Expert Commentary

Formal and informal financial services in Africa: World Bank research

2015 study from World Bank researchers on the prevalence of formal financial services in the lives of Africans and the characteristics of persons who use banking services of various kinds.

(Pixabay/public domain)

The domestic-banking sector in countries such as Kenya has grown significantly in recent years, and the past decade has seen a similar trend across much of Africa, including by “cross-border” banks that have expanded regionally. Still, as of the mid-2000s the financial systems of many African countries were still largely defined by foreign institutions.

In April 2014 the former chief executive of Barclays, Robert Diamond, announced that he and a group of partners had purchased a financial-services company in Africa. The firm, ABC Holdings, operates in Botswana, Mozambique, Tanzania, Zambia and Zimbabwe. Several months later Diamond’s firm bought a stake in Nigeria’s Union Bank, and he stated that the business would become “Africa’s premier financial-services group.”

Barclays, Standard Chartered, Citibank and Standard Bank have in the past few years also expanded their reach on the continent. The share of state-owned banks has shrunk, commercial institutions now dominate the marketplace, and private banking groups have emerged and increased competition. Further, the number of depositors in African countries increased five-fold from 2004 to 2013, according to the International Monetary Fund’s 2014 Financial Access Surveys. While the use of mobile money is still limited in many African regions, mobile technologies have provided a new way for citizens to participate in commerce.

Despite the growth in financial services offerings, however, a gap remains between populations who have access to banking and those who do not. A 2015 study in Journal of African Economies, The Role of Informal Financial Services in Africa,” looks at financial inclusiveness among adults in Africa. Researchers Leora Klapper and Dorothe Singer, based at the World Bank, sought to better understand the characteristics of populations in and out of the formal financial system. They draw on data from the Global Financial Inclusion (Global Findex), which bases its estimates on representative surveys.

The study’s findings include:

  • In Africa, 23% of adults report having an account at a formal financial institution, compared with 41% of adults in developing countries generally. Within Africa, the percentage of account ownership among adults ranges from 11% in Central Africa to 51% in Southern Africa. Almost 500 million adults in Africa remain outside the formal financial system.
  • Men are more likely than women to have a formal account, although the gender gap in Africa is relatively small compared with that in other regions.
  • Wealth and education are associated with having a formal account. Adults in the richest household income quintile are on average almost four times as likely to have a formal account, compared with those in the poorest.
  • Reasons for adults not having a formal account include: 82% said they don’t have enough money; more than 25% said travel, costs and document demands are inhibitors. Those who have an employer are more likely to own an account than those who are self-employed.
  • Across Africa, 15% of adults overall and 63% of account holders have a debit card.
  • There are more than 50 ATMs per 100,000 individuals in Southern Africa; about 11 per 100,000 individuals in North Africa; and fewer than 5 per 100,000 individuals in all other African sub-regions.
  • In Africa, 35% of account holders use their account to receive remittances, compared to 14% worldwide.
  • More than half of adults in Africa who reported having used mobile money in the past 12 months said they do not have a formal account. An estimated 43% of Kenyan adults who report having used mobile money — and 92% of adults in Sudan — report not also having a formal account.
  • About 36% of all adults surveyed have saved or set aside money in the past 12 months, on par with the global average of 36% and compared with only 31% in other developing countries. Some 44% reported having borrowed money, above the average of 34% worldwide.

“Unbanked adults in Africa cite the lack of money to use an account, high costs of opening an account, distance and documentation requirements as some of the reasons behind not having formal accounts,” Klapper and Singer conclude. “But removing physical, bureaucratic and financial barriers to expand financial inclusion is challenging since this also requires addressing the underlying structural causes such as the structure of the financial sector and available financial products but also low income levels.”

The Global Financial Inclusion database can be used to help policymakers prioritize reforms and target the unbanked, they note. Policymakers can then “track financial inclusion policies within the region and to develop a deeper and more nuanced understanding of how Africans save, borrow, make payments and manage risk.”

Related research: A 2014 research review, “Gender and Development in Africa: Roundup of Recent Research,” provides more insights on financial challenges for women. Further, a 2014 study in the Journal of Contemporary China, “Chinese State-owned Enterprises in Africa: Ambassadors or Freebooters?” examines the perceptions of China’s state-backed companies in Africa and the actual nature of their investments and behavior.


Keywords: banking, Africa, consumer affairs

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