Financial Exclusion in Sub-Saharan Africa and South America
By Adrian Glover | Oct. 6th, 2016
The arrival of modern electronic banking and its spread across the globe has increased the capacity of financial institutions’ services. Simultaneously, the global poor have been left behind due to barriers to access such as distance and cost. Several evidence-based solutions to inequality of access have emerged over the past two decades, including branchless banking and the formalization of government payments to the poor.
Practice and Solution
This Brief addresses two possible solutions to financial exclusion: branchless banking and formalization of government-to-person payments. The following pages will discuss the evolution of these solutions, general principles contained within variations of the solutions, various applications of the solutions worldwide, evidence of each solution’s impact, and challenges faced by organizations that implement them.
Modern banking has its roots in 13th and 14th century Italy, where it provided services largely to nobility and royalty (hoggson). In the 17th and 18th centuries banking became commercialized, and various national banks were created alongside paper currency; both appearing first in Sweden (history). The aftermath of World War II saw the creation of the World Bank and the International Monetary Fund, which lead to an increase in commercial loans made to impoverished national governments (bretton). The 1960s ushered in the ATM (bloomberg), and shortly thereafter advances in computer technology enabled systems of electronic payment and automated processing. These and other advances lead to the globalization of banking, but are also implicated in financial inequality as market forces bring financial services to wealthier, typically urban areas while impoverished locales continue to be excluded from formal financial systems.
Issues centralizing around the lack of access to modern financial services have been on the forefront of agendas of organizations like the UN, World Bank, and the Alliance for Financial Inclusion since the early 2000s. Within current capitalist economies, access to mainstream financial services such as banking has become increasingly important; banks mediate many economic exchanges, and the use of cash has decreased significantly. In industrialized countries, an estimated 10% of the population are financially excluded (2009 estimate), mostly in inner-city and/or public sector housing areas. In most of the developing world, where advances in banking have not been implemented or markets do not incentivize banks to open branches, the majority of populations are financially excluded (Leyshon). The World Bank estimates that 2 billion working-age adults globally are unbanked, meaning they have no relationship with an insured financial institution. The vast majority of them, 57%, live in India, China, Indonesia, and Sub-Saharan Africa. In countries defined by the UN as developing, 46% of adults are unbanked as compared to only 6% of adults in high-income countries. Worldwide, 42% of women are unbanked in comparison to 35% of men, a gap that widens in developing countries. Over 300 million adults are unbanked and receive either private sector or government wages in cash, which can present security and cost concerns (Pickens, Demigruc-Kunt).
Financial exclusion (lack of access to common financial services such as a checking or savings account) can have costly consequences. In the developing world, the financially excluded are unbanked for various reasons, including: many banks either do not open branches in low-income areas because branches are expensive to maintain, or do not offer products for customers with few resources; the poor believe they lack enough money to use an account or believe they have no need for an account (often because a family member has an account); accounts are too expensive; branches are too far away (Demurgic-Kunt). The average developing country has 2 rural bank branches per 100,000 rural inhabitants, and half of the world’s countries require proof of address—often unobtainable for the poor—in order to open an account (Pickens). In one case prior to the arrival of branchless banking (one possible solution to financial exclusion), people from a village in the Brazilian Amazon spent 12 hours traveling by boat to the nearest bank branch (McKay). In Kenya, the unbanked live an average of 17.5km from the nearest bank branch (King). In Cambodia, India, and Tanzania, the unbanked send money using couriers, money changers, post office money fax services, and bus companies. These methods often take many days to complete transfers, and are much less secure than electronic methods (McKay). Financial exclusion also restricts opportunities for learning about more complex financial services because alternative services are transactional and do not support saving and credit establishment (Buckland).
Percent of Population Unbanked
+ Branchless Banking
Branchless banking promotes ease of access and allows remote users to save money, make purchases, deposit, and transfer funds (Pickens). Branchless banking is a versatile service and can function in combination with other programs such as employment or government welfare initiatives.
Following relatively successful branchless banking programs in the US, UK, and EU during the 1990s, branchless banking for the developing world launched successfully around the year 2000 in Brazil. The Brazilian model was subsequently utilized by banks in Peru, Chile, and Colombia (Mas). M-PESA—a mobile-phone based money transfer program operated by Vodafone’s Safaricom in Kenya and since expanded to Tanzania, South Africa, the Democratic Republic of Congo, India, Mozambique, Egypt, Lesotho, Ghana, Albania and Romania—has been the most successful and widely studied branchless banking initiative in the developing world to date, with 25.3 million active customers as of early 2016 (Vodafone, Jack). Other pioneers of branchless banking include GCash and Smart Money in the Philippines, WING in Cambodia, and WIZZIT in South Africa (McKay/Pickens).
Branchless banking offers a cost-effective method for providing financial services for the unbanked in areas with limited access to bank branches by using agents, such as retailers, to securely handle withdrawals and deposits or devices such as mobile phones or cards to perform financial actions (Mas). Survey data suggests client demand for other branchless services as well, such as the ability to earn interest, take out loans, and buy insurance (McKay/Pickens).
The GSM Association, which tracks the number of mobile money programs for the unbanked, reports there are currently 271 existing programs with 101 additional programs planned for the near future. The programs span parts of Africa and Asia, as well as both Central and South America, with the highest concentration of programs being located in Nigeria, India, and Bangladesh (Mobile). This paper will review branchless banking programs M-PESA in Kenya, Banco Postal in Brazil, and FINO in India.
M-PESA: During the early expansion of mobile phone usage across Africa, users began to transfer money by taking advantage of the ability to purchase pre-paid credit and send it digitally to other users, who would then sell the credit to a local broker in exchange for cash, goods, or services, effectively using the phone credit as currency. This practice was formalized in 2007 by Safaricom, Kenya’s largest cell phone provider owned and operated by Vodafone, with the launch of M-PESA. M-PESA allows clients to deposit, send, and withdraw funds using their mobile phone, as well as access savings and loans services through the affiliated M-Shwari program (Jack, McKay/Mazer). M-PESA is the most successful mobile money program in the world, having expanded to an additional 11 countries and reaching over 25 million clients (Vodafone). 90% of Kenyans say M-PESA is one of their three most important savings instruments (McKay/Pickens).
A condensed summary of the mechanics of Kenya’s M-PESA follows:
To register for M-PESA, clients with a Safaricom cell phone SIM card are required to present some form of official identification. Once registered, they can make cash deposits via agents, free of charge, in exchange for e-money which is held in an M-PESA account under the user’s name. Although deposits are free, there is charge varying from 1-3% for withdrawals. E-money can also be transferred from one client’s account to another using SMS (text messaging) technology, or sold back to Vodafone in exchange for cash. E-money transfers are charged a flat fee of around 40 US cents, and are often used to pay directly for goods and services. M-PESA utilizes a network of over 23,000 agents across Kenya with whom registered M-PESA users can make deposits and withdrawals of cash (i.e. purchase and sell e-money). The agents, who hold e-money balances on their cell phones and maintain a stock of cash on their premises, receive commission on a sliding scale for both deposits and withdrawals made by clients (jack and suri).
Banco Postal: Another pioneer in branchless banking, Brazil’s Banco Postal has opened over 6,000 postal bank branches—largely in impoverished areas—that allow clients to open accounts, make deposits and withdrawals, check account balances, apply for loans, request credit cards, pay bills, invoices and taxes, receive government social benefit payments, and exchange currency (Berthed). The service has brought financial access to 4,860 of Brazil’s 5,561 municipalities and banked almost 6 million previously unbanked individuals (BOOK).
FINO: Financial Inclusions Network and Operations (FINO), an Indian company and yet another pioneer in branchless banking, provides doorstep banking for the financially excluded. FINO provides its services through a field force of over 20,000 agents who carry handheld, biometric point-of transaction (POT) devices with connectivity to a central system. POT devices are the same technology used across the US to enable customers to make payments via credit or debit card at retailers, supermarkets, etc. The devices are used to register clients for an account with one of FINO’s 24 partner banks, and then provide them with a smart card that can be used to make deposits, payments, withdrawals, and check balances (Kiera, Shankara). As of 2016, FINO has 78 million clients (Customer).
Proof for the ability of branchless banking programs to improve the financial well-being of the poor is strong and comes from studies conducted in multiple countries. A 2014 study found that M-PESA clients were able to withstand negative income shocks such as illness, job loss, livestock death, and business failure without reducing household consumption. In comparison, households without M-PESA that suffered negative income shocks were forced to reduce consumption by 7% on average to compensate for the reduced income. The study attributed the ability to withstand shocks to an increase in remittances due to the ease of monetary exchange facilitated by M-PESA. The study also found that savings stemming from the use of M-PESA led households to diversify expenditures and crop growth, as well as enabled them to deplete assets less (Jack). A random control trial in Nigeria found that the use of mobile cash transfers in implementing government cash transfer programs reduced the cost of program implementation, as well as costs to recipients. As a consequence of the mobile transfers, the recipients diversified purchases, diet, and crop growth and had fewer depleted assets (Aker). Another 2013 study in Mozambique found that implementation of mobile money programs lead to increased financial literacy, trust in financial institutions, willingness to send remittances, and tendencies for mobile money to replace traditional savings alternatives (Batista). A 2010 report found the cost of branchless banking to be 19%-50% cheaper on average than traditional banking methods. Safaricom, the provider of Vodafone’s M-PESA, reports that 47% of M-PESA clients save an average of 3 hours of transportation time that would otherwise be used commuting to banks or other formal financial service providers (Mckay/pickens).
One obstacle to maintaining the low costs of branchless banking programs is the necessity (and often lack or poor quality) of customer education. For example, Banco Popular had to replace welfare clients’ cards 5 times as often as their normal cards for wage payments, leading prepaid welfare cards to cost the bank twice as much as normal prepaid cards. Customers had laminated cards because they were told to protect the magnetic strip on the card, lost PINs, etc. (Pickens). Some experts have expressed concern regarding the possible impact of the M-PESA program on inflation, as e-money could potentially increase the existing money supply (Jack). Many providers of mobile financial services have had difficulty developing products that are actively used by large swaths of the population. For example, in Kenya, where the vast majority of adults use mobile money, less than 1% of total transactions made by low-income households are digital. In India, less than 0.3% of adults use mobile money (Faz). In 2008, CGAP found that only 10% of branchless clients are poor, previously unbanked, and utilizing services beyond simple billpay and withdrawals. Though all services reached a large number of poor clients, only in Brazil did poor clients represent the majority of branchless users at the time of the report (McKay/Pickens). Fortunately, these numbers are improving (Bold).
+ Formalization of Government-to-Person (G2P) Payments
Governments make regular payments (hereafter called G2P payments) - such as welfare, wage, and pension payments - to over 170 million poor people worldwide. However, fewer than 25% of G2P payments are electronically deposited in formal financial accounts (Pickens). Research shows that access to formal financial services allow the poor to better handle financial emergencies, save, and increase household consumption (Cull). Electronically transferring government payments into a formal financial service provider brings recipients into the formal financial system, benefits which can be further bolstered by complementary education efforts.
Over the past 15 years, over 40 new social transfer (i.e. welfare) programs have been launched, only half of which allow for electronic delivery. Where there is no electronic delivery, G2P payments are made in cash, in person, and are costly to both governments and welfare recipients due to administrative expenses and fraud. However, the majority of current electronic G2P programs demonstrate limited functionality, as cards holding funds are only reloadable by the government, and if funds are not withdrawn quickly they are returned to the government. Truly inclusive programs - a growing minority - use branchless banking channels such as mobile banking to promote ease of access and allow users to save money, make purchases, deposit, and transfer funds (Pickens).
Elements of successful programs include safe storage of funds (i.e. PINs are required for access, payments made directly to accounts controlled by recipients, protections are made against fraudulent activity, etc.), transactional capability (the accounts can be used to make and receive payments, transfers, etc.) and accessibility (the accounts can be accessed via a card or online or mobile account) (Pickens). The section below will outline important aspects of government programs in Brazil, India, and South Africa, as well as non-governmental programs such as Proyecto Capital, run by Fundación Capital and associated corporate and institutional partners.
As mentioned previously, effective programs are being implemented by Brazil, India, and South Africa. Brazil is in the process of moving over 12 million welfare recipients from the Bolsa Familia program to a financially inclusive account that includes a debit card, insurance, and a financial literacy program. In India, over 45 million people every year receive G2P payments from the National Rural Employment Guarantee Act, which employs the impoverished in rural areas for up to 100 days of work every year. Some of these payments are made via bank accounts, post office savings accounts, or electronic prepaid accounts that can be accessed via smartcards. 25% of South Africa’s G2P payments are made into a debit card-based account through the country’s largest bank. The accounts have no minimum balance as well as allow for 2 free withdrawals monthly, and purchases. Studies have shown that recipients of these electronic G2P payments have increased savings significantly, which allows the impoverished to survive financial crises without offsetting losses by eating less, removing children from school, selling assets, or borrowing (Pickens).
Fundación Capital is an international organization that works to enable families seeking to leave poverty by expanding financial inclusion, capacity building, and promoting investment. Their Proyecto Capital program promotes, designs, and supports the practice and policy of financial inclusion in conditional cash transfer programs (CCTs, a type of G2P payment) in Latin America and the Caribbean, and has received several awards, including the Skoll Award for Social Entrepreneurship in 2014. The program works with the governments of 12 countries in Latin America, including the Brazilian Bolsa Familia program, and relevant financial institutions, and has led to over 6 million recipients of CCTs opening personal savings accounts. Evaluations have shown increased rates of short-term savings among CCT recipients (Proyecto). It has also provided over 70,000 families with financial literacy education to support enhanced financial capabilities, an element that is not included in most government electronic G2P payment programs. This is mostly done via the award-winning LISTA Initiative, a tablet-based financial education application that teaches users how to use financial technology and can be circulated throughout communities by community leaders (LISTA).
Recent research provides outcomes-based evidence supporting the efficacy of electronic G2P payments into formal financial accounts. A 2008 randomized control trial in Kenya showed that women with access to a savings account increased their productive investments by 40% after 6 months, were better able to absorb the shocks of financial crises, increased food expenditure, and increased investment in their personal businesses by 38-58% more than the control group (Dupas). Studies on access to savings accounts in Malawi and the Philippines showed increased business investment, expenditures, crop outputs, and female empowerment. Insurance services provided by access to formal financial institutions have allowed farmers in India and Ghana to shift from subsistence farming to cash crops, upscale operations, and increase income (Cull).
A major obstacle preventing recipients of G2P funds from maintaining accounts is accessibility. The average developing country has 2 rural bank branches per 100,000 rural inhabitants, and half of the world’s countries require proof of address, often unobtainable for the poor, in order to open an account. This can be overcome through forms of branchless banking such as mobile accounts (Pickens).
Many banks also charge fees that are unaffordable for the poor, such as transaction charges, monthly fees, and minimum balances (Deshpande). Provision of affordable, low-cost, quality accounts should be a priority if the poor are to maintain their accounts after opening them.
Future of Issue
Above, you discussed what is happening currently, but we want to be ahead on what may happen in the field. Will certain aspects of the issue become more threatening or important in the next few years? What does the future look like? Are there any future trends on the solution side of the issue? Are new tactics being discovered to combat the issue?