Bridging the Digital Inclusion Divide in Sub-Saharan Africa: Takeaways on the policies and regulations for digital finance and their impact on rural and agricultural communities

On January 25, 2017, more than 30 individuals from foreign embassies, U.S. government agencies, multilateral development organizations, financial inclusion incubators and media convened at Meridian International Center for the first regional session of The Digital Finance Future: Inclusive and Global Economic Growth. The conversation examined the role of policy and regulations shaping Sub-Saharan Africa’s digital finance landscape, with a particular focus on how it impacts rural and agricultural communities.

The session took place over two hours and was structured by two segments separated into three parts. The first element was two short presentations from financial inclusion experts, who framed the overall discussion. Each presentation was followed by simultaneous small-group discussions among attendees at their respective tables. The full group then reconvened to share key insights that emerged from the breakout conversations. In the first segment, the speaker explored the challenges to advancing digital financial inclusion through cross-sector partnerships given existing policy and regulatory environments; the speaker in the second segment unveiled the consequences (sometimes indirect) of certain policies and regulations on rural and agricultural communities, whose economically disadvantaged position is compounded by geographic and cultural barriers.

Regulations and Reality

Across the discussions, the group collectively identified an overarching problem of the disconnect between regulations and reality. In the existing regulatory framework, there are multiple regulators for providers of financial services. Discussants raised concern over how the various regulators’ interests are not always aligned and their lines of communication are not always open, which can create distortions that favor some providers over others – and ultimately impact financial service facilitators like agents and consumers the most. In Indonesia, rules for hiring e-money agents are applied differently to banks than mobile network operators. Meanwhile, “Know Your Customer” (KYC) laws that prevent banks from being used for money laundering or other criminal activities are applied to smallholder farmers not relevant to their daily needs or operations. Agricultural business is seasonal, which makes for seasonal payments following seasonal crop sales. Farmers often receive seasonal payments a few times a year in large sums of cash. Unfortunately, KYC laws impede most smallholder farmers from receiving funds digitally, which requires them to travel long distances to reach a physical bank and collect their payments in cash. The alternative option is to direct the single large payment across numerous bank accounts and request multiple transfers of small funds to their mobile devices. These options are neither safe nor efficient for farmers.

Emphasis was placed on the need for greater balance and transparency in regulations surrounding digital financial services, which could be achieved through policy changes allowing for greater market competition and innovation. Participants from across sectors called for the involvement of private sector influencers to help adopt and adapt innovations in digital finance and encourage use of financial services by low-income populations. While sharing these sentiments, discussants representing multilateral finance organizations and policy spheres in particular emphasized the importance of financial inclusion policies being compatible with traditional mandates of financial regulation – stability and integrity of the system and consumer protection.

The Informal Sector Conundrum

Given the current policy and regulatory environment, challenges remain to advancing financial inclusion through formal channels. Discussants referenced costly barriers to entering the formal economy, like higher taxes on business accounts over personal ones, as well as behavioral barriers stemming from fear and mistrust of both traditional banks and digital tools and services. For farmers or artisans who live and conduct business differently from urban dwellers, the cash economy is more accessible, familiar and favored – despite the disadvantages. Participants asked what the formal and informal sectors could learn from one another in order to address the unique needs of different populations and create value in formal financial systems by tapping into their particular desires. Those from nonprofits and philanthropies examined the issue more holistically, emphasizing the importance of contextual finance, which requires representation of all stakeholders to ensure that economic needs and interests are addressed in culturally relevant ways across communities, businesses and governments.

Cross-Sector Partnerships to Advance Inclusion

All participants noted that cross-sector partnerships are at the heart of creating a healthy and inclusive digital finance ecosystem. Reflecting on the importance of context, discussants stressed the value in having multiple players working together to better understand the specific financial needs and wants of various groups. They also highlighted perspectives that are currently missing, in particular the end user or client of digital financial services, as evidence for strengthening relationships among all stakeholders.

As economic governance grows more collaborative in the digital age, opportunities emerge for increased data sharing and open networks. Representatives from both government and private business raised concern over data privacy and security; meanwhile those individuals from philanthropies and international development offered examples like India’s digital locker, which draws on support from banks, private companies and the government to house personal documents of millions of citizens who have control over who accesses what information. In offering these examples, attendees built the case for cross-sector involvement in creating open data policies that, by nature, are more transparent and thus help build trust in and adoption of digital financial services.

Understanding Needs through Data

Participants also mentioned ancillary benefits of data sharing, including greater understanding of the needs of rural populations that lack financial resources and/or access to them and collective problem solving to drive benefits to the individual user. Emphasis was placed on country-specific, if not localized, approaches to bridging the rural-urban divide in emerging economies, inclusive of but not limited to Sub-Saharan Africa. Another benefit of open data systems is increased digital literacy, which could help increase experimentation with more digital tools and services – users and creators alike.

One interesting provocation came from a representative of an international development organization who challenged a suggestion to stem rural to urban flow using data. The provocateur argued data should help with provision of resources and equitable access to them, which would make flows into cities more organic and less concentrated. For example, equipping more farmers with tools so they do not have to leave their land and families to seek employment or new income streams in cities.

Building Capacity alongside Financial Inclusion

With the future policy and regulatory environment in mind, discussants looked ahead to the potential of cross-sector partnerships to not only build a case, but also capacity, for a digital finance-driven world. Participants highlighted flexible regulation that allow for low-risk innovation to broaden financial services and products; policies that encourage free market competition among financial service providers; and surround-sound programs in financial literacy and digital finance training for banks, farmers and beyond.

With the ubiquity of mobile phones reaching every corner of the world, there is untapped potential to build capacity in agricultural communities, which are home to 1.5 billion people and produce food for 80% of the world’s population. Participants shared ideas about tech savvy youth in rural areas helping to increase the value of agricultural production by working with entrepreneurs around the world while creative financial policies could lower cost barriers by offering rainfall or crop insurance to farmers’ collectives. Individuals representing startups and economic development firms suggested digital finance providers diversifying product and service offerings for farmers through apps with crop encyclopedias and GPS land mapping that are highly relevant and attractive for these groups. Others stressed the importance of going beyond savings to help farmers operate and thrive sustainably in a digital-first financial system.

Measuring Impact and Success

The conversation culminated with all participants thinking about next steps for advancing financial inclusion through digital services around the world. Many reflected on the examples offered and ideas shared during the session to emphasize the importance of metrics in helping measure quality and define success. A U.S. Government representative encouraged the group to shake traditional notions of success and consider financial health as one indicator. Most of the entrepreneurs, development consultants and philanthropists in the room elevated the role of metrics in making digital finance scalable. These final interactions mirrored the very ideas shared during the session, with individuals from across sectors having open conversation about the opportunities and challenges for the digital finance future.

Project Partner

Participants