Role of Mobile Money and Digital Payments in Financial Inclusion for Sustainable Development Goals in Africa

Abstract

Financial inclusion has been presented in some global policy documents, for instance, the Universal Financial Access 2020, to be a tool that can potentially reduce socioeconomic deprivation around the world. Financial inclusion of economically challenged households will enable them to accumulate human capital through, for instance, education, consumption of healthcare services, medical insurance, and other social determinants of health. This chapter describes the role of mobile money and digital payments in financial inclusion for the realization of Sustainable Development Goals in Africa. During the COVID-19 pandemic era, mobile money and digital payments kept people connected by delivering vital financial support and providing safe, socially distanced or no-contact ways to pay for food, electricity, and other essentials of life. Financial inclusion is not a panacea to the problems of the economically challenged families, despite the merits of both mobile money and digital payments for financial inclusion. The economically challenged need a combination of knowledge, skills, attitude, and habits to be able to break out of the poverty trap. Besides other objectives, financial inclusion programs should seek to build appropriate intellectual competencies, for example, financial literacy, problem-solving skills, emotional intelligence as well as financial capability.

1. Introduction

Alleviation of poverty and enhancing opportunities for inclusive economic growth in part demands that the population is financially included to be able to participate in the internet-based new economy. Financial inclusion enables households to undertake transactions required for daily living as well as social protection [1]. Through financial inclusion, economic agents, for example, households, enterprises, and the government, access financial products that improve their well-being and resilience to unforeseen disruptions such as climate change and pandemics (e.g. COVID-19 and Ebola).

It is paradoxical that in a globalized world, more than one-third of its population is excluded from the formal financial system. Nevertheless, evidence suggests that appropriate financial services can help improve household welfare and promote small enterprises. The traditional financial ecosystem is characterized by weaknesses that financially exclude majority of the population. Although mobile money coupled with digital payments can enable the financial inclusion of the financially excluded, empirical evidence demonstrates that small-sized transactions in the conventional setting are associated with high costs, which makes them unfeasible. Mobile money technology in combination with digital payments can permit small-sized transactions at a cost that is affordable by agents. Well-thought-out combinations of digital payments and mobile money technology can potentially reduce the turn-around time for bulky financial transactions [2]. Due to the aforementioned benefits, leaders in low-income countries have embraced mobile money technology and digital payments to overcome financial exclusion to facilitate inclusive economic growth.

Although none of the Sustainable Development Goals (SDGs) of the United Nations Agenda 2030 is dedicated to finance and financial inclusion, this chapter sought to answer the following questions. To what extent can mobile money technology integrated with digital payments enable financial inclusion, which in turn can lead to sustainable development goals? To what extent financial products on mobile money technology and digital payments enhance social inclusion and thereby inclusive-poverty reducing economic growth? What inhibitors stand in the way of mobile money technology and digital payments in realizing financial inclusion to facilitate inclusive economic growth?

This chapter describes how mobile money and digital payments enable financial inclusion. The paper is organized into five sections and unfolds as follows. The next section presents the conceptualization of financial inclusion while the third section describes the relationship between mobile money and digital payments for financial inclusion. Mobile money and digital payments as enablers for the realization of Sustainable Development Goals (SDGs) is the subject matter of the forth section, while the final section concludes.

2. Social inclusion and financial inclusion

Social inclusion has been examined by various scholars, including sociologists, historians, economists, psychologists, and natural scientists. Sociology provides a valuable orientation from which to consider social inclusion, because it illuminates how social integration maintains and manages the ways in which people move about and through their socially stratified worlds [3].

On the other hand, financial exclusion is a small but significant component of social exclusion. The latter has been explained as having two broad components, namely economic or structural exclusion (distributional dimension) and social–cultural (relational dimension) [3]. Economic or structural exclusion (distributional dimension) consists of material deprivation and inadequate access to government as well as semi-government provisions (“social rights”). Here the term “Material deprivation” is used to refer to deficiencies in relation to basic needs and material goods, “lifestyle deprivation,” problematic debts, and payment arrears. The lack of access to public services demonstrates itself in longer waiting times coupled with financial obstacles to socioeconomic services. The socioeconomic services include but are not limited to banking services, credit, health services, household finance especially helping with household debt acquisition and management; investment advisory services, business development services, business incubation services as well as business mentoring.

Relatedly, the lack of social-cultural inclusion refers to inadequate integration both socially and culturally. Inadequate integration socially connotes failure to participate in the social functioning of a community (including the absence of social support systems). On the other hand, the lack of integration from a cultural perspective means failure to comply with a community’s institutions. These institutions represent the rules that govern expected work ethics, social conduct, adherence to the social security system, behaving in socially acceptable ways as well as full participation in the functioning of one’s community.

By and large, social inclusion is the process through which all members of society have equitable access to opportunities. Social inclusion policies and institutions seek to promote meaningful participation in society’s development by all members by eliminating the barriers that prevent them from full participation. Inhibitors that affect the rate of social inclusion include but are not limited to: diverse interpretation of social inclusion, lack of funds to finance social enterprises development, lack of community enterprises, and a weak social inclusion model [4].

Similarly, financial inclusion is the ability of hitherto excluded individuals as well as firms to access financial products that are appropriate for their needs at an affordable cost. Individuals and firms who are financially excluded cannot smooth their incomes and expenditures, cannot grow their businesses because they cannot access finance that is outside of the firm, and are financially insecure due to failure to accumulate savings. Specifically, improved financial inclusion facilitates the integration of unbanked individuals and firms into the financial ecosystem through the provision of diverse financial services, investment advisory services as well as investment vehicles [5].

Well-functioning financial systems serve a vital purpose by offering savings, payment, credit, and risk management services and thereby contribute to inclusive economic development. Inclusive financial systems are those with a high share of individuals, households as well as enterprises, which have an access to and use services of a financial nature [6]. Financial systems that are well functioning enable firms and individuals to access resources that in turn enable them to meet their needs of a financial nature. These financial needs include but are not limited to the accumulation of retirement savings, human capital accumulation through investment in education, re-tooling and mentoring, insurance against catastrophic expenditures associated with the consumption of medical services, taking advantage of available investment opportunities, and being able to cope with unexpected disruptions. The failure to use the highlighted financial services, in part, leads to rising income inequality coupled with economic growth, which is not inclusive and which leads to rising unemployment.

Social inclusion and financial inclusion are two major development policy agenda in many countries. Financial inclusion is a crucial driver of economic development, and many countries are implementing ambitious strategies to increase their populations’ use of financial services, especially digital financial services [7].

3. Mobile money and digital payments versus financial inclusion

Payments refer to the various ways to transfer money. Advances in payment technology influence household choice of payment methods [8]. Consequently, it is instructive to review how switching between payment types affects financial inclusion of households and ultimately, their welfare. On the one hand, mobile money enables users of mobile phones to deposit, withdraw, and transfer money without having a bank account. Mobile money services are provided by telecommunication companies in conjunction with commercial banks through a network of licenses agents. Mobile money services provide various services including but not limited to making deposits into a virtual wallet, which can be used to make payments for purchases, receipt of remittances, person-to-person payments, person-to-government payments, making saving as well as borrowing. Mobile money is available to individuals with bank accounts as well as those without bank accounts. The provision of financial services to those without bank accounts has helped to financially include individuals who previously lacked access to bank services in Africa. Conversely, digital payments allow households to pay digitally instead of via traditional means such as cash or cheque. They include the use of credit cards, credit cards, e-wallets, and mobile phones.

The Digital Revolution, which started in the 1980s and is ongoing, refers to the advancement of technology from analog electronic and mechanical devices to the digital technology available today. The digital revolution has enabled more persons and firms to access the internet, mobile phones as well as other digital services, which are automated and are controlled by the customer of the service, for example, as an "app" on a mobile phone or tablet PC. The interesting question from the perspective of the global agenda is how the digital revolution can enable to attainment of the sustainable development goals? One potential answer is digital financial inclusion. Digital financial inclusion involves the deployment of the cost-saving digital means to reach currently financially excluded and underserved populations with a range of formal financial services suited to their needs that are responsibly delivered at a cost affordable to customers and sustainable for providers. Inclusive digital financial services include online accounts, mobile money services, electronic payments, combinations of insurance and credit as well as FinTech applications that reach individuals and firms, which were hitherto excluded. If digital financial inclusion is provided through a well-regulated ecosystem, it has the potential to enable economic growth and launch countries on to a trajectory to the realization of sustainable development goals [9].

Digital finance and financial inclusion have several benefits to financial services users, digital finance providers, governments, and the economy. The digital finance issues presented by Ozili [10] are relevant for the ongoing debate and country-level projects directed at greater financial inclusion via digital finance in developing and emerging economies. Digital finance and financial inclusion have the potential to work better for individuals, businesses as well as governments.

Although financial inclusion has a central role in efforts toward global economic empowerment, financial inclusion has been deemed the soft side of financial services. This is because it has received limited or no attention from regulatory, policy as well as financial perspective. A major segment of world’s population that is economically disadvantaged is either financially excluded or financially underserved [11]. Financial inclusion helps low-income households to get access to basic financial services such as savings, credit, and insurance, improving their financial self-control, thereby promoting economic growth, which is crucial for the realization of development. Therefore, financial services not only foster economic development but also reduce poverty and income inequality. The lack of financial inclusion is a root cause of other social ills in low-income regions of the world, for instance, intergenerational poverty, lack of food security as well as civil unrest. Financial exclusion is an integral part of social exclusion. Therefore, the financially excluded individuals and firms are socially dependent upon their social networks.

4. Status of mobile money and digital payments in Africa

4.1 Basic facts and the African experience

By allowing people to transact in small amounts, digital payments create new opportunities based on micropayments that characterize the majority of the markets where consumers in Africa operate. In these markets, it is common to find cash transactions dominating the market system. The emergence of digital payments appears to have simplified the transaction process under such markets especially given the insecurity of carrying cash in one’s wallet that previously attracted the thieving industry to blossom. One comes to the market simply with his/her mobile phone and finds the mobile money agent right in the market for any money withdrawal for market transactions. Financial inclusion in this case goes beyond mere ease of payments to improving financial lives of the populace in Africa. Well-off relatives in town use the same process to send their poor relatives money to afford the basics of life and to make such transactions possible from near their doorsteps. In fact, one can safely argue that the mobile money establishment has a big role in poverty reduction in Africa and hence would act as a gateway to achieving sustainable development goals. Otherwise stated, the effect of mobile money technology extends beyond financial inclusion to poverty reduction as well as risk management, but also consequently to increased productivity.

Mbidde [12] investigated the connection between financial inclusion and the extent of using mobile money services in Uganda. The findings reveal that apart from making use of mobile money services for buying airtime, these electronic wallet services improved financial inclusion whereby 70% of households used mobile money services for cash withdrawals while 60% of households use mobile money services to pay their bills. A positive change is apparent in terms of improved living standards. Notwithstanding the existing challenges, for example, to a layperson who could neither save money earned out of selling a bag of coffee nor communicate easily to a relative in town to help financially in case of an emergency, the mobile money service is a blessing. It should not be forgotten that many local farmers here and in many parts of Africa, after the sale of a big harvest, could keep their money under the bed or somewhere in the banana plantation in a polythene bag. The risks involved in such a practice were enormous, leading to losses and deeper poverty. Financial inclusion, risk management, and poverty reduction are therefore critical consequential outcomes of mobile money services for an African previously ignored by the expensive inaccessible banking services majorly situated in urban centers.

Therefore, it may not be farfetched to argue that for the case of Sub-Saharan Africa, the potential of financial inclusion in aiding the attainment of the Sustainable Development Goals is much alive. A similar view is reiterated by Kuada [13], who, in reference to SDGs 1, 2, 5, and 8, notes in particular that financial inclusion has the potential to accelerate the pace of enterprise development and job creation in African countries and thereby contribute to economic growth and poverty alleviation. Specifically suggested in maximizing the latter benefits are multifaceted policy interventions and strategies, rather than an attempt to extend the outreach of existing financial institutions. The rationale behind these pragmatic solutions is that the current services are fundamentally flawed in terms of appropriateness to the needs and financial capabilities of the unbanked segments of the population especially in the rural areas of Africa where the majority of the populace can be traced. It is therefore recommended that a multipronged approach should include interventions that strengthen the poorest individuals’ control over their experienced situations as well as beliefs in their personal efficacy to take initiatives that will take them out of poverty. Such endeavors would most likely produce long-lasting benefits of financial inclusion to those that have for long been financially excluded involuntarily in Africa. Yet the contribution of the latter to the region’s food basket is notably significant.

4.2 Effect of mobile money and digital payments in Africa

The potential of financial inclusion in aiding the attainment of the Sustainable Development Goals in Sub-Saharan African countries has been discussed by various scholars. For instance, Kuada [6] highlights the direct contributions of financial inclusion to the attainment of SDGs 1, 2, 5, and 8. He notes that financial inclusion will accelerate the pace of enterprise development and job creation in African countries and thereby contribute to economic growth and poverty alleviation. Additionally, some of the challenges that need to be rectified have been highlighted. A multipronged approach relating to interventions and strategies is preferred rather than one that seeks to scale up the outreach of existing players in the financial ecosystem. This is because existing services are inappropriate with regard to financial ability as well as needs of the segments of the population that lack access to banking services. Therefore, the multipronged approach should include interventions that strengthen the poorest individuals’ control over their experienced situations as well as beliefs in their personal efficacy to take initiatives that will take them out of poverty.

There is also a growing body of empirical literature that documents the potential development benefits of financial inclusion, especially from the use of digital financial services, including mobile money services, payment cards, and other financial technology applications [14]. Mobile money services have been found to permit individuals and firms to store value and transfer value or money by means of a mobile phone. This has in turn aided improvements in people’s ability to earn income and thereby reduce poverty. Access to mobile money services among women-headed households in Kenya has been found to access increased savings by at least 20% and reduced extreme poverty by 22%.

Fourth industrial revolution advances in technology have greatly changed the digital payments’ ecosystem through among other things: the internet of things, application programming interfaces, biometric technologies, digital identification, cloud computing, and quick response codes. These technologies facilitate new access modes and products [15]. The new products include but are not limited to central bank digital currencies (CBDCs) and stablecoins. Central bank digital currency (CBDC) is money that a central bank can produce. It is called digital (or electronic) because it is not physical money like notes and coins. It is in the form of an amount on a computer or similar device. On the hand, a stablecoin is a digital currency that is pegged to a “stable” reserve asset like the US dollar or gold. Stablecoins are designed to reduce volatility relative to unpegged cryptocurrencies like Bitcoin.

Smallholders with farms under two hectares produce between 70 and 80% of the world's food. Agricultural digital financial services (agri DFS) powered by mobile money can connect smallholder farmers to both local and international markets. Through digitized payments, agricultural digital financial services enable smallholder farmers to receive payments from agribusinesses [16]. Vital transactional data as well as digital footprints enable financial institutions to assess the creditworthiness of smallholder farmers. Nevertheless, the extent to which agricultural value chains are digitized is dependent on the effectiveness of the partnerships and collaboration between cooperatives and agribusinesses on the one hand and mobile money providers as well as other agricultural digital financial services, on the other.

Several studies have been undertaken to estimate the effects of financial inclusion on welfare in Sub-Saharan Africa. These include but are not limited to Ofori-Abebrese et al. [15], who reveal that financial inclusion is low with approximately 88% of sampled countries having a low financial inclusion index. Financial inclusion was found to improve welfare by working through education and income. The positive effect of financial inclusion on welfare has important implications for policy.

Mobile money and digital payments have proved vital during disruptions. When the COVID-19 pandemic emerged, mobile money kept people connected through the delivery of vital financial support as well as providing safe, contactless payment methods for food, electricity, and other essentials of life. Mobile money is a crucial component of daily routine for many people around the world. As at the end of 2021, more US$ billion was transacted each day [17].

In Africa, independent bodies have recently established digital platforms to facilitate the aforementioned transaction processes. For example, AfricaNenda, an independent Africa-led coalition of dedicated payment experts, governments, and the private sector launched a digital platform aimed at supporting poor households and creating prosperity opportunities for the underserved population. The coalition aims at accelerating the growth of inclusive payment systems geared toward benefiting all Africans, including those who are economically challenged and are financially excluded.

Digital payments systems have been found to enable the upscaling of government-to-persons social assistance programs. This is because of their affordable cost with regard to reaching persons in hard-to-reach remote locations. Ideally, a social protection program operated through a digitized ecosystem seeking to promote the economic empowerment of women should possess the following desirable attributes: accountable, flexible, accessible, reliable, and secure. Although myriad merits are associated with digitized government-to-persons systems, especially during disruptions such as earthquakes and pandemics, the potential reach is dependent on the available infrastructure to provide digital payments, digital financial services being offered as well as their regulatory framework [15]. Digitized payments ecosystems have reduced the exclusion of women through the provision of access to money in close proximity to where they live and work besides enabling them to receive money in various accounts. Morocco provides an example of a country where advanced government-to-persons fast digital payments have enabled payments to reach those in remote areas by relying on retail agent networks.

Whilst the year 2020 was a year of unexpected and sweeping change, the challenges and strategies were different, but the focus remains the same: an inclusive digital future for all. At the global level, the live services stood at 310 decomposed as follows: Sub-Saharan Africa (157); East Asia and Pacific (49); Europe and Central Asia (9); Latin America and the Caribbean (30); Middle East and North Africa (29); and South Asia (36). The number of registered accounts stood at 1.2 billion decomposed as follows: Sub-Saharan Africa (548 million); East Asia and Pacific (243 million); Europe and Central Asia (21 million); Latin America and the Caribbean (39 million); Middle East and North Africa (56 million); and South Asia (305 million). The number of active accounts stood at 300 million decomposed as follows: Sub-Saharan Africa (159); East Asia and Pacific (52 million); Europe and Central Asia (4 million); Latin America and the Caribbean (16 million); Middle East and North Africa (3 million); and South Asia (66 million). The transaction volume at the global level stood at 41.4 billion decomposed as follows: Sub-Saharan Africa (27.4 billion); East Asia and Pacific (5.4 billion); Europe and Central Asia (234 million); Latin America and the Caribbean (701 million); Middle East and North Africa (146 million); and South Asia (7.5 billion). The transaction value in US$ at the global level stood at 767 billion decomposed as follows: Sub-Saharan Africa (490 billion); East Asia and Pacific (111 billion); Europe and Central Asia (4.0 billion); Latin America and the Caribbean (19.8 billion); Middle East and North Africa (10.5 billion); and South Asia (131 billion) [15].

The number of live services stood at 171 decomposed as follows: West Africa (70); Southern Africa (14); North Africa (14); Central Africa (16); and East Africa (57). Sub-Saharan Africa compared with other regions accounts for much of the growth with respect to mobile money technology. The number of registered mobile money users is more than half a billion. Forty-three percent of all new mobile money accounts are in the region. The registered accounts stood at 562 million (representing 12% point increase) decomposed as follows: West Africa (198 million); Southern Africa (11 million); North Africa (14 million); Central Africa (46 million); and East Africa (293 million). The number of active accounts stood at 161 million (representing an 18% rise) decomposed as follows: West Africa (47 million); Southern Africa (3 million); North Africa (1 million); Central Africa (16 million); and East Africa (94 million). The transaction volume stood at 27.5 billion (representing a 15% rise) decomposed as follows: West Africa (6.4 billion); Southern Africa (284 million); North Africa (77 million); Central Africa (2.2 billion); and East Africa (18.6 billion). Transaction value (US$) stood at 495 billion (representing a 23% rise) decomposed as follows: West Africa (178 billion); Southern Africa (3.0 billion); North Africa (5.4 billion); Central Africa (35.7 billion); and East Africa (273 billion). Although absolute growth was highest in West and East Africa, Southern Africa grew the fastest at 24% year-on-year [18].

Coulibaly [15] attempted to understand the factors driving the adoption and the use of mobile financial services in the West African Economic and Monetary Union (WAEMU compared with East Africa. Probit and multinomial logit estimations are undertaken using data drawn from the 2017 Global Financial Inclusion database. The same set of determinants drive the adoption and use of mobile money in both groups of countries. Compared with East Africa, the slow uptake of mobile money in WAEMU countries is due to insufficient policies toward raising awareness to the benefits of using mobile financial services. Government officials in WAEMU countries are advised to boost the use of mobile money services by enhancing income levels, introducing incentives to reward higher levels of education attainment.

In some cases, mobile money providers offer bulk payments besides providing agricultural value chain payments to farmers. Overall, as at the end of 2020, 39% of mobile money providers that offered bulk payments also provided agricultural value chain payments to farmers. As at the end of 2021, 120 agricultural organizations around the world used mobile money to digitize value chain payments [14]. Seventy-five percent of these organizations are in Sub-Saharan Africa. Due to the ongoing COVID-19 pandemic, there is growing urgency of financing needs of smallholder farmers. Therefore, agribusinesses are using digital technology to improve their operations to scale up the access of smallholder farmers to financial services. Besides the need for collaboration with specialized technology providers, for instance, agritech and insurtech companies, there are opportunities for synergy between mobile money providers and agribusinesses to grow their partnerships to serve farmers better. In turn, this will enable them to develop specialized services for the agricultural sector over and above digital payments. This will enable new uses ranging from digital farm as well as farmer records to agricultural insurance, credit, and loan products.

5. Conclusion

Financial inclusion has been presented in some global policy documents, for instance, the Universal Financial Access 2020, to be a tool that can potentially reduce socioeconomic deprivation around the world. Financial inclusion of economically challenged households will enable them to accumulate human capital through, for instance, education, consumption of healthcare services, medical insurance, and other social determinants of health.

Mobile money services in conjunction with digital payments have the potential to improve the financial inclusion index across many countries in Sub-Saharan Africa especially those in hard-to-reach remote locations. By improving the financial inclusion of individuals and firms, mobile money services, and digital payments will improve upon their social inclusion, thereby aiding the realization of the sustainable development goals.

Financial technology’s benefits for financial inclusion need to address the associated risks [15]. Some of these risks include: (i) development of financial technology requires increased coordination across borders and currencies. Effective coordination among policymakers, regulators, central banks, and supervisors can avert regulatory arbitrage as well as enhance effective supervision and oversight; (ii) there is need to constantly keep abreast of innovations by authorities to mitigate potential regulatory failure and challenges in the application of new business models; and (iii) developments in financial technology have indicated the challenges as well as opportunities associated with extending the access of payment service providers to payments infrastructures as well as the need to guard against cyber-attacks.

The mobile money industry has embraced disruption and built resilience over the COVID-19 pandemic era. The solutions that emerged as well as the growth that occurred despite the pandemic demonstrate evidence of the industry’s strong partnerships. These relationships enabled mobile money providers to move quickly, sustain their operations, and contribute to more robust local economies and communities.

The ongoing COVID-19 pandemic catalyzed the realization of changes to the regulatory environment. For instance, the pandemic prompted the simplification as well as streamlining of processes required to sign up for a mobile money account. There is need for regulators as well as governments to constantly consult with industry players in order to create a conducive environment that benefits the long-term sustainability of the industry and benefits consumers [15]. It remains to be seen if the COVID-19 pandemic will affect the use of cash, consumer behavior as well as digitization. As the global economy recovers, the mobile money ecosystem will change the modern economics of mobile money.

While this chapter has focused on the mobile money and digital payments dimension of financial inclusion, fintech firms have enabled the saving as well as the borrowing dimension of financial inclusion. The latter could be an area for future research.

Acknowledgments

We acknowledge invaluable feedback from the reviewers of our draft versions of this chapter.

Conflict of interest

The authors declare no conflict of interest.