How Fintech can help financial inclusion in Sub-Saharan Africa
As a major force which shapes the structure of the financial industry in Sub-Saharan Africa describes Fintech a recent report from IMF. According to the report “FinTech in Sub-Saharan African Countries - A Game Changer?” new technologies which are being developed and implemented in the region have the potential to change the competitive landscape in the financial sector.
Furthermore, for the IMF team FinTech can have a significant impact on financial inclusion and deepening by improving the level of efficiency of the industry. “Sub-Saharan Africa has lower levels of financial inclusion and depth compared to other emerging market and developing economies. This provides space for significant growth opportunities in the sector as there is a large proportion of the population that does not have access to financial services”. The report argues that FinTech offers opportunities to new entrepreneurs and incumbents in the financial sector that can leverage innovative and less costly business models to serve this large uncovered segment of the market. Mobile phone which is very popular in the region (81 mobile phones per 100 inhabitants) plays a crucial role as it gives new entrants a unique opportunity to reach these new customers with mobile-based financial services.
Access to credit
The research recognizes that the cost of credit risk assessment remains high in Sub Saharan Africa. Challenges for banks stem from unreliable accounting and financial information, a lack of credit bureaus, and limitations in legal institutions. Small- and medium-sized enterprises (SMEs) cite access to finance as their main challenge, which has also gender equality implications as women-owned SMEs are even more limited in getting access to credit.
Access to credit could also be extended through technologies that overcome information barriers. Big data and machine learning, tools that Channel VAS has already used in its solutions, have the potential to reduce the cost of credit risk assessments, particularly in countries that do not have an established credit registry. This can be achieved by using a broader range of information such as mobile phone usage data and payments data, which is available in higher volume, and new statistical tools to process this larger volume of information to better understand and measure the nature of credit risks. Such alternative information for credit risk assessments, possibly at a lower cost, in Sub Saharan Africa could attract new entrants into the provision of credit, including FinTech firms. This will have implications for competition and the use of personal information by third-party players and carry legal and regulatory risks.
For IMF, bank competition in Africa is low compared to other regions of the world and several researches have shown that the current financial system has historically been inefficient. Moreover, banks in sub-Saharan Africa are typically less efficient than banks in other world regions and, therefore, financial services are more expensive. Higher operational costs, negative business climate and regulation are described as the biggest barriers.
FinTech can change the financial industry in sub-Saharan Africa by increasing competition and efficiency. “New entrants may face lower entry barriers as they may require a smaller scale of operation to be profitable” says the report.
Moreover, broader financial development in Sub Saharan Africa could be pushed forward at an accelerated pace. For IMF there is a strong need to develop financial markets in the region beyond retail payments filling the gap of other financial institutions and instruments (insurance companies, pension funds etc.) that remain limited.
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