Africa is home to the world’s largest number of unbanked people. Many of them rely on underground financial services.
According to some estimates, half of the nearly 1 billion population does not have a bank account and as few as 5 to 10 percent use a credit or debit card.
Alternative sources of capital are required for Africa’s poorest. This is a significant market opportunity for proactive financial services companies. But despite limited competition and high margins, almost all big banks have shown little appetite for banking the remittance sector.
Africa’s endemic problems with financial inclusion have long been on the agenda for governments, think tanks and humanitarian organisations. The business case has been proffered, but traditional financial models often do not fit the needs of fringe communities in Africa.
The process of innovation to develop newer financial models such as microfinance, microcredit and remittances – which may necessitate the creation of infrastructure as well as bespoke compliance and due diligence measures – requires supplementary funding.
As a result, the larger banks and financial institutions frequently deem these financial models ‘unprofitable’. That is very short-sighted.
As an indigenous African business, Dahabshiil specifically serves Africa’s more remote regions. Fringe territories are key markets for us, despite and, in part because of, their challenges.
To put into context the importance of remittances to Africa, approximately $37.5bn is sent annually to Africa by its diaspora. For the region as a whole, this represents 50 percent more than net official development assistance. The International Fund for Agricultural Development (IFAD) estimates that, on a country-by-country average, remittances represent 5 percent of GDP.
Clearly, Africa’s remittance figures are compelling and highlight the substantial market opportunity. There are also wider benefits to the economy.
Financial inclusion has the potential to boost domestic savings, increasing incoming money transfers from the diaspora. It can also lower the cost of doing business for financial institutions and the private sector by reducing the number of financially excluded households and enterprises in Africa. By having a deeper pool of consumers with access to finance, financial institutions reduce their cost-per-customer while the wider economy benefits from increased liquidity.
Smart regulation
Applying generic international financial services regulations to countries with nascent financial systems is problematic. If there is genuine will to succeed in opening financial services up to unbanked communities, there must be acceptance that many African countries cannot be expected to immediately operate like Singapore and Switzerland.
Unfortunately there is no quick fix.
As Africa’s many frontier markets continue to formalise and align structures with global standards and practices, it is essential that international stakeholders embrace them during this process.
For example, in Iraq Standard Chartered is advising the government and the Central Bank on developing the financial system.
However in the US and the UK, a number of commercial banks, under various pressures, have taken independent decisions to close accounts of entities that provide remittance services to perceived ‘high risk’ countries. In Africa, regions such as Somalia, Central African Republic and South Sudan are most at risk of being cut off.
Banks have closed the accounts of money transfer companies as well as foreign embassies, Muslim charities and NGOs because of where they operate. Banks cite wariness of terrorist or money laundering funds passing through their services as the reason. Advocates argue that legitimate transactions are also being cut off.
Unfortunately, de-risking by de-banking has become commonplace among international financial institutions. This stems from the tougher global regulatory environment that has seen the likes of HSBC and BNP Paribas pay big penalties for misdemeanours perpetrated by their clients.
Banks’ concerns are often legitimate. However, governments, the regulators and the banks are not offering joined-up explanations for their actions.
In Africa, the problem is exacerbated by the lack of information such as credit ratings for many countries. Often decisions are made without fully analysing the situation on the ground. The only winner in this situation is underground entities, while fully compliant companies, including Dahabshiil, are challenged to demonstrate the viability of serving certain markets.
Informal economies present a particular conundrum for financial institutions. They tend to operate in cash, and so they are not linked in with the global payment system or correspondent banking network.
This is less traceable and therefore more difficult for regulators to track. However, if these markets were linked to the global financial system, there would be more regulation and less need for cash transactions.
There are inescapable up-front costs and risks to serving the ‘bottom billion’. For financial inclusion to become a driver of sustainable and inclusive growth in Africa, banks and regulators need to improve their knowledge and work as partners.
Payment corridors must be effectively patrolled without quashing legitimate business. Remittance services currently represent the single largest available source of capital to unbanked people across Africa. It is a collective challenge posed to governments, regulators, banks and remittance providers to help these flows along.
Abdirashid Duale is CEO of Dahabshiil Remittance Group
