FINANCIAL INCLUSION IN AFRICA: THE ROLE OF INFORMALITY Leora Klapper and Dorothe Singer

FINANCIAL INCLUSION IN AFRICA: THE ROLE OF INFORMALITY Leora Klapper and Dorothe Singer

OVERVIEW Global Findex: Goal to collect comparable cross-country data on financial inclusion by surveying individuals around the world: Measure the use of formal and informal financial services, using consistent methodology across economies and time Added questions on the use of financial services - payments, savings, credit, and insurance to the 2011 Gallup World Poll Surveys 1,000+ individuals in 148 countries; overall nationally representative data based on 150,000+ interviews of adults aged 15+ Funded by a 10 year grant from the Bill & Melinda Gates Foundation (through 2020) 2014 and 2017 next years of full data collection Motivate and track policies to expand financial services to the poor

ACCOUNTS Over 2.5 billion adults do not have a formal account 41% of adults in developing economies are banked compared to 89% of adults in highincome economies 37% of women in developing economies are banked compared to 46% of men 23% of adults living below $2 per day have a formal account

ACCOUNTS Account penetration Adults with an account at a formal financial institution (%) 60% 51% 40% 41% 23% 28% 23% 20% 12% 17% 0% Developing Countries Africa Southern Africa Eastern Africa Western Africa Central Africa North Africa 23% of adults in Africa are banked compared to 41% of adults in developing countries Wide variation of account ownership across sub-regions, from 12% in Central Africa to 51% in Southern Africa In several countries fewer than 5% of adults have accounts, including Central African Republic and Democratic Republic of Congo

ACCOUNT OWNERSHIP TYPE 2011 Account penetration in Africa by individual characteristics Adults saving at a formal financial institution in the past year (%) Women, rural residents, youth, adults with little education and the poor are the least likely to have a formal account Adults in the richest income quintile in Africa economies are four times as likely to be banked as adults in the poorest quintile Compared with other regions, the gender gap in Africa is relatively small.

BARRIERS Positive but imperfect correlation between account penetration and financial depth raises questions regarding cross-country differences in financial use and access and suggests room for policy reforms.

BARRIERS Self-reported barrier to the use of formal accounts Non-account-holders reporting barrier as reason for not having account (%) Developing Countries Africa Not enough money only* Too expensive Family member already has account Too far away Lack of necessary documentation Lack of trust Religious Reasons 0 5 10 15 20 25 30 35 40 Note: Respondents could choose more than one reason. The data for Not enough money only refer to the percentage of adults who reported only this reason. 82% of unbanked in Africa choose Not enough money and 36% of unbanked in Africa cite it as only reason. This compares to 66% and 30%, respectively, in developing countries overall. Cost, lack of documents, and distance cited by more than 25% of unbanked in Africa, a significantly higher number than in developing countries in general.

BARRIERS VS ACCOUNT PENETRATION Cost to open checking account vs account penetration 100 % of adults with account at a formal financial institution 75 50 25 0 0 20 40 60 80 100 120 140 160 Minimum amount to open a checking account (% of GDP per capita) Self-reported barriers to the use of accounts closely related to objective measures of costs, documentation requirements and bank branch penetration.

BARRIERS VS ACCOUNT PENETRATION Documentation requirements vs account penetration 100 % of adults with account at a formal financial institution 75 50 25 0 1 1.5 2 2.5 3 3.5 4 4.5 5 Number of documents needed to open a checking account (1to 5) Self-reported barriers to the use of accounts closely related to objective measures of costs, documentation requirements and bank branch penetration.

BARRIERS VS ACCOUNT PENETRATION Bank branch penetration vs account penetration 100 % of adults with account at a formal financial institution 75 50 25 0 0 20 40 60 80 100 120 Commercial bank branches (per 100,000 adults) Self-reported barriers to the use of accounts closely related to objective measures of costs, documentation requirements and bank branch penetration.

ACCOUNTS AND PAYMENTS 14% of adults in Africa use a mobile phone to pay bills, send or receive money in the past year 68% of adults in Kenya use mobile money technology, driven by the early success of M-PESA 51% of adults in Africa who use mobile technology to transfer money are otherwise unbanked 5% of adults in all developing economies use mobile money technology

SAVINGS Formal and informal savings in Africa Adults saving any money in the past year (%) Saves at a formal financial institution Saves using other methods only Developing Countries Africa Central Africa East Africa Southern Africa West Africa North Africa 0% 10% 20% 30% 40% 50% 60% 36% of adults in Africa saved in the past year, compared to 31% in developing countries 13% of adults in Africa (35% of savers) saved using a formal financial institution 19% of adults in Sub-Saharan Africa (48% of savers) saved using a community-based method. 34% of savers report having used a only community saving clubs.

FORMAL SAVINGS Formal savings in Africa by individual characteristics Adults saving at a formal financial institution in the past year (%) Female Male Rural Urban 15-24 25-64 65+ Formal savings most likely among men, adults living in urban areas, adults between ages 25-64, adults with higher education, and adults in the highest income quintiles. Informal savings most likely among women, adults living in urban areas, adults with a primary education or less, and the poor Elementary Secondary Tertiary Lowest Q2 Q3 Q4 Highest 0% 10% 20% 30% 40% 50% Percent of Adults

CREDIT Sources of credit in Africa by individual characteristics Adults with outstanding loan from source specified (%) 44% of adults in Africa have borrowed money in the past 12 months, compared to 34% of adults worldwide. 38% of adults in Africa have borrowed from family and friends, including 28% who report this as their only source of borrowing 5% of adults in Africa have borrowed from a formal financial institution 3% of adults in Africa report having a credit card

SAVINGS Reasons for loans reported by borrowers Adults with outstanding loan for purpose specified (%) 25% School fees Emergency or health purposes Funeral or wedding 20% 15% 10% 5% 0% Developing Countries Africa Southern Africa East Africa West Africa Central Africa North Africa Compared to developing countries in general, adults in Africa are more likely to report outstanding loans for funerals or weddings (4%), school fees (8%) and emergency or health purposes (15%). Adults in Central Africa are most likely to report an outstanding loan in each of these categories.

REGRESSION RESULTS Determinants of Account Ownership, Savings, and Credit Account ownership: women, poorer and less educated adults, and adults living in rural areas are least likely to have an account. Employment status is also an important determinant. Savings, formal vs informal vs none:. Formal savings, compared to not savings at all, are more likely for men, the rich, more educates, those living in urban areas, and those employed for an employer. The determinants for saving informally, compared to not saving at all, are similar to formal savings, however, urban and employed for employer are no longer significant. Credit, formal vs informal vs none: Formal credit, compared to no credit, is more likely the richer, more educated and those employed by an employer Access to credit from informal sources such as family and friends the main source of credit in Africa --, compared to no credit at all, is not related to income

CONCLUSION To conclude Despite financial sector in Africa over the past decades, almost 500 million adults in Africa remain outside the formal financial system. Data show deep disparities across sub-regions and individual characteristics in how adults use financial services. Unbanked adults cite the lack of money, high costs, distance, and documentation requirements as barriers. Removing financial, physical, and bureaucratic barriers to expand financial inclusion is challenging and will require addressing underlying structural issues. Technological innovations such as mobile financial services and new business models such as agent banking offer new opportunities to expand financial inclusion in a cost-effective manner. For financial inclusion efforts to be successful, policy must be tailored to systemic failure in each setting

DATA RELEASE Global Findex Suite of Products Financial Inclusion Data Portal World Bank eatlas of Financial Inclusion The Little Data Book on Financial Inclusion 2012 Global Financial Inclusion Microdata Databank Findex Notes and research papers Reference citation for the Global Findex: Asli Demirguc-Kunt and Leora Klapper. 2013. Measuring Financial Inclusion: The Global Findex Database. Brookings Papers on Economic Activity. www.worldbank.org/globalfindex

COUNTRY SAMPLE Angola Djibouti Mauritania Sudan Benin Egypt, Arab Rep. Mauritius Swaziland Botswana Gabon * Morocco * Tanzania Burkina Faso Ghana Mozambique Togo Burundi Guinea Niger Tunisia Cameroon Kenya * Nigeria Uganda Chad Lesotho Rwanda Zambia Comoros Liberia Senegal Zimbabwe * Congo, Dem. Rep. Malawi Sierra Leone Congo, Rep. * Mali South Africa GLOBAL FINDEX data is available for 38 African countries. A star indicates that country is excluded from the regression analysis due to data availability.