Financial inclusion and extent of usage of financial services in Africa

Introduction

Promoting sustainable growth is one of the major preoccupations of countries in Africa. The concept of sustainable growth has financial inclusion as a key conduit. For countries to make sustainable progress, appropriate financial services and products are needed in a way that is inclusive and inuring to the benefit of majority of the poor and vulnerable people in society.

According to the 2017 Global Findex report, about 1.7 billion adults worldwide remain unbanked — without an account at a financial institution or through a mobile money provider. Interest to promote financial inclusion continue to increase in recent years as seen in countries’ commitment to the Maya Declaration and the G-20 Financial Inclusion Action Plan. In Africa, the rising interest led to the institutionalization of financial inclusion strategies. Subsequently, countries have moved to setting individual quantifiable targets aimed at measuring progress on financial inclusion.

What constitutes financial inclusion? A journey through recent progress

What comprises financial inclusion have evolved over time. The definition and measurement of financial inclusion increasingly have progressed from categorizing individuals according to a dichotomous scale as either included or excluded, to observing financial inclusion as multi-dimensional. The Financial Inclusion Data Working Group of the Alliance for Financial Inclusion (AFI FIDWG) established financial inclusion along three dimensions: (i) access to financial services (ii) usage of financial services and (iii) quality of products and services delivery. Thus, a well-inclusive financial inclusion strategy does not only ensure access to groups excluded from the formal financial sector, but also ensures that services provided are of high quality that are used by individuals.

Close to 60% of the adult population in Africa remain unbanked. Even though the percentage of adults (age 15+) who report having an account at any type of financial institution or personally using a mobile money service in the past 12 months in Africa grew from 31% in 2014 to 41% in 2017. The growth in account ownership in Africa is also uneven as gender disparities exist (see Figure 1). Increases in account penetration is exceedingly higher among males compared to females. However, this gender gap is not peculiar to only Africa as most developing and emerging economies have a gender gap in account penetration, though the degree of disparity varies.

At the regional level, even though account penetration grew between 2014 and 2017, account penetration is higher among Africa’s non-fragile states (45%) compared to fragile states (30%). Despite the low financial inclusion in fragile states, growth in mobile money services has boosted account ownership in several African countries and have played even a greater role in deepening financial inclusion in fragile and post-conflict-afflicted countries such as Togo, Cote d’Ivoire, Chad, Liberia and Mali. The COVID-19 pandemic also led to an expansion in the use of digital financial services. Social distancing and the lockdowns influenced a shift to the use of mobile money services, which provide an opportunity for people to seamlessly remit, access finance, save, insure, pay and smoothen their consumption. In Africa number and the value of mobile money transactions grew for most countries. Available from IMF Financial Access Survey suggests that, in Uganda for instance, the number of active mobile money accounts increased by 19.3% while the value of associated transactions also increased by 28.2% between 2019 and 2020.

From an access point of view, there has been an increase in account penetration over the past years. Africa’s automatic teller machines (ATMs) per 100,000 adults rose from 13 to 15 between 2014 and 2017. However, progress is much slower in Africa’s fragile states relative to non-fragile states. Penetration of ATMs in fragile states is at least three times lower compared to Africa’s average and even slower relative to non-fragile states. A number of factors explain the low account penetration in African fragile states. In addition to overall low incomes, on-going conflicts, weak institutions and political uncertainty undermine the development of the financial systems. Because of the highly volatile environment, provision of financial services is only limited to few targeted users as fragility increases and financial institutions becoming exceedingly risk averse.

Notwithstanding the progress in account penetration over the past years in extending formal finance to the unbanked, financial inclusion goes beyond improved access to formal account to encompass usage of the financial services/products. Indeed, a well-functioning financial inclusion strategy should lead to account holders engaging more with financial institutions through the active usage of their services. Available evidence compiled from the Global Findex suggests that, account penetration is not accompanied by the usage of financial services irrespective of locality and gender. For instance, from Figure 2, while Africa’s account penetration is 41% in 2017, only 33% have made or received digital payments using their debit or credit card or via mobile money-based platform. In 2014, 31% had account ownership while 23% only used it to receive or make digital payments. Both account penetration and usage of financial services in Africa grew by 10% between 2014 and 2017. For non-fragile states however, growth in the usage of financial services exceeds growth in account penetration as former surged by 13% relative to 11% increases in account deepening. Account ownership among males surged by 12% compared to 9% among females. However, in relation to usage, the percentage of males using financial products grew by 13% while that of females grew by 10%. In addition, usage of financial services grew by 13% in non-fragile states compared to 8% in fragile states. In terms of gender divide, the uptake of digital finance is high in non-fragile states and even higher among males.

Three key factors may be attributed to these disparities in account ownership and usage. First, in addition to not owning a debit or credit card, account holders may be inaccessible to ATMs due to their sparse distant location in a way that makes traveling to ATMs access points difficult. Second, despite the growth in mobile money services in Africa, several countries are yet to embrace it. Concerns regarding data insecurity and unreliable digital financial services might inhibit usage of the financial services even though there is a rapid proliferation of mobile phones subscribers. Third, financial literacy is low in Africa on the back of low human capital accumulation occasioned by low school enrolment.

Improving financial inclusion in Africa: Going forward

Given the unbalanced proportions and growth in account penetration and usage, people who have an account at a formal financial institution may miss the advantages that come with financial inclusion unless they actively use the available financial services. Financial inclusion strategies should also seek to inspire usage of financial products and not only encouraging account ownership. This requires paying special attention to the section of the population that have been historically excluded from the formal financial sector either because of their income status, gender, location, lack of trust in the financial system or level of financial literacy. In addition to defining clear policy priority actions, well-designed financial inclusion strategies should be agile in identifying key policy gaps and incorporating the needs of both the served and the underserved segments of the population. A complete universal inclusion should largely encourage higher usage of financial services and products in a way that meets the needs of the hitherto, excluded segments and making their lives better.

To better capture and encourage financial inclusion, it is crucial to design strategies that fully encompass the different dimensions after analyzing and understanding the existing data. A number of notable institutions have invested significant resources in ensuring financial inclusion in Africa by designing interventions and coordinating efforts that address both the supply and demand side of financial inclusion data. For instance, deepening financial inclusion is a key work pillar of the Making Finance Work for Africa (MFW4A) Partnership. The Partnership has over the years, supported efforts aimed at providing individuals and firms with access to full range of quality financial services to meet their financial needs. In Africa where majority of the population are unbanked and financial services appear a mirage for millions of people, there is the need for governments and other financial sector players to foster the financial inclusion agenda. Indeed, recent data is also needed to document progress, given the on-going efforts aimed at spurring financial inclusion and usage of financial services in Africa.

About the author

Muazu Ibrahim is the Research Officer of MFW4A. He is a numerate resource person with experience in development finance and economics, policy analysis, strategic planning and evidence-based research. Prior to joining MFW4A, he worked with the United Nations Economic Commission for Africa (UNECA) in Ethiopia. He has contributed to notable flagship reports including the Economic Report on Africa (ERA) and the Economic Governance Report (EGR). Muazu was a Lecturer with the School of Business and Law (SBL), University for Development Studies (UDS), Wa campus, Ghana, where he taught courses in development finance, international trade and finance, financial markets, financial crisis and bank regulation. Muazu obtained a PhD in Economics and Finance from Wits Business School, University of the Witwatersrand, South Africa where his research examined critical themes in financial sector development–economic growth nexus in sub-Saharan Africa.