Financial Inclusion can help formalise the economy, increase transparency and efficiency, and provide financial stability for India and Africa.
In recent years Financial Inclusion (FI) has come to occupy a prominent position on the global stage as a key enabler of reducing poverty, and furthering development and prosperity. Universal Financial Inclusion (UFI) is a coveted goal for both India and Africa as it possesses particular prominence for developing countries, where the informal sector constitutes a major part of the economic sphere. FI can help formalise the economy, increase transparency and efficiency, and provide financial stability with assured access to financial products and services like credit, insurance, and a gainful savings mechanism.
In spite of the concordant objective of UFI, India and Africa have taken different paths to achieve the same objective. Within Africa, East African states such as Kenya, Uganda and Tanzania have been leading the charge on financial digitisation via mobile money for well over a decade. They have also displayed an eagerness to embrace the new age fintech.
FI in East Africa has primarily been driven by the private sector, where a leapfrogging over the so-called redundant technology and onto far more advanced and frictionless mobi-tech and digital payments platforms has been observed. On the other hand, in India the government has played a major role in FI through its public sector banks. The launch of Pradhan Mantri Jan Dhan Yojna (PMJDY) in 2014 may be regarded as the biggest initiative in this regard.
Degree of Financial Inclusion in India and East Africa
|% of People with Accounts
|% of People with Financial Institution Accounts
|% of People with Mobile Accounts
Source: Data from Global Findex Report, 2017.
Although both approaches contribute towards a certain degree of FI, neither can be fully successful without the other. The 2017 Global Findex Report substantiates this argument: it suggested that while the percentage of people with bank accounts in the Indian sub-continent was 79.9%, a mere 2% possessed mobile accounts. On the other hand, in East African states the percentage of people with mobile accounts exceeds the percentage of those with bank accounts by a huge margin.
While the East African model of FI -- which primarily pertains to mobile money accounts like Vodacom and Safari’s M-Pesa -- has had considerable success in Kenya, Uganda, and Tanzania, we are yet to see the same outcome in Mozambique and Rwanda. The discrepancy is mainly because of delayed implementation and the limited interoperability capacity of mobile money in these countries. Also, the inclusion achieved is more or less a low equilibrium FI, since the countries still have large proportions of population that continue to remain unbanked, and access and inclusion in the formal sector banking sphere constitute a vital part of proper FI.
On the other hand, India experienced an improvement in the level of FI with the launch of the PMJDY in 2014. According to the Global Findex Report 2017, the proportion of the population with financial institution accounts rose from 52.8% in 2014 to 79.9% in 2017, but the percentage of people with access to mobile money remained abysmally low. This was primarily due to the widespread digital illiteracy and rigid branch banking habits in the Indian sub-continent. Therefore, even though it cannot be denied that the substantial rise in formal sector banking is a laudable achievement, one cannot neglect the need or the importance of mobile money and other forms of financial technology and innovations in today’s highly digitised landscape. This is because fintech contributes greatly towards lowering the banking costs, and in increasing transparency and efficiency.
Holistic FI requires an approach that strikes a balance between the methodologies followed by India and East Africa, and this is precisely where the need and potential for cooperation arises. The East African region, owed to its epochal prowess in the digital FI sphere, thus emerges as an appropriate partner for India. Moreover, while addressing the Ugandan parliament in July 2018, Prime Minister Modi outlined 10 guiding principles for India Africa engagement; one of these was to “harness India’s experience with digital revolution to support Africa’s development; improve delivery of public services; extend education and health; spread digital literacy; expand financial inclusion and mainstream the marginalised.”
Cooperation on FI will prove to be mutually beneficial for both India and East Africa as it will offer learning experiences for both regions and help them overcome their aforementioned shortcomings on the FI front. The Indian government can collaborate with the governments of the East African countries and help them formulate their own versions of the PMJDY in their respective countries. This will go a long way in promoting formal sector financial inclusiveness and will help bring the hitherto unbanked into the realm of formal sector banking. Designed with the specific purpose of accelerating FI and providing improved access to financial services like savings accounts, insurance and pension schemes, and affordable credit, the PMJDY does well in remedying the major challenges to formal sector FI. These mainly include the lack of sufficient funds to open an account, distrust in the formal financial institutions, and high costs in terms of both time and money. For instance, one of the most novel features of the scheme is the construct of a ‘Zero Balance’ bank account or the Basic Savings Bank Deposit Account which requires ‘nil’ or a very minimal amount of balance. It involves no or minimal charges and can be easily opened due to simplified Know Your Customer norms. This goes onto solving the problem of fund paucity.
The Indian government also has a lot to learn from the East African countries. While USSD (Unstructured Supplementary Service Data) based banking services which do not require internet to function can be used on basic feature phones, and can cater to the low income groups, digital and financial illiteracy, and rigid branch banking habits pose an obstacle for the spread of fintech and digital financial platforms in rural India. Although Unified Payments Interface (UPI) and RuPay are steps in the right direction, they have limited impact in rural regions where people aren’t particularly avid users of banking services.The Government of India can engage in the creation of knowledge sharing platforms and learn from the East African model. Moreover, the governments can also collaborate on the extension of associated fintech platforms like UPI and RuPay to the East African region which will create a better digital infrastructure. This will help reinforce and enhance the efficiency of the existing financial structures by reducing the cost of formal sector banking. This will also enable India to gain a stronger foothold in East Africa, which is of great strategic importance. The governments can also collaborate on setting up financial and digital literacy camps and awareness drives in both the regions. They can thus, provide the people an opportunity to educate themselves about the importance of FI.
In light of FI’s increasing importance on the global stage as a requirement for the holistic development of a country, the achievement of universal financial inclusion has become paramount. However, moving forward, cooperation between the India and East Africa is required if the regions wish to attain comprehensive FI that gives due prominence to the formal sector and does not neglect the need or the importance of fintech. The regions need to learn from each other’s experiences and mistakes in order to pave way for a holistic future.
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