Digital Transformation of Microfinance and Digitization of Microfinance Services to Deepen Financial Inclusion in Africa

Digital financial services (DFS) are spearheading greater financial inclusion in Sub-Saharan Africa, with 338 million registered accounts in 2017 and a significant boost in penetration from 12 percent to 21 percent between 2014 and 2017. Over the past decade of market development, DFS has diversified from basic money transfer and bill payments to credit, cross-border remittances, savings, insurance, merchant payments, bulk disbursements and other value-added services like pay-as-you-go (PAYG) energy, crowdfunding, savings group and value chain digitization. Digital credit offers are growing rapidly in mature DFS markets in Africa, such as Kenya, Tanzania, Uganda and parts of West Africa. Digitization of services is no longer an option, but a race MFIs must run to stay relevant in rapidly evolving markets.

Microfinance providers are taking progressive steps to embrace digital finance, often starting with the digitization of existing products, services and operations, either by using mobile devices, partnering with a digital financial service provider or developing a proprietary agency network. Although this triggers benefits for both clients (convenience, security, faster transactions and creation of a digital footprint) and microfinance providers (increased operational efficiency, diversification of customer base with value-added products, rural outreach at a lower cost), digital finance comes with certain challenges and risks, and can sometimes represent a threat if not leveraged appropriately.

Microfinance providers have to compete with other DFS players by serving millions of traditionally un(der)served populations. Despite the progress in expanding the reach of DFS, many Africans, especially vulnerable segments like rural residents, women and the very poor remain unserved. Microfinance has traditionally focused on serving these groups and have developed methodologies for building relationships with vulnerable clients. Given the scale and rapid rise of DFS and the rural/women focus of microfinance, partnerships offer great potential to deepen financial inclusion: between microfinance providers and mobile network operators (on digital savings and loans, mobile-to-wallet interoperability, etc.) or between microfinance providers and technical services specialists and FinTechs (credit scoring solutions, blockchains, etc.).

As technology disruptions and new players change the face of microfinance, regulators need to fully comprehend this changing environment and be prepared with adequate supervision and oversight tools. Inclusive digital finance is contingent on a broader disaggregation of the financial services value chain, with banks and non-banks (including FinTech companies) assuming different responsibilities according to their area of specialization, through a web of partnerships. This could include account and client data storage, management and analytics, and many more. Regulators need to identify how to optimize synergies between digital finance and microfinance for financial inclusion, such as consumer protection for DFS, KYC, credit risk management, data privacy, innovation, reporting, financial education and other areas.

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