An Excluded Society? Financial Inclusion in SADC through the FinScope Lenses

New findings on financial inclusion in the Southern African Development Community countries

In January 2016, FinMark Trust published the book “An Excluded Society? Financial Inclusion in SADC through the FinScope Lenses”. The book provides an in-depth analysis of the current state of financial inclusion in the twelve Southern African Development Community (SADC) states. It contains informative and diverse reviews from industry experts on the challenges and opportunities that regulators and the private sector ought to eliminate or take advantage of, in order to advance financial inclusion.

The book questions whether the SADC community is in fact an excluded society considering that 34% of the 125 million people are financially excluded. This translates into 41.9 million adults who do not have any financial accounts and do not fully participate in the mainstream economy. As illustrated in Figure 1 below, Mozambique has the highest proportion of the excluded population (60%), followed by the Democratic Republic of Congo with 52%.

Figure 2 depicts formal and informal financial services that often complement each other fulfilling different consumer needs and as such should not be seen as competitive. Lesotho is an example where informal financial services exceed formal services and act as a driver for financial inclusion while Zambia is an example where informal and formal financial services have equal penetration.

The book highlights informal mechanisms emerging as vehicles for financial outreach as a first step in the right direction. However, the demographics and socio-economic characteristics of the informal financial account users are often such that their participation in the formal sector does not improve their welfare, as argued by Lwanga Nanziri from South African Representative Association for the Advancement of African Women Economist (AAWE). Substantiating the same sentiments, Oabile Mabusa (Botswana Bankers Association CEO) believes that although it is counter-productive to seek to replace all informal activity with formal arrangements, it is necessary where informal markets have grown in relative significance in any single market. Professor Chipeta adds that if formalizing simply means registration then it is not a problem, but if it implies regulation and control (attempting to copy practices of formal markets), then there would be problems as informal markets thrive in the absence of these restrictions.

Based on these realities, the current global conversation on financial inclusion should probe:

• Whether informal mechanisms offer a viable option for regulators and industry to advance financial inclusion?
• Whether gender plays a role in the uptake of formal (or indeed informal) financial products?
• Whether under-served markets respond well to regulations as the first point of call?

For instance, in Uganda, before 2004, the size of the financial system was small and underdeveloped, where commercial banks accounted for 83% of the entire financial system assets. There was low penetration of the formal sector in the rural areas and the opportunity allowed for the emergence of informal financial institutions, including microfinance institutions, non-governmental organization-led entities and a large number of informal operators. Over time and with government support, by establishing an enabling and supportive regulation that actively encourages microfinance, savings and credit cooperatives, financial inclusion rocketed to 85% by 2013. As technological advancements set in and banks adopted mobile payments facilities, these developments were instrumental in getting people into the formal sector. The book offers insights into the Ugandan case study and other lessons learned where the informal sector was used as a vehicle for financial inclusion.

Such lessons are crucial in aiding SADC states to turn the corner from an excluded society into an impactful financially included region.

The Microfinance Gateway asked Mr. Motsomi about the new information from this book.

1. What were some surprising findings from the review?
The key outcome is that SADC countries are developing financial inclusion programs in isolated and uncoordinated pockets across the region. This means that countries are not sharing lessons and insights – thus not accelerating the development agenda as much as they would like. The obvious observations are that informal markets, with careful and proper guidance, can be the drivers of transposing excluded communities to inclusive ones.

2. How are the challenges to financial inclusion similar (or different) across the SADC countries?
Across the board, the perceived barriers to banking relate to low or insufficient income, irregular income and irregular employment or unemployment. All these are linked to the ability of an individual to constantly engage with the financial sector. There is a lack of knowledge about existing products, such as mobile money, which is mainly used for foundational activities (purchasing of airtime) rather than mobile money payments.

3. How does the design of the FinMark questionnaire provide new insight?
Since inception, FinMark Trust seeks to develop instruments that are relevant and changing with times. In the recent past, financial inclusion has been more focused on bridging access to services (under- or un-served) markets. As more countries have better access to financial services and products, the question is now changing to “are consumers making ‘good’ use of the financial services they currently have?” the FinScope questionnaire for example, is now looking into next generation indicators that strive to measure that.

4. What new questions have been brought up by this research?
We need more information on the usage of financial accounts, especially the issue of dormancy of formal accounts. For instance, some adults withdraw all their money as soon as its deposited into their banking accounts. The new FinScope questionnaires tracks this behavior in order to provide the evidence to have meaningful discussions with public and private sectors. 

About the Book:
"An Excluded Society – Financial Inclusion in SADC through the FinScope Lenses," provides an all-inclusive regional financial inclusion picture. It profiles the current state of inclusion, daily realities of people and conversations with a group of experts to highlight areas of development, persisting obstacles, record of trials and errors and progress in the region. The book serves as a wealth of information and is intended for regulators, development agencies, financial services providers, academics and everyone with an interest in financial inclusion.