World Bank Document

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Mobile Banking in Southern Africa Mobile Banking in Southern Africa: Consolidated Draft Report Acknowledgments This report was prepared by Robert Stone, Jerry Grossman, Philippe Breul, Abigail Carpio & Mateo Cabello (Oxford Policy Management) under the leadership of Samuel Munzele Maimbo and Tania Saranga (World Bank) of the Africa Finance and Private Sector Department managed by Gerarrdo M. Corrochano (Sector Manager) and Marilou Uy (Director). Adelina Mucavele (World Bank) provided administrative support for the report. Peer reviewers for the paper included John R. Wille, Ismail Radwan, Mark Pickens and Vincent Palmade. This report received financial support from the governments of Finland, Norway, Sweden and the United Kingdom through the Multidonor Trust Fund for Trade and Development. ii Mobile Banking in Southern Africa Preface This Consolidated Draft Report is submitted to the World Bank by Oxford Policy Management (OPM) and The IRIS Center at the University of Maryland, College Park (IRIS) under World Bank Purchase Order 1272039, for consulting services for Trade in Financial Services: Mobile Banking in Southern Africa. The objective of the project, as set out in the Terms of Reference (TOR), is to positively influence the expansion of access to finance through the rapid, but safe, take off of domestic and cross-border branchless banking, with appropriate protections for customers and the financial system by encouraging (i) the use of incentives that encourage innovative bank and non-bank led domestic and international m-banking solutions; (ii) the establishment of appropriate financial system infrastructure, and its good governance; and (iii) the establishment of proportionate regulation which provides an open but safe environment. The focus countries for the project are Angola, Malawi, Mozambique, South Africa and Zambia. The work that has let to the current report, in accordance with the TOR, consisted of: A literature review in September/October 2008 resulting in an inception report submitted in October 2008, confirming or modifying the proposed work plan as appropriate, and firming up the questionnaire for the diagnostic template; Discussion of the inception report and agreement of the work plan with the World Bank Task Team Leader (Sam Maimbo); A visit by the Tânia Saranga (World Bank) and Jerry Grossman to the target countries in November-December 2009; Draft country diagnostics for each of the five countries submitted to the World Bank in February 2009, and a synoptic table, draft policy recommendations and a draft workshop presentation submitted early in March. Feedback from a peer review of the main documents received in mid-March. This Consolidated Draft Report draws together the previous documents into a single report, taking account of the feedback in the peer review and of further research by OPM and IRIS. We are very grateful to the World Bank, and particularly to Sam Maimbo and Tânia Saranga for their invaluable support in organizing the country visits and in facilitating the development of the reports. We are also grateful to those who gave of their time to speak to us during and after the country visits and to those who provided feedback in the peer reviews, which gave us useful new insights into the subject and pointers on presentation. The responsibility for any remaining errors in the present report, however, lies entirely with the authors. It should be borne in mind that this is a very fast moving field, so it is quite likely that some of the information in this report (written in April 2009), will already be out of date by the time the report is circulated! Mobile Banking in Southern Africa: Consolidated Draft Report Executive summary The objective of the project under which this report is submitted is to positively influence the expansion of access to finance through the rapid, but safe, take off of domestic and cross-border branchless banking, with appropriate protections for customers and the financial system. The key focus of the study is on cross-border payment services The migration patterns in Southern Africa have important implications for domestic and cross- border remittances, the two key migration corridors being (a) Namibia-Angola-Zambia; and (b) South Africa-Mozambique-Malawi. In some cases, refugees tend to constitute a significant proportion of immigrants in a country, and the flow patterns tend to be significantly influenced by proximity (and much less by income). The patterns of cross-border migration are complex, and do not appear to conform entirely to the normal distinctions between migrant-sending and migrant-receiving countries. Similarly, there is a complex mix of skilled and unskilled migrants, and there therefore is no simple correlation between migration and financial exclusion. While most migrants in the region continue to be male, there is an increasing pattern of feminization of migration in the region. Domestic migration is also widespread, linked to rapid urbanization in the focus countries. Internal migrations have greatly contributed to the enlargement of the informal sector within the countries and in some cases, to the growth of urban agriculture. Rural-urban migration has also resulted in many ―geographically split households,‖ with important implications for the demand for m-baking. The means of sending remittances for both cross-border and domestic migrants include banks or other formal financial intermediaries, post offices, money transfer operators (e.g. Western Union and Moneygram), or by carrying cash by hand (personally or through an agent such as a friend, a relative or a taxi driver). The informal channels are inextricably linked with the informal nature of migration in the region, with important consequences for the relative ease and security of money transfers. The relatively high costs of sending remittances through the formal financial sector are also an important factor in determining patterns of demand. In relation to trade patterns, it is informal cross border trade that is the main potential source of demand for cross-border m-banking services. Individuals cross borders to sell small amounts of goods – for example, as informal street traders. While such individuals are not strictly classified as migrants, some studies describe these informal traders as ―amongst the most enterprising and energetic of contemporary migrants‖ Interestingly, the same study noted that informal traders crossing the borders tend to be mostly female (70%). Thus, informal cross-border trade is said to be closely linked to the feminization of migration described earlier. Despite the importance of informal cross border trade – especially with respect to livelihood and income generation among the poor in the region – policies tend to favour formal (and often larger) trade activities. Efforts have, however, been made in some countries to address some of the key challenges being faced by informal traders. As with migration, the problem is that it is difficult to make an estimate of the true size of informal trading activity and the volume of informal trade-related payment transactions between the countries. One might expect that – as in the case of labour migration – income, proximity and networks will likely be the factors influencing the magnitude and direction of informal trading across borders. In terms of the financial sector landscape, most of the focus countries have either fully or substantially implemented financial sector reform programmes. In the last decade, countries‘ financial markets have expanded, with a noted increase in the number of commercial banks operating in countries like Zambia, and measures have also been taken to reduce government ownership or privatize state-owned banks such as in Malawi. However, despite these recent developments in several iv Mobile Banking in Southern Africa areas, the degree of competition in financial markets in a number of countries still remains limited to a few operators, and there is only a thin supply of financial instruments. In general, the financial sectors (especially in most of what may be considered migrant-sending countries) are characterized by: weak competitive environment (especially in the remittance market); lack of access to technology- supporting payments and settlement system; and burdensome regulatory and compliance requirements (for banks). The countries in Southern Africa are all at different levels of information and communications technology (ICT), with comparatively more developed ICT sectors among the higher income countries like South Africa and Namibia. In Zambia, Angola and Malawi, the telecommunications sector is still mainly characterized by the monopoly of state-owned operators or service providers. Only a few countries in the region already have extensive telecommunications backbones in place that employ a combination of microwave radio relays and fibre-optic cables with other countries in advanced stages of deploying their backbones. Some of the countries in the region are landlocked (Zambia and Malawi) without the possibility of direct connection to submarine fibre. Such countries will have to rely on expensive satellite links for their international traffic and may be unable to afford or access high bandwidth links. Moreover, there are few countries with an extensive and high-speed backbone and access network to reach out to many users, which creates an artificially

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