Payments and Financial Inclusion in Africa
The launch of Person-to Merchant (P2M) and digital payment solutions in African countries have boosted the digital access of several financial services to Small Medium and Micro Enterprises (SMMEs) and in the informal sector from financial institutions.
According to the World Bank, Africa entails several financial service deployments, but these are not without bottlenecks. While the continent leads globally with about half of the over 800 million users, elements such as insufficient technology and traditional card rails challenge the financial intermediation.
Exclusion of formal financial services in Africa could lead to the loss of savings, capacity to create wealth, and investible cash. Conversely, access to financial services encourages credit creation and improves capital accumulation; hence, raising the level of economic activities and investments.
To efficiently serve African SMEs, SMMEs, and the informal sector at large, key players should create a domestic payments ecosystem based on policies that focus on local development. The government, too, could use this financial access as a tool to enhance economic growth.
Pillars of the economy, such as users, financial service providers, and financial markets, need to benefit when there is integration in the financial systems. There are many ways in which key players benefit and could improve financial inclusion in Africa.
Financial Markets
Financial markets play a vital role in wealth distribution and ensuring investors have access to funding. These markets could boost financial inclusion through the introduction of custom products and services to match entrepreneurs’ needs. Buyers and sellers could transact/ trade stock at reduced costs and even across borders.
Innovative strategies, financial education, and proper division of financial users are ideal strategies to encourage financial inclusion. A well-developed financial market forms a sustainable, low-cost circulation instrument for distributing several financial products and services across the continent.
Investors in the stock market, forex market, or even bond market need systems where they have control over their money and data. Banks and stockbrokers have been holding consumers’ money instead of being customer-centric. There are limits to how much customers can withdraw or transact; hence, the customers are not in full control.
Blockchain technology has, however, encouraged decentralized finance movement. For example, Bitcoin (a digital currency) has snatched the control from financial institutions through cryptography. Individuals can make transactions online with minimal restrictions. Cross border payments are now made faster and devoid of expensive service fees. There is no need for plastic cards and several intermediaries a common thing in modern banking.
Cryptocurrency, like other forms of cash, could be used to trade online (cryptocurrency trading), and it has proved to be safer than forex trading. Not many have full trust in crypto technology. Sovereign banking could counter this problem and perform better than crypto without adding service fees on the consumers’ end.
Sovereign banking systems could employ the practice done using Stablecoins. These maintain fiat’s value at the same time bolstering low-cost and quick money transfers across borders. This way, people can reap the most out of banks without the need for using cryptocurrencies. People can control their data, cash, gain access to credit, loans, and overdrafts in an open financial market.
Financial Service Providers
The biggest hurdle to offering financial services in African nations is the huge cost of brick-and-mortar banking systems. Several financial service providers are situated in urban areas; hence, people in rural areas incur unbearable charges when traveling to get financial services.
Fintech has helped cuts these costs to a high percentage. Not only are the operating costs lower but also profitable. Banks in countries like Kenya have mobile agents in many remote regions that need little investment to provide customers with cash-in-cash-out services. Customers only need a registered SIM card and a cell phone; therefore, reducing the challenge of user enrolment.
Mobile money also enhances the efficiency of financial services through quicker peer-to-peer payments with lower service fees. For example, Kenyan conventional banks charge about 10% of the amount of cash transferred. But, the cost of money transfer is reduced to below 3% per transaction when using M-Pesa.
So many in the unbanked population have suffered for long when using informal channels of credit like friends, relatives, and unregulated moneylenders. When banks offer transparent and adequate credit options through fintech like M-Shwari of Safaricom and KCB-M-pesa – a collaboration with Kenya Commercial Bank and Safaricom, these products provide mobile credit avenues in the micro-finance sector with lower interest rates.
There is a significant demand in Africa for digital financial services like cross-border payments, credit services, and other investment products. Financial service providers are embracing fintech to leverage the enormous customer base and client experience.
Many banks don’t view SMMEs and financially excluded persons as profitable target populations. With the advancements in fintech, banks have now cut the cost of reaching and serving the financially excluded. In return, there is the development of opportunities for financial institutions. Financial inclusion could boost the GDP by up to 15% in African nations and 40% in frontier markets like Kenya. Strategies suitable for banking systems are innovative channel strategies and customized offerings.
Mobile-payment providers, especially in East Africa, are offering new financial services. For example, Tala and Branch are leading mobile money blenders in East Africa who are using fintech to pump in cash in an already available market.
Users
An OECD survey reveals that SMEs in African nations like Kenya accounts for 80 percent of the economy (FSD Kenya, 2010). Approximately 95% of manufacturing jobs in Nigeria are within SMEs (Ganbold, 2008).
An efficient payment system is essential to cut the costs of doing business in African economies. When a financial service provider allows digital integration in its services, customers reduce the costs, and payment of goods and services is faster.
In Kenya, Safaricom rolled out another fintech product, dubbed Lipa na M-Pesa. Here, customers don’t have to incur withdrawal costs to access money for buying goods. Payments of services are cost-free and instant. On the SME side, they can pay merchants, manufactures, or even taxes and not extra cost. Transactions amongst SMMEs, financial service providers, manufactures, and consumers are done in real-time; hence, faster circulation of money in the economy.
Research conducted by the Massachusetts Institute of Technology (MIT) reveals that M-Pesa works with features phones and smartphones alike. The inclusion of services through feature phones that the majority of people afford to have a significant impact on the fight against poverty.
The researchers from MIT state that mobile money has helped 186,000 eradicate poverty. Another benefit of such a fintech product is the ease of use in everyday life. When families are doing business in their rural areas, they have relatives dwelling in urban areas or abroad who could send them money instantly. For example, World Remit enables family and friends living in other countries like the US to send money instantly to persons in any part of Kenya via M-Pesa.
While the current state in the fintech realm is promising, more research needs to be carried out to help bolster efforts to ensure utilization and will inform decision-makers in developing African countries of the bottlenecks and best practices for new financial technology for development.