Digital Innovation: Three Key Lessons to Improve the Resilience of African MFIs and Their Clients

If there is one thing that has become obvious during the COVID-19 pandemic for the financial inclusion sector, it is the need to accelerate the digitalization of financial service distribution channels.  Of course, this is easier said than done. The path is replete with challenges, from managing the new cyber risks involved to establishing partnerships among the diversity of actors with different digitalization strategies. So how can we ensure the success of digitalization while maintaining manageable risk levels?

The African Microfinance Week (SAM), which took place in October 2021 in Rwanda, was a unique opportunity to consider this question, share lessons learned and discuss the challenges of digitalization and its role in improving the resilience of the financial inclusion sector and its clients.

During this event, I had the pleasure of moderating the session, “Digital innovations for the resilience of inclusive finance institutions and clients in Africa: actors, strategies, collaborations and challenges.” Along with Olivier Mugabonake (CEO of ADFinance and President of the Fintech Association of Rwanda), Jean-Louis Perrier (Head of the Africa Cybersecurity Resource Center for Financial Inclusion (ACRC) program and co-founder of Suricate Solutions), and Ivan Ssettimba (Head of the Africa Regional Office of the Alliance for Financial Inclusion), we discussed the challenges for their institutions, the main regulatory and political bottlenecks that limit the adoption of digital solutions by low-income segments of the population, as well as the rise of fraud and cybersecurity issues.

From the rich discussion with the panelists and the audience, I would like to share three key takeaways.

1. Adoption of digital channels by MFIs is a necessity.

A consensus emerged during our panel that digitalization is not a luxury or just an option for MFIs, but rather a vital necessity  due to the competition from new players. At the same time, MFIs must preserve their objective of contributing to poverty reduction for low-income people. Moreover, while adopting digital tools and channels to deliver their products and services, MFIs must continue to offer productive credit in all sectors, including agriculture. They must avoid aligning themselves with the offer of fintechs and mobile telephone operators, which instead offer consumer credits that cannot meet all their clients’ needs.

So how to balance these ongoing objectives with the move towards digital? MFIs’ digital transformation requires financial resources for investments in technology. It also requires human resources to define the strategy and identify and establish partnerships with a long-term perspective to ensure the viability of digital offers and their adoption by customers. Donor support will be essential to strengthen MFIs’ resources and capacity to carry out this transformation, especially for smaller institutions that do not benefit from the support of an international group.

2. Jurisdictions must adapt the regulatory and legal framework to facilitate digitalization.

During the pandemic, many countries and regions, including the Economic and Monetary Union of West Africa (UEMOA), introduced temporary measures to ease customer identification requirements for opening accounts, especially mobile money. These measures enabled remote transactions when branches were closed and social distancing was required. Now, two years later, we should assess the impact of these measures and consider adapting them for the long term to enable greater adoption of digital financial services by low-income people who, in many cases, do not have the documentation required to open an account. To make these measures more permanent, MFIs would need to take a risk-based approach, with well-defined balance and transaction limits tailored to the needs of MFI clients who have low money laundering and terrorist financing risks. Such provisions would promote the financial inclusion of the most vulnerable populations, who would then benefit from appropriate financial services in order to strengthen their resilience to shocks such as the pandemic.

Another regulatory aspect highlighted during the panel concerns making the USSD channel, used for sending SMS messages, more accessible to promote financial services which are available on basic telephones. Increasing access to the USSD channel requires an affordable price policy, which often requires supervision from the regulator. For example, in Togo, the telecommunications regulator has set a very low price for the USSD session at $0.005.

3. Digitalization must be accompanied by cyber-resilience to control risks.

The pandemic pushed many inclusive finance institutions to adopt digital solutions quickly and without enough preparation, especially when it comes to cybersecurity.  While the new financial services and digital channels have indeed contributed to the resilience of populations and institutions, they also bring more risks for institutions and customers as hackers take advantage of increased opportunities. Improving cyber resilience is therefore an urgent priority.

Human and financial resources dedicated to cybersecurity are often limited. We need to collaborate at the sector level by sharing information and best practices in terms of cybersecurity, especially for small and medium-sized institutions. Moreover, in the face of cybercrime without borders, the response must be organized at the regional level, as many countries do not have a solid cybersecurity ecosystem. For example, the African Cybersecurity Resource Center for Financial Inclusion (ACRC ) is a public-private, non-profit consortium funded by the African Fund for Digital Financial Inclusion (ADFI) and supported by the African Development Bank (AfDB) with the aim of fostering the collaboration of the entire African financial sector, including central banks, banks, fintech, MFIs, and microinsurance companies.

As we can see, there are many challenges that require both reforms and resources. Collectively, all stakeholders must support inclusive finance institutions on their path towards digitalization, particularly on complex but essential issues such as the fight against cybercrime, to ensure the resilience of these institutions and their customers.