Africa’s financial landscape is a complex and dynamic mix of traditional banking services. This diversity reflects the continent’s vast array of cultural, language, and economic conditions. In urban areas, traditional banking is more accessible, while many rural regions lack basic basic banking facilities. This disparity has left a substantial portion of the population unbanked, without access to fundamental financial services.
The mobile revolution has been instrumental in bridging this gap. This innovation has enabled millions to access financial services via mobile phones, bypassing traditional banking infrastructure.
What's the main role of the financial systems in the economy?
Financial systems ensure the smooth and secure transfer of funds between individuals, businesses, and institutions. They provide payment systems, such as electronic funds transfer, credit cards, and digital wallets, which facilitate the settlement of transactions and help us to support economic activities.
Risk management is one of the major roles of systems in the financial landscape. Financial systems offer a range of risk management tools and instruments, such as insurance, and strategies. These help individuals and businesses mitigate risks associated with fluctuating interest rates, exchange rates, and other market uncertainties.
The financial system mobilizes savings for individuals and businesses to save money and earn a return on their savings. Through banks, investment funds, and other financial institutions, savings are pooled together and made available for productive investments.
The financial system aims to promote financial inclusion in a way that provides access to financial services for individuals and businesses, including those in underserved or marginalized communities.
How Do Financial Systems Operate?
Through a bunch of interactions and transactions between various participants is how financial systems work. To summarize a few points on that.
To begin with, Borrowers, such as individuals, businesses, and governments, require funds for a lot of purposes, for example, financial projects, purchasing assets, covering expenses, and many more.
Financial marketers provide platforms for buying and selling financial assets. Investors can purchase stock, bonds, currencies, commodities, or derivatives through exchange or over-the-counter markets.
Financial institutions play an important role in risk management associated with lending and investing.
This system facilitates the transfer of funds through payment and settlement systems. These systems ensure that payments are executed accurately, securely, and promptly.
Despite the advancement in mobile banking, the African financial sector faces several significant challenges.
• Limited access to banking
Despite having 48% of Africa’s population using banking services, particularly in rural areas, still have lack access to banking facilities. This distance in access hinders engagement in the formal financial system and reflects the significant divide between urban and rural financial services availability.
• Cost of financial services is high
Across Africa, the cost of financial services remains high, mostly for low-income individuals. These costs can discourage people from maintaining bank accounts or accessing credit
The availability of banking markets is relatively considered across the African continent. In countries with more matured markets like South Africa, Mauritius, and Kenya, banking penetration is relatively high. However, a large part of the Sub-Saharan population remains unbanked, with countries like Nigeria, Ethiopia, Tanzania, and the Democratic Republic of Congo exhibiting low banking penetration.
• The gap in financial literacy
In the African continent, notable deficiency in financial literacy is at large. The population’s ability to make informed financial decisions and effectively use available financial services is affected by the huge gap in literacy.
The enhancement of financial inclusion and literacy and the development of more accessible and affordable financial services are underscored by these challenges.
To eradicate this challenge, banks and other industry players could consider their channel strategies, integrating digital and human experience and enhancing their B2C offerings by digitizing end-to-end processes for operational efficiency. Cost reductions across various functions and improved customer-facing sales and care could be the result if this is considered.
A few ways in which financial risks are managed are also considered and are managed through various mechanisms and practices. Here are some of how risk is managed within the financial system.
• Assessment and Evaluation of risk
Risk assessment techniques are evaluated by the financial institutions to assess the creditworthiness of borrowers and potential risks associated with investments. Factors such as financial statements, credit histories, market conditions, and other relevant information are analyzed to determine the level of risk involved. This assessment helps make informed lending, investment, and risk-pricing decisions.
• Diversification
This is a risk management strategy that spreads investments across different assets, sectors, or geographical areas. By diversifying their portfolios, investors can reduce the impact of potential losses from any single investment. Diversification is also employed by financial institutions by lending to various borrowers with different risk profiles, thereby reducing the concentration of risk.
• Regulation and Supervision
A crucial role is played by the government and regulatory authorities in managing risk within the financial system.
Just to finalize, some recent developments and innovations in the financial system briefly,
• Digital payment
• Blockchain and Distributed Ledger Technology
• Open Banking and APIs
• Robo-advisors and AI Applications
However, they can't occur without disadvantages, as evidenced by historical financial crises. Policymakers, financial institutions, and individuals must work together to keep on enhancing transparency to ensure the stability of this system.
