Several years ago, during a business trip to one of the African countries, I noticed the large number of houses under construction, which seemed to be untouched for a long time. At that moment I was sure that this was a negative indication of the state of the local economy, when many residents started building their houses and had to stop in the middle, probably due to lack of funds. But as I researched the issue in depth, I was surprised to find that the exact opposite is true, and that those houses under construction are not an indication of financial difficulties, but rather of their high status, representing the local form of savings.
For hundreds of millions in sub-Saharan Africa, basic economic services like formal savings or loans are still a distant dream. As over 66% of the population are unbanked, and lacking access to the most basic formal financial services, informal and creative solutions are a must. Building houses is one of them; as hundreds of millions are managing their financials with cash, long-term savings do not exist, and keeping your cash at home is dangerous. So, as I learned, whenever someone has some spare cash, they start building a house, presenting a much safer saving option. And so, thousands of under-constructed houses arise, waiting for their owners to have some additional cash to finish the work.
Additional creative local solutions are the community operated peer-to-peer saving circles, called “Stokvel”, which makes informal financial services available to millions. Known by different names in every country (“Ajo’s” in Nigeria, Tontines in Mali and Senegal, and so on), these initiatives respond to the problems of poverty and income insecurity, and enable members to meet their basic needs while providing opportunities to save, invest and even own assets.
This sounds like a nice community endeavor, but looking at the big picture, the market is much bigger than one might imagine. In South Africa alone, the stokvel sector is estimated to have 11.6 million members, collectively saving US$3 billion annually. These community financing circles promote trust, and honest culture of saving, but they have a massive flaw. Being completely autonomous, and not connected to any official entity, stokvel users are unable to establish a credit history, or longer-term savings, and do not get to enjoy the broader benefits of financial services.
Mobile money is not enough
With hundreds of millions using stokvels, and other informal ways to gain financial access, a massive gap was very noticeable in the continent’s sector, that was, and still is, lagging far behind other countries around the world. Mobile money was invented to fill this gap, and began circulating in Kenya in 2007, when Safaricom launched M-PESA. The service quickly became a success, and by 2015 there were about 270 mobile money services in more than 80 markets worldwide, with more than half in sub-Saharan Africa. In 2019, the total number of mobile money users in the region stood at 469 million, and the total value of the 23.8bn transactions exceeded $456bn, reaching 3.5 times the value of transactions recorded in South Asia, the second-largest mobile-money user.
Problem solved, right? Not exactly. Not all is positive in the mobile money sphere, to say the least. Although the service is much more inclusive than classic financial services given by banks, there are still substantial gaps. According to the World Bank, Only 25% of adults in the poorest 40% of households across SSA own a mobile payment account, compared to 46% of those in the richest 60%. Expensive fees are another issue, with higher fees for the small transactions, as high as 31%, exclude many from using the services.
Albeit a massive improvement, mobile money is still unable to provide the coveted financial inclusion that the local communities and governments seek, as access to credit, insurance, and good savings rates are still inadequate. Small business owners and suppliers for example, which make up a vast portion of the working community, have a limited capability for merchant integration with mobile money, and are often unable to accept it as a form of payment. Cash remains king on the continent, responsible for about 90% of consumer payments, which are expected to reach $2.1-trillion in 2025.
A world-leading hub for financial innovation
Africa’s FinTech scene began flourishing with the invention of mobile money, and the market is now rapidly expanding, with multiple ventures and companies offering a wide range of financial services. The massive proportion of unbanked and underbanked citizens together with a substantial mobile penetration rate of 44% laid a fertile ground for a FinTech boom, with the number of companies growing from 262 in 2018 to a whopping 674 in 2020.
There are some interesting ventures providing services across the continent. Tala uses a mobile phone and behavioral data to provide quick loans, Sampay is a Zambian startup providing online and mobile payment transactions, and Cryptofully and BitLipa are both crypto-based startups facilitating money transfer using Bitcoin.
Among the various technologies that fintech encompasses, blockchain is the main presenter of opportunities to tackle issues that banks haven’t yet been able to solve. It enables zero-fee borderless microtransactions, which are game-changers for many Africans living on less than $2 per day. It provides businesses and individuals with enhanced transparency, secure transactions and data aggregation, and third party redundancy.
Circling back to the community-led Stokvels, technology can be the epitome of these saving circles, as it depends on peer-to-peer trust, taking it one step further with a digital guarantee. For hundreds of millions in the region who lack trust in banks and other formal entities, it is the perfect solution.
Africa’s financial revolution is already here, and with the right policies and smart investments, FinTech could realize its massive potential to bridge the multiple gaps across the continent, while establishing an inclusive economy for all.