our money our rights - the evolution of financial services in africa

8/7/2019 Our money our rights - The evolution of financial services in Africa

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Our money, our rights: The evolution of financial services in Africa

The stark reality is that most poor people in the world still lack access to

sustainable financial services, whether it is savings, credit or insurance. The great

challenge before us is to address the constraints that exclude people from full

participation in the financial sector. Together we can and must build inclusive

financial sectors that help people improve their lives 1.

Kofi Annan, on the announcement of the International Year of Micro-credit, 2005.

Table of contents

An introduction from Joost Martens,

Director General of CI.

Poor people are interested in financial

services.

Poor people are not a bad risk.

Despite this, the financial services

sector is under-developed in Africa.

Micro-credit is a worldwide

phenomenon. It is popular, growing and

becoming mainstream.

Localised micro-credit schemes are

often linked to production as well as

consumption.

But credit is not the only financial

service.

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p2

p3

p4

p4

p5

p6

Basic consumer protection

mechanisms are needed as the sector

evolves.

The state can take the initiative to

improve banking services.

To avoid the mistakes of others, is

there scope for a distinctively African

approach to financial services for

consumers?

Is money transfer by mobile phone the

new magic bullet?

Towards universal access.

Endnotes

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p8

p9

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p12

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An introduction from Joost Martens, Director General of Consumers

International.

Access to stable, secure and fair financial services is important for consumers

everywhere, including Africa. Despite relatively low levels of coverage by the formal

banking sector, studies show that African consumers are willing and able to use a

variety of financial services. Commonly held myths that poor consumers presenttoo great a risk or are simply not interested in financial services are not borne out

by the facts. Indeed, the phenomenon of micro-finance has firmly taken hold on the

continent and is set to grow significantly. Nevertheless, despite demand, the

financial services market is still significantly under-developed, and consumers go

under-served. The evolution of financial services provision in Africa presents a

number of interesting questions. Will African consumers be spared the negative

consequences of mistakes made by others? Will governments promote the rightconditions for this sector to thrive and work with all stakeholders to ensure that the

consumer interest is upheld?

This briefing explores the latest developments in this ongoing story. It is produced

by Consumers International (CI) as part of celebrations for World Consumer Rights

Day 2010.

Poor people are interested in financial services.

Savings ratios (ie the percentage of household income put aside), for example, are

higher in middle-income countries (26%) than in high-income countries (23% 2). In

Sub-Saharan Africa (SSA) the level is far from negligible at 15%. In 2000, Uganda

had a rate of 3.5% (a similar level to that of the United States before global financial

crisis), while the figure for the wider COMESA (Common Market for Eastern and

Southern Africa) region was 18% 3. This indicates a significant variability within and

between regions.


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Although formal banking coverage is low among households in much of Africa,

levels do vary. Less than one fifth of households in Kenya and Zambia, and about a

fifth in Ghana, are covered, while in South Africa and Namibia the level is closer to

50% 4.

However, CIs recent publication Our money, our rights: how the global consumer movement is fighting for fair financial services, points out that poor families often

have to display a degree of financial sophistication which has not been fully

appreciated in the past. Portfolios of the Poor , a publication by the Financial Access

Initiative, studied 250 poor households in India, Bangladesh and South Africa over

one year 5. The researchers found that all the families dealt with at least four types

of financial instrument over the course of the year and rural households had total

cash flows equal to 10 to 30 times their end-of-year asset values. The sheercomplexity of transactions (involving savings clubs, banks, formal and informal

institutions, savings and debts) belies the idea of the poor as financially ignorant. In

fact, the sums of money are simply less than those transacted by wealthier people.

Poor people are not a bad risk.

Most poor consumers manage their financial affairs responsibly. Evidence of

consumer capability in this regard can be found, for example, in the very low rates

of default in micro-credit. Loan repayment rates in excess of 95% are the norm, and

have remained so for at least a decade 6. The rate for some micro-credit schemes in

Senegal, for example, stands at 98.5% 7. Although micro-credit in Africa is generally

for production, not consumption, when it is for consumption it is often for one off

life events such as marriages and funerals, and not for trivial items 8.


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While arrears rates have slightly increased since the global financial crisis, levels

still remain very low. The World Banks International Finance Corporation (IFC) has

collated data from the top 150 micro-finance institutions showing that, globally, the

proportion of borrowers 30 days behind on loans has risen from 1.2% before the

financial crisis, to 2-3% in 2009 9.

Despite this, the formal financial services sector is under-developed in Africa.

The UN bluebook Building inclusive financial sectors for development reported in

2006 that risks in lending to the poor have been consistently overrated 10 . Repeated

surveys have reported that although only a small proportion of African households

are covered by the formal banking sector, many more make regular savings

through less formal institutions, such as the susu system in Ghana (based on small

daily collections) and savings and credit co-operatives, as in Tanzania 11 .

Micro-credit is a worldwide phenomenon. It is popular, growing and

becoming mainstream, in Africa too.

As long ago as 2000, a study by the UK Department for International Development

(DFID) and the United Nations Development Programme (UNDP) 12 found that the

informal sector appeals to poor consumers because:

they welcome the combination of self-discipline and informality small deposits are possible doorstep services use a personal approach (no references required, for

example) there can be an easy mix with social activities (such as church gatherings)

loans can be made flexibly over different time periods and varying amounts.


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This prognosis has been borne out by events. Interest in micro-finance from the

formal sector is increasing. The IFC gave 55% more every year to micro-finance

lenders between 2004 and 2007, and at the global level micro-finance portfolios of

private investment funds grew from $600 million in 2004 to $2 billion in 2006 13 . In

South Africa, micro-lending tripled between 1995 and 1997. The countrys

commercial banks also started micro-lending and have come to dominate themarket. By 2005, banks accounted for 50% of outstanding micro-loans, with

retailers and cash lenders making up 48% 14.

Conversely, micro-finance institutions (MFI) are now evolving in the direction of the

mainstream. For example, Equity Bank in Kenya registered as an MFI in 1984 and

is now a full commercial bank with 52% of Kenyan bank accounts and 3.9 million

clients15

. It has targeted the base of the pyramid through specific products such asfanikisha (Swahili for enable) loans for women, of which 80,000 have been issued

with up to two years duration. Vijana (Swahili for good things for young people)

loans are aimed at the youth market, and number some 50,000 according to recent

estimates. In Ghana some highly specific micro-finance products have been

developed, for example, for AIDS sufferers 16 .

Localised micro-credit schemes are often linked to production as well as

consumption.

Micro-credit can be used to help households and communities develop

infrastructure services such as drinking water. Involvement of micro-finance in the

water sector was recommended by the Camdessus report Water for All in 2003,

long before the present crisis saw a downturn in private institutional investment and

a decline in development aid 17. Involvement of micro-credit in infrastructure

development can be seen on a small scale in Burkina Faso, Kenya and Ethiopia 18.


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In Ethiopia it has evolved from individual revolving credit used by women, to a more

collective system for funding water facilities through the Amhara Credit & Savings

Institute 19. The Moroccan government has legislated to enable micro-credit to be

used for the development of electricity and drinking water supply, as well as

housing for poor households 20 . Micro-credit can be used to finance first time

connections and may extend from the individual to the collective, so that familiesinvest in their own communal development.

A distinctive feature of Africa, particularly rural areas, is that the distinction between

the consumer and producer is more blurred. Many of the activities supported by

micro-loans for small businesses (such as baking, cloth dyeing, market gardening)

often take place either in, or in close proximity to the home. In Kenya 80% of micro-

enterprises are owned by women 21. Under those circumstances there are likely to

be spin offs that benefit families as consumers as well as producers.

But credit is not the only financial service.

At a World Bank conference in 2000, it was reported that there is a larger market

for savings products than for credit products as has been demonstrated repeatedly

by micro-finance organisations, which consistently report loan/deposit ratios of less

than 50% 22. Similarly, the above mentioned DFID/UNDP study points out that

financial services providers need to diversify. Savings and risk pooling (insurance)

are also essential services that are comprehensible to a wide range of consumers

and yet under-provided. The Agence Francaise de developpement has also

reported an evolution from micro-credit to micro-finance in Africa, widening in scope

to include insurance and money transfer in addition to the now traditional micro-

loans 23.


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Basic consumer protection mechanisms are needed as the financial sector

evolves.

In considering consumer protection, the UN Blue book (which marked the

international year of micro-credit) distanced itself from the traditional caveat emptor

(let the buyer beware) principle. According to the UN this minimalist option is often

considered anti-consumer24

. The authors suggested that policy makers could optto:

increase consumer information ( truth in lending for example) invest in financial literacy initiatives (ie consumer education) insist that the retail financial industry take steps to protect consumers (self

regulatory codes of conduct, for example)

encourage the development of an independent regulatory oversight bodyresponsible for monitoring, reviewing and taking complaints.

Examples of recent practices in South Africa 25:

Ending the practice of card and PIN collection, under which borrowers are

forced to surrender ATM cards to lenders.

A Consumer Credit review, which led to a new National Credit Act, generallysupported by CI member organisations in the country. There is also a new

consumer credit regulator and a national credit register. The huge growth in micro-lending during the 90s necessitated the re-

regulation of the sector in 1999 under the Micro-Finance Regulatory Council,

which became in effect a licensing body.


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2004 saw the introduction of Mzansi basic banking for low income

consumers, providing deposit services and ATM usage (but not credit) for

reduced charges. There was no government subsidy. Within six weeks there

were 180,000 users, far exceeding expectations. 90% of the new customers

were previously unknown to the bank 26 .

The Financial Sector Charter committed banks to a major expansion ofbanking services.

There is a national ombudsman scheme and a National Consumer Tribunal

that can mediate and act as an informal court in disputes over credit

transactions. Courts have the power to suspend a loan if it is thought to have

been reckless on the part of the lender. There is a countervailing duty of

disclosure on the consumer to disclose all relevant information (such as

outstanding debts) when applying for a loan.

The state can take the initiative to improve banking services.

This can be in the form of direct provision. For example postal banks exist in many

countries, but bricks and mortar networks are slow to develop and branches are

often far from much of the population. The use of bank mandates for money

transfer by postal banks is declining and has virtually collapsed in parts of

Francophone Africa 27 . Attempts are being made to introduce an electronic

equivalent. Consumer education programmes can also be directed at children

through national school curricula. CI member organisations across Africa are

playing a key role in the development of materials and their dissemination to

youngsters 28.


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The UN bluebook argued for state sponsorship over state provision . This could take

the form of regulation (by credit bureaus, for example) to promote enhanced risk

mitigation, and enhanced transparency, involving legislation along the lines of the

South African example referred to above . The Ugandan government explicitly

adopted an oversight (rather than a direct provision) role, after the failure of

government run schemes in the late 90s29

. Of course service providers do notsimply have to rely on legislation to develop good practice.

In Uganda, the Association of Microfinance Institutions has developed a code of

practice for Consumer Protection with a focus on disclosure and financial

education. It has been adopted by 42 MFIs and is a condition of entry to the

association, thus providing a badge of conduct to reassure consumers 30.

To avoid the mistakes of others, is there scope for a distinctively African

approach to financial services for consumers?

Africa has avoided the worst excesses of the financial services sector suffered in

rich countries, precisely because the sector is relatively young. Only 17 countries in

Africa have a stock market and their combined total fraction of global portfolio is

1.81%, and African bank assets account for only 0.15% of the global total. Simon

Heliso, writing in Global Future states: The sophisticated evils unleashed by the

sub-prime mortgage markets are simply absent. The South African banking sector

has attracted praise for its recently elaborated regulatory structure, which has

avoided many of the problems experienced in the North.

Yet that does not insulate Africa from global economic trends, as trade has been

badly affected by the recession. Capital markets in SSA fell by 30-40% between

November 2007 and November 2008.


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The global economic slowdown affects remittances sent home by Africans working

abroad, which amount to about $10 billion annually. Those remittances must be

vulnerable in the present climate as unemployment bites in rich countries 31.

Remittances are important both in and of themselves as a major support for

families, and in terms of the incentives they have provided for technological

evolution. Between 2000 and 2005, remittances to SSA increased by over 55%.

Although lower in volume than aid and direct investment, they have proved to be

less volatile and are often counter-cyclical, helping smooth over difficult times (such

as seasonal problems for crop farmers). Furthermore, remittances can be saved to

a very high degree an IMF sponsored study found levels of remittance saving as

high as 40% among families 32.

Traditionally only about one third of remittances go through formal channels,

because even though migrants may have access to banks in the countries where

they work, the recipient families may not. Consumers may be put off by high bank

charges and high transfer charges by money transfer operators (MTOs). The

market is heavily dominated by a few MTOs, notably Western Union, which has a

market share of 65-100% in some countries in Francophone Africa 33. Many

communities in Francophone Africa rely on porters of money, with the obvious

risks that this entails, to carry sums for several families from, for example, a group

of workers in France to a village in Mali.

Some institutions have developed to meet the frustrated demand. Theba Bank, a

miners bank, offers low cost transfers from South Africa to families in surrounding

countries, such as Mozambique. The International Remittance Network of about

200 credit unions offers low cost remittance services in many countries and does

not require recipient families to have an account.


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The potential for such development in Africa is clearly huge, but there are

limitations that should be taken into account. Mobile banking services have tended

to be taken up by people with bank accounts as a convenient add-on service, and

there is a risk of new monopolies developing.

And of course the system will only be as comprehensive as the extent of thetelephone network and transactions can fail due to system congestion at peak

texting times 36. While Kenya, South Africa and much of North Africa are

approaching 100% mobile phone penetration, levels in Burundi, the Central African

Republic, Eritrea, and Rwanda are less than 30% 37. There are also issues around

whether such services should be bank led (as in South Africa, where mobile phone

companies have to form joint ventures with banks to provide mobile banking) or

whether non-bank agents may take part, as in Kenya38

. The root cause for

optimism is that there are already about one billion people on the planet with a

mobile phone but without a bank account 39. In South Africa, for example, 48% of

the population is banked, while mobile phone usage is 78%. In Kenya the figures

are 10% and 20% respectively 40 .

Towards universal access.

Many of the approaches to financial services for poor consumers are common

across continents. There are similarities in many of the recent innovations with

developments in South Asia for example. Broad conclusions can be drawn for the

poorer regions of the planet.

However, different initiatives must be judged carefully on merit. Micro-credit, for

example, should not be considered a magic bullet and has had to face the problem

of costs remaining relatively fixed regardless of the size of the loan, meaning that

charges for small amounts tend to be high.


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According to the Consultative Group to Assist the Poor (CGAP), MFIs are generally

considered efficient when operating costs equal 12-15% of assets, while for banks

this level would usually be around 5% 41. Nevertheless, micro-finance is still

normally significantly cheaper than the alternatives 42.

Given that it is still early days in terms of banking coverage for much of Africa,some basic strategic orientations could be adopted from the outset. CI have argued

for the regulation of retail banking and investment banking as separate activities,

even though they can be provided by the same banks. Retail banking can perhaps

be viewed as a public utility (not necessarily publicly owned but aimed at the

general public), to be encouraged through universal service programmes, which

have been successfully applied in the telecoms sector.

The argument for universal service to be fully integrated into future policy making is

aptly articulated in the UN Blue Book:

We suggest that access to finance should be a central objective of prudential

regulation and supervision...the two traditional goals of prudential regulation: safety

of funds deposited in regulated financial institutions and the stability of the financial

system as a whole, should be supplemented by a third goal: achieving universal

access to financial services.


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Endnotes1. UN Blue Book Building Inclusive Financial Sectors for Development UN, 2006

2. Ian McAuley Globalisation for all-reviving the spirit of Bretton Woods, an examination of

developments in global financial markets Consumers International, 2003

3. L Chen The protection of small savers in the Ugandan Micro-finance industry World

Bank, 2000

4. Nicholas Gyabaah, Ministry of Finance & Economic Planning (MoFEP) Ghanas national strategy for financial literacy and CP in the micro-finance sector / Deogratias P Macha

Developing a national financial literacy strategy Tanzania Both MFW4A conference,

Accra 2009

5. Daryl Collins, Jonathan Murdoch, Stuart Rutherford, Orlanda Ruthven Portfolios of the

Poor: How the Worlds Poor Live on $2 a Day Financial Access Initiative, 2009.

www.portfoliosofthepoor.com

6. The Economist, 21 March 2009. L Chen op cit ;

7. Agence Francaise de Developpement Paroles dacteurs (Key Players views) AFD, 2005

8. Finmark Trust The savings market for the poor: assessing the barriers costs and

potential January 2007

9. The Economist, 21 March 2009.

10. UN bluebook op cit

11. Ignacio Mas Being able to make (small) deposits and payments, anywhere. Consultancy

Group to Assist the Poor (CGAP) Focus note no 45 April 2008 / Financial Sector

Deepening Trust, Finscape National Survey on Access to and Demand for Financial

Services in Tanzania. (2006 survey) Finscape e-book www.fsdt.or.tz / Gerda Piprek A

national strategy in progress: Tanzania Macha op cit Both Accra 200912. Leonard Mutesasira The microsave Africa experience World Bank, 2000

13. The Economist, 21 March 2009.

14. Mark Napier Finnmark Trust SA. Provision of Financial services in SA in Liberalisation &

universal access to Basic services OECD, 2006.

15. F Kariuki Financial education intervention examples of Equity Bank Accra, 2009.

16. Nancy Lee (CGAP) Social marketing and finance review. MFW4A Accra, 2009.

17. Financing water for all Report of the World Panel on Financing Water Infrastructure,

chaired by Michel Camdessus, report written by J. Winpenny; Word Water Council, et al

World Water Forum 2003.


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18. R Cardone & C Fonseca Financing and cost recovery IRC International Water &

Sanitation Centre, 2003 / N.Shah et al: Financing of Water Supply & Sanitation Finance

Policy Background Paper DFID, 2007.

19. Meera Mehta Meeting the financing challenge for water supply & sanitation. Water &

Sanitation Programme World Bank, 2003.

20. Agence francaise de developpement op cit.

21. Kariuki op cit 22. Mutesasira op cit.

23. Agence Francaise de developpement op cit

24. UN Blue Book op cit

25. M. Napier, Finmark Trust op cit ; also ABSA Financial Health: you and the National

Credit Act 2007

26. Gautam Ivatury Using technology to build inclusive financial systems CGAP Focus note,

32 January 2006.

27. Agence francaise de developpement / Les operateurs de transferts formels.

28. Our money our rights: How the global consumer movement is fighting for fair financial

services Consumers International, 2010.

29. E. Duflos & K Imboden The role of governments in micro-finance CGAP Donor brief no

19, June 2004.

30. David Baguma Concept note: Consumer Code of practice for micro-finance institutions;

Association of Microfinance Institutions in Uganda AMFIU, Accra 2009

31. Simon Heliso Africa: to integrate or to delink? in Global Future no 1, 2009

32. S. Gupta, C. Pattillo & S. Wagh, Making remittances work for Africa in Finance &

Development, June 2007 www.imf.org/fandd 33. Agence Francaise de Developpement. Op cit

34. O. Morawczynski & M. Pickens Poor people using mobile financial services:

observations on Customer Usage and impact from M-PESA Focus note CGAP brief,

August 2009.

35. Louise Greenwood, Africas mobile revolution, BBC Africa business report, August 23

2009.

36. Morawczynski op cit.

37. Greenwood op cit


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38. Regulating transformational branchless banking: mobile phones and other technology to

increase access to finance CGAP Focus note no 43, January 2008

39. Greenwood, op cit.

40. G Ivatury & I Mas The early experience with branchless banking CGAP Focus note No

46, April 2008

41. Ivatury CGAP 2006 op cit

42. I Kota Microfinance: banking for the poor, Finance & Development June 2007

www.imf.org/fandd

Consumers International (CI) is the only independent global campaigning voicefor consumers. With over 220 member organisations in 115 countries, we arebuilding a powerful international consumer movement to help protect andempower consumers everywhere.

Consumers International is a not-for-profit company limited by guarantee,company number 4337865, and registered charity number 1122155.

Consumers International24 Highbury CrescentLondon N5 1RXUnited KingdomTel: +44 20 7226 6663Fax: +44 20 7354 0607www.consumersinternational.orgwww.consumidoresint.org

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