Why It’s Time for Africa to Adopt a Regional Digital Financial Identity
According to the World Bank Group’s Identification for Development, 1.1 billion people globally, including women, children and refugees, lack any form of officially recognised identification. This is a significant obstacle to financial inclusion and other development efforts, and the global community is increasingly focused on addressing the problem. For instance, the UN’s Sustainable Development Goal 16 includes a target on identity, and aims to “provide legal identity for all, including birth registration” by 2030. But though this target looks easily achievable when viewed through the lens of a developed country, it’s considerably more difficult in emerging regions like Africa.
Across the continent, many people are still denied access to basic services because of the lack of identity documents. And this issue has become worse in the age of COVID-19, as the pandemic is increasing the negative consequences of lacking a reliable ID – primarily among the poor. For instance, virus containment measures like contact tracing and the quarantining of infected individuals are impossible without widespread digital IDs. And universal ID could also help ensure that all individuals have equal access when health care systems are distributing medication – and ultimately, a vaccine to combat the virus.
Below we’ll explore some of the challenges to expanding access to formal identity in Africa – as well as some possible solutions. And we’ll discuss why an effective solution will require not just country-level, but also regional action.
Digital Financial Identity and Remittances
Broadly speaking, an identity is simply a collection of attributes which uniquely identify an individual or legal entity – such as a small or large business – for particular use cases. When some or all of these attributes are captured and stored digitally, the composite result is known as a digital identity. However, since not all digital identities are accepted or used in the financial sector, financial institutions may choose to create a form of sector-specific or functional identity called a digital financial identity. This type of identity is issued and relied upon by financial services providers, it qualifies as a recognisable identity across all institutions, and it is informed by Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations. Digital financial identities are broadly similar, though some jurisdictions are completely risk-based and require lower Know-Your-Customer (KYC) requirements.
The storage of identity particulars within a widely accessible digital financial identity can enable greater access to domestic and cross-border remittances and other formal financial services for those who currently struggle to satisfy KYC requirements. And it can allow financial service providers to remotely onboard new customers, while complying with AML/CFT regulations. BankID in Norway is a good example of an ID issued by banks, and it has an equivalent status to the national ID. But a functional digital financial identity, in terms of both identity technology and usage, does not replace a country’s national ID – rather, it complements it to ensure that banks are able to identify and serve all customers.
However, digital financial identity is often only valid within the country where it was issued. There is a big business opportunity for companies involved with digital identity to partner with financial services companies to develop a digital financial identity that can cut across borders and extend across regions, such as the Southern African Development Community (SADC). A digital financial identity developed for SADC member states could ensure that a citizen of any SADC country has a functional ID across the region, as long as that ID is fully verified in their country of residence. This could allow them to open a transactional account in another SADC state, and to remit funds to loved ones across borders. This would not only channel more international remittances through formal channels, reducing their cost, it would also boost SADC economies, increasing trade among member states and with the world at large.
Digital Financial Identity: Benefits and Challenges
Increased regional growth and the emergence of an integrated banking system in recent years highlight the potential for a SADC-wide digital financial identity. According to research done by FinMark Trust Africa on Landscaping a Digital Financial Identity for SADC, there are three key benefits of this approach:
- It would increase the digitisation of financial services and the growth of e-commerce
- It would enable regional electronic payment arrangements
- It would address the priorities of public policymakers by increasing access to information about individuals and businesses, for tax management and Know-Your-Customer purposes
For these reasons, the Committee of Central Bank Governors, which facilitates cooperation among the central banks of SADC member states, stands a good chance of facilitating the acceptance of a digital financial identity programme. To date such a programme has not been proposed to the Committee. I believe it would benefit financial institutions and promote inclusion in SADC if development organisations were to approach the SADC Secretariat to push for the adoption of a functional ID for the region, and FinMark Trust is set on encouraging organisations to present a proposal. Although the ID would first be valid and recognised in SADC, through consultation with other African trading blocks, there is scope to enter into partnership with East Africa and other regional blocks. This would not only help in boosting formal international remittances sent from countries in SADC and promoting trade across Africa, it would also help ease trade inequality among member states by allowing banks to acquire information about individuals and businesses more easily. This could also help boost informal trade across Africa, creating an avenue for employment creation and the formalisation of cross-border trading.
For instance, a citizen of South Africa whose identity is already verified in his country would have the opportunity to trade and open an account in Zambia using his South African bank credentials. For banks, such a programme would lower KYC costs when serving foreign citizens. And for governments, it could improve tax management, as the thousands of informal traders who cross African borders daily to do business in neighbouring countries currently have no uniform or digital means of linking their identities to their businesses. With a digital identity, these traders’ business activities could more easily be tracked by governments for tax purposes.
Relatedly, the ability to track transactions across borders in Africa could also give monetary authorities more effective AML/CFT controls. But though its impact on AML/CFT efforts would be positive, a unified digital financial identity would also raise some challenges on that front. An effective regional identity would have to be heavily compliant with multiple countries’ AML/CFT regulations, and harmonising those regulations would be paramount to ensuring that IDs are uniform, standardised and easy to verify among SADC member states.
But whatever the challenges of a regional digital financial identity, the benefits outweigh them. From both a financial inclusion and broader global development perspective, the lack of formal identity has made the lives of poor communities in Africa more difficult. Providing people across the SADC with digital financial identity would be an important step toward ensuring that formal finance, remittances and other essential services are accessible to people throughout the region.
Nkosinathi Ncube is the Head of FinMark Trust Zimbabwe.
Photo courtesy of Pexels.
- Finance, Technology