On a sunny January afternoon, riders with bikes branded in green with matching tops and helmets are crisscrossing the streets of Kigali doing home and office deliveries. It’s a new online food ordering and delivery platform launched in Rwanda to fill the gap left by Jumia Foods which shut operations in Kigali, Rwanda in December 2019. ‘Vuba Vuba’s platform aims to help businesses, restaurants, hotels and supermarkets increase their sales as well as their marketing efforts through the mobile app that also handles and settles payments with the vendors. In rural Rwanda, Rwamagana district Mutesi a 28-year-old mother of two, who is also a small scale farmer is part of a VSLA (Village savings and loan associations) and through it is able to open a bank account save, pay school fees, carry out her farming activities all mostly from her mobile phone. Although she is disabled, a credit from the VSLA has made it possible to pay for casual labour during harvesting and planting avoiding disruptions in the production process from cashflow challenges thereby helping her and other members achieve economic security. Consolée, a new mother smiles as a text comes in on her mobile money service, it is confirming a receipt of cash from Ingoboka cash insurance. It will be able to cover her medical bills after her caesarean delivery at the local hospital. All these are part of changes to the financial services sector and a budding fintech ecosystem driving inclusive finance and heralding a new era in service delivery and inclusive finance.
Fast forward to the 18th of March 2020 the National Bank of Rwanda announced various measures meant to mitigate the negative economic impact as a result of the COVID-19 pandemic. This was a pre-cursor for an impending lockdown that followed a few weeks down the line. These are part of a social distancing approach that is crucially important in reducing the spread of coronavirus and thereby helping to “flatten the curve” resulting from new infections in a bid to make it possible for health facilities to cope with the increase in activity. In hindsight, the move by the Government of Rwanda led by the National Bank with some of its partners including Access to Finance Rwanda (AFR), to drive the economy towards mobile commerce and digital financial services would not have come at a better time. It is now poised to help cushion the country against the unintended consequences of an economic shutdown.
The COVID-19 outbreak is a tragedy that will have widespread and long-lasting implications for humanity and the global economy. The rapid and global spread of the deadly new coronavirus caught households, business leaders, investors and policymakers off guard with a potential for disruptive economic consequences.
The History of Global Outbreaks and World Economy
Plagues and epidemics have ravaged humanity throughout its existence and have always been inevitably co-related with economic progress. The Black Death carried off one-third to two-thirds of the population of Europe, it took them a while to recover. The “Spanish” flu of 1918 was one of the deadliest pandemics in human history, a third of the world’s population was infected, 50 to 100 million people died and the global economy shrank by 5%. According to a recent article by the economist “Interconnected trade networks and teeming cities have made societies both richer and more vulnerable, from the empires of antiquity to the integrated global economy of the present”. As history indicates the same trade links which spread a pathogen can themselves be undone by its effects. During the Roman Empire, a high degree of specialization and trade lifted incomes to high levels however the same links facilitated the spread of the disease.
In a recent article by The Wall Street Journal “Global Outbreaks Are Likely to Increase”, Epidemics of infectious diseases have become a regular part of the global landscape in the past quarter-century, partially due to economic trends including urbanization, globalization and increased human consumption of animal proteins as society becomes more prosperous. It’s postulated that an old rule of thumb in pandemic research was that such events happened about three times every century. And as a highlight so far this century, the world has already confronted an array of viral scares, including SARS in 2002 and 2003, the Swine Flu (also known as H1N1) in 2009, MERS in 2012, Ebola in 2014 to 2016, Zika in 2015 and Dengue fever in 2016.
Different experiences with pandemics can be an indicator of future economic divergence, historically these have been shown to guide the direction societies take in charting their way to prosperity. For the past few years use of digital applications has been at the top of the list of technologies being adopted by individuals and organizations however the coronavirus pandemic is pushing digital transformation to the front of the line. The value of digital channels, products and operations is immediately obvious to companies everywhere right now as it may force firms to embrace new technologies in order to operate while warehouses and offices are empty, with lasting effects on growth and productivity.
Embracing Digital Financial Solutions - The Case of Rwanda
The non-bank financial sector, particularly mobile money, has been the key driver of formal inclusion.
As they say, "necessity is the mother of invention," and coronavirus (COVID-19) is forcing many people around the world to rethink how they carry on activities in their daily lives from work, schooling and entertainment. This is becoming even more relevant and an everyday fixture in response to travel bans, school closures and avoiding gathering in large crowds as part of social distancing. Social distancing is key to limiting the spread of the virus and in response, many people are turning to digital tools to maintain a semblance of normality. Rwanda’s experience has not been very different from its neighbors, however, the growth in payment digitization is mainly due to numerous policy commitments, including the goals of the Government to shift to a cashless economy and to achieve a nationwide formal financial inclusion level of 100 per cent by 2020. With those goals in mind, the Government has joined forces with Access to Finance Rwanda (AFR) and other partners to formulate national strategies and implement regulatory reforms to foster payment digitization and financial inclusion.
These new technologies and innovative business models are bringing about a transformation of the financial services industry in Sub-Saharan Africa, with low-income people, farmers and small-scale entrepreneurs getting an opportunity to be financially included while at the same time being involved in the economic development of their countries. These Innovations in digital technology have created new and exciting opportunities to reach unbanked and underbanked low-income customers in emerging markets as well as developed countries. Traditionally, these customer segments have been considered too risky and too poor to be of interest to banks and insurance companies however this is changing. Mobile wallets and mobile money transfers, peer-to-peer and other alternative lending platforms, pay-as-you-go asset finance and digital micro-credit are examples of recent innovations that are reaching hundreds of millions of consumers and small businesses. These innovations are radically changing the financial services landscape around the globe.
As the effects of the COVID-19 pandemic continue to reverberate, banks and other players in the financial services sector have a role to play as systemic stabilizers. The measures prescribed by BNR (The National Bank of Rwanda) are expected to help the economy to cope with the adverse effects from coronavirus pandemic whose impacts are likely to be felt for a while to come. Part of the conditions is to ease the loan repayment challenges through a restructuring of loans by banks for borrowers facing cash flow challenges as a result of the pandemic. Additionally, the Central Bank increased its liquidity support to the banking sector through the introduction of an extended lending facility, reviewing of the existing treasury bonds rediscounting window and the reduction of the reserve requirement ratio by 100bps from 5% to 4%, all these were in addition to the existing facilities.
However, the more exciting change was the policy support around encouraging the use of digital channels and contactless mobile payments. In cases of a global health pandemic spread by human contact as we are experiencing now, the dominance of mobile money in the country provides a policy tool to encourage digital versus physical contact on a wide scale through financial transactions. And in addressing these challenges, all charges for transfers between bank accounts and mobile wallets for both pull and push services were dropped. All mobile money transfers will also attract no charges, as well as zero merchant fees for all contactless point of sale transactions. The limit for mobile money wallets was also increased from FRW 500,000 ($ 542) to FRW 1,500,000 ($1,628) for Tier 2 customers and from FRW 1,000,000 ($1,085) to FRW 4,000,000 ($4,343) for Tier II customers. The above changes will be in effect for a period of 90 days.
Rwanda has 4,700,987 mobile payment subscribers with 378.8 million transactions as at the end of 2019 according to the National Bank of Rwanda’s monetary policy and financial stability statement released on 25th Feb 2020. The country’s mobile penetration is reported at 78.8% at the end of 2018. Banks offer platforms for Internet banking (via the bank’s online website) and mobile banking (via the bank’s mobile app or Unstructured Supplementary Service Data [USSD]) to their customers. According to a report by UNCDF as at the end of 2017, there were 52,020 Internet banking users in the country, who collectively performed 339,522 transactions amounting to RFW 1.42 trillion (US$1.56 billion); meanwhile, 1,158,944 mobile banking users were performing 3,906,642 transactions totalling RFW 36 billion (US$40 million). The low number of subscribers and frequency of transactions, in comparison to the transacted amounts, suggests that Internet banking transactions are predominantly performed by businesses, while most mobile banking transactions are individual payments. Still, mobile money constitutes the largest proportion of transactions initiated by digital instruments in Rwanda. The number of registered mobile money customers at the end of 2017 was 9,079,983. During 2017, the mobile money industry facilitated over 251 million transactions worth RF1.38 trillion (US$1.52 billion).
Another interesting phenomenon has been the entry of Fintech start-ups into the landscape as payment aggregators with infrastructure that supports card-based and mobile payments. These are offering competitive services including bill payments, airtime top-ups and merchant payments. The change in the fintech start-up landscape is positively correlated with regulatory reforms in the payment sector and the launch of ICT-focused government policies and they have increased from 5 in 2010 to 44 in 2019 a 780% growth according to a UNCDF report. The Fintechs can broadly split into 1) CORE Fintechs that provide financial services such as payments/remittances, lending/financing, savings and insurance products directly to end-users and 2) ENABLING Fintechs that provide technology/business solutions primarily to financial institutions to enable the delivery of financial services. They do not offer their own financial products and services to end-users.
Because of the efforts highlighted above, the proportion of the adult population that is formally financially included increased from 42 per cent in 2012 to 68 per cent in 2016, while total financial inclusion (both formal and informal) stood at 89 per cent in 2016. The non-bank financial sector, particularly mobile money, has been the key driver of formal inclusion. The number of mobile money customers grew eight times, from about 1.4 million subscribers in 2012 to 11.1 million subscribers in 2018; meanwhile, the volume of mobile money transactions grew from 22 million to nearly 300 million and the value from RFW 162 billion (US$178 million) to almost RFW 2 trillion (US$2 billion). Moreover, the use of retail e-payments grew from 3 per cent of the gross domestic product in 2011 to nearly 27 per cent in 2017. The country is aiming to reach 80 per cent by 2024.
While the global adaptation to COVID-19 will take much longer, perhaps several years, each country’s financial services industry will need to make sizable adaptations to their operations in order to survive without permanent impairment to their business crises of this magnitude. Financial services are the lifeblood of an economy, enabling households and businesses alike to save, invest, and protect themselves against risk. The effects of the Covid-19 pandemic seem to have many layers unfolding in front of our eyes as our normal way of life gets disrupted and political leaders, financial institutions, and global governance structures are being severely tested. However, one thing that is clear, the private sector has a huge role to play as Governments, Central Banks and the WHO will not defeat the coronavirus alone. From a strategic perspective, businesses that can shift technology capacity and investments to digital platforms will mitigate the impact of the outbreak and keep their companies running smoothly now and over the long term.
Despite the challenges that come with this pandemic, it also presents an opportunity: more sophisticated and flexible use of technology, less polarization in the midst of these unprecedented changes. Digital finance offers the perfect solution; individuals and companies can have access to payments, savings, and credit products without ever stepping into a banking hall. Digitization turns a smartphone into a wallet, a chequebook, a bank branch, and an accounting ledger, all in one. The gradual shift in consumer attitude and growing demand for anytime-anywhere access to services has characterized some of the changes in the banking sector in the recent past and will have even more profound impact on the industry business model.
The value of digital channels, products and operations is immediately obvious to companies everywhere at the moment. It is also a wake-up call for organizations that have placed too much focus on daily operational needs at the expense of investing in digital business and long-term resilience. Businesses that can shift technology capacity and investments to digital platforms will mitigate the impact of the outbreak and keep their companies running smoothly now, and over the long term. Those companies that are able to use technology well to keep going and rethink their business model for the future by fast-tracking digital transformation will be ones ahead of their competition. There will be a need for financial institutions to reach out and diversify from the traditional models of operation towards technology-driven service provision and one such approach is through collaboration between microfinance banks and Telcos in rolling out products and services that boost financing of Micro Small and Medium Enterprises (MSMEs. This is happening to some extent, however, the efforts should increase so as to foster the development of more innovative products.
As social distancing becomes the new norm and people stay at home to contain the virus, their unmet needs for daily supplies will most likely increase their digital banking or online shopping. Use of contactless technology and digital wallets will also increase as these tools can keep consumers away from devices that can be potential platforms for the new coronavirus. The lack of friction and physical contact in digital payments not only accelerates commerce but will also keep the economy moving during these challenging times.
These showcase opportunities and how the financial sector players can adapt their business models during the crisis in order to continue serving their customers or bank new ones. The SME’s are the economic engine and their contribution is needed the most. Digital financial services have re-defined service delivery within the industry through offering even greater access to mainstream banking services, especially to the underbanked.
Access to Finance Rwanda’s (AFR’s) core is to stimulate and continue supporting the development of the financial sector in Rwanda through removing systemic barriers that hinder access to financial services by putting the low-income people particularly the rural poor and women at the centre of its interventions. AFR supports the development and provision of financial services including savings, credit, insurance, payments and remittances.
We are all collectively on a journey and we are not sure how long the crisis will persist, but it carries with it a disruption of our way of life, both economically and socially. The path ahead is a precarious one driven by uncertainty from the pandemic combined with a unique blend of resultant shocks to both supply and demand in the global economy. Building resilience by adopting new business models in the private sector will be key for our economies to survive in the long term.
There exist enough opportunities in all sectors of the market brought about by these forms of unprecedented disruption. They have the potential to give rise to new markets for households and businesses to manage their day to day operations and deal with risk as they contribute to inclusive economic development. A good number of our micro, small and medium enterprises are operating under the informal sector and may be the hardest hit by the disruption caused by the pandemic. However, giving customers a choice in performing financial transactions through new and innovative ways assures them continued access to essential goods and services and in effect gives a lifeline to our vulnerable groups.
These shifts in customer needs and requirements in line with changes in the operating environment underpin the need for the financial services sector to diversify away from the traditional models of operation towards being technology-driven thus serving their economies and markets better.
With a background in strategy and development finance, he has more than 15 years in Banking and finance. He has great interest in how inclusive capitalism and investment can drive growth in developing economies while contributing positively to society.