This post is written by Shital Shah, Enclude’s Global Strategy Group Coordinator.
While Kenya’s mobile money success story continues to garner attention and showcase the promise of digital financial services, a different story lives right next door. In Ethiopia, a contrasting situation exists, given the nation’s history, geography, and infrastructure. The landlocked country has the second largest population in Africa, with most people living in rural areas in an economy driven by agriculture. A large portion of the adult population remains unbanked. In a country with a population of over 80 million, 45 million are of working age and 34 million are under the age of 14. However, 92%-95% of the adult population does not have access to financial services, despite the presence of 18 commercial banks and over 30 microfinance institutions.
In short, daily transactions are expensive and inconvenient for most Ethiopians. While neighbouring countries in East Africa are engaged in mass market efforts toward the digitization of financial services, Ethiopia still grapples with basic infrastructure issues that make building the “rails” of a digital platform challenging. Physical, electronic and financial infrastructure is weak and still developing in most parts of the country, especially in rural areas. At the same time, given the current state of financial services in the country, the need for a more efficient, reliable option is pressing.
Ethiopia is on the cusp of becoming an attractive market for mobile financial services. Its infrastructure is indeed weak, but improving at impressive rates, indicating that the “rails” necessary to build a mobile financial services platform will be largely in place in the coming years. Mobile network coverage is low – under 30% – but increasing rapidly as the state-run monopoly telecom provider, Ethio Telecom, aggressively builds out its network. Financial infrastructure, including ATMs and bank branches, is also still under development, leading to a heavy dependency on cash.
Next, the demographic majority in Ethiopia is young and mostly in rural areas, and a large population remains unbanked, indicating that there is substantial market scope for digital financial services. Finding the right approach to encourage uptake will be critical, and will involve both awareness raising and financial literacy, as well as developing an appropriate set of products that may catalyze latent demand.
Importantly, regulations are evolving but are generally permissive, allowing market players to respond to the changing landscape and build innovative solutions. The National Bank of Ethiopia (NBE) has promoted a bank-backed model that requires any market entrant to work through financial institutions to offer digital services. Third party agents are also allowed, which means that an extensive network may be built up if anyone wishes to move past financial institution staff and recruit retail outlets to serve as a last mile channel. NBE has shown a progressive approach to mobile banking, and is a signatory to the Better Than Cash Alliance.
Efforts to implement mobile financial services exist from all sectors, and the regulatory framework will define how they emerge. A series of efforts are underway, from banks themselves who are starting to roll out mobile banking services, to third party companies who offer a technology platform and other added services for financial insitutions. Even airtime – which was the root driver of the creation of M-PESA – is only now starting to convert into an electronic offering by Ethio Telecom. As NBE continues to clarify the regulatory framework through directives and as infrastructure improves, the market will likely see on the ground implementation happening on a large scale, and with aggressive roll out plans.
Market trends in Ethiopia indicate a dependence on cash, along with the large unbanked population, and a push for financial inclusion. At the same time, market gaps include limited access to financial services, unaffordable services, and a lack of convergence around transactions. There is a real opportunity to transform the way Ethiopians handle cash, conduct their daily operations, and interact with institutions and one another. The digitization of services will require time, to allow for regulations, deepening understanding of market demand, and pilot maturation; innovation, to create platforms, products, and services that respond to the Ethiopian context in an efficient and relevant manner; and catalytic support, from the government, international donor community, and private market players, in order to garner the type of aggressive and coordinated ecosystem development that is required to offer financial services to all Ethiopians.
In coming posts, we will take a closer look at other aspects of the Ethiopian context that will provide further detail about the opportunities, challenges and promise of this emerging market for mobile and branchless banking innovation.