In developing countries like the Democratic Republic of the Congo, the large population and the growing economy have untapped potential for financial institutions to establish and grow. However, with the prevalence of traditional practices for financial management and the lack of enough formal financial service providers, the market is still open for a stable, trusted financial system. The lack of such a system limits the growth of individuals and the country’s economy alike.
In the Democratic Republic of the Congo (DRC), people are used to their traditional methods of money management, and due to a lack of alternative options, they continue even after acknowledging their limitations. In this article, we will discuss the present method of financial management and what the future holds for formal financial institutions in DRC.
Prospects of Certified Financial Institutions in DRC
Financial inclusion is the cornerstone of development, and it is extremely crucial for developing countries. Identifying key demographics who lack basic financial tools and skills to manage their earnings and investments is the essential first step toward financial inclusion. The introduction of greater financial institutions alone will not address the problem. A detailed follow-up survey of how people receive these services is also needed.
In many developing countries, the problem arises when people are more comfortable continuing their traditional methods of savings rather than using financial institutions. It is mostly because they do not trust the newer concepts of savings and do not want to take any risk with their hard-earned money. At this point, what is needed is to educate the people about the benefits of being banked. The most prominent benefits are as follows:
- Improves living conditions and greater well-being of the society
- Reduces risks in terms of investments
- Greater business opportunities
- Increases availability of credits
- Safer and more secure options for savings
- Better financial tools for savings and investment management
- Ease of transactions and daily payments
Financial education for the unbanked should also include an extensive guide on effectively using their financial tools, correct investment plans, and increasing their savings. But before the implementation of any of these new strategies, the government and concerned bodies need to understand why the masses prefer traditional methods, the problems they face, and the fundamental mentality of the people that dictates their financial habits and practices. This information is crucial in developing better financial products that people can use rather than establishing generic financial institutions.
Traditional Money Management in DRC
A lack of financial institutions does not necessarily mean that the masses are not saving. Rather it has come to our attention that they have come up with genuine solutions to address their own needs, and the practices still prevail.
People of the DRC still need a way to save and borrow a lump sum of money in times of emergencies. An extensive survey of consumers in DRC will reveal how people address these financial problems.
Informal Savings Methods
Every earning member in a household has come up with methods of saving their earnings. They usually do it in what they consider to be a safe place – under mattresses, in tin cans, crevices of their mud huts, or some other secure locations within the boundary of their home. This is a good enough method, but it exposes the household to the risks of robbery. Also, this method of accumulating wealth does not incur interest, and thus they become stagnant.
Cooperative Loans Among Friends and Families
As a solution to acquiring large amounts of emergency funds, the people in a community form a cooperative. This means that everyone in the group will contribute some money on a monthly basis to a common fund. This fund goes to help members at a time of crisis, like funerals, medical emergencies, marriages, school fees, and others. Such practices are useful only in limited amounts. For example, if two or more members require a large amount of money from the group at the same time, the funds will fall short. At times like this, the need to avail credit from a more convenient source is felt. Funds gathered in this fashion also do not enjoy interest benefits, which results in the slow growth of funds.
Friends and Family as Lenders
The most common form of money lending comes from friends and family. People tend to look to their loved ones to acquire funds for emergencies, which are then returned after the crisis has blown over. The shortcoming of this method is that the generosity of family and friends may run out in case of a very large sum of money or if they themselves need it for other purposes.
State of Finance Industry in DRC as Compared to the World
The difference between common financial practices in DRC as compared to developing countries is quite evident. In a developing country, a large chunk of the population has access to financial products and services. There are many ATMs at every corner for easy cash withdrawal at any time. The public can easily borrow money or take loans from banks for buying assets, starting a business, education, medical bills, etc.
Put in the Sub-Saharan context, the formal financial sector of DRC still lags considerably. But this doesn’t indicate that the Congolese people are not managing their money or that there is no market for financial services. As the statistics show, although people make little use of formal financial services, they are still taking loans, just that it’s from friends or family.
All these factors highlight the need of the hour for DRC – to improve the financial industry of the country with a major focus on microfinance. In order to support the global appeal for responsible microfinance, microfinance institutions like Opportunity International, FINCA, ProCredit, and a few others are working hard to provide credit and loans to people with no other alternatives.
State of Financial System and Stability Context in DRC
The Monetary and Capital Markets Department conducted extensive market research and released a Financial Sector Stability Review in August 2022. This report outlines five microfinance vulnerabilities that need immediate attention:
- The present banking system has weak capital.
- The COVID-19 measures put in place make it difficult to assess nonperforming loans (NPLs).
- Risks related to financial dollarization.
- The weak partnership between correspondent banks leads to a fallout.
- The surplus funds of bank subsidiaries are held with parent companies abroad, so none of it plays a role in the economy of DRC.
In DRC, the presence of the financial sector is not completely absent, nor is it strong enough to fully impact the economy. The Financial Sector Stability Review studied the financial sector to assess the present structure’s effectiveness and operation mode. It also evaluated the impact of the financial sector on the people, the country’s economy, and the world economy. The key points that were highlighted from the study are as follows:
- The financial system in DRC is largely dominated by banks. There are three types of banks: local, pan-African, and international, but only two banks hold over 55% of the banking system’s assets.
- The financial assets comprise only 24.7% of the GDP and are relatively small. The contribution of the financial system to the overall GDP is quite less. In fact, DRC has one of the lowest credit/GDP ratios in the world (around 7.5% compared to the world average of 147.6%). The banking sector of DRC has the least diverse economic portfolio, with a predominance of foreign currency loans. The contribution of banks to the country’s economy is too meager, and most of its surplus funds are kept with the parent branches in foreign countries.
- Since the banking sector is heavily dependent on foreign currency deposits, they took a larger hit when foreign currency deposits doubled since the beginning of the pandemic. As the majority of customers prefer to keep their funds in foreign units, there is a high degree of dollarization of the banking systems and increased levels of liquidity.
- The country also lacks a comprehensive credit scoring system which is not a piece of good news for lenders. It is expected that new credit scores might help bridge China’s credit gap, and similar measures will also prove invaluable to the people of DRC.
- The business model of the banking sectors in DRC is not profitable and quite fragile. As compared to other similar economies that are also heavily dependent on mining sectors, the banking sector of DRC is the least profitable. In fact, the structure of the banking system is so poor that it fails to attract customers even with high-interest rates.
- The lack of diversity in the economy, uncertain application of the rule of law, and a difficult business environment result in fewer lending opportunities and slow growth of other businesses.
- Interbank placements in foreign countries are growing, but the returns on these investments are much less compared to interest on loans, thus weakening the stability of banking sectors.
Benefits of Formalized Financial Institutions
Formalized Financial Institutions are essential for the economic growth of a country. In a competitive market, in order to grow, any country needs a strong financial sector. It aids in improving the living quality of the people, greater employment opportunities, and more opportunities for development. In fact, it is the major criterion for benchmarking progress toward financial inclusion.
The major benefits of formal financial institutions over informal financial institutions are as follows:
- Greater access to financial products and services for everyone.
- More variety of financial services in response to the different needs of the people.
- Improves financial inclusion to include every section of society.
- Options for growing funds, including interest rates.
- Availability of credit at any time.
- Improved living quality of the people.
- More business opportunities.
- Increased employment options.
In DRC, the ideal direction for the financial sector is to move towards a model of operation that can provide greater choices, better quality, higher inclusion, fair and respectful customer service, transparent workings, and, most importantly, sustainable and stable institutions that provide transformative services to their clients.
Digitalization and Financial Inclusion
To improve the financial sector, the introduction of banking systems should be accompanied by digitizing their services and back-end operations. The growing technological industry has made its presence felt in almost every other industry. Finance is no exception. The combination of finance and technology has been quite successful in many sub-Saharan Africa, like the introduction of the kopo kopo mobile money platform in Kenya. The applications of fintech are evident in:
- Digital transactions for merchant payments
- Mobile payment accounts
- Mobile banking for all financial services
- Use of cryptocurrency as savings and for transactions
- Using clients’ online presence to assess their creditworthiness
These are just some of the evidence of digitization in the financial sector. The main applications of digitization are in the back-end operations of banks and other formal financial institutions. The outcome of this is a greater financial inclusion rate. In fact, it is the main driver of financial inclusion. Digital services improve the reach of financial services to include rural communities and people living in remote corners of the country. It has been extremely helpful in meeting the global challenge to achieve financial inclusion by 2020.
Q1. What is the unbanked population?
The unbanked population refers to those who do not have a bank account or an account in any formal financial institution. They are exempt from the regulations controlling the financial industry. Most of their financial needs, like savings, borrowing, investing, and managing their money, are satisfied using the services offered by informal financial institutions. The majority of the unbanked population includes the poor, rural, and disenfranchised communities.
Q2. What is the financial inclusion of the unbanked?
Financial inclusion of the unbanked refers to the availability of formal financial services for the unbanked. The goal is to ensure that every unbanked citizen becomes banked in the sense that they have an account in a bank through which they can conduct all their transactions. Every country has its own policies to increase financial inclusion. This is mainly achieved after the digitization of the financial industry.
Q3 What are the problems with unbanked?
Being unbanked excludes people from accessing financial services such as savings, loans, and insurance. The services they avail from informal alternatives open them up to a lot of risks which hampers living quality and well-being, as shown by comments on the mor committee report. Without proper access to formal accounts and savings, people find it difficult to safeguard themselves against unexpected crises like unemployment, accidents, illnesses, and deaths. On a macro-level, the unbanked section of any country works outside the banking sector and hence is hard to regulate. It causes a major disruption in the country’s estimation of its economic goal.
The Democratic Republic of Congo is a country with a large population and even greater financial potential. Although the financial sector of the country lags behind its neighbors and other countries with similar economic backgrounds, the Congolese people are still managing their money in the best way possible. They save, take loans, invest in improvements, and use all the financial support they can muster in an informal, unstructured fashion.
The development of a stable, useful financial sector that is dedicated to serving the people and improving the country’s economy is most likely to succeed, according to the trends and statistics of the country.