Future of FinTech in Ethiopia #2: FinTech as a Motor of Financial Inclusion
On November 3rd, the Pears Program hosted the second webinar event of the series organised with IceAddis and the Israeli Embassy in Ethiopia, focusing on the adoption, benefits, and challenges associated with Fintech in Ethiopia. After covering the global FinTech landscape, the second event focused on financial inclusion and how FinTech could create opportunities for the underbanked and unbanked. The event was attended by some leading voices in the fintech and digital tech community. This included Jennifer Chien, senior financial sector specialist at the World Bank, Anna Stone from GoodDollar, Ariel Resnik, the CEO at Paretix, and Oswell Kahonde, the African Regional Lead at Better than Cash Alliance.
The event began with a keynote presentation from Jennifer Chien, who provided an overview of the current state of financial inclusion in Ethiopia. In Ethiopia, where only 30% of people own financial accounts, there is a need for increased financial inclusion, whereby individuals who are underserved and lack access to financial services are given the ability to unlock the potential of financial products and services. Greater financial inclusion for the Base of the Pyramid market can translate into improved risk management, the growth of human capital, economic growth and employment generation. Jennifer Chien also noted that women and those living in rural areas have significantly lower access to existing financial services, and that the gender gap is widening. Some of the obstacles to financial inclusion include insufficient infrastructure, market and access issues, and the dominance of state-owned banks with little competition. But if such challenges can be overcome, digitalised financial services offer previously unconnected users with the opportunity to make payments and send small loans/ remittance with much greater ease. The increase of new players in the financial market will also create a more competitive environment, with better tailored products for customers. See her presentation here.
The discussion then opened up to the panellists, looking at how each of their organisations/ companies are encouraging a digitalised financial environment. Anna Stone explained how her organisation, Good Dollar, functions as a new digital marketplace that allows users to trade ‘Good Dollars’ to increase economic activity. The more people using this unconventional market, the more commerce occurs, allowing those who do not have bank accounts to experience greater financial access.
Oswell Kahonde explained his role in encouraging a greater cash alliance, working with the Ethiopian government to support the uptake of digital payments. There is a tendency for financial solutions to fail to consider what customers look for in a product. Considering this, the cash-alliance creates responsible digital payment practices which design products specifically around the individual needs and capabilities of the users.
As the CEO of Paretix, Ariel Resnick spoke about how his company enables banks and mobile networks to offer digital lending. Ariel highlighted how loans pose a challenge for banks, as it is difficult for them to assess the risk of borrowers; this means there are high operational costs for banks and the access to credit is limited and expensive. Whilst informal lending processes are filling this gap, he spoke of the potential of micro-finance to fill this gap. Through using phones to make loans over a course of seconds, the entire practice of borrowing money will be likely revolutionised in the future. With loans digitalised, the provision of loans is given based on m-wallet loyalty scores.
Payment is a driver of financial inclusion but it is challenging to make into a profitable industry. If financial institutions want to have a profit, they need to offer loans to their customers. “Unfinancial, the largest FinTech company in the world, makes more profit from loan than payment” highlighted Ariel. Entrepreneurs need to balance this and take care of over indebtedness. Ariel mentioned the example of the nanoloans being used for sport betting in Kenya, affecting their credit score and therefore their potential.
Cryptocurrency has different use cases. It is used as a speculative tool all over the world but also as a payment tool. In developing countries with high levels of connectivity, such as Kenya, there is a leapfrog phenomenon and a good percentage of the population have adopted blockchain technology and cryptocurrencies as a means of payment. In the case of Ethiopia, because the infrastructure is not as developed yet, cryptocurrency adoption may take a bit longer.
The panel ended with some pointers for the future. The importance of connecting digital banks to the central banking systems was noted as an essential step in order to enhance financial inclusivity in emerging economies. Additionally, the importance of teaching financial literacy was noted, in order to ensure increased comfort and familiarity with the use of smart phones for financial services, especially for those at the bottom of the pyramid. The effects of Covid-19 also seem mixed, with a longer-term projection of increased confidence in digital technology adoption. However, it has also disrupted initiatives which could not be carried out.