Revolutionising Financial Inclusion through Digital Financial Services in Africa

Preamble:

We can all agree that Africa has been on her Digital Transformation Journey for the last decade or so but an undeniable consequence of the COVID-19 pandemic was the forced adoption of Digital channels for consumers, especially due to associated lockdowns during that period. The wheels were already in motion but the events from the pandemic have catalysed consumer confidence in Digital platforms, and in turn given traditional Financial service providers an entirely new market to sell to.

Something that I find extremely interesting is that due to the forced nature of the adoption, customers of all age groups and walks of life had no option but to embrace these emerging technologies and innovations which in turn opened the potential of new and alternative distribution channels. A potential key beneficiary from this quantum shift is financial inclusion.

The CGAP (Consultative group to assist the poor) describes financial inclusion as a desired state where all people and businesses have access to and are empowered to use affordable, responsible financial services that meet their needs. These services include payments, savings, credit and insurance amongst others. The definition is expanded by other thought leaders to include the following marginalised of previously overlooked groups;

·?????? Low-income populations: which includes the poor and the working poor who often lack access to basic financial services.

·?????? Women: Especially in rural areas often face significant barriers to accessing financial services

·?????? Micro, Small and Medium Enterprises (MSME’s): Due to the lack of structured data, these entities frequently struggle to obtain credit and other financial services.

·?????? Youth & Elderly Population: Both young and older people struggle to participate in financial systems due to age related barriers.

·?????? Rural Populations: People living in rural areas often struggle to gain access to Financial Institutions and their services.

·?????? Migrants and Refugees: These groups may face legal and logistical challenges in accessing financial services.

In parts of Africa, where many people reside in remote areas and rely on cash transactions, traditional banking infrastructure struggled to meet the needs of the unbanked population. In fact, the Global Findex Report of 2021 by the World Bank indicated that over 300 million adults in Sub-Saharan Africa remain unbanked. The barriers to entry include high fees, lack of documentation and geographical constraints.

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What’s the current state?

Worldwide, there are currently just under 1.5 billion* people who do not have any financial account at a bank, mobile money provider or any other applicable institution. Closer to home, approximately 70% of Africans**? do not have access to the above services and I strongly believe that the advent of Digital Financial Services could be the key ingredient in the secret sauce that will unlock this opportunity. Digital Financial Services offer a beacon of hope and at its very core it is destined to win because it is leveraging off existing ecosystems to provide parity through financial access and give the unbanked, underbanked and underserved an equal opportunity to participate in economic growth actives.

Emergence of Digital Financial Services

Digital Financial Services (DFS) have emerged as a powerful tool for bridging the financial divide. The rise of mobile technology, particularly mobile phones, has enabled innovative solutions catering for the needs of the unbanked and underbanked populations. Companies like M-Pesa in Kenya; M-Pesa in Tanzania and Mozambique, OneMoney in Zimbabwe amongst many others have revolutionized the landscape by allowing users to send and receive money via mobile devices, laying the foundation for other services like savings accounts, loans, and insurance products.

To put things into context , a leading authority in this space the ITU (International Telecommunications Union) has shared statistics which outline that in the early 2000’s mobile phone usage stood at around 60 million customers in Africa compared to approximately 1.5 billion at the end of 2020 which demonstrates the exponential growth potential. Further to this, the adoption of smartphones has seen a similar trajectory with an estimated 3% of smartphone adoption from the total addressable market in 2013, this figure rose to an estimated 50% in 2020 and most recently 60% in 2022. With improved infrastructure and declining costs of mobile data, the GSMA (Global system for mobile communications association) has predicted that this figure could reach 80% by 2025.

Key Features of Digital Financial Services

1. Accessibility: DFS eliminates the need for physical branches, allowing users in remote areas to access services through their mobile devices. This accessibility is particularly important in rural regions where traditional banks are scarce.
2. Affordability: Many DFS providers offer low-cost services, reducing the financial burden on users. This inclusivity helps lower-income individuals manage their finances more effectively.
3. User-Friendliness: The rise of intuitive mobile applications and platforms has made it easier for individuals with minimal financial literacy to navigate financial services. This user-friendliness serves to empower users, enhancing their ability to manage their finances.
4. Variety of Services: Beyond basic money transfers, DFS includes savings and investment accounts, microloans, insurance products, and payment solutions, catering to diverse financial needs.

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Key Players in Ensuring Holistic Financial Inclusion

This list is not exhaustive but some of the key stakeholders to ensure that the Financial Inclusion revolution is successful are;

·?????? Regulators

·?????? Financial Institutions

·?????? NGO’s (Non-Governmental Organisations)

·?????? Technology providers & FinTech’s

·?????? Governments

·?????? Central Banks

The Effects of DFS on Financial Inclusion in Africa are Profound:

1. Increased Banked Population: Countries like Kenya have seen an increase in the number of banked individuals. According to the Central Bank of Kenya, mobile money services have contributed to increased financial access, with over 70% of adults now using formal financial services.
2. Economic Empowerment: With access to financial services, individuals and small businesses can build credit histories, allowing them to secure loans for entrepreneurial ventures. This economic empowerment drives local economies, creating jobs and fostering innovation.
3. Women’s Financial Inclusion: DFS has played a pivotal role in increasing financial access for women, who often face additional barriers to traditional banking. Empowering women with financial tools not only supports household economic stability but also contributes to broader societal well-being.
4. Resilience During Crises: The COVID-19 pandemic highlighted the importance of digital financial services. During lockdowns, those with access to DFS were able to continue transactions, receive government support, and access essential services, underscoring the need for resilient financial systems.

Where Does Artificial Intelligence fit in – The Role of AI as an Enabler?

With the rapid advancement of data analytics and machine learning , the question is how does all this assist in granting consumers financial access? There is rich non-traditional data which can be mined, aggregated and analysed using a wide range of data sources to assess various factors such as credit risk. These alternative data sources include social media activity, mobile money transaction history mobile phone usage, the opportunities are unlimited. This approach is particularly useful for individuals who lack formal credit histories.

The associated technologies such as AI chatbots with human like responses can also assist to give personalised financial advice, financial education and 24/7 access to services which will empower consumers and give them the peace of mind that they are making informed decisions on the products and services that they purchase. With AI being a very much developing field, it will be extremely interesting to see how Financial Service Providers (FSP) can really harness its full potential to increase accessibility, affordability, customer experience and the variety of services that can be offered.

Reaching the last mile - Challenges and the Road Ahead ?

Despite its many successes, DFS in Africa is not without challenges. Issues such as digital literacy, cybersecurity threats, regulatory hurdles and infrastructure limitations tend to impede growth. To ensure sustainable progress toward financial inclusion, [1]stakeholders including governments, financial institutions, and technology providers must collaborate to address these challenges.

1. Enhancing Infrastructure: Investments in internet connectivity and mobile network coverage are crucial to reaching the remotest populations.
2. Promoting Financial Literacy: Educational programs that enhance digital and financial literacy can empower users to take full advantage of DFS offerings.
3. Strengthening Regulation: A balanced regulatory approach can foster innovation and allow for growth while safeguarding consumer protection and financial stability.

Conclusion

Digital financial services have emerged as a catalyst for financial inclusion in Africa, enabling millions to access essential financial resources and services. By addressing the barriers that have historically excluded large segments of the population, DFS presents a pathway toward economic empowerment and sustainable development. As technology continues to evolve, the collaborative efforts to enhance infrastructure, literacy and regulation will be vital in ensuring that the benefits of digital financial services are maximised for all Africans, paving the way for a more inclusive and prosperous future for all.

-Ends-

* - World Bank

https://www.worldbank.org/en/topic/financialinclusion/overview#:~:text=Great%20strides%20have%20been%20made,adult%20population%20had%20an%20account .

** - CGAP (Consultative group to assist the poor)

https://www.cgap.org/financial-inclusion

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