Part Two: Efficient Flow of Money Through Trade in Africa – Mobile Financial Services; A Necessity for Small and Medium Enterprises
In my previous article of the trade series we examined the potential role of a Ministry of Integration in facilitating the effective implementation of the African Continental Free Trade Area (AfCFTA). Now, as we turn our attention to the efficient flow of money through trade in Africa, it becomes evident that mobile financial services have emerged as a necessity, particularly in markets dominated by small and medium-scale traders and enterprises. This part of the series explores how mobile financial services can drive interoperability and accelerate intra-African trade.
Who is a Small and Medium Enterprise and Why Should Africa Care?
Small and Medium scale enterprises (SMEs) are crucial towards contributing to Africa’s inclusive socio-economic development and growth. This is because SMEs are generating work opportunities, income, and wealth creation, and thereby, enhancing poverty reduction. Notably, there is no standard international definition of small and medium-scale enterprise (SME) that exists. SMEs are variably defined in the legislation across countries. This is because the dimension “small” and “medium” of a firm is dependent to the size of the domestic economy.
The Organisation for Economic Co-operation and Development (OECD) refers to SMEs as companies that are employing up to 249 people. Micro employs between 1 to 9 people, small refers to hiring 10 to 49 people, and medium ranges between 50 and 249 people. This consideration and definition can enable the best comparability given the varying data collection practices across countries, as various countries are using different conventions.
SMEs account for approximately 80% of jobs in Africa and this makes SMEs a significant mechanism for socio-economic growth. For example, within Sub-Saharan Africa, there are approximately 44 million SMEs. In addition, the African Continental Free Trade Area (AfCFTA) is promising to expand access to regional and continental-wide export markets for SMEs. Further to this, the Sustainable Development Goals and the African Union acknowledge that Africa’s drivers of economic growth and long-term sustainability for emerging markets are dependent on the potential of the effective development of the SME business model.
The presence of SMEs in all sectors of the African economy signifies their vital role in steering the socio-economic development and growth of the African continent. In the context of Africa, SMEs are essentially contributing towards job creation and employment for a large populace. For example, up to 90% of the population in African countries such as Uganda, Ethiopia, and Kenya are employed within SMEs. This is because SMEs are essentially enabling invention, innovation, and the creation of new ideas and technologies. Fundamentally, SMEs are providing for pre-incubation, incubation, introduction, and commercialization of innovation and technology into the market. This provides a platform for creating and testing new products before they can be upscaled and disseminated into larger industries through macroeconomic systems.
The Necessity of Mobile Financial Services in African Markets
Africa has witnessed a remarkable surge in mobile phone adoption over the past decade. According to the GSMA, over 45% of the population in Sub-Saharan Africa subscribes to mobile services, with more than 500 million unique mobile subscribers across the continent. This widespread mobile penetration has laid a robust foundation for the proliferation of mobile financial services.
According to the World Bank, Mobile financial services have significantly enhanced financial inclusion across Africa. Traditional banking infrastructure is often limited, especially in rural areas, but mobile money platforms have bridged this gap by providing financial services to the unbanked population. Services like M-PESA Africa in Kenya, MoMo from MTN in Ghana, and Orange Money in West Africa have transformed the financial landscape, enabling millions to access banking services without needing a traditional bank account.
As noted by the World Bank, “mobile money services have brought financial services to millions of previously unbanked individuals, fostering economic participation and inclusion.“
SMEs are the backbone of African economies, contributing significantly to employment and GDP. However, these enterprises often face challenges related to accessing finance, managing transactions, and expanding their market reach. Mobile financial services offer a solution by providing secure, efficient, and accessible financial tools. With mobile money, SMEs can manage their finances, receive payments, and pay suppliers with ease, thereby streamlining their operations and reducing transaction costs.
Driving Mobile Interoperability for Intra-African Trade
Harmonizing Regulatory Frameworks: To accelerate mobile interoperability and foster intra-African trade, harmonizing regulatory frameworks across the continent is crucial. This involves standardizing regulations related to mobile financial services, ensuring cross-border compatibility, and fostering collaboration between central banks and financial regulators.
The African Union’s Digital Transformation Strategy emphasizes the need for “a harmonized regulatory environment that promotes cross-border mobile financial services and facilitates seamless digital transactions.“
Interoperable Mobile Money Platforms: Developing interoperable mobile money platforms is a key step towards facilitating seamless transactions across African borders. Interoperability allows users of different mobile money services to transact with each other, breaking down barriers and fostering a more integrated market. Successful examples include the East African Community (EAC), where mobile money interoperability has been implemented, allowing cross-border transactions between Kenya, Tanzania, Rwanda, and Uganda.
Infrastructure Development: Robust digital infrastructure is essential for the effective functioning of mobile financial services. This includes reliable internet connectivity, secure data storage, and efficient payment gateways. Investing in digital infrastructure will not only support mobile financial services but also enhance the overall digital economy, creating a conducive environment for intra-African trade.
The IFC – International Finance Corporation highlights in its Digital Opportunitied for African Businesses Report that “investments in digital infrastructure are critical for leveraging mobile financial services and driving economic growth.”
Public-Private Partnerships: Public-private partnerships (PPPs) can play a significant role in advancing mobile interoperability. Governments, mobile network operators, financial institutions, and technology companies need to collaborate to develop and implement interoperable mobile money systems. PPPs can facilitate the sharing of expertise, resources, and infrastructure, accelerating the deployment of interoperable solutions.
Capacity Building and Awareness: Educating SMEs and the general public about the benefits and usage of mobile financial services is vital. Capacity-building initiatives can help businesses understand how to leverage mobile money for their operations, while awareness campaigns can increase the adoption of these services. Training programs and workshops can equip SMEs with the knowledge and skills to effectively use mobile financial tools.
Economic Benefits of Mobile Financial Services for Intra-African Trade
Reduced Transaction Costs: Mobile financial services can significantly reduce transaction costs associated with cross-border trade. Traditional banking transactions often involve high fees and lengthy processing times, which can be a barrier for SMEs. Mobile money platforms, on the other hand, offer quicker, cheaper, and more transparent transaction processes, making it easier for businesses to trade across borders.
A study by the Brookings Institution found that “mobile money services can reduce transaction costs by up to 90%, making cross-border trade more accessible and affordable for SMEs.“
Increased Trade Volume: By facilitating easier and more efficient transactions, mobile financial services can boost trade volume within the AfCFTA. SMEs can engage in more trade activities without the constraints of traditional banking systems, leading to increased economic activity and growth. Enhanced trade volumes contribute to GDP growth, job creation, and poverty reduction.
Enhanced Market Access: Mobile financial services enable SMEs to reach new markets across the continent. With interoperable systems, businesses can seamlessly transact with partners and customers in different countries, expanding their market reach and customer base. This increased market access can drive business growth and economic diversification.
Financial Inclusion and Economic Empowerment: By bringing financial services to the unbanked and underbanked populations, mobile money promotes financial inclusion and economic empowerment. This inclusivity allows more people to participate in economic activities, enhancing overall economic resilience and reducing inequality. Mobile financial services can empower women and youth, who are often disproportionately excluded from traditional banking systems.
Innovation and Competitiveness: The adoption of mobile financial services can drive innovation and competitiveness among African businesses. As SMEs leverage digital tools to streamline their operations, they can innovate new products and services, improve efficiency, and enhance customer satisfaction. This competitive edge can position African businesses to compete effectively in global markets.
The efficient flow of money through trade in Africa is crucial for the success of the AfCFTA and the continent’s economic prosperity. Mobile financial services have emerged as a necessity, particularly for SMEs that dominate African markets and providing them with accessible, efficient, and secure financial tools, mobile money platforms can drive interoperability and accelerate intra-African trade.
More importantly, to realize its full potential of mobile financial services, it is essential to harmonize regulatory frameworks, develop interoperable platforms, invest in digital infrastructure, foster public-private partnerships, and build capacity among SMEs.
As Africa continues its journey towards greater economic integration and prosperity, mobile financial services will play a pivotal role in shaping a more connected and vibrant continental economy. The advancements discussed here align with the goals of the AfCFTA and underscore the importance of leveraging digital solutions to drive economic growth and development across Africa.
