05 Feb 4IR, fintech and the ripe promise for Africa
February 2020 – Africa is at cross-road in its development. Among the many tailwinds, the Fourth Industrial Revolution (4IR) has the potential to propel the socio-economic development of the entire African continent at a meteorite speed. Being the youngest continent, whereby 60% of the 1.25 billion people are under the age of 25, Africa must make the right decisions in the next few years to chart a new path to prosperity. In this process, the continent needs to understand the new technology revolution and how to shape it for the new growth path. But what exactly is this revolution, and why does it matter, especially for Africa?
The promise of 4IR and related offshoots: 4IR describes a phase in modern human history of how new technologies and their cumulative impact on our world with lightning speed. In Africa, 4IR’s potential is limitless and benefits enormous – especially fast-tracking development through leap-frogging. Technological achievements, like artificial intelligence (AI) and the internet of things (IoT), offer a new vision for economic growth, innovation, development and human well-being on the continent. 4IR offers Africa a range of smart solutions to a host of business and societal challenges. From providing better healthcare and basic services to creating more efficient governments, and helping businesses become intelligent enterprises that drive growth and prosperity, giving people the ability to identify themselves, to be able to access government grants and vote in elections to speeding up financial inclusion.
While Africa still suffers from a massive infrastructure deficit, the 4IR’s technologies allows for a start with limited big legacy systems and programmes before rolling them out. Numerous case studies and examples from other developing countries show how the continent can move quickly to new digital approaches that can transform production and public service delivery in critical areas like farming, healthcare, education and finance.
As an example, a hanging fruit for Africa would be to roll out digital identification systems, as India has done with its Aadhaar system, which can play a major role in driving financial inclusion and combating corruption through reduced fraud and leakages in social benefits payment systems. Once people have digital identities, they can do anything from getting a SIM card to arranging a bank account or pension online. Moreover, when citizens are empowered with their personal information and data, they can use this data to get better loans, better skills and ultimately income security. For Africa, developing a high-performing digital financial and broader socio-ecosystem will provide a unique chance to stimulate the economy, create jobs, deepen inclusion and democracy as well as the very meaning of human existence for the estimated 700 million young people.
Risks and anxiety: The socio-economic effects of joblessness are devastating including deskilling of labour, hopelessness and crime. Demographic modelling indicates that Africa’s population is growing rapidly. For optimists this means a “dividend” of young producers and consumers. For pessimists, it means a growing problem of youth unemployment colliding with poor governance and weak institutions. Currently, fewer than 1% of African children leave school with basic coding knowledge. Development partners and stakeholders – big business, governments, NGOs and civil society – must do more to give Africa’s youthful workforce the skills needed for the fast evolving digital economy.
Without adequate preparation and retooling, new technologies threaten to amplify current inequalities, both within and between countries. Mining and agriculture – typically large employers in most African countries – may become more characterized by ‘precision processing’. That means driverless trucks and robots, all fully digitized, conducting non-invasive mining and smart cropping. As an example, the nearly 500 000 people employed in South African mining alone may lose their jobs. Rising inequality and income stagnation in a country like South Africa is also socially problematic as these may ignite historical resentments and a sense of injustice. Moreover, unequal societies tend to be more violent, have higher incarceration rates, and have lower levels of life expectancy than their more equal counterparts as the contrast between the United States and Norway shows. So how can African countries benefit this revolution while mitigating its nascent risks?
Opportunities, the future and fintech in development: African governments should be proactive in adopting new technologies while working to protect those being left behind by the 4IR. It is critical to create institutions that promote widespread innovation as those that mitigate risks. The recent report, titled Potential of the Fourth Industrial Revolution in Africa, launched the 2019 Africa Investment Forum by the AfDB and its partners, shows significant uptake in Africa of the Internet of Things – a market projected to reach $12.6 billion by 2021 – and strong investment growth in new technology-led areas of Artificial Intelligence (AI), Big Data Analytics, blockchain, additive manufacturing and drones. The wide ranging and transformative effects of these new technologies will be felt in sectors such as agriculture, manufacturing, health, education, mining, financial services and the way government can rejuvenate the social contract and democracy.
With Africa’s population project at 2.4-billion people by 2050, it is clear a fundamentally new approach to development from African leaders and partners across the board must be adopted to address current gaps (social, technological and political) and build the foundation required to continue pushing the continent forward and create the inclusive growth and a shared future for all. Indeed, job creation must be the core of this approach, and the fourth industrial revolution (4IR) – underpinned by forward-looking trade agreements and support systems for the private sector – has the potential to supply much of that need. Entrepreneurship and SMEs are the backbone of any economic success story. The continent needs to ensure particularly SMEs, and the private sector in general, have access to the requisite finance and related economic services to drive the growth and structural transformation agenda espoused in the SDGs and Agenda 2063. The private sector should be ready to tap into benefits of the African Continental Free Trade Area (AfCFTA) and its single market expected to generate a combined GDP of more than $3.4-trillion and benefit the 1.2 billion people of the continent.
Digitization is changing the world. From the types of goods and services produced, how they are accessed, and how people communicate with one another, to how people access excellent financial services via e-banking platforms, 4IR is making it possible for everyone on the continent to be included. While poorer households in Africa still have limited access and low sustained usage of financial services, fintech provides an opportunity to promote the financial inclusion of these low-income households in developing countries, whilst recognizing the drivers of financial inclusion. Several studies show that greater financial inclusion can be a catalyst for eradicating poverty, and for developing the small business sector. Fintech must include both access and usage of financial services focusing on affordability, appropriateness, financial literacy, regulations and fair competition.
There is need to widen human understanding of what is meant by financial inclusion and its criticality in development of weaker economies. This is because financial inclusion statistics currently tend to exclude such a key factor of usage, focusing predominantly on consumers’ access to financial products. In countries such as Kenya or South Africa, the rates of access to financial facilities are amongst the highest in emerging economies, but this obviates other severe platform/infrastructural challenges experienced by customer’s in these countries, leading to low rates of usage and a dependence on cash. Despite high rates of access to a banking account or mobile-wallet facility, rates of poverty have remained high, and the expected benefits of financial services for the low-income segment have not materialized. The drivers of financial inclusion differ depending on the local context requiring policy makers, regulators and innovators to have a clear understanding of the needs of their respective markets (https://t20japan.org/wp-content/uploads/2019/03/t20-japan-tf2-10-fintech-strategies-financial-inclusion-sub-saharan-africa.pdf). From this vantage point, the evolution of fintech and related digital financial services will create more competitive environments as well as promote the expansion of product offerings – including the quality and diversity of mobile financial services. Indeed, financial inclusion on the African continent has grown by leap and bounds thus obtaining extraordinary results in recent years.
The huge interest in technological development in Africa has led to extremely innovative experiments and, at times, shocking solutions for the traditional banking system, which often struggles to keep up with such rapid changes including requisite regulations. The World Bank’s Global Financial Inclusion Database (https://databank.worldbank.org/reports.aspx?source=1228) shows a growing rate of financial inclusion in Africa. As an example, the number of adults registered with an account in the three-year period between 2011 and 2014 rose from 23.2% to 34.2%. In 2017, 42.6% of all adults in sub-Saharan Africa had an account with a banking or financial institution. Of the adults having an account in 2017, 60.3% had a secondary or higher education qualification, highlighting that a relationship between financial inclusion and the level of education exists. The World Bank further estimated that, in 2017, 45.7% of the sub-Sahara African population had requested a loan.
The above figures were largely a result of the adoption of information technology in the financial services, making it possible, among others, for online purchases and to obtain and receive credit without physically going to bank branches, which often are very distant and expensive in transport costs. M-Pesa, for instance, has given low-income Kenyan workers the ability to send money instantly and without the risks of physical transportation. For the population in the poorest and rural areas, the fintech revolution translates into more opportunities to get out of their disadvantaged condition and joining into an economically more productive population, freer and equal. Technology will continue to redefine the delivery of financial services in Africa for years to come. The obvious thing to do is for government to create the ecosystem for financial growth.
 See Villasenor, J. D., West, D. M., & Lewis, R. J. (2016). The 2016 Brookings Financial and Digital Inclusion Project Report: Advancing Equitable Financial Ecosystems. Washington DC. Retrieved from https://www.brookings.edu/wpcontent/uploads/2016/08/fdip_20160816_project_report.pdf