Financial Inclusion and Market Development in East African Economies

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    Financial Technology in Tanzania: Assessment of Growth Drivers
    (African Economic Research Consortium, 2023-10-04) Macha, Deogratias Philip; Massawe, Nangi Mosses
    This paper provides an in-depth insight of existing fintech environment in Tanzania, focusing on growth-driving and retarding factors and bringing up opportunities for scaling up fintech solutions to a broad range of the population. The analysis is descriptive, based on information gathered from various institutions, open data sources and interviews from key informants in the market. The analysis incorporates both fintech start-ups and incumbent fintech companies, including mobile money. The findings show that most of the fintech innovations in Tanzania are in payments and lending—drivenby mobilemoney providers, ofwhich most have integrated with banks and financial institutions to facilitate delivery of banking services. Gaps have been established in the legal framework governing nano-credit (mostly offered by mobile money operators) and the protection of fintech innovations in nascent stage. A ‘test and learn’ institutional set-up is also missing, making it challenging to nurture and/or support fintech innovations from the initial stages. Although there is improvement in support infrastructure, there is slow adoption and use of smartphones capable of supporting most digital transactions. Also observed from the analysis is absence of a coordination platform for fintech players. To address these challenges, the paper recommends a review of the legal framework to accommodate new fintech innovations and products from the market, including nano-credit; institutionalizing ‘test and learn’ approach to facilitate engagement with fintech innovators; and facilitate establishment of a platform for coordinating fintech ecosystem, including a fintech association for self-regulation and capacity building.
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    The Old and the New Economics of Financial Inclusion
    (African Economic Research Consortium, 2023-10-04) Knaack, Peter
    The past decade has witnessed dramatic technological advances that have changed the economics of financial inclusion. This paper contrasts the old and the new economics of financial inclusion and draws policy implications. The old model of financial inclusion was not able to defy the logic of financial markets, relying on subsidies and nudges from state authorities to make financial institutions include underserved segments of the economy. The new economics of financial inclusion derive from digital automation. It has dramatically lowered transaction costs and increased returns to scale, allowing services at lower margins and lower volumes than ever before to be commercially sustainable. Rather than banks, digital newcomers such as mobile network operators or BigTech firms are protagonists of digital financial inclusion. They are willing to make significant investments that foster financial inclusion even when it is not profitable in the short-run, because it allows them to leverage a feedback loop of data analytics and network externalities that also harbours the danger of creating new monopolies and oligopolies. Regulators may thus face a Faustian Bargain: trade private sector led financial infrastructure investment now for anticompetitive behaviour later. To avoid the short end of the Faustian Bargain, regulators can consider a two-step policy: laissez-faire first, rectification later.
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    The Monetary Economics of E-Money in East Africa
    (African Economic Research Consortium, Nairobi, 2023-06) Mbiti, Isaac; Weil, David N.
    This paper updates and extends previous research that has looked at the roll-out of phone-based electronic money in East Africa. To the extent possible, we do parallel analyses for Kenya, Tanzania, Rwanda, and Uganda, although, data limitations in the latter two countries severely limit our analysis. Where possible, we present data on the outstanding level of e-float, the magnitude of monthly customer-to-customer transfers, and the average size of person-to-persontransfers. In addition, we construct two measures of particular interest to monetary economists: the velocity of e-money and length of the “cash loop.”
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    Financial Technology in Tanzania: Assessment of Growth Drivers
    (African Economic Research Consortium, 2023) Macha, Deogratias Philip; Massawe, Nangi Mosses
    This paper provides an in-depth insight of existing fintech environment in Tanzania, focusing on growth-driving and retarding factors and bringing up opportunities for scaling up fintech solutions to a broad range of the population. The analysis is descriptive, based on information gathered from various institutions, open data sources and interviews from key informants in the market. The analysis incorporates both fintech start-ups and incumbent fintech companies, including mobile money. The findings show that most of the fintech innovations in Tanzania are in payments and lending—driven by mobile money providers, of which most have integrated with banks and financial institutions to facilitate delivery of banking services. Gaps have been established in the legal framework governing nano-credit (mostly offered by mobile money operators) and the protection of fintech innovations in nascent stage. A ‘test and learn’ institutional set-up is also missing, making it challenging to nurture and/or support fintech innovations from the initial stages. Although there is improvement in support infrastructure, there is slow adoption and use of smartphones capable of supporting most digital transactions. Also observed from the analysis is absence of a coordination platform for fintech players. To address these challenges, the paper recommends a review of the legal framework to accommodate new fintech innovations and products from the market, including nano-credit; institutionalizing ‘test and learn’ approach to facilitate engagement with fintech innovators; and facilitate establishment of a platform for coordinating fintech ecosystem, including a fintech association for self-regulation and capacity building.
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    Bridge Contracts in Africa: A Case Study of Orange Mali
    (African Economic Research Consortium, 2023) Greenacre, Jonathan
    People incur transaction costs fitting their organizational arrangements into their surrounding property rights system. This paper analyzes organizational adaption to surroundings by examining which tool(s) from mechanism design people will use to solve moral hazard problems. Broadly, the weaker people’s surrounding property rights system, the more a principal will use tools from mechanism design, which provides greater autonomy to the agent. The paper finds support for this hypothesis by identifying ‘bridge contracts’, which Orange Mali uses to respond to weak property rights between urban and frontier communities in Mali. The paper proposes to use these findings to stimulate a ‘context specific’ approach to engineering economics. This involves developing mechanisms to encourage people to work towards social goals but also fit within specific communities. The paper applies this approach to random control trials.