Findex: Sub-Saharan Africa Continues to Be the Leading Frontier of Financial Inclusion

Half of the world's population lives and works in the informal economy - not by choice, but by necessity. In the language of economists, poor families in developing countries are consumption-smoothing households and capital-consuming, self-employed entrepreneurs at the same time. As a result, they need a broader range of financial services to manage inevitably irregular income and expense spikes, accumulate working capital, build assets, and mitigate risks. Lacking better alternatives, they often resort to informal financial mechanisms, such as moneylenders, pawnbrokers, and rotating savings clubs, which can be very unreliable and expensive.

Against this backdrop, the notion of financial inclusion has risen to the top of the global development agenda, and the new Findex financial inclusion data is giving an important update on progress. Headline news is that 700 million more working-age adults gained access to the formal financial system since 2011, when the last comprehensive Findex survey was conducted. In this round, researchers included some 40+ financial usage related questions into the Gallup World Poll, covering sets of 1,000 randomly selected, nationally representative adults in more than 140 countries, to create the most robust summary data set of its kind in the world.

The new data suggests that the global progress is broader-based, with access increasing across most world regions. By income, poorer families are catching up with more affluent ones. However, when looking at gender a sizable gap between men and women persisted. The new data also suggests important levers for how to potentially ramp up families in the informal economy to formal financial services: some 400 million unbanked adults globally receive wages or government transfer payments in cash that could be directed towards basic transaction accounts; similarly, 440 million unbanked adults in developing countries receive cash for the sale of agricultural produce; and 270 million send or receive domestic remittances in cash.

Experts are excited about the potential of digitizing retail payments because it directly reduces transaction costs, theft, corruption, and increases access to emergency funds if necessary. In addition, a digital payments history provides new data for credit underwriting of small loans and digital payments make micro-leasing businesses that need to collect a huge number of tiny transactions viable - which would be prohibitively expensive in a cash-based economy.

Sub-Saharan Africa in general, and East Africa in particular, are pushing the frontier in this regard. According to the new Findex data, in five countries - Cote d'Ivoire, Somalia, Tanzania, Uganda, and Zimbabwe - more people now have access to the relatively new phenomenon of mobile-based money than to traditional bank accounts. In Kenya, which got a head start with its pioneering M-Pesa service, mobile money penetration is almost 60 percent. In Somalia, Tanzania, and Uganda it's 35 percent. Kenya and Tanzania are also the countries where mobile money penetration has created large enough markets for the second-generation digital financial services to take hold. Innovations such as M-Shwari in Kenya and its equivalent M-Pawa in Tanzania are providing phone-based savings and algorithmically underwritten, short-term credit services, which have found rapid uptake among the previously unbanked as superior liquidity management tools. Companies such as M-Kopa and Off Grid Electric leverage the mobile money infrastructure in East Africa to provide small-scale solar units against small, incremental leasing payments.

But the new Findex data also hints at the limitations for private sector financial intermediation when it comes to help people improve their lives. In Sub-Saharan Africa and South Asia, the most frequent reason for borrowing money was for healthcare and medical emergencies - with some 20% of adults in the Findex sample reporting having to do so. While they might be able to afford some limited private health insurance, the protection from the financial consequences of prolonged health episodes or chronicle illness as well as financial security in old age requires some form of Government-brokered intra- and intergenerational solidarity mechanisms, which financial inclusion alone simply can't provide.