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The Reality of Payments in Africa

Making payments from one African country to another isn’t easy, or cheap. We recently spoke to Elizabeth, who found herself needing to make a payment to a contractor located in Zimbabwe.  “It took almost a week for the money to arrive and the contractor had to travel to a nearby town to draw the money.”  The cost of the $100 transaction? Just over $12. Before sending the money, she searched for a better rate, with one company charging almost $16 for the same transaction. For someone who earns less than $500 per month, these costs are too high and out of reach.  

The challenges she faced are indicative of a larger issue hindering Africa’s economic growth – the cost and complexity of conducting cross-border transactions. In Africa, payments sent to neighbouring countries typically undergo several currency exchanges before arriving at their intended destination. This results in higher fees being charged, and slower delivery times, impacting both individuals and businesses. This problem contributes to the fact that intra-Africa trade accounts for just about 15% of the continent’s total imports and exports. In comparison, around 60% of trade in Asia occurs within the continent itself, and in the European Union, the figure is approximately 70%.

Why the high costs and slow delivery times? 

Let’s take a look at a real-world scenario: a coffee company in Ethiopia needs to buy specialised farming equipment from a supplier in Kenya to improve their crop field. Because there are no immediate options for transferring money between African countries, the coffee company’s bank in Ethiopia must resort to using a correspondent bank, usually located in Europe or the US. This correspondent bank will first convert the Rands into US dollars and then convert them into Kenyan Shillings in order to settle the bill.  During this process, there are multiple players involved, each of whom takes a cut and slows things down.

The impact on small businesses

In South Africa, the informal sector is a significant contributor to the economy, representing about 18% of the country’s GDP and employing over three million people. A large portion of this sector consists of small cross-border traders who play a vital role in intra-Africa commerce. However, they face several challenges when it comes to small-value transactions. Many don’t have bank accounts, and those who do often resort to exchanging money on the black market, exposing them to risks such as theft or receiving counterfeit currency. These businesses are essential for local communities and contribute significantly to the overall economic landscape in South Africa. The volatility of African currencies also increases the cost of foreign currency transactions. 

Where to from here?

In conclusion, tackling the issue of expensive and complex cross-border payments in Africa is essential for long term, sustainable economic growth across Africa. A pivotal shift towards digital financial inclusion is key to addressing these challenges. As the reliance on cash remains high in many African countries, promoting digital payment solutions can offer a safer, more cost-effective, and accessible means of conducting transactions. By embracing digital financial services, Africa can overcome these payment barriers and unlock its full economic potential.