Monday 15 September 2014

Commercial banking in Africa: The melting pot

Changing the way fortune is managed in Africa, might just change the fortunes of Africa.

In culinary terms, Africa is an exciting place. Variety is indeed the spice of life: from the fiery Ghanaian curries to bunny chow (food served in hollowed out bread) in South Africa. To a geek like me, financial innovation in the country is as exciting as the food - both have a rich mix of traditional and outside influences, of simplicity and complexity and of history and ingenuity.  

However, the most exciting thing about this innovation is that it's a recipe for growth. Banking is the cornerstone of a functioning economy. It provides liquidity and security, supporting both the growth of business as well as the financial security of citizens. 

It is thus dispiriting to read that Africa is one of the least ‘banked’ places in the world. The level of banking penetration (the proportion of people with bank accounts) is only 16.6% in Sub-Saharan Africa, compared with a global average rate of 63.5%. This is partly because of a lack of infrastructure (there are only 5.8 branches per 100,000 people in Nigeria). However low levels of income across sub-Saharan Africa also play a role, as banks have few incentives to attract savers with the likelihood of only ever saving small amounts. Indeed at many banks, the minimum required deposit can be as high as a person’s average annual wage. There is also reluctance by banks to locate in places where political and economic environments can be volatile. It was only a court injunction that prevented Barclays from cutting all banking services in Somalia recently, due to concerns over exposure to money laundering in the fragile state. 

But despite economic, political and structural challenges, the bottom billion is rising and the opportunity to attract first time customers is just too good to forgo. Thus a variety of actors are stepping into the breach, with new and innovative ways of providing financial services to poor Sub-Saharan Africa. The ingredients are a surprising mix, but could, in the right amounts and with good timing, send African GDP climbing. 

The ingredients for a newly banked Africa: 
  • Loans and savings:
    • Innovative saving schemes 
    • Micro finance
  • Transfer of money:
    • Cheaper and quicker domestic money transfer systems  
    • Cheaper and quicker cross-border money transfer systems
  • New types of money not subject to  state governments
    • Virtual currencies
So let's start with those traditional ingredients we take for granted in our own long established banking sector; the ability to save and take out loans. 

Providing innovative ways of saving has the ability to transform the business environment and home life for many Africans. Without bank accounts many people in sub-Saharan Africa are left without the opportunity to save for the future - to even out income streams or save enough capital to start or scale an enterprise. Instead they are entirely dependent on their daily income.

Yet, innovative schemes are negating the need for a traditional banking infrastructure. Let's start by looking at the now famous micro-finance movement. The precise origins of the schemes are unclear but it is most commonly attributed to Muhammad Yunus who set up the now largest microfinance institution, Grameen Bank, in Bangladesh.  Yunus had discovered that the poor often remain poor because of lack of access to credit or savings. Lack of access to small amounts of capital meant that when a crisis occurred such as the ill health of a wage earner, a family could not tide itself over with a loan. Equally, many micro-businesses, which operate primarily in the informal sector, often have no access to credit; either through a lack of financial know-how or because they are sitting on what Hernando de Soto described as 'dead capital'. This phenomenon occurs when, activities in the informal sector are denied loans as the capital they have is not legally securable. Therefore it cannot be used to help guarantee a loan. By making tiny loans to those living in poverty across the globe, microfinance institutions can help avoid people falling back into catastrophic poverty and deprivation as well as giving them opportunity to secure a better livelihood through entrepreneurship.

Innovations in micro-finance schemes have also lead to micro-saving schemes. These occur at the community level in the form of a saving and loans association. Similar to a regular bank, 25 to 30 members pay in small amounts of money which are then pooled and lent to individual members over a 6 to 12 month period. Interest payments form the returns to those in the association. These schemes have proved to be popular across the developing world they have 4.6 million users across 54 countries.

However banks exist not solely to provide loans and savings. They also provide other crucial services such as the transfer of money between accounts and providing hard currency, allowing account holders to securely pay bills or transfer money to friends and family. Both security and liquidity are the key ingredients provided by banks here. Traditionally this has required expensive infrastructure and willingness by financial institutions to invest in a country. 

But African entrepreneurs are finding ways around this by using technology to leapfrog traditional barriers and in the process often enhancing the technology they originally absorbed. A classic example, and the next ingredient in this recipe, is the mobile money transfer system, M-Pesa. Developed in Kenya by Vodafone's local service provider Safaricom with advice from the UK's Department for International Development, the system allows Kenyans, Tanzanians and more recently South Africans to transfer funds through their mobile phones. They can also use the service to withdraw money for a small fee. This simple technology has radicalised finance in Africa driving better financial management by individuals and an increased rate of business activity.  The charitable network CGAP found that M-Pesa increased the incomes of rural recipients by 5-30%. It has also increased security by negating the need for users to carry cash. 

This tasty ingredient could be further complemented by a superior international financial transfer system. Let's go back to Barclays attempting to cut off financial ties with Somalia. This would have been a disaster for the country, which is dependent on remittances (money being sent to the country by Somalis working abroad). Fully 40% of Somali families rely on these to meet their most basic needs, such as food and healthcare, according to Oxfam. And Somalia is not an anomaly in Africa, remittances comprise 25% of Liberia and Lesotho's GDP and 38% of Eritrea’s.

The challenge with international transfers is that moving money across borders can be expensive. Africans sending money home, using transfer services like Western Union and MoneyGram, lose an average 12.4% in fees. Within Africa it can be even worse; it costs an average of 22% to transfer money between Tanzania and Kenya, the homes of M-Pesa. These high fees are largely due to a lack of competitors and high regulatory hurdles. 

How to prevent Africans losing 12.4% of the $60 billion they send home every year? A company called Earth Port might be the answer. It is not a small start-up or a charitable endeavour, but since 1998 it has worked to become a global aggregator of local payment systems. Instead of navigating the numerous electronic banking systems it moves money on its own platform called universal payments systems. In this way it provides low cost international transfers to over 60 countries and its reach continues to expand. Its clients include smaller online transfer systems like Azimo to the major players such as Barclays and Bank of America. Earth Port promises to halve the cost of remittances compared to traditional wire payments. If adopted across Africa, this could have enormous financial benefits. A 2013 World Bank study found that if, remittances fees fell in Africa by just over half, to 5%,  then this would return $4 billion into Africans pockets. Earth Port’s innovative technology might just be a way of achieving this.

The final and most experimental ingredient in this recipe is digital currency, which has the potential to be the most transformative in Africa's financial system. I'm going to use the most infamous example of virtual money, Bitcoin, but it's possible to look to other varieties too. Bitcoin is a decentralized, software based, digital currency that uses peer-to-peer technology to facilitate instant payments, mostly to purchase goods and services.  The media has tended to focus on Bitcoin’s more nefarious uses, particularly its use to launder money and to pay for illegal substances, most famously on the Dark net marketplace, Silk Road. Yet, the features which make it such a bugbear to governments and central banks could actually bolster trade and investment in Africa. 

To begin with, digital currency might make the transfer of money faster and cheaper than any remittances service ever could. Bitcoin operates outside the traditional financial system and by cutting out banks as middlemen, it could greatly reduce the cost and speed of moving money in Africa. Moving Bitcoin is virtually free and transfers would be near instant - the current remittances process can take up to 5 days. E-commerce in Africa would particularly benefit from the wider use of virtual currency. Merchants currently struggle with global online payments as credit cards place high transaction fees on payments to Africa and fraud issues are a constant worry. 

However, the most appealing feature of virtual currency as an ingredient is that its stability does not rely on the stability of a national government. This might seem a strange point to some. How could Bitcoin, whose price volatility is 10 times that of the US dollar, and whose value dropped by nearly a third after the crash of the Bitcoin exchange Mt. Gox, be more stable than a national currency? It's important to remember that Bitcoin is relatively new and the first of its kind to achieve significant market attention. As Bitcoin and other virtually currency's expand they should naturally trend towards stability as confidence in them grows. Consumers were wary of trusting online payments such as PayPal in their early days. However a growing number of users and a proven safety record created a virtuous circle of growth and trust and PayPal was, until February, the largest online payment system. Increased liquidity will also lend stability to Bitcoin. It stands to reason that with more Bitcoins and money behind them, a single incident or player, is less able to disrupt the market. Governments also creating a fixed regulatory policy around virtual currency would also lessen much recent uncertainty

Thus an increasingly stable ingredient might be the key for many African countries where their own local currency is often very unstable. One only needs to think of the instability experienced by Zimbabwe under Mugabe, where inflation reached 79.6 billion % before the currency was abandoned entirely.  Even Ghana, a bastion of new growth and development in Africa, has seen its currency slide by around 40% this year. Bitcoin, which doesn't rely on a central bank and is relatively free from political meddling, could provide Africans with a currency they can trust. Indeed a company, BitPagos, is focused on trying to create a Bitcoin ecosystem in Latin America, where individuals in countries with high inflation such as Argentina and Venezuela, can rely permanently on Bitcoins, instead of switching into national currencies. 

Virtual currencies are not a perfect answer to unstable economies in the emerging world. There are of course risks that Bitcoin's anonymity will attract money laundering and finance terrorism in Africa, thriving on, instead of helping solve, instability. Yet the world’s most stable national financial institutions often developed over hundred year periods - in a country that is increasingly using technology to leap frog so many traditional development problems, currency should be no exception. 

So there we have it, a rich mix of innovation, coming together to ‘bank’ Africa. It’s inspiring to see a continent, where 600 million still lack access to enough electricity to light their homes, at the cutting edge of financial innovation in so many ways. From local village groups to global online payments systems, finance is driving development and equality across Africa. That’s what I’d call a recipe for success! 
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Tuesday 13 May 2014

Advice to the chef-in-chief: How to cook the perfect health care system

It's seems ever since President Obama passed his healthcare bill in March 2010, politicians on the right have been loudly protesting about the implications for American freedom. Despite health care costs significantly higher than any other developed nation and nearly 50 million uninsured resulting in 45,000 Americans deaths a year, they have reacted to the President’s attempt to ensure every American can afford treatment as an assault on America's founding principles. Perhaps they are taking Patrick Henry's "give me liberty or give me death" speech a little too literally...
Perhaps unsurprisingly, the anger surrounding the Patient Protection and Affordable Care Act appears to be largely due to misunderstanding of what it contains. Talk of 'death panels' and socialism have created a fear of the unknown. An excellent piece from the Jimmy Kimmel show (you can watch it here) shows Americans first being asked if they agree with ‘Obama Care’. They all say no. They are then asked if they support an alternative bill, the Affordable Health Care bill and describe its principles. They all say yes. They are then shocked to discover that the latter is in fact the dreaded ‘Obama Care’. This is not only an interesting study on the depth partisanship in America, but also highlights how uninformed many Americans are about this issue and how complex healthcare provision is. And indeed Americans have one of the most complicated and expensive systems in the world. Americans spend $8,602 per person annually on health care. Meanwhile, Britain spends only $3,609 per person and the Germans spend $4,495 per person. Even the “socialist” French spend less at only $4,118 per person a year. 
How to unpick this mess? In homage to the Guardian’s ‘How to cook the perfect…’ column by Felicity Cloake, I’ve decided the trick to finding the perfect healthcare recipe is to look at many different versions and see what works best. I’ll be looking at recipes from the Germans, the British, and the Singaporeans, determining what works best and from whom America could borrow.
NB. To stay true to Felicity’s style I’ve dispensed with my usual ingredient list. Please find them scattered through the content of this post.
I'll begin with Germany and their Bismarck model, named after the Prussian Chancellor who implemented their system in the 1880's. It is very similar to what President Obama would like to see in the US. It is mandatory to have health insurance and no one can be excluded based on any pre-existing conditions. Employers and payroll deductions form the basis of funding. However, one of the key differences between the systems is the insurers themselves. 
If the US was working from scratch, this model might not be too difficult to implement. Unfortunately, the President is using some ready-made ingredients. In Germany, compulsory health insurance is provided to 92% of the population through "sickness funds", private non-profit organisations none of which are allowed to deny coverage for a pre-existing condition. In the US, health insurance has traditionally been provided by for-profit behemoths. These companies are very reluctant to accept clients with pre-existing conditions that will hurt their bottom line. They lobbied heavily against the Affordable Care Act. 
The implementation of this system is hindered by an economic condition that plagues the insurance industry; adverse selection, where the propensity to buy insurance is highly correlated with an individual’s level of risk. Simply put, those with a higher risk of requiring medical attention are more likely to buy insurance. If, as the Affordable Care Act ensures, insurers are bound to serve all patients regardless of pre-existing conditions they will suddenly find themselves with a greater number of already sick and injured patients relative to healthy ones, pushing up their costs. To protect profits they will have to raise prices. Of course, if coverage was truly universal, as in Germany's recipe, this would not be an issue. The healthy low risk citizens would bolster the expensive unwell. This is what Obama is hoping to achieve - an influx of the young and fit by penalising those without health insurance. However, achieving this kind of universality will take time. Meanwhile, insurance costs will rise, further putting off the healthy and uncovered. 
If the Bismark model, so effective in Germany, works best when made from scratch are their other recipes which could perhaps guide the United States? Should they perhaps use a different set of ingredients? 
Perhaps if you can't get Americans to buy, you can get them to save? In Singapore healthcare costs are primarily covered by Medisave, a compulsory saving scheme, where Singaporeans and their employers contribute a part of their monthly wages into regulated account to save up for their future medical needs. Singaporeans are expected to use these savings, and, in dire circumstances, Medishield - a low cost catastrophic medical insurance scheme - to foot their medical bills. While healthcare costs are heavily subsidized, they are never free. This helps avoid over utilisation while still providing high quality health care.

And this recipe certainly has succeeded. Singaporeans have one of the most highly ranked healthcare systems in world - Bloomberg puts them 2nd, just behind neighbouring Hong Kong. It also has the world’s lowest infant mortality rate.

Perhaps this is because the Singaporean recipe avoids another pitfall of the traditional insurance systems: moral hazard. Simply put, if an individual feels certain that they will be protected regardless, either by insurance or by the state, they will be encouraged to take greater risks with their health. The rationale is that between using primarily savings and always paying for care, even if the fee is only nominal, Singaporeans will be discouraged from overly relying in the healthcare system and encourages them to focus on prevention. At its crudest the logic runs something like this, if I eat healthily and exercise I am less likely to need expensive healthcare treatments and am more likely to be able to afford braces for my kids. One can only imagine how appealing this recipe would be to American policy makers, where citizens suffer so much from lifestyle diseases such as diabetes or cardiovascular problems. 

But, given conditions in the US kitchen, is this recipe transferable?

Unlike the Singaporeans, Americans do not have a tradition of saving. US citizens have on average $15,191 in credit card debt alone. Contrast this with Medisave which emerged against the backdrop of high savings in Singapore. This meant that enabling a behavioural change in Singapore was not difficult. Encouraging U.S citizens to save the Medisave minimum sum of $40,500 would perhaps be a cultural shock. 

It should also be noted that the American recipe needs to feed a lot more people. Singapore is really a city state with 5.3 million people. The US population is well over 50 times that size. Dishes that work well at a small dinner party are often unfit for serving large numbers of people. 

Who then might the US turn to for culinary inspiration? Why not look at a neighbour closer in size and in heritage? With 63 million people the UK, though still a relatively small island, is more similar in size and complexity to the US. However, their approach to healthcare has been radically different. 

Instead of entrusting healthcare to private providers, the government runs the healthcare system from start to finish. UK citizens pay taxes, a portion of which are allocated to fund the National Health Service (NHS). The state also runs the healthcare infrastructure for the most part, (although there are exceptions) and pays for the doctors and nurses. In this way British citizens using the NHS never see a medical bill and most offerings are free at the point of service. Exceptions include a nominal fee for things such as dentist visits and a standard prescription fee. 

The government, as the sole large employer of healthcare workers in the UK, is something of a monopsonist. That is, it is the only major purchaser of a particular good or service, in this case doctors and nurses, allowing it substantial control in the marketplace. This allows the UK low healthcare costs, especially when compared against the United States. The British government spends only $3,609 per capita or 9.4% of its GDP. The US government spends $8,602 per head or 17.2% of its GDP. 

However, the amount collected from taxes, forms the limit of what can be spent on healthcare by the NHS. As such healthcare in this form must be rationed to some extent. The body charged with this responsibility is, perhaps ironically, entitled NICE (or on more formal occasions the National Institute for Health and Clinical Excellence). They are entrusted with deciding what treatments the NHS will and will not pay for, assessed in terms of QALYs (Quality-adjusted Life Years). Simply put, new treatments are evaluated in terms of how many quality years of life they will provide per pound spent.

As you may imagine, this is not the most PR-friendly of policies - cancer sufferers frequent news channels, explaining why the government won't pay for their treatment. This is the kind of media minefield the US government would certainly want to avoid, especially when talk of "death panels" already abounds on Fox News. Furthermore, it is hard to imagine an America, still so fearful of federal government intervention, willing to experiment in the kitchen with an entirely government run healthcare system. And while it certainly outperforms US's position, of 46th in Bloomberg’s healthcare efficiency ranking, the UK still comes only 14th.

Which recipe should the US borrow from then? I have only shown you three of the world's 40 state run healthcare systems, passing over many excellent recipes. However, what is clear, from a very brief attempt to discern the perfect recipe is that, of course no such thing exists. Each healthcare system is designed to suit the context in which it exists. And the context in which President Obama is working is particularly complicated.

Healthcare reform in America is famously difficult to implement. Nixon planned to introduce healthcare reform, far more radical than anything Obama has implemented, but this was vetoed by 70's Democrats for not being far-reaching enough. Twenty year later Hillary Clinton's attempts at healthcare reforms were also dashed. So the fact that Obama has even managed to implement his Bismarkian reforms is in itself a small miracle. That fact that the scheme has now signed up 8 million mostly poor Americans is further cause for celebration.

Is it a perfect recipe? No. So far the scheme has enrolled only a quarter of those eligible. This is partly due to the chaotic nature of its roll-out. A multitude of technical glitches affecting healthcare insurance exchanges in their first weeks prevented many frustrated American signing up. Outside of federal mismanagement, America's day-to-day government is largely run at a state level, leaving state administrators with a large say in the extent to which they implement President Obama’s healthcare reforms. Democratic Vermont for example has enrolled 85% of those eligible. Republican South Dakota just 11%.

Yet in a country as large and complex as America shooting for perfection is not the best way to get things done. To quote a Republican favourite, Ayn Rand, Republicans dissatisfied with healthcare can continue to “evade reality” but they “cannot evade the consequences of evading reality”. In the world wealthiest country, the deaths of 45,000 uninsured Americans is a travesty. Politicians should stop complaining, roll their sleeves up and focus on giving Americans the healthcare system they deserve.
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