Digital Financial Services: The Next Frontier For Financial Inclusion In The Middle East

BY ELISSA MCCARTER-LABORDE

This article was originally published on SAIS Perspectives


Elissa McCarter-LaBorde, Chief Executive Officer of Vitas Group, is Vice President of Development Finance for Global Communities, where over the last 12 years she has built the technical department that manages Global Communities’ microfinance, SME, and housing finance operations. Ms. LaBorde has 18 years' experience as a microfinance practitioner. Prior to Global Communities, she spent seven years in the field, having started up and managed two microfinance institutions in Armenia and Turkey, and serving as technical advisor to more than a dozen MFIs in Africa, the Middle East, and Eastern Europe. Ms. LaBorde has authored two books on microfinance mergers and continues to publish articles and opinion pieces that span a number of topics related to financial inclusion. She has a Master’s degree from Georgetown University School of Foreign Service and Institut d’Etudes Politiques de Paris, and currently serves as adjunct professor of a Master’s level course on financial inclusion at Johns Hopkins School of Advanced International Studies.


Photo by Staff Sgt. James SelesnickThere is growing enthusiasm about the positive disruption that digital financial services (DFS) can bring to the financial inclusion industry. For decades, the high cost, people intensive, high-touch nature of microfinance through brick-and-mortar branches has been a major obstacle to both accelerating outreach and lowering costs of financial services for the poor.

Today, low-income communities are increasingly gaining access to digital services by using mobile phones, reloadable cards, local agents, and other point-of-sale methods to manage their money.  The best known examples are in Kenya, where MPesa has revolutionized the way poor people remit money to family members across the country, and where MShwari enables them to save and access small amounts of credit linked to savings instantly via their mobile phone.

While many of the solutions we see today help manage payments, there is still much to be done to enable DFS to go further and allow for a more robust set of services that include loans, savings, insurance and cross-border remittances.  However, despite the regulatory barriers, lack of interoperability of different solutions and systems and the still significant high-touch required for such services makes them difficult to truly scale, many in the industry still believe that these solutions are the way of the future.   

But one disruption caused by digitization is often overlooked: the promise of revolutionizing the slow back-office support processes of banks and financial service providers. This prospect might be less exciting, but could be more of a game changer since it could easily cut time and cost by more than half. In other words, financial technology companies are exploding with new ways to completely digitize customer acquisition and account management.

The combination of digital products, channels and a revolutionized back-office administrative process to quickly and conveniently deliver what customers need all signify the true disruption the industry has been waiting for. 

We are beginning to see this play out in the Middle East, where I have spent the better part of a decade building a network of microfinance lenders known as Vitas Group.  Founded by Global Communities, a global development non-profit organization that operates in 27 countries, Vitas lends to small enterprises in Iraq, Jordan, Lebanon and Palestine. We currently see the Middle East undergoing a huge technological transformation that could put it on the verge of a massive digital disruption. If governments and private institutions play it right, microfinance could be the next frontier for digital solutions in the region.

As highlighted in the recent McKinsey (2016) report, countries like Bahrain, UAE, and Qatar are leading the digital consumer charge, with high smartphone adoption rates and social media use. Not only does digitization improve efficiency, it also gives individuals access to accounts, creates an electronic record for businesses and offers new business opportunities. Moreover, digitization helps governments distribute cash safety net payments, collect taxes and tariffs, and save money.  

Most recently, as a result of the Syrian refugee crisis, there is a concerted effort to apply digital payment solutions for humanitarian purposes. CGAP, MasterCard, Visa and Gates Foundation are among the many companies interested in exploring how digital accounts set up for refugees could serve as an on-ramp for other financial services over time. These include savings and loans to not only accelerate financial inclusion among refugee populations more broadly, but also create digital identities that form a financial history (think credit score) that can travel with them wherever they go.  In this way, refugees and migrants would be “on the map” and thus more viable customers to financial institutions in new countries.

Another positive sign for digital financial services in the Middle East is its youth population.  According to the Economist Corporate Network report (2016), more than 60% of the region’s population is under 30. These consumers are tech-savvy and ready to experiment with unconventional DFS products that promise speed and convenience. But even though consumers may be ready, governments, private institutions, and businesses have struggled to keep up with the changing environment.

The Middle East, like many emerging economies, is a heavily cash-centered society.  This will gradually change, but trust needs to be built – which means enhancing security and privacy.  Furthermore, digital solutions also have to solve a big enough problem for consumers to start using them in order for the significant investment in infrastructure and agent networks to pay off.  Customers’ use of digital payment platforms will be driven by three primary factors:

Infrastructure: The lack of adequate bank branch infrastructure or inconvenience in hours or locations in a country encourages clients to make payments using digital technology. If branches are too far from where they live or do business, it prompts them to use an alternative method.  While Jordan and Lebanon are fairly well banked and are generally small in geographical distance from one town to another, places like Egypt and Iraq provide an opportune ground for digital financial services to take hold.

Opportunity cost: The transactional cost of leaving one’s business to travel to a branch or the post office to make payments means spending time and money, at the expense of not running one’s business.  Furthermore, if sending money or making payments involves significant transaction fees as a percentage of the amount, customers will look for other, more affordable options.  A way to demonstrate the savings therefore needs to be devised to incentivize customers to use digital payments.  

Security: In some Middle Eastern societies, leaving your business or home and traveling to a bank or post office is not safe, and time spent commuting is considerably greater. Unfavorable safety and security conditions, therefore, create a desire for customers to pursue easier options like using digital technology. This is particularly the case in Iraq, where Vitas disburses more than $11 million per month to customers, but often has to close branches temporarily or restrict movements to adapt to the fluid security environment.

In the long-term, financial inclusion in this region, like in others, can be accelerated through DFS. Meanwhile, in the short run, governments will have to join hands with private institutions to create and implement more favorable policy and regulatory frameworks that will encourage and fund innovation while nurturing talent in the digital sector. We see huge potential as younger generations are poised to embrace smart technologies. At the same time, factors that strain public resources such as rising unemployment, persistent social and economic inequalities, and an influx of refugees, make it imperative that we seize every opportunity to create greater economic opportunity for vulnerable populations.