Why are some African countries more advanced in mobile phone penetration and mobile banking?

The mobile phone revolution has changed the lives of many Africans, providing not just communications but also basic financial access in the forms of phone-based money transfer and storage. In essence, the substantial penetration rates of mobile telephony that are transforming cell phones into pocket-banks in Africa is providing opportunities for countries on the continent to increase affordable and cost-effective means of bringing on board a large chunk of the population that hitherto has been excluded from formal financial services for decades. This transformation has been appealing not only for banks and Micro Financial Institutions (MFIs) but also to financial regulators and governments, as well as development partners who are providing support to ameliorate the lives of Africans via sustained growth and poverty reduction policies. The Economist (2008) described the phenomenon with the following sentence: “a device that was a yuppie toy not so long ago has now become a potent for economic development in the world’s poorest countries”. Consistent with Aker & Mbiti (2010, 2008), at the Connect Africa summit in 2007, Paul Kagame president of Rwanda asserted: “in ten short years, what was once an object of luxury and privilege, the mobile phone has become a basic necessity in Africa”. These perceptions have been investigated and we have found mobile phone penetration to mitigate African inequality, due to its positive correlation with informal financial sector development. 

            Against this background, while mobile banking has grown at a breathtaking pace in certain countries (e.g Kenya), most African nations still need to take full advantage of the many benefits procured by these mobile banking services. Hence, a current policy challenge is to know why some African countries are more advanced in mobile phone penetration and mobile banking than others. I am currently working on this issue and I will share with you the results as usual.

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[1] “Relative to the spread of some other technologies that have been introduced in sub-Saharan Africa-improved seeds, solar cook stoves and agricultural technology-mobile phones adoption has occurred at a staggering rate on the continent. Yet few empirical economic studies have examined mobile phone adoption. This could be due to a variety of factors, including unreliable or nonexistent data on individual level adoption (leading to measurement error)…” Aker & Mbiti (2010, 225).

[2] As far as we have reviewed, one of the most exhaustive accounts of the ‘mobile phone’ development literature concludes: “Existing empirical evidence on the effect of mobile phone coverage and services suggest that the mobile phone can potentially serve as a tool for economic development in Africa. But this evidence while certainly encouraging remains limited” (Aker & Mbiti, 2010, 224).

URBANIZATION and HOUSING FINANCE DEVELOPMENT: Fresh empirical based implications for African and Asian countries

In the context of a less developed mortgage market and relative high and stable urban growth, African Countries key challenge is to make its growth more inclusive, sustainable and able to reduce poverty and inequality through finance development (Nguena & Tsafack Nanfosso, 2014abc). Africa has the highest rate of urbanization but the least developed housing finance in the world. UN Habitat reports that 46 African cities are now larger than one million people and every day for the coming fifteen years, Africa’s cities will have to accommodate an extra 40.000 people. Over the next 25 years, more and more people will be added to the number of urban dwellers in Africa. This implies a growth in the demand for housing that Africa countries will face and the need to address this by developing a housing finance system. This new challenge is emerging in a context of already widespread poverty and inequality in cities, with a lot of people living in slums without adequate basic services.    

As a result of our literature review, there are a few specific empirical studies about the direct impact of housing finance on poverty reduction through shared prosperity especially in SSA. However there are several empirical research papers focusing on the impact of housing finance on job / economic growth. Accordingly, housing finance impacts economic growth through the following ways: Reducing Cost of (Capital Dubel, 2007; Hongyu, Park & Siqi, 2002; Freire et al., 2006; Chen & Zhu, 2008); increasing savings (Buckley, 1996); increasing Tax Revenues (Hangen & Northrup, 2010; Wardrip, Williams & Hauge, 2011); and increasing investment on education and reduce vulnerability for the poor and increasing financial deepening and financial inclusion (Jacoby & Skoufias, 1997; Demirguc-Kunt & Levine, 2004; Singh & Huang, 2011; Beck).

Considering this well documented literature on positive externalities of housing finance development, we intend here to answer the following questions with a worldwide comparative approach: What is the state and forecast of housing demand in Africa in comparison to other region? Is there a link between housing demand and urbanization? What is the gap to fill in terms of housing finance system development to respond to this demand? 

1. Characteristics and evolution of housing finance demand in Africa: a comparative approach

Figure 1: Annual housing demand evolution in SSA for 1965-2050 (projection) period.

Source: Authors calculation using the World Bank data base on housing finance; Badev et al., 2014: “Housing finance across countries: New data and analysis”.

We can see from the figure 1 on this left side that annual housing demand is increasing since urbanisation rate is increasing while the household size is practically stable around 5 peoples. The ownership rate is therefore lower than it should be. This situation could be explained by several reasons: Firstly, the fact that the housing sector financial system is centralized and State-based; indeed this situation is at the base of the development of social housing which tend to encourage household to become renter and landlord than owner. Secondly, banks in the region are quite risk-averse, making mortgages harder and more expensive to get. Thirdly, governments do not encourage this sector. For example, unlike high-homeownership countries like in developed countries, African governments don’t let homeowners deduct mortgage-interest payments from their taxes. Without that deduction, the benefits of owning and renting are more evenly balanced.

The figures 2 & 3 bellow highlights the fact that by 2050, African countries will face a higher rate of housing demand in comparison with other regions in the world. Indeed after Asia, Africa will have 18% projected housing demand.

 Figure 2: Projected housing demand by region (2015-2050)  Figure 3: Projected housing demand by income group

Source: Authors calculation using the World Bank data base on housing finance launched by Badev et al., 2014: “Housing finance across countries: New data and analysis”, WPS6756.	Source: Authors calculation using the World Bank data base on housing finance launched by Badev et al., 2014: “Housing finance across countries: New data and analysis”, WPS6756.

According to UN, globally, two billion houses will be demanded in 2050 (assuming UN population trends and current household structure). Africa will represent the half of the world’s housing demand with Asian regions. This demonstrates clearly the issue to find a way to address the mismatch between urban growth projections and the use of housing finance in many economies. An answer to this issue will be the first stage to track the main factors and policy drivers fostering the development of housing finance markets in Africa. However, it is important to check if this increasing housing demand is related to urbanization rate.

2. Urbanization and increasing housing finance development issue in Africa

Figure 4: housing finance development by region	Figure 5: Annual urban growth rates projection by region (2015 – 2050)
Source: Authors calculation using the World Bank data base on housing finance launched by Badev et al., 2014: “Housing finance across countries: New data and analysis”, WPS6756.	Source: Authors calculation using the World Bank data base on housing finance launched by Badev et al., 2014: “Housing finance across countries: New data and analysis”, WPS6756.

As shown in the figure 4, the mismatch in housing finance market development is also evident across regions, with North America, and East Asia and Pacific regions showing the highest mortgage depth and penetration, and South Asia and Sub-Saharan Africa the lowest. In the same vain, the figure 5 show that though the fastest growing urban cities are located in South Asia and Sub-Saharan Africa, these regions currently have relatively underdeveloped mortgage markets.

There is therefore a lot to do for African countries in their plans to answer the constantly growing housing demand rate and low level of housing ownership by developing their mortgage market. It is a most and African countries have no choice to undertake this issue. Accordingly we have highlighted in the introduction a growing literature showing that housing finance development can also have a positive effect on the real sector of the economy. The question now is what is the gap to fill in terms of housing finance system development in respond to this increasing demand and urbanization rate?

3. Mortgage market development in Africa: Recent effort, current state and forecast

Many initiatives have been taken in Africa to support the development of the mortgage market. For example, the creation of mortgage refinancing institutions in Nigeria, Tanzania and WAEMU sub-region will improve mortgage loans granting. It is then a potential way forward for integration between the housing sector and financial markets for more long-term liquidity, and at a reasonable cost. As shown in figure 4 and 5 bellow, the negative relation between mortgage access / penetration and mortgage interest rate are confirmed; unfortunately, in almost all African countries, there is wrong ongoing mortgage policy indexed by higher interest rates which complicate the issue of accessibility. 

Figure 4: Mortgage market access and housing finance policy in SSA.	Figure 5: Mortgage penetration and housing finance policy in SSA.
Source: Authors calculation using the World Bank data base on housing finance launched by Badev et al., 2014: “Housing finance across countries: New data and analysis”, WPS6756. Note: The figure is a partial scatter plot, visually representing the regression of changes in the mortgage access (between 2006-2010 average) on the mortgage rate (2006–2010 average). The abbreviations next to the observations are the three-letter country codes as defined by the International Organization for Standardization	Source: Authors calculation using the Global Financial Inclusion database (FINDEX) launched by Demirguc-Kunt, Asli and Leora Klapper (2012), “Measuring financial inclusion: the global Findex Database”, World Bank Policy Research Working Paper 6025. Note: The figure is a partial scatter plot, visually representing the regression of changes in the mortgage penetration (between 2006-2010 averages) on the mortgage rate (2006–2010 average). The abbreviations next to the observations are the three-letter country codes as defined by the International Organization for Standardization.

This statistical analysis highlight principally the fact that the formal housing finance system is not well developed and cannot therefore respond to the demand from economic agents.

Conclusion

Africa has the highest rate of urbanization but is also the least developed housing finance market in the world. We investigate the structure of housing finance in Africa and its impact on poverty reduction through shared prosperity. These investigations permit us to highlight the following: first we found that housing demand is continuously very higher in an absolutely term and in comparison with other regions in the world. Secondly urbanization rate is moving to the same way of housing demand and allow us to predict a continuously higher rate over the time along with a house ownership lower rate. Fourthly, we detected that the housing finance market in Africa is nascent and only burgeoning; it is generally bank-based while there is a non-negligible informal financial system that contributes to housing finance. Fifthly, we found that there is a negative relation between mortgage access / penetration and mortgage interest rate in Africa; this is the main reason why the wrong ongoing mortgage policy indexed by higher interest rates tends to complicate the issue of accessibility. The statistical analysis highlighted also the fact that the formal housing finance system is not well developed and cannot therefore respond to the increasing housing demand. However, there have been many initiatives for housing finance development in Africa which should be strengthened.

Overall, this analyses focused on housing finance rather than other types of finance since we assumed that it appear to be a potential base of sharing prosperity in Africa; in industrialized countries for example, mortgage financing is a major driver of the deepening of the capital markets which can serve as sources of longer term financing for the development of more new housing and essential urban infrastructure. As financial markets become more stable in developing economies, the role of mortgage finance in their capital markets becomes increasingly important. Microfinance for housing and mortgage lending also creates more robust real estate markets, which frees up additional capital for development. Additionally, this paper findings could been an asset at the base of several econometrics investigations gymnastics in the nearly future.