What does financial inclusion really entail?

SMEs are the backbone of most African economies, but in order to thrive they need affordable access to finance. Until they obtain this, the term financial inclusion will remain a hollow buzzphrase says Dr Tarek Mouganie


SMEs are the backbone of most African economies, but in order to thrive they need affordable access to finance. Until they obtain this, the term financial inclusion will remain a hollow buzzphrase says Dr Tarek Mouganie

Access to finance is a fundamental human right. Financial services can provide the path to independence, from helping individuals secure their first home to paying for their children’s education. The long-term impact on banking businesses is even greater.

Businesses, especially small and medium-sized enterprises (SMEs), are drivers of social and economic growth. In the UK, SMEs account for 99.9% of all private sector businesses (only 0.1% of companies employ over 250 people, with 96% employing less than 10). SMEs employ 60% of the private sector and generate 51% of turnover. SMEs also generated 47% of UK government income through taxes. Let us also not forget that all large companies start small.

Whilst these figures differ slightly across the developed world, they pale in comparison to countries in SSA.

In Zambia, SMEs employ 73% of the workforce. This may seem a high level but informal businesses (unregistered companies) are included in the figure, which is often the case when SMEs are mentioned in SSA.

Over 90% of SMEs in Zambia are informal; only 7% of the labour force comes from formal businesses and SMEs account for only 11% of GDP. In addition, 44% of those in the informal sector are unpaid (e.g. family members) and 20% are paid in kind.

These numbers matter. A lot. Africa’s population is rising fast. Zambia went from 8m to 18m people in 25 years. In 2017, the population of sub-Saharan Africa was 1.1bn, with 60% under the age of 24 and it is predicted to rise to 2.3bn by 2050. On a continent with high unemployment and poverty, job creation is vital. If nothing changes, it is expected that 86% of the world’s poor will live in SSA.

Also, governments need the economic diversity SMEs can provide. In 2013, when commodity prices collapsed, economies that were heavily dependent on the export of raw materials were severely affected (in Ghana, 65% of exports were in gold, oil and cocoa). SMEs add diversity, create employment and build resilient economies.

It will come as no surprise that a lack of finance is a big barrier to growth for SMEs. In Zambia, 7.2% of informal businesses can access capital, in comparison to 86% of registered corporates.


Financial inclusion is a fashionable term used by developmental institutions, governments, funds and non-profits, who wish to make financial services accessible to all individuals and businesses. This is a broad definition that needs fine-tuning.

The current push for financial inclusion encourages mass on-boarding without the necessary additions such as financial literacy and effective policy. Take Ghana, where the banked rate is 58% (41% excluding mobile wallets) and inflation has averaged 13% over the last 10 years. With the majority of deposits held in accounts or mobile wallets that offer no interest, individuals are earning negative real interest rates. That means every 100 cedis is worth 87 at the end of the year. Even worse, most accounts have monthly fees and withdrawal charges. Ironically, it may be more sensible to keep cash under your bed than put it in a bank account.

The banked rate also does not take into account access to credit. In Ghana only 6% of SMEs have access to credit. The SME financing gap in Africa is over $330bn, where 95% of SMEs have access to bank accounts but only 15% can get credit. Most of these credit lines are from microfinance institutions and digital lenders, and are short-term (seven days to three months), high-interest (6-20% a month) in nature. Whilst these lenders address a gap in the market where traditional banks have failed, the loans are only suitable for short-term financing (personal emergencies, working capital) and bring with them a number of long-term pitfalls.

Firstly, a desensitisation to debt; when SMEs outgrow micro loans and require larger amounts to invest in their business, they multi-borrow, fall into a debt trap and default.

Secondly, these lenders are subject to changes in regulation; in Kenya, the central bank is looking to regulate online lenders for their predatory practices,  and the same applies to Google, who have banned high-interest rate lenders from the Google Play Store.

These lenders have customers who depend on their services to finance their day-to-day lives (just like Wonga’s customers did in the UK, before regulation wiped them out), with no other viable option to upgrade to. With one swift policy change, their lifeline is gone.

So why are the traditional banks shying away from SME lending? The ecosystem for lending is poor in most African countries; data is scarce and liquidity is high. With banks growing their balance sheet in double-digits, lending small amounts to SMEs is riskier than deploying larger loans to corporates. It is also incredibly difficult for an existing bank to change its strategy (in the UK, the RBS is launching its own digital standalone to compete with challenger banks like Monzo).

The way forward

SMEs need the collective effort of policy makers and investors to improve the ecosystem, so as to allow lenders to do their jobs effectively.

The Central Bank of Nigeria placed a minimum loan to deposit ratio of 65% to encourage lending (a large part of banks’ assets are held in government bonds instead of loans) – this will likely increase NPLs and/or cause banks to turn away depositors. Balance sheets will contract.

Another example is in Ghana, where all bank account holders now need to have a Tax Identification Number – an initiative enforced without digitising the process, frustrating banks and disincentivising the unbanked from opening an account.

Instead of policy interferences to fix symptoms of a systemic problem, policy makers should improve upon infrastructure, for example creating access to data by building organisations with databases and API access (in areas like tax, and business registration). With regard to regulation, governments can clamp down on unethical practices, like predatory lending, and ban financial institutions from providing customers with options like buying lottery tickets through their mobile apps.

When it comes to investors, long-term solutions need to be developed. Requesting that traditional lenders  change their strategy is not the right path forward, and whilst technology may enable leapfrogging, customers need to come first when new and innovative solutions are being developed. These new solutions need the support and encouragement of the investor community.

To enable SMEs to flourish in Africa, we must build a retail banking model that provides long-term low-interest growth capital. Funding that will enable SMEs to invest in their business, grow and incentivise them to formalise, employ more people and pay taxes.

Until then, let us agree to redefine financial inclusion as making financial services accessible and affordable to all individuals and businesses. 


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