Op-ED: Is a Cashless Africa Achievable?

Carl Manlan
Carl Manlan works at the intersection of the public, private and civil society sectors, and has contributed to health financing through multi-lateral organisations. As a Mo Ibrahim Fellow at the Economic Commission for Africa, he focused on industrial and agricultural policies designed to accelerate the transformation of the African continent. Prior to his current role at Ecobank Foundation, he led a public-private initiative to support an African response to Ebola in West Africa. Carl Manlan holds a Master of Public Administration from Harvard Kennedy School. He is a 2016 Aspen Institute New Voices Fellow. He writes on African economic transformation.

Acknowledgment: The author appreciates the guidance and feedback from Hezekiah Shobiye in the write-up of this article.

An expansion of cashless transactions in Africa would be transformative! Imagine a world where a Burundian could trade easily with a Cape Verdean despite the countries having different currencies and belonging to different economic zones. But, with 1.2 billion people spread across 54 independent countries in one continent, is a cashless Africa achievable?

The case for a cashless Africa is rooted in the need to accelerate African integration. This is particularly important as the African Continental Free Trade Area (AfCFTA) goes into force. AfCFTA is the largest trading platform for Africa and the world as it brings together all 55 African Union member states with a combined market strength of more than 1.2 billion people and a gross domestic product (GDP) of US$ 3.4 trillion.

What is needed to enable AfCFTA’s success is the glue that makes trade in advanced economies stick – the use of digital financial services. However, currently in Africa, only 10 percent of transactions are digitized. As a result, cash is still king for many doing business within and across Africa, meaning that the continent is missing out on several saving opportunities.

The Benefits of a Cashless Africa

At current rates, the continent’s reliance on cash for transactions costs Africans billions of dollars annually. In particular, the printing, distribution and handling costs of cash place a burden worth as much as a 1.5 percent of national GDP, a cost estimated to be over US$ 50 billion. Thus, re-organizing African economies to take full advantage of digital financial services implies that more resources could be made available to invest in the public interest such as in agriculture, education and vocational training.

Furthermore, providing financial services digitally offers several benefits to transactors. First, it is more efficient. Second, by authenticating and guaranteeing producers, intermediaries and consumers that goods or services will be exchanged for the agreed fee, it reduces risk.

In addition, cashlessness can be a key driver of financial inclusion, particularly through mobile money. For example, In Burkina Faso, Côte d’Ivoire, Gabon, Kenya, Senegal, Tanzania, Uganda, and Zimbabwe, only about 20 percent of adults use a mobile account. In Egypt, high mobile phone ownership offers an avenue for 7 million unbanked adults who send or receive domestic remittances currently using cash or an over the counter service. While there has been an increase in mobile transactions in some African countries, there is still a long road to fully achieving a digital finance ecosystem in Africa.

Apart from improving financial inclusion, a cashless Africa could also embrace Africa’s large informal economy. Currently, 85.8 percent of Africans are employed in the informal sector, where workers are not regulated or protected by the state. In Nigeria, it is estimated that 47 percent generate their income from informal sector employment while in Morocco, 31 percent of GDP is derived from the informal sector. Supporting the informal sector thus remains a key component of Africa’s opportunity to take full advantage of a cashless Africa.

The Road to a Cashless Africa

There are innovations from the private sector that can spur Africans to contribute to a cashless society. One way is through the unlocking of existing phone infrastructure across the continent. For example, there are 747 million sim connections (some individuals have multiple sim cards) yet, only 250 million Africans have a smartphone. Changes will thus come from enhancing existing basic phones to be able to perform advanced functions like digital services. As such, KaiOS technology, which brings smartphone-like functionalities to feature phones, could become a lever for half a billion people to be offered mobile money services. However, using such smart technology would require having access to an internet connection and only 24 percent of the population currently have access to mobile internet.

Providing a pathway for digitizing consumer spending in Africa is another way to achieve a cashless Africa. Transactions are set to reach USD 2.1 trillion by 2025 from USD 1.4 trillion in 2015. However, less than 10 percent of these consumer-to-business transactions are digitized in Africa. To address this, improving interoperability of banks and mobile network operators is a good start at the country level. Next is improving African Central Banks interconnectivity, so that Nigerian Naira can be used to pay invoices in Malawian Kwacha through an African digital platform. Amazon and Alibaba operate at scale because of the single home market. AfCFTA opens that lane. However, achieving this would be dependent on the continent’s ability to produce locally across the 54 countries what informal traders typically source globally.

Nevertheless, working with Africans in the informal sector poses several challenges, chief of which is that many live in rural areas, speak different languages, and have lower levels of literacy. Despite adult literacy being at 60 percent, 80 percent of the continent’s adult population still do not use any formal or informal financial services. As a result, a cashless Africa may not be achievable without first improving the financial literacy of Africans.

Coupled with improving financial literacy, there should be an increase in the provision of tailored financial services to Africans. Providing customized financial services would need to start at home with a focus on offering adults and children opportunities to connect to financial institutions throughout the course of their lives. In addition, it would require integrating into the informal economy a value-add component like a seamless digital platform, which would allow informal workers to demand digital payments from trusted customers and intermediaries. As the understanding and the development of tailor-made solutions for different groups in the population expand, more people will transition from stashing banknotes under their mattresses to securing their money within the financial system.

However, with more money in the financial system, the purpose of improving financial literacy needs to be clear for all. It is not just about convenience, rather, it is about building savings and reserves for the African continent. Africa’s path to prosperity requires the availability of long-term capital from long-term deposits. In the end, the more capital in the financial system, the more likely domestic resources will be available to spur investments in Africa. As the number of Africans with disposable income rises, digital finance options must increase their ability to save, transact and invest digitally. Ultimately, the ability to generate capital and improve Africa’s infrastructure and livelihood will allow the continent to reap the full benefits of a cashless society.

Probably, one of the greatest hurdles is getting the financial mechanisms available in the informal sector of many African countries to the full scale of digital finance.  For example, tontine in Côte d’Ivoire, stokvel in South Africa, Susu in Ghana, Pamoja in Tanzania, and other names carrying the same concept of domestic savings are informal yet effective. Yet, to date, African financial institutions have been unable to allow eSusu (savings groups) access to the full scale of digital finance. To achieve this, the trust and the purpose that bring African traders, particularly women together, need to cohabit with the technology to digitize existing financial mechanisms.

As a result, the business journey of the average woman who collects empty bottles for recycling and trade to other women can provide a clear pathway for the transition from cash to digital finance. In her ecosystem, she has the trust of the network of informal businesses that re-use her recycled bottles for their production and sale of homemade juices, nuts and other products. In addition, women who operate most fast food joints, require customers to pay before they eat. Their ability to nudge their customers to pay through an electronic means is far greater than that of any financial institution. Trust interwoven in a cash-based economy is therefore the intangible element necessary for transitioning to a cashless economy.

The informal market holds the key to a cashless Africa. It is by harnessing the skills of Africans and understanding their contribution to the continent that the single African market can be strengthened and AfCFTA can be positioned for success.  Other parts of the world offer lessons that Africa may draw from.

Lessons from India

In November 2016, India’s demonetization invalidated billions of 500- and 1,000-rupee banknotes. Despite early missteps and frustrations, it turned out to be a change for the better for the country’s 1.31 billion people. Research from National University of Singapore Business School shows that in response to demonetization, there was a dramatic spike in debit card usage by 84 percent. The rise was especially strong for debit cardholders who were infrequent users prior to demonetization. These users increased the number of transactions by 400 percent after demonetization, whilst the value of their transactions jumped by 150 percent. Furthermore, digital wallets saw a surge in both transaction volume and value in the wake of demonetization. Specifically, customers added 82 percent more money into their digital wallet accounts and increased their use of the payment mode to make transactions via peer-to-peer transfer by 745 percent and in e-shopping by 405 percent.

As such, demonetization provides a systemic shock to stimulate the transition from a cash-based economy to a digital one. However, it does not necessarily sustain the change once cash is re-injected into the system. It is a process that requires policymakers and financial institutions to think more about those that are not included and how they might be incentivized to remain. Lessons from India suggest that fostering access to technological innovation, expanding the digital financial services infrastructure and enabling greater financial inclusion will be priorities for policymakers and regulators seeking to accelerate the transition toward a less cash-reliant economy.

Final Words

A cashless Africa is possible as consumers, businesses, policymakers and financial institutions work towards it. With AfCFTA in place, there is an opportunity to increase intra-African trade through digital financial services. Also, the large African informal economy offers a tremendous avenue to achieve a cashless Africa. However, financial institutions and policymakers need to work together to improve financial literacy, financial inclusion and the provision of highly customized services to the informal workers. Digital finance infrastructure should not only be built for the working class professionals but should also be targeted at the informal economy because of its large volume of transactions that is a major driver of the African economy. Digitizing the informal economy will require trust but would provide the continent with a pathway to include and expand intra-Africa trade, an act that would make the dream of expanding cashless transactions in Africa more likely to happen.

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