Financial Inclusion: A new risk awakens

A new risk is developing that provides Africa with an opportunity to leap frog the developed world.

One of the consequences of the global financial crisis is the lower risk appetite amongst established African retail banks. This has reduced accessibility to loans and banking services for subprime customers in Africa.

Although CBN reforms have increased the number of Nigerians with bank accounts from 18.3m in 2008 to 28.6m in 2012 and reduced the financial exclusion rate from 53% in 2008 to 46% in 2010, Nigerian banks still face difficulties in expanding formal financial services due to identification issues and poor implementation of the three tiered Know Your Customer requirements.

Financial Inclusion is the process of ensuring access to affordable appropriate financial products and services needed by all sections of the society and low-income groups in particular.

The rate of financial inclusion in Africa is low with only 55% of the adult population with tertiary education having bank accounts, but this drops to 10% amongst those with primary or no formal education. The fraction of population having access to formal financial products is small in many countries, with large proportions of individuals using only informal products and services, or being completely excluded from financial sectors.

Financial exclusion

Exclusion from the financial mainstream often means that people pay a higher price for products and services and have less choice. Credit scores determine the availability of loans and the interest rates.

Traditional credit scoring based on the FICO methodology developed by Fair Isaac Corporation in the 1950s is a key supply-side barrier to financial inclusion in Africa as people with a sparse credit file, or no credit history find it difficult to access affordable credit. The score sourced from credit bureaus is used to predict the likelihood of the borrower repaying the loan.

Traditional credit scoring Components

Their method takes into account 5 core parameters including; payment history, amounts owed, length of credit history, new credit and types of credit used to predict the likelihood of the borrower repaying the loan. A higher score allows you to borrow larger amounts, at lower interest rates from a broader range of lenders. The lack of available traditional data in Africa means qualified borrowers are either denied loans or charged a high interest rate for a loan. Over 4.5 billion people around the world have sparse credit profiles.

There is a huge opportunity to address the financial exclusion in Africa using sophisticated digital technologies, non-traditional big data and social relationships to provide more accurate risk scoring. This helps loan providers make better decisions and allows people to gain access to and keep control of their finances.

A new wave of firms including StartCredits are utilising innovative risk models in the field of predictive analytics to help facilitate affordable lending to underserved qualified borrowers. These models enable new ways of understanding customers and markets, by utilising validated borrower provided data residing in the ever-growing social network databases.

Africa is currently underserved by private credit bureaux

The sparse coverage by traditional credit bureaux provides Africa with the opportunity to leap frog the developed world into new risk measures, that promote financial inclusion, similar to the advancements made in payment systems by M-Pesa.

Half of all mobile money transactions in the world take place in Kenya, where annual transfers have reached $10 billion. The system is used by two thirds of the adult population (over 17m Kenyans) and has around 25% of the country’s gross national product flowing through it.

Innovations in financial technology will help expand access to financial services in Africa although demand side barriers to financial inclusion such as low financial literacy must also be addressed.

Financial literacy empowers people to make informed and effective decisions with all of their financial resources and is a core life skill for participating in modern society. South Africa has made a long-term commitment to financial education through a national strategy, but the majority of countries in Africa lack a strategic, co-ordinated approach to financial education.

Account penetration in Africa

A financial system that excludes significant numbers of citizens cannot foster sustainable growth or spread prosperity. Financial inclusion is key to achieving the World Bank Group’s goals of eliminating extreme poverty by 2030 and helps improve private investment, equality, job creation and national productivity.