NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, February 24, 2015

Banking Africa’s unbanked population–adults who don’t use formal banks or semi-formal microfinance institutions to save or borrow money–may not be the solution to providing wider access to financial products and services.

“One of the obstacles to providing wider access to financial products is that financial services institutions are stuck in a paradigm that suggests that “banking the unbanked” is the solution. If the problem is framed differently then financial service providers can change tack in delivering real solutions to the financial inclusion challenge,” says Frans Prinsloo, Managing Director at Hollard International, South Africa’s largest privately-owned insurance group.

The company, which has a footprint in highly unbanked Africa and Asia, notes that accepting ‘unbanked’ as a defining measure for financial inclusion could make financial services institutions find it very challenging to offer products to lower income groups due to the lack of physical banking infrastructure.

Downplaying the unbanked market, who make up about 80 percent of the continent’s population according to a McKinsey research, could mean financial institutions are missing out on a customer base of 2.5 billion adults, majority of whom reside in emerging markets.

A paper by a Development Research Group of the World Bank concludes that only 24 percent of adults in sub-Saharan Africa have formal bank accounts and 18 percent in the Middle East & North Africa. Researchers reported a strong correlation between income levels and financial product penetration. However, the 2010 report by McKinsey, titled Half the World is Unbanked noted that the fact these people are unbanked does not mean they are unservable. The report clearly stated that serving adults who live on less than $5 a day is not only possible at scale, but it is already happening.

From the insurance perspective, Hollard notes in its 2014 Integrated Report, that low income communities are not uninsured because they face uninsurable risks; but rather because very few insurers truly understand their needs.