation is piercing through the darkness on the emerging continent faster than anywhere else in the world. Indeed, according to the World Bank Findex survey for 2017 whose results were released in May 2018, financial inclusion in Sub-Saharan Africa has gone up by leaps and bounds – from 23% in 2011 to 43% in 2017.

Drilling deeper into the numbers of adults moving into the financial inclusion net, the proportion of adults with an account – either traditional or mobile – rose from 24% in 2011 to 34% in 2014. Over the same period, the share of adults with an account at a bank or a financial institution increased from 24% to 29%. Therefore, about half of the improvement in financial inclusion is due to the expansion of the traditional banking sector, the other half to that of mobile accounts. This trend is accelerating and by December 2016, there were 277 million registered mobile money accounts in SSA– more than the total number of bank accounts in the region. More than 40% of the adult population in a number of countries, including Kenya, Tanzania, Zimbabwe, Ghana, Uganda, Gabon and Namibia, use mobile money on an active basis.

Thus, the mobile is already playing a huge role in the transformation of the financial inclusion landscape in Africa. Indeed, handhelds have powered $300-million in monthly transactions in Africa from 7.2-million new people using digital financial services, representing a whopping 250% increase from the baseline figure of 2012. This phenomenal increase is the result of concerted efforts made under a financial inclusion project run jointly by the World Bank’s IFC and the Mastercard Foundation.

Credit: Mastercard Foundation

The report outlining this initiative, ‘Digital Access: The Future of Financial Inclusion’, serves as a testimony to the “phenomenal success of digital financial services in Sub-Saharan Africa and outlines the challenges still to be tackled to reach universal financial access”. Just look at the difference this initiative has made to an African economy that is often handpicked to showcase financially vulnerable populations, the Democratic Republic of Congo, where the overall financial inclusion rate was a measly 3.7% in 2011. Indeed, in DRC, mobile money services rose 16% by 2017, pushing the overall financial inclusion rate to 26%.

Statistics from the report aside, we are all aware of shining examples from the continent where the mobile has served as the ground for path-breaking innovation in financial services, giving access to the unbanked. For instance, M-Pesa, a mobile-based money transfer and micro-financing application founded in Kenya, has gained a lot of ground across Africa, where almost a billion people have mobile phones. Indeed, it would not be too much to say that M-Pesa is helping Africa move forward financially. 

However, the service is available to only 30 million people in 10 countries. When we consider that the Africa middle class alone is expected to grow from 355 million in 2010 to 1.1 billion in 2060, it becomes clear that robust financial tools and services are the need of the hour. 

Building on Blockchain 

Thus, it is evident that there is an urgent need for the growth of other financial services that can bridge the huge divide between the financially secure and the unbanked in Africa. It is here that blockchain might serve to be the building block of financial inclusion, by cutting costs and enabling mass connectivity.

INFOGRAPHIC: BLOCKCHAIN MARKET

Source: World Economic Forum

A World Bank report posits that blockchain will help distribute value over wealth, facilitating as it does rapid payments and remittance settlements by eliminating middlemen, giving people access to capital when they need it.What makes its potential more enormous than that of even mobile money is that blockchain supports smart contracts – transactions that include multiple assets, multiple parties and two-way transactions. This will allow the unbanked to not only access bank accounts but global capital markets as well, by providing all types of value transfers.

For banks, blockchain provides a win-win solution by helping cut costs and reach customers at the edge of wireless – and not just bank accounts. According to Santander, blockchain could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 Bn per annum by 2022. At the same time, initial high capital costs are likely to be a major concern for banks, which could delay the adoption of a pervasive and widespread blockchain processing system, despite its appeal on grounds of tremendous subsequent savings in transaction costs and time. Further, against the backdrop of uncertain regulatory status due to mass reluctance of global governments to embrace legal frameworks enabling blockchain, it will continue to face a hurdle in widespread adoption by financial institutions.

INFOGRAPHIC: MARKET OPPORTUNITY FROM UNBANKED POPULATION

Credit: World Bank Development Indicators, Financial Access Survey, Accenture, CGAP (the Consultative Group to Assist the Poor)

Despite these pressing constraints, there are already many real world examples of how blockchain is already making a tangible difference, especially to vulnerable communities. The World Bank report, for one, illustrates that such critical financial inclusion is being achieved through blockchain-powered instances of:

1. Economic Identity: Blockchain provides digital identity to individuals with enhanced privacy, so that identity is restricted to devices as well as other individuals with access. In this arena, BanQu is a noteworthy example as a technology platform for the creation of a personal digital profile comprised of various records of personal, financial and other activities. That profile is recognized and accepted by financial institutions as legitimate identification information.
2. Digital identity for citizens in poverty: As a related corollary to the economic identity powered by blockchain, under this category, citizens lacking appropriate access to the financial system would gain a higher independence and better chances for welfare by creation of digital identity on blockchain. Some of the key start-ups empowering this are Credit.vision, OneName, ShoCard and BitNation.
3. Services for refugees and migrants: In a clear cut case for blockchain powering access for vulnerable populations, the examples of payments and remittance systems encompassing this particularly vulnerable sub-set of individuals are many, and growing. For instance, Regalii is an international mobile payments platform that allows immigrants to pay their families’ bills anywhere in the world through SMS. While, Ripple is making it easy to send money anywhere in the world in any currency instantly by loading money to an active Ripple wallet through a participating gateway. Finally, WorldRemit provides an online service that lets people send money to friends and family in other countries, using a computer, smartphone or tablet.
4. Remittance services: Joint efforts by Stellar, the Stripe-backed open-source payment network, and Oradian, a cloud-based software provider for micro-finance institutions in developing countries, provide a stellar example of a blockchain-powered remittance service. To showcase the immense potential of this payment-transfer network, accessing Oradian allows 300,000 Nigerians (90% of them women) to cheaply transfer money between micro-finance institutions over the Stellar network. 

Future forward

It is clear then that blockchain technology empowers financial inclusion of billions of unbanked people. Indeed, blockchain is paving the way for a whole new micro-economic revolution. 

Let us join forces to convince governments to lay enabling regulation in place, and banks to invest in the initial capital costs to power the revolutionary and inclusive blockchain.