Financing the frontier: Inclusive solutions for strengthening finance in fragile states

New research from global organization Mercy Corps examines the impact of financial sector development on poverty, fragility, and stability across Sub-Saharan Africa. The report “Financing the Frontier: Inclusive Financial Sector Development in Fragility-Affected Africa” was commissioned by Financial Sector Deepening Africa and supported by the UK Department for International Development.

Poverty rates in countries and regions considered fragile are, on average, 20% higher than countries with comparable levels of economic development. The gap is widest for countries affected by repeated cycles of violence. Finance can play a crucial role in poverty and conflict cycles, as lack of equitable access to financial services can lead to underdevelopment and stagnation, exacerbating social and economic unrest.

Our research recommends donors and development actor should prioritize financial inclusion for investments in fragile countries.

Here are three of key findings and recommendations:

1. Populations facing fragility often have limited trust in financial institutions and low risk tolerance: Fragile states have lower rates of formal salaried employment (on average 12%) equating to high informality and income insecurity, often effecting household consumption and production decisions. This results in a need for a wide-range of financial services to build assets, manage risks, and smooth consumption. In fragile situations, individuals often become more risk averse and invest less.

2. Promising trends for investment: Our research advocates for investments in ID solutions and ‘fit for purpose’ regulations and seven promising trends:

• Market segments: Islamic finance and solutions for displaced populations
• Financial delivery channels: impact investing and remittances infrastructure
• Financial products and instruments: inclusive insurance, liquidity funds, and diaspora investment platforms

3. Market system solutions are still relevant: While each fragile situation is unique and complex, using a market systems approach is an opportunity for donors and development actors to adjust tactics but adhere to several key principles: think long-term, do not ignore the informal sector, ensure a positive business case, carefully sequence interventions, and utilize a diverse package of smart aid instruments.

This blog was written by Thea Anderson, Mercy Corps Director for Financial Inclusion