Digital financial inclusion in ten African countries: foregone digital dividends?

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.

		Mobile	money
		Yes	No
Bank	Yes
account	No	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.

Country, n	Financial inclusion	Digital fin. inclusion	Digital fin. exclusion
South Africa, 1809	.61	.08	.02
Ghana, 1198	.33	.56	.29
Nigeria, 1802	.45	.04	.001
Kenya, 1208	.43	.88	.45
Senegal, 1230	.12	.35	.21
Lesotho, 2158	.28	.37	.21
Tanzania, 1197	.21	.56	.37
Rwanda, 1203	.35	.34	.13
Uganda, 1858	.09	.47	.39
Mozambique, 1160	.26	.24	.11
Total, 14823	.31	.39	.22

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.

Figure 1. GDP per person, financial inclusion, digital financial inclusion and digital financial exclusion in ten African 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.

Figure 2. Determinants of financial inclusion, digital financial inclusion and digital financial exclusion in ten African countries [n = 14823]. Other covariates included are country fixed effects, rural versus urban location, number of household members with a mobile phone, household access to the internet, literacy, own a personal computer and marital status.

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.

Figure 3. Marginal probabilities of financial inclusion, digital financial inclusion and digital financial exclusion in ten African countries.

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.

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Financial Inclusion and Institutional Voids: Are Digital Platforms a Solution?

“What drives development” has long been a fundamental question for many scholars and policymakers. One consensus reached is that financial inclusion – access to and use of formal financial services by all members of an economy – is a central tenet of development [1]. It facilitates efficient allocation of productive resources by reducing the volume of money outside the banking sector, i.e. by shrinking the informal sector [2]. Conversely, exclusion from the formal financial system reinforces social inequalities and deepens poverty.

However, the World Bank’s (2017) Global Findex Database indicates that about 1.7 billion adults across the world are still unbanked and therefore they are excluded from the formal financial system (see figure below). Evidence further indicates that almost all the unbanked population lives in developing countries and nearly half of these live in just seven countries: Bangladesh, China, India, Indonesia, Mexico, Nigeria and Pakistan.

But why are developing countries the home for the unbanked? In order to answer this question, we first need to address the cause of market failures leading to exclusion in emerging markets; namely institutional voids.

Globally, 1.7 billion adults lack an account [Source: Global Findex database ^[1]. Note: Data are not displayed for economies where the share of adults without an account is 5 percent or less.

Institutional theory suggests that institutions shape the conditions that drive socio-economic development and the particular rules that actors follow within a given context [3]. As Scott (1995) points out, institutions are socially constructed and embedded structures that provide the rules and frameworks upon which societies operate. If these institutions are absent or weak, it can create institutional voids that impact economic growth and development [4,5].

Therefore, while every economy should have a range of institutions (e.g. payment processing systems, contract enforcement, etc.) to support financial inclusion, many developing countries fall short. Thus, it is lack of, or weak institutional frameworks, i.e. institutional voids, in developing countries that differentiate them to a great degree from developed countries. The presence of institutional voids is apparent in the inefficiency of the formal financial systems to provide appropriate services, quality of institutions and legal origins [6]. Such institutional voids cause buyers and sellers to experience information asymmetries and uncertainty, thus creating serious operating challenges and higher transaction costs (i.e. the cost of capital) in emerging markets. All these act to constrain financial inclusion, and in effect hamper prosperity and wealth creation.

Digital platforms, which have rapidly grown in number and reach in developing countries, have the potential to generate social and economic value by filling the voids and thus building well-functioning markets. For instance, digital platforms for financial services can enable individuals and businesses to more easily reach and find previously hard-to-locate financial services. They also have the potential to facilitate the accumulation of capital by lowering search and transaction costs, reducing information asymmetries and thus fostering trust between parties [7].

Despite this recognition, however, the linkage between digital platforms and institutional voids in these contexts remains significantly underexplored. Apart from a few studies (e.g. [7]) that explored the importance of digital platforms in institutional development and capacity building in developing countries, the focus of the literature on digital platforms in emerging and transitioning economies has been mainly on the general functioning of digital platforms (e.g. business strategy, platform governance and consumer behaviour) [8]. Therefore, we need more research to better understand how digital platforms could help alleviate the negative impact of institutional voids in developing countries, such as in the banking and financial system.

References

[1] World Bank Group (2017). The Global Findex Database, Measuring Financial Inclusion and the Fintech Revolution. World Bank, Washington, DC.

[2] Sarma, M. & Pais, J. (2011). Financial inclusion and development. Journal of International Development, 23(5), 613-628.

[3] Acemoglu, D. & Robinson, J.A. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Books.

[4] Scott, W. R. (1995). Institutions and Organizations. Thousand Oaks, CA: Sage.

[5] Khanna, T., & Palepu, K. (2010). Winning in Emerging Markets. Harvard: Harvard Business Press.

[6] Zins, A. & Weill, L. (2016). The determinants of financial inclusion in Africa. Review of Development Finance, 6(1), 46-57.

[7] Drouillard, M. (2016). Addressing voids: How digital start-ups in Kenya create market infrastructure. In B. Ndemo & T. Weiss (Eds.), Digital Kenya: An Entrepreneurial Revolution in the Making(pp. 97–131). London: Palgrave Macmillan UK.

[8] Koskinen, K., Bonina, C., & Eaton, B. (2018).Digital Platforms in the Global South: Foundations and Research Agenda, Working Paper no.8Manchester, UK: Centre for Development Informatics, University of Manchester.

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The Puzzle of Digital Financial Inclusion: A Generation Game?

If we thought that financial inclusion and its digital variant are tightly correlated, we may be in for a surprise, judging from the Global Findex 2017 microdata released by the World Bank last month. Owning a bank account (financial inclusion) and owning a mobile money account (its digital variant) throw a puzzling pattern. I plot the averages of bank account ownership and mobile money account ownership in 144 countries across groups of low to high incomes economies, showing a clear separating trend. The thought is borne by 25 low income countries with the two measures of financial inclusion strongly correlated at 0.7. But as income level steps up (to middle and high incomes level) bank account shares increase while mobile money shares decrease. The final panel is flat at the bottom right: most of the 44 high income countries have more than 80% bank account shares with less than 20% mobile money account shares. The correlation? –0.2. One explanation for this negative correlation can be discounted. The digital variant is not yet a substitute for a bank account: savers cannot yet use their mobile money account on its own or as a substitute to secure property or business investment. As countries move up the economic ladder, the puzzle of separation insists on an explanation.

 

Figure 1. The puzzle of bank account ownership vs mobile money account ownership (number of countries in parentheses) Source: calculated from Global Findex 2017 microdata

I explore an alternative here. In high income economies financial inclusion is nearly universal among adults. Not so in low and middle income economies; on the demand side lower average incomes as well as lack of trust in banks coupled with, on the supply side, weak financial infrastructures combine to leave many adults financially excluded. But the costs of financial services, such as sending and receiving money, have been pared down thanks to mobile technology, especially in low income economies. In Uganda, transfers can be made cheaply and directly from the south west to the north east without recourse to Kampala in the centre.

First in this exploration I show a map of the uneven financial inclusion around the world (https://globalfindex.worldbank.org/ accessed 31 October 2018). Map 1 shows that financial inclusion varies along levels of development. The high income economies of North America, Europe, Australia and New Zealand, are homes to adults with the majority of them having a bank account. Moreover a financial inclusion gradient is discernible with economies around the equator, where many lower and middle income economies are located, reporting lower percentages of account ownership. In particular, available data from African economies in the Global Findex and on the map show how financial inclusion is still a minority story on the continent.

 

Map 1 Financial inclusion around the world 2017, source: Global Findex 2017 report

But has mobile technology made any difference to financial inclusion? It is increasingly so. A map of ownership of mobile money accounts (those who own an account and use a mobile phone to access it) tells how things have improved (Map 2). Over the last three years, some economies in East Africa such as Uganda or Kenya have accumulated owners of mobile money accounts; West African economies are treading the same path. Although it remains the case that the majority of African economies are home to the majority of adults without a mobile money account (60% or more without one).

 

Map 2 Digital financial inclusion in Sub-Saharan Africa, source: Global Findex 2017 report

To explore further I build a non-linear multilevel model of accounts for each type of financial inclusion: in one the model explains owning a bank account, in the other owning a mobile money account. The model is non-linear because ownership is an indicator, as well as multilevel because 154,472 adults reside in 144 countries. The models account for country income groups, average national incomes, population, age, gender, education, employment, and personal incomes (quintiles). The most interesting findings relate to the associations with age and gender. I show marginal predictions of age and gender for financial inclusion below.

 

Figure 2. Marginal predictions of financial inclusion (own a bank account), calculated from the Global Findex 2017 microdata

Figure 2 shows the age gradient of financial inclusion that is consistent with the life cycle effects of incomes and wealth. With age comes accumulation of wealth from earnings that needs to be stored for investment and consumption. So for both genders higher age groups have higher odds of owning a bank account (compared to the youngest age group) in a step-wise manner. The youngest (hollow point ○) and the oldest (solid point ●) form bookends to the predictions; both for men (left) and for women (right). There is also a clear gender inequality, although by age 25 women (diamond ◊, right) already have higher odds than the youngest male group. Thus financial inclusion reflects the life cycle effects of earning and saving.

 

Figure 3. Marginal predictions of digital financial inclusion (own a mobile money account), calculated from the Global Findex 2017

 

 

But the marginal predictions for digital financial inclusion do not conform at all to the life cycle effect (figure 3). Digital financial inclusion does not move lock-step with age. In contrast with traditional financial inclusion, the two oldest age groups have lower odds of owning a mobile money account; instead the highest predicted marginals are attained by the mid-30s. The solid point (● oldest group) for instance is furthest below the hollow point (○ youngest group). Here the two oldest–youngest groups do not form bookends. The gender digital divide is also sharper. For similar levels of other characteristics, no female groups have higher odds of owning a mobile money account than the youngest male group.

The strong age reversion effect (inclusion does not move in lock-step with age but reverts after age 40) suggests a generation effect. This is also consistent with the fact that many of the low income economies are still young while many of the high income economies are already ageing.

The puzzle that digital financial inclusion parts ways with financial inclusion may be driven by the generation effect. But there is no reason to expect that the life cycle effect should disappear soon. Thus the need for financial accounts around the world is likely to grow as adults age, leading to some reconciliation in paths of financial inclusion.

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