Financial Inclusion Briefing paper 07072016

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  • Financial Inclusion in Africa

    AFFORD UK - The African Foundation for Development

    Chatham House July 1st 2016

    Jack Van Cooten

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    Policy Brief July 2016 Financial Inclusion in Africa


    There is direct relationship between rates of poverty and financial exclusion. Globally, approximately two billion

    people, or 38% of working-age adults do not have access to regulated banking or financial services. For those

    who live in poverty, the proportion who are unbanked almost doubles, with 73% financial excluded, showing the

    disproportionate impact that financial inclusion has on the poor (IFAD, 2015).

    Despite the impressive growth rates witnessed in many African countries over the past decade, for growth to be

    sustainable and for development to be inclusive, it is imperative that all sections of society are financially

    included. The data shows that Africa is falling behind other continents when it comes to inclusive financing, with

    only 34% of adults having a bank account and 16% of adults having formal savings; the second lowest of any

    region in the world, with only the Middle East having lower rates (World Bank, 2014). Of course, there are

    disparities within Africa too, with lower rates of financial inclusion among the continents women, youth and

    poor. Expanding financial services to these groups in particular will enable communities to be resilient against

    shocks, allow them to both save and invest in their families, and will help grow a class of entrepreneurs who in

    turn will drive development. The continents diaspora and their remittances can and will play a role in this process;

    they represent a significant economic force that if properly organised can play a key role in the continents


    This policy brief first outlines how financial inclusion is both defined and measured, before looking at rates of

    financial inclusion in Africa. It then looks at who and where in Africa is financially included and indeed, excluded,

    and what the opportunities are to broaden financial systems across the continent. The role of the diaspora in

    financial inclusion is then explored, with a focus on the tens of billions of dollars per year that are sent to African

    countries from abroad. Finally, best practices from Womens World Banking and Rwandas Umurenge SACCO

    programme are highlighted, before a number of policy recommendations to key stakeholders are put forward.

    What is Financial Inclusion?

    Interest in understanding and broadening financial inclusion has grown in recent years, as exemplified by multi-

    country commitments such as the G-20 Financial Inclusion Action Plan (G20, 2014), and the number of individual

    countries who have established their own policies in the area. Financial Inclusion refers to a state in which all

    working age adults, including those currently excluded by the financial system, have effective access to the

    following financial services provided by formal institutions: credit, savings (defined broadly to include current

    accounts), payments, and insurance (GPFI, 2016).

    Explanations and metrics of financial inclusion have progressed away from categorising people according to a

    binary separation of being either included or excluded, to seeing financial inclusion as multi-dimensional. The

    below table summarises how aspects such as access, usage and quality are being considered as part of a more

    encompassing and accurate definition of inclusive financing (Table 1).

  • Table 1 The dimensions of financial inclusion. Adapted from the Financial Inclusion Data Working Group (2011) in AfDB (2013)

    It is important also to understand the distinction between voluntary and involuntary financial exclusion (Young-

    Park & Mercado 2015). People who are voluntarily financially excluded are individuals that choose not to use

    financial products and services, either because they do not feel they need them or due to cultural factors that

    discourage usage. Conversely, involuntarily exclusion relates to people who cannot access financial services, even

    though they may want or need to. This could be down to a number of factors, such as discrimination, lack of

    income, being perceived as too risky or unprofitable by financial institutions, or due to lack of proximity, for

    example those living in rural areas.

    Information on financial inclusion has usually been

    broken down into supply and demand-side data.

    A simple way to understand this distinction is that

    supply-side data is measured from the top-down,

    by central banks and governments for instance. An

    example of the type of information that supply-

    side stakeholders produce is the number of ATMs

    or bank accounts in a country or region. However,

    using this information to convey levels of usage

    and access to financial services is inaccurate, as it

    does not show how regional, social or economic

    disparities have an impact on financial inclusion.

    Demand-side financial inclusion however, is

    measured from the bottom-up, and attempts to capture the levels of usage based on perspectives from the

    poorest households and low-income, often informal businesses (BIS 2012).

    Financial Inclusion in Africa Whilst financial inclusion in Africa is growing rapidly, increasing from 24% of the population in 2011 to 34% in

    2014, Sub-Saharan Africa remains the second least financially included region in the world, with only the Middle

    East having a lower proportion unbanked. The World Banks Findex Database defines being banked as those

    who have an account with either a financial institution, such as a bank or credit union, or alternatively with a

    mobile money provider, which can be used to transact money to and from a mobile phone account (Global

    Findex Database 2014). It is interesting that whereas globally, only 2% of adults have a mobile money account,

    in Sub-Saharan Africa this figure climbs to 12% of the population.

    In Africa, when it comes to financial inclusion, there are sharp disparities, both between and within countries. We

    will come to how disparities manifest within countries below, but in the countries for which data is available

    (Figure 1, above), it is those in Southern Africa that tend to have the highest levels of account ownership South

    Access Usage Quality

    Availability of formal, regulated

    financial services:

    Physical Proximity


    Actual Usage of formal financial

    services and products:



    Duration of time used

    Products that are well tailored to

    client needs:

    With appropriate

    segmentation to develop

    products for all income levels

    Figure 1 Account Penetration across the World (Global Findex Database 2014)

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    Policy Brief July 2016 Financial Inclusion in Africa

    Africa is the highest with 70% coverage, closely followed by Namibia (59%) and Botswana (52%). East Africa also

    shows relatively high rates compared to the rest of the continent, but this is largely down to the region being

    the global hub of mobile money. 75% of Kenyans have an account at some form of financial or mobile money

    institution, along with 44% of Ugandans, 40% of Tanzanians, and even 39% of those in Somalia. The rise and

    subsequent prevalence of mobile money will also be discussed in greater detail below. The picture is more mixed,

    but generally lower in West Africa, ranging from regional highs in Nigeria (44%) and Ghana (41%), to a regional

    low of 7% in Guinea. The Sahel and Central African countries also have low percentages of their populations

    who are financially included, with almost every country under 20% (Global Findex Database 2014).

    Who is Financially Excluded in Africa?

    But percentages at the national level do not tell the complete story. For example, if 44% of the 186 million people

    in Nigeria do have an account at a financial or mobile money institution, it means that over 100 million people

    in Nigeria do not. Who are these people, and why is it important that efforts are made to include them financially?

    African Women

    African women are an extremely diverse cohort, coming from different

    cultural settings, income levels, societies, marital statuses etc. (MFW4A

    2013). Throughout Africa, women are less likely to hold an account at a

    financial institution than men (figure 2). However, it is widely

    acknowledged that the positive effects of broadening financial inclusion

    among women go far beyond benefiting the individual, but subsequently

    benefits their households, the wider community and ultimately, men too.

    Financial products should be tailored so that they are appropriate for

    womens needs and allow more flexibility. Focus also needs to be targeted

    towards building knowledge on financial services, so that they can be fully

    taken advantage of by women (ibid.).

    African Youth

    Of all of the demographic groups in Africa, African youth are some of the most marginalised. According to a

    report by the UN, for African youth, that is those that are aged between 15 and 24, only 12% have a formal bank

    account (UN 2013). Much of this is down to negative stereotypes of youth, legal restrictions and non-inclusive

    financial policies and therefore, there is much work to be done. As the continent with highest proportion and

    fastest growing population of young people, it is imperative that the financial exclusion of African youth is

    addressed. In doing so, the youth should be provided with the knowledge, skills and financial products that will

    allow them to build a sustainable livelihood (Braga 2009).

    African Poor

    Financial inclusion has been broadly recognised as critical in reducing poverty and achieving inclusive economic

    growth; however, in every country in Africa, it is the poorest that are the most financially excluded. With the

    wealthiest 20% of adults twice as likely to have a bank account as the poorest 20%, financial inclusion is strongly

    related to wealth. Financial exclusion also perpetuates poverty, as financially excluded individuals and SMEs are

    Figure 2: % Sub-Saharan Africans who

    are Financial Included (Global Findex

    Database 2014)








    Men Women

  • more likely to seek financial services such as loans through riskier, higher-interest sources (AfDB 2013). Ultimately,

    for both individuals and their businesses at the poorer end of African societies, being able to access financial

    services can contribute to investment in education, management of risks and a boost in economic growth (Bruhn

    & Love 2014).

    Opportunities to Broaden Financial Inclusion

    For all of the groups listed above, and indeed for other marginalised sections of society in Africa, not having the

    financial infrastructure means to also not have a place to securely save or invest money, not having the ability

    to insure oneself or ones business, and thus not having as much ability to build resilience against shocks (IFC

    2013). However, impressive progress has been made across the continent in recent years. For example, whereas

    in 2011, 76% of the continent was unbanked, only three years later that figure dropped to 66% (and as you are

    reading this, that figure is lower still). But quick gains should not mask the fact that there is immense scope by

    both governments and the private sector to broaden financial inclusion, particularly among these marginalised


    Broadening Financial Inclusion at the Local Level

    At the local level, broadening financial inclusion needs to take a tailored approach, depending on the target

    group. For example, African women tend to be in a weaker position for accessing finances than African men,

    partly due to discriminatory gendered land rights, meaning they lack the collateral when attempting to obtain

    funding (OECD 2011). Their higher vulnerability and higher levels of poverty particularly among rural women -

    also means that they are more risk averse than their male counterparts. Additionally, cultural norms placing the

    responsibility of raising children in the hands of women and also a lack of financial literacy creates obstacles that

    for men are less likely to exist. On the other hand, convenience and the geographic proximity of financial services

    have been found to be a greater driver of usage for African women than men (MFW4A 2013). Similarly, African

    women generally make smaller transactions than men, and are more reliant on cash. Therefore, gender sensitive

    financial products are essential, particularly for women that face multiple-barriers, such as poor or rural women.

    One such example is the utilisation of a mobile delivery van in Malawi that brings a range of financial services to

    women who would otherwise not have access (Stuart, Ferguson and Cohen 2011).

    Measures have been taken to increase the financial inclusion of youth too. Through a joint study of financial

    inclusion programmes and accompanying financial management lessons in Togo and Ethiopia (FUCEC in Togo

    and ACSI in Ethiopia), participants in both countries doubled their net average incomes (after average expenses),

    compared to their respective control groups. This was in part due to their participation in financial education

    sessions which taught money management strategies. In addition, participants in both groups tended to save

    more and for longer periods of time following the programmes emphasis on each participant making a financial

    plan (UNCDF 2016a). This highlights the importance of financial education accompanying efforts to broaden


    Broadening Financial Inclusion at the National Level

    Some national governments are taking steps to digitalise the payment of staff wages. By providing their public

    sector staff with bank accounts and paying wages into them, rather than in cash, they hope to quicken the pace

    of financial inclusivity (World Bank 2015). However, we need to be careful to ensure that we do not assume that

    simply providing a person with a bank account automatically means that they are financially included. For

    example, a case study in a 2016 UNCDF report describes the situation of a Mozambican school teacher who was

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    Policy Brief July 2016 Financial Inclusion in Africa

    provided with a bank account into which her monthly wages were transferred. However, this was detrimental to

    both her overall income and also to her students as she would have to miss one day of teaching per month to

    take the long journey to collect her wages, and in doing so, incurring the additional cost of travel (UNCDF 2016b).

    This is just one factor among many (such as high bank account fees) in which broadening financial inclusion

    through simply providing access to financial services is insufficient. Need and usage are equally important. It is

    essential therefore, to provide concrete national regulatory frameworks that are beneficial to account ownership.

    This can include measures such as requiring banks to provide low or no-fee accounts, incorporating innovative

    technologies such as mobile money, and introdu...


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