The Oke-Arin market is a massive labyrinth of opportunity at the heart of Lagos, Nigeria’s capital. Along the narrow, winding streets, vendors sell everything from textiles and tomato paste to cutlery and custard. Streams of shoppers and hawkers carrying products on their heads deftly dodge speeding motorcycle taxis and delivery trucks. Somewhere deep in the sea of stalls is Shade Okins, who sells bottled soft drinks and water. Mrs. Okins built her business through hard work and an entrepreneurial spirit, which has driven her to manage two profitable stalls that have helped send three of her six children to university.
But, it wasn’t always so.
Mrs. Okins recalls the difficulty of starting a business. “I crawled and crawled before I could make it.” To keep pace with growing demand, she needed access to financial services, and in that, she resembled many of her fellow African entrepreneurs.
Over the past decade, many African countries have seen economic growth accelerate averaging more than 5 percent annually. In 2014, countries such as Ethiopia and Nigeria expect gross domestic product (GDP) growth to reach 7.5 percent. Some families and small businesses, such as Mrs. Okins’s, have flourished in these markets. Yet, many Africans have struggled to seize the opportunities created by this growth because they lack access to the financial services. Improving financial inclusion, in fact, is crucial to making this recent acceleration in growth more inclusive and sustainable for the majority of African households and entrepreneurs.
By “financial inclusion,” we mean that a full suite of quality financial services is provided, to all who can use them, by a range of providers to financially capable clients. Africa is a perfect place to build and improve the infrastructure of inclusion: With more than 1 billion inhabitants across 54 countries, the region has some of the highest levels of poverty and the lowest levels of financial inclusion in the world. More than 60 percent of Africans live on less than $2 per day and only 23 percent of adults have a formal savings account at a regulated financial institution. This varies significantly from country to country – only four percent of people have accounts in the Democratic Republic of the Congo, while 54 percent of South Africans are “banked.” Widespread poverty and financial exclusion are linked trends; the vast majority of those who do not have accounts state that their income is too low to open and use one. In this context, access to a savings account is an important first step toward participating in the formal financial sector for low and middle income households as well as micro, small, and medium enterprises (MSMEs).
A savings account facilitates building long-term capital. It offers clients a coping strategy when faced with income shocks in the short term. Nigeria’s Accion Microfinance Bank (AMfB), which lends to Mrs. Okins, uses daily collections in the main marketplaces and business areas. It does not charge fees and it provides a market-based interest rate so that clients have a safe, convenient saving mechanism and lower overall transaction costs. AMfB’s service works – the institution is profitable and currently services 60,000 savers, 22,000 of whom have active loans averaging $900 per client.
That was certainly Mrs. Okins’s experience. A savings account and microloans have allowed her to build her business in a viable but volatile market. With her first loan, she bought crates so she could buy and store more soft drinks; the second went toward a refrigerator and two water pumps. Her most recent loan, for $2,000, allowed her to open a second stall. “There are not many challenges if you have enough capital,” she says with a smile. “My work now moves smoothly…and the loans make me move forward faster.”
As more robust technology solutions and telecommunications infrastructure come into the market, such banks will increase account openings, payment services, and savings mobilization from clients through mobile channels. Already, 14 percent of African adults access payment services on their phones; usage is at its highest in East Africa, with 35 percent of adults. Akiba Commercial Bank (ACB) in Tanzania, another Accion partner, offers clients mobile access to their savings accounts, which has enhanced the geographic scope of the bank’s service delivery capacity for its 200,000 clients and will streamline the operational costs of future expansion.
But, the stories of people like Mrs. Okins and their journeys to financial stability don’t end with savings: the number of Africans with access to credit is even lower than those with a savings account. The rate of inclusion through formal credit services ranges from one percent of adults (in Algeria) to 10 percent (in Kenya), but the demand for credit from MSMEs, such as Mrs. Okins’s business is largely unmet by the formal financial sector. Indeed, many of the people who do benefit from access to credit in Africa are already formally employed and using their loans for consumption purposes. There’s a clear gap in the market – and we must start meeting that demand, or risk leaving millions of people excluded from these opportunities.
Banks like AMfB and ACB are currently focused on using data analytics to reduce the cost of offering personalized loans to MSMEs and renewing these facilities. As many African countries lack national identification systems and credit bureaus, this approach has enabled some microfinance banks to overcome some important bottlenecks and to streamline and automate the loan renewal process. With improved turnaround time and a more efficient and effective evaluation of clients’ willingness and ability to repay, bank staff can be more responsive to clients’ financing requirements and make rapid loan decisions to support their growing businesses. As the banks’ databases are developed and their internal capacity to analyze the data is built out, they can enhance the scorecards with more sophisticated analytics. These loan products finance productive investments such as working capital, business structure improvements, and equipment purchases – like Mrs. Okins’s supplies – and collateral can range from a group guarantee to an asset pledge.
In terms of financial growth, Africa is a region ripe with potential – and concrete demand. Building the strong infrastructure needed for full financial inclusion – from innovative technologies to an informed clientele – will require patience, expertise, and support from investors, practitioners, and clients alike. But with the right tools, local market knowledge, and an entrepreneurial spirit, these institutions, companies, and microentrepreneurs can contribute significantly to improving financial inclusion in stable and competitive markets.
The impact of helping one Nigerian entrepreneur may not be felt beyond the marketplace where she operates, but, by helping the millions like Shade Okins, we can achieve more inclusive and sustainable growth in the region and change the face of Africa’s economy for good.