Our money, our rights: - Consumers International

Our money, our rights:
The evolution of financial services in Africa
“The stark reality is that most poor people in the world still lack access to
sustainable financial services, whether it is savings, credit or insurance. The great
challenge before us is to address the constraints that exclude people from full
participation in the financial sector. Together we can and must build inclusive
financial sectors that help people improve their lives 1 .”
Kofi Annan, on the announcement of the International Year of Micro-credit, 2005.
Table of contents
An introduction from Joost Martens,
Director General of CI.
Poor people are interested in financial
services.
Poor people are not a bad risk.
Despite this, the financial services
sector is under-developed in Africa.
Micro-credit is a worldwide
phenomenon. It is popular, growing and
becoming mainstream.
Localised micro-credit schemes are
often linked to production as well as
consumption.
But credit is not the only financial
service.
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Basic consumer protection
mechanisms are needed as the sector
evolves.
The state can take the initiative to
improve banking services.
To avoid the mistakes of others, is
there scope for a distinctively ‘African’
approach to financial services for
consumers?
Is money transfer by mobile phone the
new magic bullet?
Towards universal access.
Endnotes
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An introduction from Joost Martens, Director General of Consumers
International.
Access to stable, secure and fair financial services is important for consumers
everywhere, including Africa. Despite relatively low levels of coverage by the formal
banking sector, studies show that African consumers are willing and able to use a
variety of financial services. Commonly held myths that poor consumers present
too great a risk or are simply not interested in financial services are not borne out
by the facts. Indeed, the phenomenon of micro-finance has firmly taken hold on the
continent and is set to grow significantly. Nevertheless, despite demand, the
financial services market is still significantly under-developed, and consumers go
under-served. The evolution of financial services provision in Africa presents a
number of interesting questions. Will African consumers be spared the negative
consequences of mistakes made by others? Will governments promote the right
conditions for this sector to thrive and work with all stakeholders to ensure that the
consumer interest is upheld?
This briefing explores the latest developments in this ongoing story. It is produced
by Consumers International (CI) as part of celebrations for World Consumer Rights
Day 2010.
Poor people are interested in financial services.
Savings ratios (ie the percentage of household income put aside), for example, are
higher in middle-income countries (26%) than in high-income countries (23% 2 ). In
Sub-Saharan Africa (SSA) the level is far from negligible at 15%. In 2000, Uganda
had a rate of 3.5% (a similar level to that of the United States before global financial
crisis), while the figure for the wider COMESA (Common Market for Eastern and
Southern Africa) region was 18% 3 . This indicates a significant variability within and
between regions.
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Although formal banking coverage is low among households in much of Africa,
levels do vary. Less than one fifth of households in Kenya and Zambia, and about a
fifth in Ghana, are covered, while in South Africa and Namibia the level is closer to
50% 4 .
However, CI’s recent publication Our money, our rights: how the global consumer
movement is fighting for fair financial services, points out that poor families often
have to display a degree of financial sophistication which has not been fully
appreciated in the past. Portfolios of the Poor, a publication by the Financial Access
Initiative, studied 250 poor households in India, Bangladesh and South Africa over
one year 5 . The researchers found that all the families dealt with at least four types
of financial instrument over the course of the year and rural households had total
cash flows equal to 10 to 30 times their end-of-year asset values. The sheer
complexity of transactions (involving savings clubs, banks, formal and informal
institutions, savings and debts) belies the idea of the poor as financially ignorant. In
fact, the sums of money are simply less than those transacted by wealthier people.
Poor people are not a bad risk.
Most poor consumers manage their financial affairs responsibly. Evidence of
consumer capability in this regard can be found, for example, in the very low rates
of default in micro-credit. Loan repayment rates in excess of 95% are the norm, and
have remained so for at least a decade 6 . The rate for some micro-credit schemes in
Senegal, for example, stands at 98.5% 7 . Although micro-credit in Africa is generally
for production, not consumption, when it is for consumption it is often for ‘one off’
life events such as marriages and funerals, and not for trivial items 8 .
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While arrears rates have slightly increased since the global financial crisis, levels
still remain very low. The World Bank’s International Finance Corporation (IFC) has
collated data from the top 150 micro-finance institutions showing that, globally, the
proportion of borrowers 30 days behind on loans has risen from 1.2% before the
financial crisis, to 2-3% in 2009 9 .
Despite this, the formal financial services sector is under-developed in Africa.
The UN bluebook Building inclusive financial sectors for development reported in
2006 that risks in lending to the poor have been consistently overrated 10 . Repeated
surveys have reported that although only a small proportion of African households
are covered by the formal banking sector, many more make regular savings
through less formal institutions, such as the susu system in Ghana (based on small
daily collections) and savings and credit co-operatives, as in Tanzania 11 .
Micro-credit is a worldwide phenomenon. It is popular, growing and
becoming mainstream, in Africa too.
As long ago as 2000, a study by the UK Department for International Development
(DFID) and the United Nations Development Programme (UNDP) 12 found that the
informal sector appeals to poor consumers because:
• they welcome the combination of self-discipline and informality
• small deposits are possible
• doorstep services use a personal approach (no references required, for
example)
• there can be an easy mix with social activities (such as church gatherings)
• loans can be made flexibly over different time periods and varying amounts.
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This prognosis has been borne out by events. Interest in micro-finance from the
formal sector is increasing. The IFC gave 55% more every year to micro-finance
lenders between 2004 and 2007, and at the global level micro-finance portfolios of
private investment funds grew from $600 million in 2004 to $2 billion in 2006 13 . In
South Africa, micro-lending tripled between 1995 and 1997. The country’s
commercial banks also started micro-lending and have come to dominate the
market. By 2005, banks accounted for 50% of outstanding micro-loans, with
retailers and cash lenders making up 48% 14 .
Conversely, micro-finance institutions (MFI) are now evolving in the direction of the
mainstream. For example, Equity Bank in Kenya registered as an MFI in 1984 and
is now a full commercial bank with 52% of Kenyan bank accounts and 3.9 million
clients 15 . It has targeted the base of the pyramid through specific products such as
fanikisha (Swahili for ‘enable’) loans for women, of which 80,000 have been issued
with up to two years duration. Vijana (Swahili for ‘good things for young people’)
loans are aimed at the youth market, and number some 50,000 according to recent
estimates. In Ghana some highly specific micro-finance products have been
developed, for example, for AIDS sufferers 16 .
Localised micro-credit schemes are often linked to production as well as
consumption.
Micro-credit can be used to help households and communities develop
infrastructure services such as drinking water. Involvement of micro-finance in the
water sector was recommended by the Camdessus report Water for All in 2003,
long before the present crisis saw a downturn in private institutional investment and
a decline in development aid 17 . Involvement of micro-credit in infrastructure
development can be seen on a small scale in Burkina Faso, Kenya and Ethiopia 18 .
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In Ethiopia it has evolved from individual revolving credit used by women, to a more
collective system for funding water facilities through the Amhara Credit & Savings
Institute 19 . The Moroccan government has legislated to enable micro-credit to be
used for the development of electricity and drinking water supply, as well as
housing for poor households 20 . Micro-credit can be used to finance first time
connections and may extend from the individual to the collective, so that families
invest in their own communal development.
A distinctive feature of Africa, particularly rural areas, is that the distinction between
the consumer and producer is more blurred. Many of the activities supported by
micro-loans for small businesses (such as baking, cloth dyeing, market gardening)
often take place either in, or in close proximity to the home. In Kenya 80% of micro-
enterprises are owned by women 21 . Under those circumstances there are likely to
be spin offs that benefit families as consumers as well as producers.
But credit is not the only financial service.
At a World Bank conference in 2000, it was reported that ‘there is a larger market
for savings products than for credit products as has been demonstrated repeatedly
by micro-finance organisations, which consistently report loan/deposit ratios of less
than 50% 22 .’ Similarly, the above mentioned DFID/UNDP study points out that
financial services providers need to diversify. Savings and risk pooling (insurance)
are also essential services that are comprehensible to a wide range of consumers
and yet under-provided. The Agence Francaise de developpement has also
reported an evolution from micro-credit to micro-finance in Africa, widening in scope
to include insurance and money transfer in addition to the now traditional micro-
loans 23 .
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Basic consumer protection mechanisms are needed as the financial sector
evolves.
In considering consumer protection, the UN Blue book (which marked the
international year of micro-credit) distanced itself from the traditional caveat emptor
(let the buyer beware) principle. According to the UN ‘this minimalist option is often
considered anti-consumer 24 ’. The authors suggested that policy makers could opt
to:
• increase consumer information ( ‘truth in lending’ for example)
• invest in financial literacy initiatives (ie consumer education)
• insist that the retail financial industry take steps to protect consumers (self
regulatory codes of conduct, for example)
• encourage the development of an independent regulatory oversight body
responsible for monitoring, reviewing and taking complaints.
Examples of recent practices in South Africa 25 :
• Ending the practice of ‘card and PIN collection’, under which borrowers are
forced to surrender ATM cards to lenders.
• A Consumer Credit review, which led to a new National Credit Act, generally
supported by CI member organisations in the country. There is also a new
consumer credit regulator and a national credit register.
• The huge growth in micro-lending during the 90s necessitated the re-
regulation of the sector in 1999 under the Micro-Finance Regulatory Council,
which became in effect a licensing body.
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• 2004 saw the introduction of Mzansi basic banking for low income
consumers, providing deposit services and ATM usage (but not credit) for
reduced charges. There was no government subsidy. Within six weeks there
were 180,000 users, far exceeding expectations. 90% of the new customers
were previously unknown to the bank 26 .
• The Financial Sector Charter committed banks to a major expansion of
banking services.
• There is a national ombudsman scheme and a National Consumer Tribunal
that can mediate and act as an informal court in disputes over credit
transactions. Courts have the power to suspend a loan if it is thought to have
been ‘reckless’ on the part of the lender. There is a countervailing duty of
disclosure on the consumer to disclose all relevant information (such as
outstanding debts) when applying for a loan.
The state can take the initiative to improve banking services.
This can be in the form of direct provision. For example postal banks exist in many
countries, but ‘bricks and mortar’ networks are slow to develop and branches are
often far from much of the population. The use of bank mandates for money
transfer by postal banks is declining and has virtually collapsed in parts of
Francophone Africa 27 . Attempts are being made to introduce an electronic
equivalent. Consumer education programmes can also be directed at children
through national school curricula. CI member organisations across Africa are
playing a key role in the development of materials and their dissemination to
youngsters 28 .
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The UN bluebook argued for state sponsorship over state provision. This could take
the form of regulation (by credit bureaus, for example) to promote enhanced risk
mitigation, and enhanced transparency, involving legislation along the lines of the
South African example referred to above. The Ugandan government explicitly
adopted an oversight (rather than a direct provision) role, after the failure of
government run schemes in the late 90s 29 . Of course service providers do not
simply have to rely on legislation to develop good practice.
In Uganda, the Association of Microfinance Institutions has developed a code of
practice for Consumer Protection with a focus on disclosure and financial
education. It has been adopted by 42 MFIs and is a condition of entry to the
association, thus providing a ‘badge’ of conduct to reassure consumers 30 .
To avoid the mistakes of others, is there scope for a distinctively ‘African’
approach to financial services for consumers?
Africa has avoided the worst excesses of the financial services sector suffered in
rich countries, precisely because the sector is relatively young. Only 17 countries in
Africa have a stock market and their combined total fraction of global portfolio is
1.81%, and African bank assets account for only 0.15% of the global total. Simon
Heliso, writing in Global Future states: ‘The sophisticated evils unleashed by the
sub-prime mortgage markets are simply absent.’ The South African banking sector
has attracted praise for its recently elaborated regulatory structure, which has
avoided many of the problems experienced in the North.
Yet that does not insulate Africa from global economic trends, as trade has been
badly affected by the recession. Capital markets in SSA fell by 30-40% between
November 2007 and November 2008.
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The global economic slowdown affects remittances sent home by Africans working
abroad, which amount to about $10 billion annually. Those remittances must be
vulnerable in the present climate as unemployment bites in rich countries 31 .
Remittances are important both in and of themselves as a major support for
families, and in terms of the incentives they have provided for technological
evolution. Between 2000 and 2005, remittances to SSA increased by over 55%.
Although lower in volume than aid and direct investment, they have proved to be
less volatile and are often counter-cyclical, helping smooth over difficult times (such
as seasonal problems for crop farmers). Furthermore, remittances can be saved to
a very high degree – an IMF sponsored study found levels of remittance saving as
high as 40% among families 32 .
Traditionally only about one third of remittances go through formal channels,
because even though migrants may have access to banks in the countries where
they work, the recipient families may not. Consumers may be put off by high bank
charges and high transfer charges by money transfer operators (MTOs). The
market is heavily dominated by a few MTOs, notably Western Union, which has a
market share of 65-100% in some countries in Francophone Africa 33 . Many
communities in Francophone Africa rely on ‘porters’ of money, with the obvious
risks that this entails, to carry sums for several families from, for example, a group
of workers in France to a village in Mali.
Some institutions have developed to meet the frustrated demand. Theba Bank, a
miners’ bank, offers low cost transfers from South Africa to families in surrounding
countries, such as Mozambique. The International Remittance Network of about
200 credit unions offers low cost remittance services in many countries and does
not require recipient families to have an account.
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Sometimes remittances are grouped at village level and converted to local savings
schemes to be used for house construction.
Is money transfer by mobile phone the new magic bullet?
Technology is accelerating access to money transfer and helping the informal to
‘formalise’. Recently, telephone operators have started to help clients to send
money home via text messages. If the receiving household does not have a bank
account, then the remitted sum can be converted into a pre-paid debit card that can
be used to make purchases. Alternatively, a line of credit can be opened at local
stores with password protection operating through SMS. Thus the particular
circumstances of African development – namely money transfers over long
distances, lack of ‘bricks and mortar’ banking infrastructure but ready availability of
mobile telephony – have led to the evolution of ‘branchless banking’, in which Africa
is leading the way.
For example, Safaricom in Kenya introduced M-Pesa in March 2007 with initial
support from DFID’s Financial Deepening Challenge Fund. The service provides an
SMS-based, low cost, person-to-person money transfer facility, which also allows
the user to purchase prepaid goods and services (such as mobile top-up time and
utilities). It has seen subscribers increase from around 100,000 at its launch to
more than 7 million by August 2009. During that time M-Pesa has moved some 130
billion Kenyan shillings ($1.7 billion). The average transaction is just over $20 but
the volume has now risen to $2 million per day 34 . South Africa's MTN recently
announced plans for a fully fledged bank account on mobile phones, with an
optional credit card. The service will be extended to the 20 countries where MTN
operates, including Uganda, Nigeria, Cameroon and Côte d'Ivoire, which combined
have over 90 million mobile-phone users 35 .
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The potential for such development in Africa is clearly huge, but there are
limitations that should be taken into account. Mobile banking services have tended
to be taken up by people with bank accounts as a convenient add-on service, and
there is a risk of new monopolies developing.
And of course the system will only be as comprehensive as the extent of the
telephone network and transactions can fail due to system congestion at peak
texting times 36 . While Kenya, South Africa and much of North Africa are
approaching 100% mobile phone penetration, levels in Burundi, the Central African
Republic, Eritrea, and Rwanda are less than 30% 37 . There are also issues around
whether such services should be bank led (as in South Africa, where mobile phone
companies have to form joint ventures with banks to provide mobile banking) or
whether non-bank agents may take part, as in Kenya 38 . The root cause for
optimism is that there are already about one billion people on the planet with a
mobile phone but without a bank account 39 . In South Africa, for example, 48% of
the population is ‘banked’, while mobile phone usage is 78%. In Kenya the figures
are 10% and 20% respectively 40 .
Towards universal access.
Many of the approaches to financial services for poor consumers are common
across continents. There are similarities in many of the recent innovations with
developments in South Asia for example. Broad conclusions can be drawn for the
poorer regions of the planet.
However, different initiatives must be judged carefully on merit. Micro-credit, for
example, should not be considered a magic bullet and has had to face the problem
of costs remaining relatively fixed regardless of the size of the loan, meaning that
charges for small amounts tend to be high.
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According to the Consultative Group to Assist the Poor (CGAP), MFIs are generally
considered efficient when operating costs equal 12-15% of assets, while for banks
this level would usually be around 5% 41 . Nevertheless, micro-finance is still
normally significantly cheaper than the alternatives 42 .
Given that it is still early days in terms of banking coverage for much of Africa,
some basic strategic orientations could be adopted from the outset. CI have argued
for the regulation of retail banking and investment banking as separate activities,
even though they can be provided by the same banks. Retail banking can perhaps
be viewed as a ‘public utility’ (not necessarily publicly owned but aimed at the
general public), to be encouraged through universal service programmes, which
have been successfully applied in the telecoms sector.
The argument for universal service to be fully integrated into future policy making is
aptly articulated in the UN Blue Book:
“We suggest that access to finance should be a central objective of prudential
regulation and supervision...the two traditional goals of prudential regulation: safety
of funds deposited in regulated financial institutions and the stability of the financial
system as a whole, should be supplemented by a third goal: achieving universal
access to financial services.”
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Endnotes
1. UN Blue Book Building Inclusive Financial Sectors for Development UN, 2006
2. Ian McAuley Globalisation for all-reviving the spirit of Bretton Woods, an examination of
developments in global financial markets Consumers International, 2003
3. L Chen The protection of small savers in the Ugandan Micro-finance industry World
Bank, 2000
4. Nicholas Gyabaah, Ministry of Finance & Economic Planning (MoFEP) Ghana’s national
strategy for financial literacy and CP in the micro-finance sector / Deogratias P Macha
Developing a national financial literacy strategy – Tanzania Both MFW4A conference,
Accra 2009
5. Daryl Collins, Jonathan Murdoch, Stuart Rutherford, Orlanda Ruthven Portfolios of the
Poor: How the World’s Poor Live on $2 a Day Financial Access Initiative, 2009.
www.portfoliosofthepoor.com
6. The Economist, 21 March 2009. L Chen op cit;
7. Agence Francaise de Developpement Paroles d’acteurs (Key Players’ views) AFD, 2005
8. Finmark Trust The savings market for the poor: assessing the barriers costs and
potential January 2007
9. The Economist, 21 March 2009.
10. UN bluebook op cit
11. Ignacio Mas Being able to make (small) deposits and payments, anywhere. Consultancy
Group to Assist the Poor (CGAP) Focus note no 45 April 2008 / Financial Sector
Deepening Trust, Finscape National Survey on Access to and Demand for Financial
Services in Tanzania. (2006 survey) Finscape e-book www.fsdt.or.tz / Gerda Piprek A
national strategy in progress: Tanzania Macha op cit Both Accra 2009
12. Leonard Mutesasira The microsave Africa experience World Bank, 2000
13. The Economist, 21 March 2009.
14. Mark Napier Finnmark Trust SA. Provision of Financial services in SA in Liberalisation &
universal access to Basic services OECD, 2006.
15. F Kariuki Financial education intervention – examples of Equity Bank Accra, 2009.
16. Nancy Lee (CGAP) Social marketing and finance review. MFW4A Accra, 2009.
17. Financing water for all Report of the World Panel on Financing Water Infrastructure,
chaired by Michel Camdessus, report written by J. Winpenny; Word Water Council, et al
World Water Forum 2003.
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18. R Cardone & C Fonseca Financing and cost recovery IRC International Water &
Sanitation Centre, 2003 / N.Shah et al: Financing of Water Supply & Sanitation Finance
Policy Background Paper DFID, 2007.
19. Meera Mehta Meeting the financing challenge for water supply & sanitation. Water &
Sanitation Programme World Bank, 2003.
20. Agence francaise de developpement op cit.
21. Kariuki op cit
22. Mutesasira op cit.
23. Agence Francaise de developpement op cit
24. UN Blue Book op cit
25. M. Napier, Finmark Trust op cit; also ABSA Financial Health: you and the National
Credit Act 2007
26. Gautam Ivatury Using technology to build inclusive financial systems CGAP Focus note,
32 January 2006.
27. Agence francaise de developpement / Les operateurs de transferts formels.
28. Our money our rights: How the global consumer movement is fighting for fair financial
services Consumers International, 2010.
29. E. Duflos & K Imboden The role of governments in micro-finance CGAP Donor brief no
19, June 2004.
30. David Baguma Concept note: Consumer Code of practice for micro-finance institutions;
Association of Microfinance Institutions in Uganda AMFIU, Accra 2009
31. Simon Heliso Africa: to integrate or to delink? in Global Future no 1, 2009
32. S. Gupta, C. Pattillo & S. Wagh, Making remittances work for Africa in Finance &
Development, June 2007 www.imf.org/fandd
33. Agence Francaise de Developpement. Op cit
34. O. Morawczynski & M. Pickens Poor people using mobile financial services:
observations on Customer Usage and impact from M-PESA Focus note CGAP brief,
August 2009.
35. Louise Greenwood, Africa’s mobile revolution, BBC Africa business report, August 23
2009.
36. Morawczynski op cit.
37. Greenwood op cit
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38. Regulating transformational branchless banking: mobile phones and other technology to
increase access to finance CGAP Focus note no 43, January 2008
39. Greenwood, op cit.
40. G Ivatury & I Mas The early experience with branchless banking CGAP Focus note No
46, April 2008
41. Ivatury CGAP 2006 op cit
42. I Kota Microfinance: banking for the poor, Finance & Development June 2007
www.imf.org/fandd
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