20 Years of Financial Inclusion in East Africa: 4 Major Shifts

East Africa’s innovation in financial services has changed the global inclusion landscape; going forward to maintain its global leadership role, the diverse provider community must continue to innovate to create financial products that the poor really need and trust at a price they can afford.

Twenty years ago, when CGAP was formed, South Africa had just held its first democratic election, it was illegal for women to wear trousers in Malawi, Google didn’t exist yet, Equity Building Society (later transformed into Equity Bank) was declared technically insolvent, and Safaricom’s network couldn’t even send an SMS. A lot has changed since then, not least in the world of financial inclusion in East Africa. No one could have guessed that the region would soon become a cutting-edge leader in global financial inclusion, led in no small part by giants Equity Bank and Safaricom.

It seems fitting to reflect on the tremendous changes in financial inclusion in the region as CGAP commemorates its 20 year anniversary.

20 years ago, reliable measurement of financial inclusion was almost non-existent

20 years ago, regulators and development partners relied on supply-side data to measure progress – probably delivered in hard copy since people weren’t even using email. Today, thanks to donors changing the way they support financial inclusion, surveys including Financial Inclusion Insights, Findex, Finscope and Agent Network Accelerator provide detailed, nationally representative demand-side information and GIS mapping allow us to see every financial access touch point in a country – and we can access all this information with just a few clicks of a button.

The data reveals that East Africa has made tremendous gains in financial inclusion in recent years. In Kenya, financial access increased from 27% to 67% in just 7 years from 2006 to 2013. We can speculate that 10 years earlier, financial access was in the teens or even single digits.

20 years ago, the only “cells” in Africa were in prisons and MFIs expanded their distribution networks through bricks and mortar branches

Undoubtedly, the single biggest factor driving the growth in inclusion in the region has been the rise of cell phones and mobile money. Mobile money may have been born in the Philippines, but Kenya was the first country to experience its full potential and is still the global leader in digital financial services. Two thirds of Kenyans actively use mobile money to send and receive money and cash in and out at agents. Increasingly, they are also accessing more formal financial services, like M-Shwari, through their phones. And progress is not limited to just Kenya; it has spread throughout the region. Almost half of Tanzania’s population uses mobile money. Its ecosystem is more competitive than Kenya’s and providers are moving towards interoperability, so Tanzania is setting an example for others.

Although mobile money was the biggest factor in making financial services more accessible to the mass market, it’s not the only one. Between 2005 and 2014, Kenyan banks nearly tripled branches and quadrupled ATMs. 86% of the population now lives within 5km of a financial access point – a statistic that we could surely only have dreamed about 20 years ago.

20 years ago, we assumed that the poor needed microenterprise loans more than any other financial service

Long before M-PESA, financial institutions such as Equity Bank, Centenary Bank and NMB started to aggressively expand down-market, creating more relevant products for lower income customers while generating profits. In the early 1990s, the financial inclusion world was mostly focused on a single product (working capital loans) administered in a single way (through groups offering joint liability) to a single segment of the population (low-income female entrepreneurs), mostly in urban and peri-urban areas. These were primarily offered by NGOs with a focus on alleviating poverty, not on making profits.

About 20 years ago, the term ‘microcredit’ started to give way to ‘microfinance’ as practitioners realized all segments of low-income people needed a range of financial services including not only credit but also savings, insurance and money transfers. Equity Bank helped to lead this transformation and became a global leader in listening to clients and developing a range of products to meet their needs. Today, a broad range of institutional types (commercial banks, microfinance banks, credit-only MFIs, SACCOs, mobile money providers and innovative start-ups like M-Kopa) offer a wide range of financial products and services.

20 years ago, regulators were struggling to decide whether and how microfinance should be commercialized

Twenty years ago, most institutions providing financial services to lower-income people were unlicensed NGOs. The hot topic in the 1990s in East Africa, as elsewhere, was around commercialization of microfinance and how to effectively regulate and supervise MFIs. Should well-capitalized MFIs be allowed to be depositories? Should credit-only MFIs be subject to prudential regulations? Should interest rate caps be imposed?

Most of these questions were answered long ago, although of course many central banks still struggle with capacity to adequately supervise the non-bank sector. In the past decade, regulators (and not just financial sector regulators) have wrestled with a topic that was probably unthinkable in the 1990s: whether and how to effectively regulate mobile money services run by mobile network operators. For the most part, they’ve figured out ways to allow non-banks to safely offer financial services via cell phones and for small mom-and-pop stores in rural areas to act as agents for banks and mobile money services. Currently, the hot topics when regulators get together revolve around allowing (or mandating) interest on e-float, how to handle innovative services like credit and savings accounts delivered via mobile money, and interoperability of digital financial services.

Although on one hand the landscape of financial inclusion has completely changed in East Africa in the past 20 years, there is still much work that needs to be done. The Kenya Financial Diaries, which carefully tracked all financial transactions for 300 low-income households over one year, reveal that even as low-income households take on new financial services like mobile money, they continue to rely heavily on the chamas, mattresses and shop credit that they’ve been using for generations. Informal and socially embedded forms of finance are still meeting needs that formal services are not. And access to those formal financial services is very uneven. Those living in rural areas, below the poverty level and women are still much less likely to have access to any sort of formal financial service compared with their counterparts.