Financial Inclusion and Market Development in East African Economies

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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.
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    Digital Financial Services and Implications of Financial Literacy on Gender and Over Indebtedness: The Case of Kenya
    (African Economic Research Consortium, 2023) Kamau, Anne; Misati, Roseline; Ngoka, Kethi; Odongo, Maureen; Were, Maureen
    This study examines the relationshipbetweenfinancial literacy and over-indebtedness from a gender perspective and considering increased usage of digital financial services. The study used both primary and secondary data sourced from the FinAccess Household Survey 2021. The results show that although gender gaps in access and usage have declined over time, disparities still exist in terms of utilization of different components of financial products, financial literacy and indebtedness. Specifically, the results show that women prefer informal channels of credit services such as Chamas compared to men whose preference is formal channels. The results further show that both formal education and financial literacy lower the probability of over indebtedness, and that women are less financially literate than men and, for that reason, have higher chances of being over-indebted than men. The results also reveal that there is a huge demand for financial education, and that slightly more than a quarter of the surveyed population is aware of credit reference bureaus and less than a quarter canaccess anduse them despite their significance in minimizing information asymmetry, improving credit pricing, and minimizing default rates. Based on the results, the study provides three recommendations. First, development of customized financial initiatives targeting different customer segments S including women would be beneficial in minimizing financial literacy gaps and over-indebtedness. Second, the terms and conditions of loans that form an important financial decision-making tool need to be reviewed at industry and regulatory level, with an objective of making them simple, readable, concise and user-friendly. Thirdly, enhancement of access, usage, and awareness of CRBs can be an important policy tool for minimizing over-indebtedness.
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    Expanding Digital Financial Services in the East African Community with a Gender Lens
    (African Economic Research Consortium, 2023) Myamba, Flora
    The uptake of mobile money is on the rise around the globe, in Sub-Saharan Africa, and notably in East African countries. The digitization of government to person (G2P) payments is rising, governments are using electronic payments to pay public sector salaries, pensions and other social benefits. Social protection beneficiaries tend to be poor, are often women, and carry a legacy of financial exclusion. It is thus difficult to achieve a significant expansion of digital financial inclusion in these countries without gender consideration. Despite the outstanding achievements in the digital world, women in East Africa face more significant challenges in gaining access to digital financial services than men. This paper discusses more general and specific barriers, including women's lack of technical know-how to make transactions, low levels of mobile phone ownership, unavailability of agents, high transaction fees, and poor network coverage. The paper further discusses potential strategies for expanding digital financial inclusion for women, including those in the agriculture sector.
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    Financial Inclusion, Interoperability and Market Development in the East African Community
    (African Economic Research Consortium, 2023) Cracknell, David
    The digital finance revolution in East Africa contributed to a rapid evolution in financial services, and especially in mobile money-based services. Today, the ability of a customer to make end-to-end transactions from one provider to any other is assumed to be critical for continued rapid financial sector development. Interoperability is believed to promote financial inclusion by promoting greater and cheaper access to a wide range of financial services. This paper contributes to questions on the benefits of interoperability from an industry perspective, the anticipated value proposition for customers, and pricing structures. It establishes how interoperability has worked in practice across East Africa. From this perspective, it determines the factors that have influenced the success or lack thereof in interoperability and considers the impact of interoperability on financial inclusion. The paper looks to the future in assessing how financial technology can enhance interoperability. It presents lessons for Sub-Saharan Africa from East African financial inclusion, market development and interoperability. The paper closes with a discussion of what the research findings mean for future interoperability. In the absence of comprehensive data, the paper has relied upon extensive secondary research followed by discussions with 30 primary respondents. Regional and international respondents were drawn from regulators, policy makers, payment specialists, donors, and financial sector specialists. The study notes the impressive results in the value and volume of payments that can be derived from an interoperable platform, citing the evolution of Safaricom’s M-Pesa and Equity Bank’s digital banking platforms in Kenya. However, the findings question the assumed benefits of scheme interoperability, noting the limited interoperability achieved to date across East Africa, partly resulting from the commercial and competitive positions taken by industry participants. The position of regulators and policy makers is evolving as pressure to implement nationally interoperable platforms increases and the definition of interoperability evolves to include data and payment interoperability. Financial technology, in particular shared platforms, banking as a service, and cloud based solutions can enhance interoperability, but policy needs to evolve to support these advances.
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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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    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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    The Old and the New Economics of Financial Inclusion
    (African Economic Research Consortium, 2023) 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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    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.