Interoperability and Telecoms for Inclusive Digital Finance

Over the past few decades, financial inclusion has remained among the top global agendas. In 2011, public institutions in 40 countries signed the Maya Declaration of Alliance for Financial Inclusion aimed at broader access to financial services at lower costs. Similarly, the World Bank began publishing comprehensive reports on financial inclusion in 2011. Ethiopia developed “The National Financial Inclusion Strategy” in 2017, containing several targets.Financial inclusion is the ability to access financial services at affordable prices. Having a basic account is the first step. However, according to the World Bank’s Global Findex Database (2017), 1.7 billion adults do not have a bank account. With the acceleration of digitalisation, the number of people accessing financial services is increasing even in developing countries. Despite this, Ethiopia fares behind many developing countries. In the nation, less than 9Pct of adults hold a mobile money account compared to the more than 40Pct in neighbouring Kenya and Uganda.

Lack of access to financial services mainly affects small business and the poor. Small and micro businesses are the backbone of the Ethiopian economy in creating employment yet, conventional financial institutions are reluctant to broaden access to these firms. The problem becomes pronounced when it comes to rural areas where the majority of the poor live.
Several factors are hampering financial inclusion in Ethiopia, from poor financial literacy to lack of savings and from the inaccessibility of financial services to the cost of obtaining those services.

Over the past decade, significant strides have been made. With the expansion of bank branches, the number of people accessing banking services have increased. The monetization of the currency last year combined with several restrictive rules pertaining to cash holding have brought millions into the banking network. The introduction of Sharia-compliant financial products such as interest-free banking and Takaful insurance have brought large sections of the population, financially excluded for religious reasons, into the financial system. Currently, a bank aimed at funding small and medium enterprises is under deliberations.

Digitalization of the payment system has a considerable potential in fostering financial inclusion. Some steps have been taken over the past decade to enhance the use of digital payment systems. In 2012, a directive was issued to encourage banks and microfinance institutions to avail agent banking services with little success as the scheme was confined within the traditional financial services providers which were reluctant to expand mobile-based financial services.

In early 2020, the eligible providers of digital payment services were expanded beyond the traditional financial institutions through two significant directives. These directives set future rules regarding mobile money and other digital payment instruments. As a result, Ethio telecom launched telebirr which provides a platform for deposit, payment, and money transfers.

Digital payment systems like mobile money help the poor increase their income, reduce poverty, manage risks. and lower the cost and time of money transfers. They also increase the savings of the poor as observed in Kenya and Malawi. Apart from financial inclusion, these platforms help reduce corruption. A notable example is India. Switching pension payments from cash to a biometric card reduced leakages pension payments by almost half. Furthermore, by reducing the need for holding cash, mobile money minimizes the printing cost of money.

Inclusion of non-financial institutions in the digital payment sphere is a step in the right direction in fostering financial inclusion. Nevertheless, compared to M-Pesa in Kenya, the setup in Ethiopia is still far behind. For instance, interoperability with the banking network is missing. Although it is laudable that the state-owned Commercial Bank of Ethiopia (CBE) is considering integrating its core banking with telebirr and is selected as a trusted accountholder, private banks are left out of the loop. This not only leaves customers at the mercy of two state-owned giants—Ethio telecom and CBE—but it is also against the spirit of economic reforms which aim to place the private sector at the center. Acceleration of the interoperability and inclusion of private banks would enable the full benefits of the digital payment system, resulting in better financial inclusion.

One of the reasons that put off bidders for the new telecom licenses is the exclusion of mobile money. Perhaps, it is understandable that mobile money is a financial service not currently allowed for foreign investment. There is the expectation that mobile banking will be allowed a year after foreign telecom operators set foot in the country. This would make the competition for mobile money services just amongst a few giants, stifling the emergence of small local fintech companies. The encouragement of small local firms is essential for consumers’ welfare and the furthering of financial inclusion.

With the entrance of the telecom giant to the digital payment system, a formidable competitor is emerging to challenge banks and microfinance institutions. For example, within a week, more than a million customers have signed up for telebirr. Competition forces the banks to upgrade their services, innovate new products, and broaden their access. Banks will have to rethink the costly model of expanding their outreach through the brick-and-mortar approach.

The use of digital technology alone is not sufficient to foster financial inclusion. The National Bank of Ethiopia will have to deal with a number of challenges, from developing policies to implementation and from encouraging innovation to regulation and consumer protection.

Central banks often face a dilemma when it comes to the policy of financial inclusion as it falls outside of their mandates—monetary and financial sector stability—and the policy instruments at their disposal are not suitable for the purpose. This may result in a half-hearted approach to the issue. This can be addressed by tasking financial inclusion policies to other institutions which deal with social and economic policies. The other option is to dedicate a unit within the central bank. Here, it is important to make sure that financial inclusion policies are not in conflict with traditional tasks of the central bank.

The involvement of non-financial institutions in digital payment systems poses its own regulatory challenges pertaining to the handling of customers’ funds, consumer protection (such as information provision), the regulation of innovations, and competitive conducts. This entails a broader approach to financial inclusion through the development of a wide stakeholder-inclusive framework.

9th Year • May 16 – Jun 15 2021 • No. 98