By: Mary-Jean Nleya
A month ago the 17th annual Africa Business Conference was held at HBS. It attracted many people from within the African diaspora and those with an interest in Africa. The theme for the conference was “A More Inclusive Africa: the pursuit of progress for all“. The aim of the conference was to engage in dialogue on sustainable and inclusive growth strategies for the continent with those already working on the continent. It was a very lively, engaging, and insightful conference. Particularly, I would like to reflect on the micro-finance panel discussion. More info on the micro-finance panel can be found here: http://www.africabusinessconference.com/fostering-inclusive-growth/ .
Getting started with the micro-finance discussion
The micro-finance panel commenced with the panel moderator recalling the historical development of the concept of micro-finance. Micro-finance having become popularized in the 1970s with the advent of Muhammed Yunus’ Grameen Bank; however, the idea of ‘micro-finance’ traces back to the 1800s.
In the African context, for too long the focus has been on formal sources of access to capital; to the exclusion of those at the bottom of the pyramid. The notion of micro-finance has recently been used as the tool to foster inclusive growth. One of the panelists explained micro-finance to be the “informal access to capital [which] is critical to financial inclusion and as a result wealth creation”.
Where are we today with micro-finance in Africa?
Another panelist who does work in micro-finance stated that in addition to ensuring quality services to her clients, her primary aim is to get those at the bottom of the pyramid “… to have a positive outlook [on life]” and afford them the opportunity to financial access which they ordinary would not get access to at a commercial bank. However, the same panelist pointed out the challenges she has to work around, which (among others) include complying with Know-Your-Customer (KYC) regulations, because “identification is a major issue [in the African country in which she works]” and most people at the bottom of the pyramid have “no means of identification”.
Flowing from the focus on regulatory compliance with KYC requirements, a subsequent panelist contended that there has been an over-emphasis on KYC regulatory compliance as the major challenge for micro-finance institutions. He is of the view the goal should be to “make a seamless system” to advance the needs of the customers being served, which should include physical networks which should extend beyond the urban areas into remote regions. He reasoned that the importance of having physical networks in the form of field staff in remote areas was important so as to live up to the ideal of “inclusivity”. He further stated that micro-finance institutions’ services go beyond lending micro-credit, but also includes affording savings services. He elucidated that there is a lot of value that is being kept “under people’s mattresses” because of the lack of physical networks that extend beyond the urban areas, and as a result of this phenomenon there is a lot of value that is missing, which would otherwise be converted into additional service offerings which would include e-wallets and insurance services.
Digitizing micro-finance
It was clear after 20 minutes into the micro-finance discussion that despite the various challenges that have been experienced in the micro-finance industry, there were positive strides taken and great opportunities ahead. The great opportunities that lay ahead were exemplified by one of the other panelists, who said the “use of technology between buyers and sellers is an important conversation to have”, she said this conversation is as important for those at the bottom of the pyramid, where 90% of transactions are in cash. She said we need to “kill the use of cash” amongst this group and move to a digitized system of micro-finance. She posed a question to the audience, “How many of you bought your air ticket online? And how many of you bought your ticket in cash?” The response from her questions revealed that the entire audience had made payments without the use of “cash” (in the technical sense of the word). She went on further to say, this should be the case for those at the bottom of the pyramid, because the use of cash breeds crime and corruption. She solidified her point by referencing South Africa, as a case in point, which managed to root out fraud after the social security agency registered those who receive government social grants digitally and thereby completely eliminated cash grants.
On the other hand, the last panelist maintained that “we cannot kill cash”. This panelist indicated that 80% of Africans have mobile phones, and the question should be “what can we do with this mobile penetration to reduce transaction costs and have access to remote places on the continent?” The last panelist concluded by stating that we should work to empower the unbanked as this will have a positive impact on overall growth of the continent. In relation to growth on the continent, it was highlighted that an example of the impact those at the bottom of the pyramid have on the formal economy is significant, citing that 57% of Nigeria’s GDP comes from the informal sector.
The micro-finance conversation just does not end here
While the micro-finance panel discussion was enlightening, the conversation still continues. We are continuing on a path that was paved in the 1800s and then popularized in the 1970s and is currently revolutionized in this digital and tech 21st century world of which we occupy.
Micro-finance is an enabler – it has enabled and continues to enable the African continent to move away from the simplified ‘aid model’ poverty reduction rhetoric to a wealth creation narrative which focuses on informal sources of capital. While I view micro-finance as an enabler and as one of the ways to lead to inclusive growth on the continent; there is an interesting TED talk by an HLS student and he argues for macro-finance and he criticizes micro-finance, see here: https://www.youtube.com/watch?v=tAReayFqUEY