The people of Africa continue to battle poverty and most still have limitedn access to traditionaln financial services.
But the continent largely escaped the global financial fallout and is now considered one of the more attractive investment regions. Add to this an increased investment in infrastructure and governments that are developing enabling policy and it seems the continent could be on the cusp of a banking revolution.
The Financial Access Initiative (FAI) is a consortium of researchers at New York University, Yale, Harvard and Innovations for Poverty Action that focuses on finding answers to how financial sectors can better meet the needs of poor households.
According to the FAI, more than half the world, and in sub-Saharan Africa 80% of the adult population, remains unbanked. Although the group relies largely on World Bank data, it is still frustrated by the lack of comprehensive data and say this has knock-on effects on finding solutions.
‘Limited information on the size and nature of the global population using financial services limits policymakers’ abilities to identify what’s working and what’s not, and it limits financial services providers’ ability to identify where the opportunities lie and where they could learn from current successes,” says the FAI team in the framing research note, ‘Half the World Is Unbanked”.
Key findings from the FAI and World Bank show that:
- 2.5-billion adults, just over half of the world’s adult population, do not use formal financial services to save or borrow;
- 2.2-billion of these unserved adults live in Africa, Asia, Latin America and the Middle East;
- Of the 1.2-billion adults who use formal financial services in Africa, Asia and the Middle East, at least twothirds — a little more than 800-million — live on less than $5 a day; and
- In sub-Saharan Africa 80% of the adult population — 325-million people — remains unserved, compared with only 8% in high-income Organisation of Economic and Cooperation
Development (OECD) countries.
Although most of the unbanked fall into the most economically vulnerable category, there are some countries that are bucking the trend. ‘India and Thailand appear to be countries with relatively low per capita income and a large rural population but have greater use of financial services than many relatively richer and more urban countries.
‘These findings support the idea that countries can improve levels of financial inclusion by creating effective regulatory and policy environments and enabling the actions of individual financial services providers,” the FAI researchers say.
A key investment region
The concept of the African Renaissance, popularised during the Mbeki regime, while initially an ideal, is fast becoming an economic reality. Africa has emerged from the financial crisis, which started in the developed world, relatively unscathed.
A recent series of articles published by McKinsey & Company has highlighted the opportunities for businesses in Africa. Once shunned as a high-risk, unstable and difficult to operate in, Africa is now offering an attractive alternative to the investment-saturated European regions, and is even proving more desirable than the burgeoning Middle East and Asian economies.
Paul Collier is professor of economics at Oxford University and the author of a McKinsey Quarterly article, ‘The Case for Investing in Africa”. ‘Most international businesses are still not very aware of Africa’s investment opportunities. Information costs are high, Africa is fragmented into many different countries and, even in aggregate, the continent is a fairly small economy.
For several decades, investor ignorance did not matter — with few exceptions, Africa’s economies were too badly run for there to be many opportunities for firms of integrity. ‘But there has been a sea change — Africa is on the move. There will be ups and downs, but investors from the countries of the OECD who remain set in their ways may be missing a giant business opportunity if they fail to pay attention to the changes afoot,” he says.
New rating systems, such as the World Bank’s Doing Business surveys, have done much to allay the fears of nervous investors and allow companies to benchmark their investments by region. The World Bank surveys looks closely at a country’s regulatory environment, including access to credit, tax regimes and, most importantly, its legislative environment.
For many years, Africa was viewed as the business Wild West, where the rule of commercial law was patchy at best and, more often than not, unenforced. Data collected from surveys such as Doing Business has forced many African governments to view their policies critically and many analysts believe comparative data sets have done a lot to drive improvement.
For Africa, the data certainly seems to be painting a rosy picture. Even though Africa couldn’t avoid the effects of the global financial crisis completely and growth dipped to just 2.5% in 2009, the worst of the recession seemed to pass the continent by.
‘Countries with built-up reserves implemented stimulus packages and measures aimed mostly at easing supply-side bottlenecks.
‘African policy-makers have resisted the protectionist tendencies that often accompany a crisis of this magnitude. Instead, most countries maintained a prudent macroeconomic stance during the crisis, steered clear of protectionist measures and, in several cases, accelerated reforms to create a favourable investment climate.
‘Some countries, such as Botswana, Ghana and the Seychelles, took advantage of financial-aid packages, which helped them adjust their economies significantly,” says Donald Kaberuka, the president of the African Development Bank (ADB) in his paper, ‘Capturing Africa’s Business Opportunity” (McKinsey Quarterly, June 2010).
In March this year, the ADB forecast 4.5% real GDP growth for Africa in 2010 and 5.2% in 2011, in line with the global recovery. Althoug these growth rates are below pre-crisis levels, the recovery is broad-based, with more than 15 countries projected to grow by more than 5% in 2010.
The boost in international investment has been key to developing the financial services industry. But it takes more than capital to deliver services to a sprawling rural population, effectively cut off from utilities enjoyed by the urban minorities. Fortunately, examples of African innovation abound and the results are being felt across the continent.
In Kenya, the Equity Building Society, a microfinance institution with more than 200 000 predominantly rural-dwelling, low- to mid-income earning customers, has launched mobile banking vehicles, which service rural areas. Equity has enjoyed an almost 70% growth rate over the past eight years.
Mini ATMs launched by First National Bank have enjoyed success in Africa and, with its cellphone banking products, the bank is seeing solid growth in its African clientele. In fact, most international analysts agree that the future of banking in Africa, where cellphone penetration continues to skyrocket, will rest in mobile products.
It is clear though that, technology aside, Africa is positioned for solid growth over the next decade. If its leaders can maintain their improved policy-making trends, it is likely to continue and increase its appeal to foreign investment. And with the new investment will come new opportunity for businesses to bring real and workable financial products.