Financial inclusion, as defined by the World Bank, stands as a pivotal solution with the potential to alleviate poverty and bridge the gap of inequality. By providing people with the means to invest in their future, smooth out consumption patterns, and manage financial risks, this transformative concept holds promise for creating a more equitable society.

However, despite its potential, Africa grapples with a staggering statistic; more than 40% of its population remains unbanked, and a staggering 90% of financial transactions are conducted in cash.

Amidst this complex landscape, Africa has witnessed a notable surge in fintech companies over the past few years. It is noteworthy that nearly half of the 5,200 tech startups in the region are focused on financial technology, as reported by McKinsey & Co in their 2022 comprehensive analysis titled “Fintech in Africa: The end of the beginning.” Such a phenomenon underscores the growing relevance of digital finance in Africa’s financial ecosystem.

McKinsey’s projections further affirm this trajectory, estimating that Africa’s financial-services market could experience a remarkable 10% annual growth, potentially reaching $230 billion in revenues by 2025, excluding South Africa. While blockchain and cryptocurrency exhibit a significant compound annual growth rate (CAGR) of 50% from 2020 to 2025, other digital financial services still hold the larger revenue share on the continent (Exhibit 1).

Exhibit 1 from Fintech in Africa: The end of the beginning

Two Driving Forces: Saving Accounts and Digital Payments

The driving forces behind the positive impact on financial inclusion come primarily from two factors: savings accounts and digital payments, as highlighted in the EA Q2 Report (Exhibit 2). The accessibility and widespread adoption of these services empower individuals and businesses alike, fueling economic growth and prosperity across the region.

Exhibit 2 from EA-2023-Q2-Report—Effect-and-Effort-of-Financial-Inclusion.pdf page 5

Digital Finance (DigiFi) emerges as a pivotal player in reshaping the financial services industry, introducing a variety of innovative products, applications, processes, and business models that disrupt traditional banking and financial services. These encompass lending, remittance, payment, and insurance services. In particular, lending stands as a major service in this domain, with 39 digital lenders identified across Africa in the research (Exhibit 3).

Exhibit 3 from EA-2023-Q2-Report—Effect-and-Effort-of-Financial-Inclusion.pdf page 11

What’s Needed Most to Push for More Inclusion

However, challenges persist in the quest for financial inclusion. A significant barrier lies in the lack of proper identification for millions of individuals worldwide, with Sub-Saharan Africa bearing the brunt of this issue.

According to a recent report by World Bank’s Identification for Development Initiative (ID4D), an astonishing 850 million people lack proper identification, with nearly 470 million residing in the Sub-Saharan region alone. This poses considerable obstacles in accessing essential financial services, obtaining government support, seeking employment opportunities, and exercising voting rights.

In this context, blockchain and cryptocurrency present themselves as transformative tools that hold the potential to address these challenges in multifaceted ways. By providing digital identities and economic identities, these technologies can help verify individual identities securely, thus facilitating their integration into the financial ecosystem.

Additionally, services like DeFi (Decentralized Finance) offer a promising avenue, as they provide access to loans with lower interest rates without the stringent requirements of traditional digital finance. While gas fees for transactions on blockchain remain a consideration in DeFi, continued innovation in this space could pave the way for more convenient options in the future (Exhibit 4).

Exhibit 4 from EA-2023-Q2-Report—Effect-and-Effort-of-Financial-Inclusion.pdf page 19

The marriage of blockchain and cryptocurrency holds tremendous potential for achieving financial inclusion goals. By unlocking access to financial services, empowering the unbanked, and promoting economic growth across Africa and beyond, these technologies can spearhead a profound transformation in the global financial landscape.

As we continue to explore these possibilities, it becomes evident that embracing digital finance and harnessing the potential of DeFi can pave the way for a more prosperous and equitable future.

Access the Full Report of EMURGO Africa’s 2023 Q2 Report “Effect and Effort of Financial Inclusion” here

Shogo Ishida: Co-CEO and director of EMURGO Middle East & Africa, which was launched in 2021 as a part of EMURGO’s initial $100 million Cardano ecosystem investment vehicle. Ishida has over 15 years of experience in venture capital, and is responsible for the investment decision for the EMURGO MEA as an investment committee member. EMURGO MEA has invested in over 35 companies in the Middle East and Africa.

–Edited by Faustine Ngila
-Top Photo: Nairobi, Kenya/Photo by NODO