ICT, Financial Inclusion and Economic Growth in Africa

Oct 10, 2011
Between 2008 and 2010, financial services via mobile phones were launched in 16 African countries (and more recently in Burundi, Botswana and Zimbabwe), enabling people who would not be reached profitably with traditional branch-based financial services to have access to financial services by other means. Therefore, the increasing development of ICT and mobile phones help fill the financial infrastructure gap that has been acute in African countries.

Indeed, a large share of the population is financially excluded or using informal financial services (88 percent of the population in Mozambique and 41 percent in Botswana in 2009; FINMARK, 2009) while the coverage of mobile telephone, although already high, continues to record strong growth.

In a recent working paper (IMF WP 11/73),1
Kpodar and I analyze this issue with a broader perspective, firstly by looking at what ICT development; especially mobile phone penetration can bring to economic growth in African countries, and secondly by examining whether financial inclusion is one the channels of transmission from ICT to economic growth.

ICT can promote economic growth because they encourage capital accumulation, improve firms’ productivity, and favor larger and better functioning markets. Moreover, ICT development enables rural and social development. Given ICT's tremendous development and spread in African countries during the recent years, we focus our study on those countries. The results from various econometric specifications point to a strong positive impact of ICT development on economic growth in Africa. A 10 percentage point increase in the mobile penetration rate could lead to a 0.7 percentage point increase in real GDP growth, with the marginal impact of mobile telephone development on growth being stronger in countries with low fixed telephone penetration rates. We also find that higher communication costs hamper economic growth.

Turning to financial inclusion, mobile phones play an important role. It becomes easier and cost effective for previously unbanked people to have access to deposits and loans. In addition, better information flows through mobile phones improve information acquisition of both depositors and financial institutions, and enhance monitoring. Higher mobile penetration, indeed, reduces the physical constraints and costs of distance and time, thereby reducing the costs of financial intermediation, and contributing to the emergence of branchless banking services. The resulting effect is an improvement in access to finance for households that would be financially excluded otherwise. As expected, we empirically find that for the sample of African countries considered, mobile phone penetration fosters financial inclusion, which in turn is good for economic growth. More importantly, the impact of financial inclusion on economic growth is stronger in African countries with higher mobile phone penetration rates. Financial inclusion is measured by the number of deposits per head, and that of loans per head considering a wide range of financial institutions (commercial banks, cooperatives, microfinance institutions, and specialized state financial institutions). Interestingly, the results of our study also show that in countries where mobile financial services are actually available (during the period covered, only three countries were operating mobile financial services: Zambia since 2001, South Africa since 2004, and Kenya since 2007), mobile phone penetration further enhances the contribution of financial inclusion to economic growth compared to countries where these services are yet to be deployed.

To sum up, ICT and mobile phones in particular contribute to economic growth in Africa, and part of this effect goes through better financial inclusion. African countries should seize this opportunity to maximize the benefits from ICT development. The spread of mobile financial services is still in its early stages in Africa, suggesting that we may not have captured the full impact in our study. Nevertheless, our results suggest that policies to promote the development of ICT and mobile financial services in Africa should be strongly encouraged. Domestic and foreign direct investments are needed to develop the ICT sector. Greater competition should help make ICT services affordable to a large part of the population. The benefit from higher tax on the telecommunication sector on government revenue should be weighed against the risk of lower growth as telecommunication costs would rise. To foster financial inclusion, the links between the ICT and financial sectors should be strengthened, while addressing the challenges posed by mobile banking (security concerns, compliance with AML/CFT rules, etc.) with proportionate regulation that does not impede the growth of mobile financial services.

is currently an economist in the Regulatory Affairs
Division of France Telecom in Paris France.
Prior to that, she was a postdoctoral researcher in the R&D Department of France Telecom Group working on mobile financial services and the effects of their regulation on mobile network operators.
She holds a PhD in economics from the University of Rennes 1, focusing on Banks, Financial Markets and Growth in Developing Economies. She has written several papers on issues related to financial development, financial structure, and mobile financial services.

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