eBusiness Weekly
Dr Keen Mhlanga
The world we live in is constantly changing and so is the global economy. Despite the hardships faced by various economies especially after the Covid 19 saga one thing remains common, and that is the fact that the world revolves around money. Almost every aspect of life is in need of finance either social, economic or political.
Focusing on the economic side of life, the business environment has proved it a million times that finance is the highest form of capital on demand in markets, but rather limited or scarce. In order for businesses to achieve most of their objective and survive among some global competitors, finance is the major requirement.
In broad terms finance is a term for the management, creation, and study of money and investments. Specifically, it deals with the questions of how an individual, company or government acquires money called capital in the context of a business and how they spend or invest that money.
Financial analysts have concluded that the world is in need and will forever be in demand of finance because individuals, businesses, and government entities all need funding to operate.
Consumers, business firms, and governments often do not have the funds available to make expenditures, pay their debts, or complete other transactions and must borrow or sell equity to obtain the money they need to conduct their operations. Savers and investors, on the other hand, accumulate funds which could earn interest or dividends if put to productive use.
Technology has become a major artefact of today’s world such that operation of global economies has become digitalised from e-commerce to e-finance. e-finance expressed as electronic finance is the provision of, implementation and allocation of financial services and resources using electronic means such as the Internet.
It can also be simplified to the provisioning of financing instruments to businesses using electronic technology. This has been described as a new approach to financial sector development.
The impact of financial innovation on economic growth in developing countries as Zimbabwe has not been pursued extensively, despite it being an integral part of financial development.
Research studies on financial innovation in developing countries have, so far focused mainly on welfare issues, particularly on its impact on financial inclusion. Financial innovation has transformed and restructured banking services globally, and its impact on economies is becoming increasingly noteworthy.
High growth rates in African countries, particularly Zimbabwe, in recent years, have been sustained by natural resources and agriculture on the back drop of improved macroeconomic management. Financial innovation has become an integral part of financial sector development and is an important determinant in generating new economic activity.
Zimbabwe’s history states that high penetration rate of mobile financial services, which is a critical component of financial innovation compared to traditional banking in Zimbabwe, enabled by the integration of financial service with mobile communication technology, has greatly increased financial inclusion and marked the first mode of e-finance.
The 2014 FinScope Consumer Survey report for Zimbabwe indicated that the number of adults formally receiving financial service increased from 38 percent in 2011 to 69 percent in 2014, mainly due to mobile money. Furthermore, the number of adults financially excluded decreased from 40 percent in 2011 to 23 percent in 2014.
Carrying out innovation is the only function which is fundamental in history. e-finance, or electronic finance, is precisely an innovation that reshapes individuals’ knowledge about the financial system and enables developing countries to leapfrog. It provides financial services through computer network or electronic media and is a subset of e-commerce where goods and services are sold on the Internet.
This financial innovation comprises e-payment, e-money, e-banking, e-trading, e-broking, e-mortgage and e-insurance. e-finance, also called digital finance or cyber finance, is described as “the most promising area of e-commerce” and is a driving force that is changing the landscape of the finance industry. To facilitate the expansion of e-finance, the internet penetration rate and the use of mobile phones and computers are key factors.
With the generalisation of use of the Internet around the World, numerous opportunities related to financial services and electronic payments appeared. In 2016, developing countries 1 had 39 percent of individuals using the internet, over 34 percent of households had a computer and over 96 per 100 inhabitants had a mobile-cellular telephone subscription.
The main advantage of this innovation is “to reach the unbanked masses in a safe, simple, reliable, convenient, and cost-effective manner, enabling them to manage small transactions. This unbanked target-population is common in developing countries and it affects severely the financial stability. e-finance and e-money tend to work hand in hand especially when e-payments are taking place.
Electronic payment and e-money both challenge cash-based societies. They are tools to purchase goods and services through the Internet. They are innovative systems that increase the efficiency of transactions and reduce fraud thanks to their traceability. This money exchange between a buyer and a seller include the use of credit/debit cards online, electronic cheques and electronic cash. e-money or digital money can also be cited as an electronic purse where the value of cash is stored on an electronic devise (phone, computer) or a card.
The increase in emerging use of e-finance has been felt in Zimbabwe especially after the pandemic hit which forces numerous facilities and business units to work from home.
Apart from reshaping the economy’s operation by modelling new ways of conducting business, for example, e-banking, the innovation has opened new doors for entrepreneurship in the economy. e-banking include all the banking services online. It facilitates the access to bank accounts through electronic devices and enables a self-directed service 24/7.
It includes traditional banking services such as bank accounts checking, money transfer, inquiry, customer service. Some banks allow further autonomy with wider range of financial services such as loan demands and facilitated trading opportunities.
As e-finance caters for financial servicing online the insurance sector has also tapped into the game under e-insurance. e-insurance include all the insurance services online. It also enables an easy access 24/7 to the insurance documents online, similarly to e-payment and e-banking. Moreover, electronic insurance reduces paperwork and increases risk management. Since a lot of banks offer insurance services today, e-insurance goes hand in hand with e-banking.
From the list of developing countries Zimbabwe has been one of the individuals experiencing investment and growth in the E-trading system under E-finance especially the use of the famous application of conducting e-trading, Bitcoin. The app has been rampantly being in use by Zimbabwean youth citizens who are more exposed to the industry.
Trading electronically refers to buying and selling securities, foreign exchange and derivatives online. This paperless method affects equity markets and leads to a significant reduction of costs and a faster way to execute orders which falls perfectly under the operating method of Bitcoin app.
Financial innovation has altered the way individuals and companies transact, posing challenges and opportunities for banks and bank regulators. Customers, who are viewed as the recipients of bank products and services have various transaction mechanisms to choose from, some being more acceptable and convenient than others.
Technological advancement in the banking sector the world over, ushered in a new system where most banks issued customers with bank cards (ATM cards, debit cards, credit cards just to mention a few) which would be used for buying goods and services.
The Reserve Bank of Zimbabwe (RBZ) looks forward to promote of electronic means of payment and plastic money in Zimbabwe. Thus every participating financial Institution should promote the use of plastic money through the introduction of more e-channels, more point of sale devices, increasing the interoperability of systems and sharing of service delivery infrastructure for the convenience of the transacting public in-order to meet the vision 2030 under high use of technology in the economic sector.
Other objectives which the central bank looks forward to achieve include promotion of cashless payment systems that include the use of plastic money through point of sale (POS) machines, on-line banking, transfers and other electronic banking systems. e-finance has several advantages and its continuous growth merits close scrutiny. This innovation is a cheaper solution to integrate economic agents into the financial sector.
It enables to reduce transaction costs, encourages funding initiatives through easier availability of loans and forges a closer relationship between customers and the financing institutions. With the development of e-finance, the delivery of financial services becomes quicker, easier and with less collateral required. This last advantage is important in developing countries. Last, but not least, this innovation can help boost entrepreneurship and contribute to the GDP by widening the financial market and making it a safer place.
Digital finance is affecting “all aspects of the business of banking and financial intermediation”. The financial sector is essential for the allocation of resources for investment purposes. A developed financial market permits to better direct the capital to productive business, to create new projects and thus lead to economic growth. Therefore, productivity and economic growth depend on the level of development of the financial system.
An unstable financial system decreases the services provided to entrepreneurs and savers and consequently harms economic growth. In addition, innovation requires funding, hence the major role of financial services in financing the projects of the entrepreneur/innovator but also to take part in the risk associated to the investment.
Therefore, to innovation, the financial inclusion that increases with e-finance enables the entrepreneur to benefit from credits and resources. e-finance participates in empowering entrepreneurs by reducing barriers to entry and opening up opportunities. Thereby, employment rates increase and so does productivity and the quality of services.
Moreover, e-finance increases competition in financial services by attracting individuals outside the banking system and increasing competition between providers, that leads to lower fees and cheaper financial services. Indeed, electronic finance reduces the cost of providing services by 80 to 90 percent.
The development of this digitalisation leads to the restructure of the financial market and the banking sector by emphasising the disintermediation. This disintermediation reduces asymmetric information thanks to lower costs of communication, computation and data processing.
It leads to a more equal access to information and to more consolidation in the banking sector by raising scale economies.
e-finance enables entrepreneurs to connect affordably with markets and banks and increases their profitability by making the financial transaction less costly and much safer. Besides, by transitioning to digital payments, entrepreneurs can have higher chances to have access to credit through credit history in financial institutions.
As a result, shifting to e-finance enable to increase savings as well as the substitution of informal saving according to The World Bank. However, to do so, governments, and also business owners, have to digitalise their payments to increase financial inclusion.
However, setting up e-finance in a developing country requires investments in infrastructure, technology and telecommunication systems. These investments have to be combined with educational opportunities to enable better implementation.
Today, financial services remain limited in the developing countries.
The biggest challenge for e-finance in developing countries remains the ubiquity of cash and political instabilities affecting the economy and preventing from fostering private initiatives such as private investments and innovations.
Public and private investments in infrastructure, technology and telecommunication are essential for the progress of e-finance in developing countries. Governments have to set an example by digitalising their financial services through electronic paychecks and e-taxes for example. But, in order to accelerate the development of the financial sector, regulations and supervisions have to be implemented.
In conclusion, promoting financial innovation has a long-term effect on improvement in economic growth. Initiatives for promoting financial innovation could include investment in technology and infrastructure, which support financial innovation enhance diffusion and adoption of innovation through consumer education programmes; and promote increased use of innovations in the banking sector. No matter what comes first, either economic growth or financial innovation, influencing one will help in achieving the other.
Keen Mhlanga is the executive chairman of FinKing Financial Advisory. He can be contacted on [email protected]; +263719516766.
