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Middle EastFebruary 4 2021

Behind the push to make banking more inclusive in MENA

The Middle East and north Africa has some of the lowest access to financial services in the world, but work is underway to modernise in the industry across the region.
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Behind the push to make banking more inclusive in MENA
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With the exception of the six high-income markets of the Gulf Cooperation Council (GCC), the Middle East and north Africa (MENA) has lagged behind the rest of the world in terms of increasing access to basic financial services among its populations.

While the past 10 years have seen impressive growth within individual markets, the most recent data indicate that the percentage of the region’s population holding bank accounts is tied with sub-Saharan Africa as the lowest proportion worldwide.

Account penetration in sub-Saharan Africa may well have already overtaken that of the MENA region, given the meteoric rise in mobile money accounts in the southern half of the continent.

Mobile Money

This trend, as exemplified by Kenya’s m-Pesa, has thus far had a much more limited impact in the MENA region. “Mobile penetration rates are fairly high in several important Middle East markets beyond the GCC, such as Iran, Iraq, Israel and Jordan,” says Matthew Reed, chief analyst for service provider markets at telecoms consultancy Omdia.

“However, the prospects for mobile financial services in those countries will also depend on factors such as the status of the conventional financial services markets locally and on regulations relating to mobile financial services.”

Central banks and regulators in the MENA region have only in recent years gradually begun to embrace digital financial services, in a bid to not only raise financial inclusion rates among populations, but also to digitise the region’s informal sector, with a view to increasing tax revenues.

In addition to new regulations on mobile wallets for banks and mobile network operators in the region, governments have recently digitised salary and welfare payments as a means of stimulating account ownership.

With such initiatives in place, mobile money transactions saw an explosion in growth among account holders and small businesses in 2020 due to tight Covid restrictions, with limitations on handling physical cash obliging hesitant customers and businesses to adopt digital services for the first time. Such a trend is only likely to increase in 2021 as lockdown restrictions continue.

Barriers to progress

In spite of such momentum, there are still significant barriers to deepening financial inclusion in the region. While increasing numbers of businesses and customers are becoming more comfortable with digital services, cash use is unlikely to significantly decrease any time soon, as trust issues remain for both businesses and customers.

There’s been an extremely conservative regulatory and supervisory approach in MENA that has only started to change within the past five years

Mayada El-Zoghbi, Accion

More significant, perhaps, are deep structural imbalances regarding women’s access to financial services, with women in the region less likely to hold a bank account than anywhere else in the world.

Excluding the GCC, just 43% of adults aged 15 and over in the MENA region held a bank account in 2017, in line with the figure for sub-Saharan Africa, according to the World Bank’s Global Findex Database.

Although MENA account penetration is dragged lower by conflict-ridden countries, such as Iraq, Yemen and Syria, just two non-GCC countries (Iran and Libya) had scores of more than 50% in 2017. Algeria and Lebanon, however, saw account penetration levels decrease between 2014 and 2017.

Sub-Saharan Africa account penetration rose from just 23% in 2011 to 43% in 2017, following an explosive uptake of mobile money services. Such a rise has been less pronounced in the MENA region (rising from 33% to 43% over the same period), with regulators slow to embrace the potential of digital financial services.

Mayada-El-Zoghbi-Headshot-805x1024

Mayada El- Zoghbi, Accion

“There’s been an extremely conservative regulatory and supervisory approach in MENA that has only started to change within the past five years,” says Mayada El- Zoghbi, managing director at the Centre for Financial Inclusion at Accion, a non-profit organisation focused on increasing economic inclusion worldwide.

Such a conservative approach has not just held back basic account ownership, but has also restricted the growth of microfinance credit organisations, which have been one of the main drivers of financial inclusion in other parts of the world.

“There have been a number of very strong microfinance institutions in the region that have all had stunted growth because conservative regulations have left them unable to evolve effectively,” she says.

In recent years, however, digital financial services have received a significant boost in the region thanks to improved legislation on digital wallets and a move towards digital payment of welfare and government salaries.

“Globally, the fact that people have greater access to digital technology through mobile phones or card-based networks has made a real difference when it comes to financial inclusion,” says Margaret Miller, lead financial sector economist for the World Bank’s finance, competitiveness and innovation section.

“The MENA region hasn’t been as quick as some other places to embrace mobile money, but they’re catching up fast.”

Signs of change

Iran was one of the earliest success stories in the region in terms of financial inclusion. The Iranian government delivers welfare payments exclusively to people’s bank accounts, with around two-thirds of Iranian adults regularly receiving such payments, according to the Global Findex Database. As a result, 94% of adults in Iran have bank accounts — the highest figure in the Middle East by some distance.

Of particular note within neighbouring Iraq has been the success of International Smart Card, a Baghdad-based company co-owned by Rafidain Bank. The company’s Qi Card, launched in 2008, enables users to receive pensions, benefits and salaries electronically instead of via cash payments, and can also be used for payments across a wide range of merchants in conjunction with Mastercard.

The card had more than 8 million users as of October 2020, and processed more than 21 million transactions in 2019 via its Mastercard partnership. In 2018, the company began offering loans via Rafidain Bank, and had distributed $4bn worth of loans to 800,000 people in Iraq by October 2020.

Yet nowhere has the impact of digital financial services been greater in recent years than Egypt, the region’s most populous nation. Account penetration rose from 14% to 33% between 2014 and 2017, according to the World Bank, with a flurry of activity set to prompt a similarly dramatic increase in the organisation’s next Global Findex Database update, likely to be published in 2022.

After a slow start, digital financial services exploded into life in the country in 2016. That year saw the formation of the National Council for Payments, tasked with transforming Egypt into a cashless economy, with president Abdul Fattah al-Sisi personally taking charge of the initiative.

The MENA region hasn’t been as quick as some other places to embrace mobile money, but they’re catching up fast

Margaret Miller, World Bank

Around that time, the government began paying salaries directly into bank accounts. Such salaries could be increasingly accessed via digital wallets offered by banks in conjunction with mobile network operators. Initially launched in 2013, wallet use began to really take off in 2016/2017, as interoperability between wallets became an increasing reality.

The impact of Covid restrictions on physical cash in 2020 has further boosted the uptake of mobile payments. The number of e-wallets in the country rose by 17% to 14.4 million between March and October 2020, with transaction volumes increasing by 156% to 9.9 million per month over the same period, according to the country’s National Telecom Regulatory Authority (NTRA).

While person-to-person transfers are the largest source of mobile wallet transactions — comprising nearly 40% of transactions, according to the NTRA — the impact of Covid has prompted a surge in interest in digital payment solutions from the country’s small and medium-sized enterprise sector, which had previously operated almost exclusively on a cash basis, according to Islam Shawky, cofounder and chief executive of Egyptian payments firm Paymob. Such an uptake has been boosted by a government point-of-sale (POS) terminal subsidy programme, unveiled during the recent Covid crisis.

“Two years ago there wasn’t the appetite for POS terminals among smaller merchants, but now they realise that it’s something the government wants to happen,” he says.

Mr Shawky said that Paymob onboarded 4,000 merchants with POS terminals in September 2020, compared with just 60 per month a year earlier.

Maintaining momentum

While Covid has had a significant impact on the rise of digital financial services across the region, the question remains as to how popular such services will be after the pandemic. “We’ve seen a number of countries taking steps of different sorts to respond to the Covid pandemic, such as reducing or waiving fees for digital payments, increasing the amounts that are allowed for digital transfers and facilitating account opening remotely,” says Ms Miller of the World Bank.

“Some of these may not be sustainable in the longer term, but they’ve definitely created incentives for people to decide to use digital services who, for whatever reason, had not been using them in the past.”

Yet the ongoing popularity of cash in the region — accounting for 94% of transactions in Egypt in 2014, according to the International Finance Corporation — is unlikely to disappear overnight, especially among businesses wary of the added visibility inherent in digital transactions.

“Many businesses in the informal sector are afraid that going increasingly digital will expose the true size of their business and have the tax authorities come after them,” says Paymob’s Mr Shawky.

“But on the other hand, they’re going to have increasing numbers of people coming to their stores demanding to be able to pay either via card or by digital means. With the rise of a younger generation across the region that is increasingly comfortable with using technology, I believe that this is going to change rapidly, like we’ve already seen with smartphone penetration.”

Banking for women

While regulators in the MENA region have made great strides in enabling the greater spread of digital financial services in recent years, an even greater challenge is increasing the financial inclusion of women.

Findex data for 2017 shows that while just 43% of the region’s overall adult population had bank accounts, the figure for men was significantly higher at 52%, the largest delta for any global region measured in the survey, with the gap between overall and male account access particularly wide in Jordan, Lebanon and Algeria.

“In many societies across the region women often still require their husband or their father’s permission to open a bank or e-wallet account, especially in lower income neighbourhoods,” says Chloé Gueguen, digital finance regional advisor for the Arab Women’s Enterprise Fund (AWEF), a women’s economic empowerment programme funded by the UK’s Foreign, Commonwealth and Development Office.

“Women also face mobility constraints, and they cannot always travel to bank or mobile operator branches to open an account. They also sometimes face safety and harassment issues as well.”

Ms Gueguen notes that in addition to such societal constraints, banks in the region often lack comprehensive gender-disaggregated customer data, making tailored solutions
for would-be female customers more difficult and expensive.

Low levels of female financial inclusion are in line with wider economic trends; just 18% of the women in MENA (excluding its high-income countries) participate in the workforce, according to World Bank data, compared with a global average of 46% for low- and middle-income states.

Many societies across the region women still require their husband or their father’s permission to open a bank or e-wallet account, especially in lower income neighbourhoods

Chloé Gueguen, AWEF

Ms Miller stressed that efforts to improve financial inclusion among women need to be presented alongside other economic empowerment measures, including education on topics such as financial literacy and support for small business owners — an approach exemplified by institutions such as the non-profit organisation Brac in Bangladesh.

“It’s also very important that there are, going forward, more women in decision-making roles, both within financial service providers and within regulatory bodies, so that women’s perspectives are taken into account more at every level of the process,” she says.

Ms Gueguen stresses that a holistic approach is required to improve financial inclusion among women across the region.

The AWEF programme in April 2020 published a series of recommendations on how to tailor digital financial services for women in the Middle East, including developing a holistic understanding of women’s needs and preferences, the hiring of female agents to target new female customers, introducing non-financial services such as trainings as part of digital financial services delivery, and developing an ecosystem of relevant, user-centred mobile money use cases that offers products and services that women want and need.

The AWEF has worked with payment service providers Fawry and Dinarak (in Egypt and Jordan respectively) to pilot female e-payment networks, in order to build awareness and trust among women customers.

Ms Gueguen noted that in the case of Fawry’s ‘Heya Fawry’ campaign (‘She is Fawry’ in Arabic), the company expanded the programme via a partnership with Unilever, enabling the new female agents to offer the company’s fast-moving consumer goods in addition to financial services, in a bid to make the scheme more profitable for them.

“Financial inclusion needs to be a part of a wider effort for economic empowerment, especially for women,” she says. “Ultimately, digital financial services and financial inclusion need to be a means to an end, and not an end in itself.”

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Read more about:  Africa , Middle East , Regulations
John Everington is the Middle East and Africa editor. Prior to joining The Banker, John was the deputy business editor of The National in the UAE, and has also worked for Dealreporter, Arab News and The Telegraph. He has also covered the telecom sector in Africa and the Middle East, living and working in Qatar and the UK. John has a BA in Arabic and History and an MA in Middle Eastern Studies from the School of Oriental and African Studies (SOAS) in London.
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