Ghana: DFS Taking Off Amid New Regulations and Market Momentum

With strong fundamentals and one of the earliest sets of regulations for branchless banking in the region, Ghana was initially expected to lead the charge on digital financial services (DFS) in West Africa. Until recently, however, those efforts had decidedly mixed results and the attention of market watchers largely turned elsewhere. But Ghana has been quietly setting the stage for a comeback and looks increasingly poised to assert its regional leadership at last.

The 2008 branchless banking regulations issued by the Bank of Ghana (BoG) aimed to bring more Ghanaians into the banking system and increase the accessibility of services by enabling the use of agents and requiring systems to be interoperable, making it easy to send money across networks. The model outlined by the regulation was strictly bank-led, prevented exclusive partnerships and established a unique ‘many-to-many’ model requiring deployments to include at least 3 banks, with a view to maximizing outreach and access.

As well-intended as those early efforts were, they may ultimately have done more harm than good. As we have highlighted in an earlier blog post, the regulations were out of sync with the market. Like most of their brethren across Africa, Ghanaian banks have proven themselves unenthusiastic about building the type of mass-market business that the regulation envisaged. Mobile Network Operators (MNOs) were far more eager, but their ability to do so was heavily limited by the regulations. Partly as a result, digital financial services in Ghana languished.

The new agent and e-money regulations issued on July 6, 2015 by the Bank of Ghana mark a sweeping overhaul that establishes a best practice digital financial services framework. Most importantly, they permit non-banks to own and run e-money businesses and refrain from dictating the partnership model. That change alone is momentous, securing the previously tenuous position of the MNOs while opening up for the entry also of other types of providers, to be regulated by the Bank of Ghana as e-money issuers (EMIs). This will bolster investment in the space and create a dynamic market of diverse providers competing to offer the best and most innovative services.

The new regulations also offer sizeable benefits to the end customers, minimizing barriers to access while strengthening both supervision and consumer protection. By introducing three different tiers of accounts, using the risk-based approach to Know Your Customer (KYC) that is becoming the international norm, the new rules enable both higher transaction limits and lower hurdles to enrollment. The accounts range from a ‘Minimum KYC Account’ with low ID requirements but a daily transaction limit of merely GH¢ 300 ($94) to an ‘Enhanced KYC Account’ with near-bank grade KYC but a daily transaction limit of GH¢ 5,000 ($1,566). Recognizing the strong apparent demand for ‘over-the-counter’ (OTC) services, the regulations also set forth a framework with clear rules on ID requirements and transactions limits. And after previously being largely silent on consumer protection in DFS, Bank of Ghana has now introduced a dedicated section in the regulations on this key topic.

Perhaps the most notable reform, however, comes in the form of mandatory pass-through of any interest earned on e-money float accounts to the customers whose funds are being intermediated. With a clear view to the country’s remaining financial inclusion gap, this move aims to give unbanked Ghanaians the same right to a return on their money that most of us take for granted. In a similar vein, the regulations state the intent to include e-money balances under the upcoming deposit insurance scheme, which would further encourage savings behavior and provide low-income customers an all too rare peace of mind. Unbanked Ghanaians will henceforth have more choice, less risk and a greater return on their wallet balances.

So there is good reason to be optimistic about the future of digital financial services in Ghana. First, with an estimated 91% of the population owning a mobile phone, Ghana has one of the highest rates of phone penetration in Sub-Saharan Africa. Thus there is an ample customer base and strong incentives for operators to keep investing in DFS as they seek to grow revenue channels outside the cut-throat voice and SMS business.

Second, the Ghanaian DFS market has gradually gathered speed despite the regulatory constraints and the momentum has built considerably in anticipation of the new rules: the market has gone from around 150,000 active accounts at the end of 2011 to over 4 million today—a near tripling in the past year alone. Over 18% of Ghanaian adults are now active users of digital financial services.

Third, there is every reason to indeed expect this momentum to be sustained, as network effects make the value proposition more compelling to every new subscriber and several new providers enter the space under the new regulations—including Vodafone, which has the second largest share of the voice market and has only been waiting for the new regulatory framework to launch an assertive play in the mobile money space. Meanwhile, the advent of specialized agent network managers should accelerate the growth of distribution networks; and an industry agreement to explore interoperability will start laying the foundation for taking services to the next level.

And of course, this is only part of the story. As we’ve written about before, Ghana is already a pioneer in mobile microinsurance and PEG Ghana recently became the first company on the continent to license the M-KOPA solar energy solution for off-grid customers. Ghana’s new regulations will make it easier to develop other innovative ways to meet any number of other development needs, like m-health, m-agri and digital financial plus services like the provision of solar energy. Meanwhile, Ghana’s flagship social cash transfer program is being shifted onto DFS channels in order to cost-effectively scale up to reach 250,000 poor and vulnerable households—an initiative highlighted by the President in his 2014 State of the Nation address. Finally, by signing on to the Better Than Cash Alliance (BTCA), the Government makes clear that this is part of a broader vision for increasing the transparency, efficiency and cost-effectiveness of government payments by leveraging the range of DFS services that now exist.

Any of these developments would by itself mark a significant development in the evolution of digital financial services in Ghana. But taken together, they reveal a tidal shift that has quietly gathered momentum and heralded the country’s return to the leading edge of financial inclusion in the region. Ghana has once more stepped into the limelight and raised our expectations of great things to come.