The unconventional progression of financial development in Africa has been a hot topic of discussion for some time now. While it is true that the rate of financial growth in Sub-Saharan Africa falls far behind even that of the rest of the developing world, interestingly the continent has been swift to advance in the world of financial technology. Africa seems to have skipped over the stage of traditional banking and credit cards and jumped straight from a cash-dominated system to the world of mobile banking.
It’s no secret that cash rules the financial microcosm in Africa. Studies show that 94% of all retail payments across Africa (urban and rural), are being conducted using paper money. Underdeveloped banking infrastructure coupled with distrust in credit banking are the main motivations behind such high volumes of cash flow in Africa. The system is disadvantageous, as cash transactions are often tacked with extra fees to cover storage, security, and transportation of the sums. (McKinsey, 2014)
With such heavy reliance on cash transactions, the rise of banking in Africa remains sluggish. In 2014, it was noted that an astounding 66% of Sub-Saharan Africans did not have a bank account (Elixerr Partners LLP, 2018). So why is it that Africa, nicknamed the “unbanked continent”, lags behind in comparison to the rest of the banking world?
- Fragmented Infrastructure– Accessibility is vital to uphold a uniform banking system. In many African countries rural areas and remote roads make it difficult to develop the type of cohesion needed to support a successful banking sector.
- Political Instability and Distrust in the Judicial System– Many Africans fear fraud or are apprehensive that their transactions will not arrive to their determined destination. In addition, most credit cards in Africa are equipped with traditional magnetic strip and lack the extra layer of protection that a security chip ensures.
- Low Income Levels — Large populations in Africa do not have the money required in order to open a bank account.
- Lack of Financial Education– High percentages of Africans are unaware of the financial opportunities that are available to them.
- Inconvenience– Physical inaccessibility of bank branches ensues added travel costs. Absence of efficiency in the existing branches contributes to long bureaucratic processes and excessive wait times
It is clear that a traditional banking system is not an ideal fit for the diverse needs of the African continent. Frustratingly, however, for a long time, banks and credit unions have been the only non-cash options for business and personal transactions. Recognizing the gap in the system, Fintech and telecommunications companies have teamed together to make a giant leap forward toward mobile banking in Africa.
The mobile phone revolution swept the African continent with gusto and force, arming 2/3 of Sub-Saharan African adults with a handheld device. (McKinsey, 2014). Advances in the telecommunications sector, coupled with the launch of financial technology created a perfect breeding ground for a mobile banking insurgency in Africa. Mobile network operators (MNOs) are prolifically spreading their influence with a low-interest, accessible, and digital method of financial transacting.
The scope of MNOs is far reaching, penetrating even the most remote areas in Africa. In 2007, Vodafone developed M-Pesa, the largest and most commonly used mobile money payment system that is now used by 3 million users in 10 countries (Elixerr Partners LLP, 2018). The inclusion of formal financial methods allows people to not only save money, but also increase their financial literacy. The benefits of MNOs are not only limited to the individual, but to banks as well, who profit from the economic boosts offered by the new technology.
Although in the early stages, mobile banking offers promise for financial inclusion for many Africans. Moving away from cash transactions and toward mobile banking allows people to better plan for the future and manage their finances more efficiently. This in turn creates a more stable and ascending financial development trajectory for the African continent.