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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