The toll of covid-19 pandemic is still being counted. Meanwhile, new variants continue to threaten because the reservoir of people infected is still large enough for some random mutations to take hold and spread. Excess deaths, a global measure, were estimated by the WHO to be around 14.9 million in 2020-2021.
With all this immense suffering, is there a ray of hope? After all, governments provided support to family finances, delivered through digital and other means. With deepening financial inclusion (more families owning bank accounts), there are benefits to share. Account holders can smooth consumption and manage risks, banks can arbitrage between savers and inventors, governments can expect increased investment in the economy and better information on the funds circulating, useful for macroeconomic management.
If the outpouring of governments’ responses through digital transfer programmes improves financial inclusion, all is not lost. Examples of these programs have been curated by various groups including the World Bank. I used their database to mark whether the country has any digital transfer program (Gentilini 2022, Gentilini et al 2021, Marin & Palacios 2021) then collated the last three global financial inclusion surveys, the Global Findex, 2014, 2017 and 2021. (I wrote about these surveys before.) There were some 400,000 adults aged ≥15 in 146 countries analysed.
To estimate the digital transfer impact, one can apply a double difference estimator, using the available information before and after the pandemic started in 2020. The estimator assumes parallel trends in financial inclusion: countries with and without such transfer moved side-by-side in the past 7 years. Surely, they did not.
So I applied a doubly robust version, balancing the trends with information on society’s readiness for such programmes (digital adoption index in 2014) which accompanies the World Development Report 2016. Three outcomes are important: account in banks, in any formal financial institution and as mobile money (all binaries).
Digital readiness in 2014 and excess death in 2020-2021
Countries were visited by this pandemic at different digital readiness as shown by the span of digital adoption index in 2014. But initial digital readiness relates to lower excess death later in the pandemic, once readiness passes the median (Figure 1). Beyond the median, excess death follows a steeper decline. The pandemic has witnessed governments and society deliver transfers and various supports using digital technology, all this shows in excess deaths.
Among the survivors: financial inclusion in the pandemic’s wake
Because transfer programmes were delivered through digital means in some countries but not others, what impact do digital ones have in financial inclusion? I first check whether countries’ readiness indeed relates to delivering support via digital transfers. The marginal plot shows that the relation is positive, with more digital adoption in 2014 associates with higher probabilities of digital transfers in 2020.
Finally, putting all this together, the data showed an impact of digital transfer programme of 2% on owning any bank account to 8% on owning a mobile money account in the wake of the pandemic (Figure 3).
Perhaps this deepening financial inclusion is a ray of hope amidst the immense suffering. Governments, businesses and families can draw benefits from being part of a more inclusive financial system in the wake of this pandemic.
Global Development Institute – University of Manchester
United Nations University – World Institute for Development Economics Research
Gentilini U. 2022. Cash Transfers in Pandemic Times : Evidence, Practices, and Implications from the Largest Scale Up in History. World Bank Group. http://hdl.handle.net/10986/37700
Gentilini, U., Almenfi, A., Blomquist, J., Dale, P., De La Flor Giuffra, L., Desai, V., Fontenez, M., Galicia Rabadan, G., Lopez, V., Marin Espinosa, A., Natarajan, H., Newhouse, D., Palacios, R., Quiroz, Ana., Rodriguez Alas, C., Sabharwal, G. and Weber, M. (2021) ““Social Protection and Jobs Responses to COVID-19: A Real-Time Review of Country Measures”. World Bank, Version 15 (May 14).
Marin G. and Palacios R. 2021. The Role of Digital in the COVID-19 Social Assistance Response. Washington, D.C. : World Bank Group.
The story of mobile money in Africa, such as Mpesa, is one of the success stories to have arisen from the continent in recent years. A World Bank report in 2016, featured mobile money services, together with innovations from other places, to illustrate how digital technologies are yielding digital dividends in development. Specifically, the report highlighted the prevalence of smartphones. With their spread, digital technologies are making a huge impact by enhancing inclusion, increasing efficiency and enabling innovation.
Not just in Africa are digital technologies enabling innovation. In Indonesia for instance, our team has successfully put together a complex social-technical-medical intervention which has at its heart a mobile app in the hands of village health volunteers, that enables effective control of cardiovascular risk outside hospitals and within communities. In an editorial commentary on the intervention, cardiologists noted that empirically such complex interventions have often failed to yield the expected digital dividends in health. A previous Global Development Institute blog explains how, through mobile technology, we are tackling cardiovascular disease risk in rural Indonesia.
In Africa, however, mobile money services are spreading dividends on the back of the diffusion of mobile phones. Financial services are liable to be disrupted by digital technologies; not least by transforming the supply side of banks with machine learning. So a new landscape of financial services is being rewired by digital technologies, enhanced by financial inclusion and particularly digital financial inclusion. Using a survey from last year, we are able to examine the latest picture of the use of digital technologies in ten African countries (Survey of household and individual ICT access and use 2017–2018). The empirical analysis suggests that considerable digital dividends are foregone in these countries.
Financial inclusion and exclusion
I distinguish between financial inclusion and digital financial inclusion as they emphasize different mechanisms in the economy. On this basis I then propose a new index of foregone digital dividends. The first indicator or financial inclusion, as defined by the World Bank, is measured by the rates of bank (financial institution) account ownership in the adult population. The definition in terms of banks or financial institution recognises the fundamental role of banks in pooling funds (savings) and allocating them (investments) in macroeconomic management.
In the successful story of East Asian countries, for example, saving rates or financial inclusion is a distinguishing factor responsible for their remarkable economic growth. High levels of financial inclusion indicate effective pooling of financial resources which were then allocated to entrepreneurs and governments and used as investments. Conversely, low levels of financial inclusion translate to real constraints in macroeconomic management. It is therefore a priority to explore the survey and find determinants of financial inclusion in African countries.
Equally, high levels of financial inclusion enable better economic management by the government since formal regulations of the banks furnish information invaluable for making policy (‘the financial pulse of the economy’). Low levels of financial inclusion deny policy makers key information for effective economic management. The determinants of financial inclusion are necessary information.
Pooling of funds (or savings) and allocation of funds (or investments) are not the only important banking functions. Banks also support daily commercial transactions or transfer of funds, reducing transaction costs and enhancing economic performance. But daily transactions are increasingly carried out outside traditional banks as the story of mobile money highlights. The technologies enable anyone with a mobile phone to conduct financial transactions in a timely and efficient manner.
So irrespective of whether the pooling and allocating of funds are effectively provided for a client (much depends on the supply side), a mobile money service for peer-to-peer transfer can make a lasting difference for a person. It follows that financial inclusion can be usefully distinguished from digital financial inclusion. Access to mobile money services through a smartphone is thus an indicator of digital financial inclusion, the second key indicator examined here.
The third key indicator is digital financial exclusion as a measure of foregone digital dividends. Digital financial exclusion is defined only among mobile money users, picking those without a bank account (bottom of the penultimate column below). This last indicator is created because among mobile money users, the demand for financial services is real as revealed by their use of the service. These users are therefore primed to demand broader financial services such as longer term saving and timely investments. The fact that they are still financially excluded indicates foregone digital dividends.
Foregone digital div.
Put differently, the deeper the gap between financial inclusion rates and mobile money user rates, the larger the digital dividends foregone by the financial system. This is increasingly recognized by both bankers and mobile money service providers. In Indonesia, for instance, this recognition is becoming clearer among bankers from large state owned banks (Mandiri, BNI) and officials from GoJek which provides mobile money services.
In short, there are three questions to ask of the new data: what are the determinants of financial inclusion in Africa? Similarly, of digital financial inclusion? And what are the determinants of foregone digital dividends?
Analysis of Survey of ICT use in ten African countries
I obtained answers to these questions using a new survey from Ghana, Nigeria, South Africa, Mozambique, Rwanda, Kenya, Tanzania, Lesotho, Uganda and Senegal. The survey collected a rich set of information from adults 15 years and older including: age, gender, location (rural or peri/urban), education, incomes, marital status, household size, access to the internet and personal computers, literacy, number of household members with mobile phones.
Financial inclusion is an indicator of owning a bank/financial institution account. Digital financial inclusion is an affirmative response to the survey question: have you ever used mobile money services (Mpesa or e-Wallet)? Foregone digital dividend is defined in the scheme above. Probabilities of financial inclusion, digital financial inclusion and foregone digital dividends for various covariates are estimated using probit models.
The data show in Table 1, key variables in 2018 sorted according to average national income or GDP per person (South Africa has the highest average income). Financial inclusion (second column) shows a trend which accords with the average national income: as income increases financial inclusion also increases, with exceptions such as Mozambique which shows higher than expected level of financial inclusion given its low average income.
Digital fin. inclusion
Digital fin. exclusion
South Africa, 1809
The same data are presented in a series of plots which reveal more than the above trend (Figure 1). The top left plot shows that financial inclusion positively correlates with average national incomes. But there is no strong correlation between financial inclusion and digital financial inclusion.
Finally, at the bottom right plot, it shows a strong correlation between digital financial inclusion and digital financial exclusion. This inclusion-exclusion correlation pattern might at first appear puzzling. Digital financial exclusion is defined among those users of mobile money, specifically if they do not own a bank account. This plot shows that the more people use mobile money, proportionately more of them are excluded from the conventional banking system. If we assume that use of mobile money encourages users to access broader kinds of financial services, evidently there are considerable foregone digital dividends in these countries.
If these dividends were to be reaped, we need to understand the determinants of financial inclusion, digital financial inclusion and exclusion. The results of a series of probit models explaining probabilities of inclusion and exclusion are seen below (Figure 2). They show that education and personal incomes are significant for financial inclusion and its digital form. Having a formal job matters for financial inclusion and digital financial inclusion, more so for financial inclusion (top left pane) than for digital financial inclusion (top right pane). This difference accords with the fact that mobile money services are widely used in the informal sector. The picture of foregone digital dividend or digital financial exclusion is a converse of this story. For the same rates of mobile money users across two locations, education, formal jobs and personal incomes are the key factors that correlate with whether someone uses a bank service.
To dig deeper I plot marginal probabilities for various ages, separating those of men and women (Figure 3). Following the above coefficient plots where gender coefficient is not significant, gender difference is also negligible in the marginal plots. Now the shapes of financial inclusion and digital financial inclusion plots are telling on three counts. First, neither are linear: inclusion does not correlate with age in a straightforward manner. As shown in my blog on financial inclusion using the Global Findex 2017, age and cohort effects combine to create this non-linear effect.
Second, digital financial inclusion and financial inclusion peaked far apart in the life course, 35 versus 55 years. This is consistent with a generation game of financial inclusion which arises from the life cycle of financial needs. The younger generation needs more transaction services (conveniently offered by the digital financial services) while the older generation needs more investment services (offered by the conventional financial services for housing, portfolio and pension investments).
Lastly, among adults with demand for financial services (mobile money users), exclusion from formal financial services largely reflects the converse of financial inclusion. Thus the experience of digital financial inclusion has so far failed to induce demand for financial inclusion. If the increasing trend in digital financial inclusion (World Bank report 2016) is not caught by the trend in financial inclusion, then more digital dividends are foregone and the constraints in economic management remain. So transforming the supply side is important, for instance through adopting machine learning technology to efficiently broaden services offered.
In sum, although the figures uncovered raise more questions, some answers to the initial questions can be suggested. Financial inclusion, digital financial inclusion and foregone digital dividends are shaped by age and cohort effects, making financial inclusion peak later. Education and formal jobs are important especially for financial inclusion. Efforts to broaden financial inclusion so that younger people get on board earlier should be considered in efforts to include more citizens into an efficient financial system.
Crucially, putting too much stock in mobile money services maybe misguided. The service experience on the demand side is ineffective to bring the users into the fold of the banking system. Supply side transformation is needed. An inclusive financial system where citizens participate early and actively is a strong determinant of inclusive development.
First appeared in Global Development Institute blog 15 Oct 2019.