Access to financial services in Africa has improved tremendously over the past two decades but the financial sector has remained somewhat of a paradox. While African banks are on average more profitable and operate in less competitive environments, they are also less efficient, shallower and less inclusive than their counterparts in other regions. The banking system in Africa is plagued by high operating costs and a bias towards the short-end of the yield curve. The overall financial system is underdeveloped with a scarcity of non-bank long-
term financial instruments and a short-term outlook. The limited availability of insurance companies, pension funds, mutual funds and mortgage servicing are all indications of the short-term nature of the continent’s financial system.
Introduction to banking in Africa - the numbers
Having a bank account in Africa is still somewhat of a big deal. According to the World Bank’s 2014 Global Findex Database, only 34% of African adults have a bank account. While this figure indicates a considerable increase from 24% recorded in 2011, it is still quite low.
Access to financial services on the continent has increased but it has not been uniform. Ongoing financial innovation and the rise in mobile phone usage and by extension, mobile banking resulted in an increase in overall access to financial services in East and Southern Africa but Central Africa did not fare as well. In fact, only 10% of adults in the Democratic Republic of Congo have an account at a financial institution.
The African Development Bank’s Financial Inclusion in Africa Report examined some of the barriers to formal account ownership in Africa. The report revealed that 80% of adults surveyed reported that they did not have enough resources to set up a bank account. This shows that low income levels resulting in a limited demand for savings, credit and other financial services means it is not economically viable for banks to situate branches in many locations around Africa.
Additionally, in East and West Africa, documentation was the second most cited reason for lack of a formal account. Because a large portion of the population operates in the informal sector, they do not have the requisite means of identification and formal documentation that is required to open a bank account. This lack of identification also makes it difficult for young adults to open formal accounts.
Away from the barriers to formal account ownership, Africans use their accounts in many ways. While 14% of account holders worldwide use their accounts to receive remittances, the number is at a whopping 41% in Africa. Many Africans use their accounts to receive money from family members living abroad and in particularly fragile states like Somalia, up to 66% of account holders reported using their account to receive remittances.
Small and medium scale enterprises have a relatively high access to finance in Africa. 83% of small-sized enterprises and 94% of medium-sized enterprises in Africa have bank accounts as compared to 87% of small-sized and 93% of medium-sized enterprises in other developing economies. These businesses are however at a disadvantage when it comes to accessing loans. Only 22% of African businesses have a loan or line of credit while an average of 43% have loans or lines of credit in other developing economies.
The good news is that Africa’s banking and financial sector is developing. Access to financial services for individuals and organisations has dramatically improved. They are now provided with more financial services like credit and insurance. Furthermore, new technologies like mobile money has expanded access to financial services. Mobile money has enabled millions of people iIn Africa who were hitherto unable to access financial services to become financially included.
Africa is one of the world leaders in mobile money. Of the top twenty (20) countries in the world for mobile money usage, fifteen (15) are in Africa. While only 6% of adults globally use mobile money, the number is at 14% for Africa. In Kenya, where the ubiquitous M-Pesa service was launched in 2007, 68% of adults have reported using mobile money. As at 2011, IMF data reported that Kenya’s M-Pesa service was processing more transactions domestically than Western Union did globally.
How does Artificial Intelligence fare?
For the financial institutions and services that do exist in Africa, using technology to improve reach and effectiveness is paramount. There has been a rise in mobile money, branchless banking and other financial innovations but artificial intelligence is also playing a big role albeit in less obvious ways.
Artificial intelligence (AI) is a branch of computer science that deals with the simulation of intelligent behavior in computers. Chris Ogden who heads up fintech firm, RubiBlue, simply explains it as the ability of computers to artificially make decisions on behalf of humans and learn from those experiences to become better decision makers.
Artificial intelligence is making huge inroads in Africa’s financial sector. Banks and other financial institutions are turning to AI in innovative ways. For example in Absa’s case, it is currently experimenting with various ways in which AI can be applied across the bank. Absa is one of the largest banks in South Africa and it recognises that artificial intelligence is a strategic pillar for improving customer experience and ensuring future growth and competitiveness.
Peter Rix, Chief Technology Officer at Absa explained to me that the bank employs deep learning models in detecting and preventing fraud. Machines can more easily track large volumes of data and pick up predetermined indexes that could identify fraud leading to less incidents and saving costs. Absa is also investing in chatbots and other digital conversational channels to better engage with customers. Existing data from the bank’s contact center is analysed with machine learning tools to improve customer service and drive retention.
Artificial intelligence is shaping up to change the way Africans access financial services, save money, invest and get insured. Si Mohamed Said, Marketing Lead at Oracle, says “the potential is substantial for the financial services industry. Banks now use artificial intelligence in capital planning, flagging transactions for compliance reviews, claims processing in insurance, and chatbots to improve customer experience.” AI is also used to provide better recommendations on future investments—ultimately enabling customers to make better financial decisions.
AI is also utilised on brokering and trade platforms. These machines make trade decisions in customers’ best interests using historical data, news from the industry and several other data points to buy and sell when necessary. Banks also use artificial intelligence to make better product suggestions improving the efficacy of their ads.
Despite the notable advantages of artificial intelligence, Chris Ogden who heads up fintech firm, RubiBlue, has a word of caution on the technology. For all the good it can do to the industry, the adoption of artificial intelligence can also have a devastating effect. “Imagine a machine glitch that results in losing billions in client investments in only a few seconds on the trading arena,” Chris says.
The goal is to deliver valuable financial solutions faster and cheaper and adopting AI can ensure that the next 100 million Africans can be financially included in the next decade.