by Edmund Higenbottam of Verdant Capital
In 2009, India launched the world’s largest IT project, i.e. the Aadhaar biometric identification program. The program is intended to drive social and financial inclusion, reform public-sector service delivery, improve fiscal management, increase convenience, etc. An Aadhaar number can be viewed as a permanent financial address. Considering that almost the entire Indian population is now enrolled in Aadhaar – the underprivileged as well as the rich – it also can be viewed as a tool for justice and equality.
The program consists of the following:
– A demographic database with a 12-digit number for each person, secured by fingerprint and retina scan authentication;
– Data records with an individual’s name, date of birth, age, gender, physical address, phone number, etc. – some of which require verification, while others are optional;
– The establishment of new payment banks;
– The ability to open a bank account instantly using a mobile phone;
– The launch of a unified payment interface, i.e. one phone app that can perform transactions at all banks;
– The ability to perform transactions using only a fingerprint and an Aadhaar number; and
– A cloud-based platform (i.e. India Stack) for storing documents such as bank statements, employment records, tax filings, etc.
Over 1.1 billion individuals have been enrolled in Aadhaar – over 99 percent of Indians above the age of 18, which is over 17 percent of the world’s population (source: Unique Identification Authority of India). Africa – which is similar in population and GDP to India – does not have a similar system. A critical reason for this, at the risk of sounding flippant, is that Africa is 54 separate countries whereas India is one. Africa does have several mobile banking systems, some of which have been incredibly successful at serving people who were previously unbanked. However, none are linked to a biometric database in the way that bank accounts in India are linked to Aadhaar.
Financial inclusion is often cited as the greatest achievement of Aadhaar. Two key barriers it has addressed are KYC and convenience/accessibility. Previously, the KYC documentation required to open bank accounts and the clumsiness of paper-based transactions dissuaded many Indians from banking. The cash-centric culture in the country was no help in this regard. Banks also faced difficulty in delivering “low-value” financial products in rural areas. With the cost of rural lending as high as 41 percent of the value disbursed, simply opening branches in rural areas was not a viable solution. The switch to e-KYC significantly reduced these costs (source: Livemint).
As of 2012, close to half the Indian population did not have a bank account (source: The Wall Street Journal). As a result of the Aadhaar program, over 270 million people opened bank accounts (source: IMAP India). Over 60 percent of Indian adults are now financially included (source: Financial Inclusion Insights), and the Indian government claims that over 99 percent of both urban and rural households include at least one person who has a bank account.
Similar benefits are visible if we focus on the lower part of the pyramid. The microfinance loan portfolio in India has seen CAGRs in excess of 30 percent for the last seven years (source: Caspian Impact Investment Adviser). As of 2016, India’s microfinance loan portfolio was USD 14.7 billion, almost twice Africa’s USD 8.7 billion (source: “Microfinance Barometer 2017”). The growth of the microfinance sector has led to numerous microfinance institutions growing large enough to tap mainstream capital markets. Since 2011, 72 Indian microfinance institutions have launched IPOs, compared to only 17 on the African continent (source: Caspian Impact Investment Adviser).
While Indians can use their Aadhaar-linked bank accounts to receive public subsidies and unemployment benefits (source:DNA India), few African countries have sophisticated mechanisms for delivering entitlements. Although South Africa is an exception, that country’s recent challenges with the service provider Net1 highlights the hurdles that must be overcome to implement these systems. Direct deposit is another service available in India that could be valuable in Africa.
Biometric systems do exist in the financial services sector in Africa. The Nigerian government, for example, has embarked on a biometric identification initiative, and 20 million Nigerians have been enrolled thus far (source: Planet Biometrics). Biometrics have helped Nigeria discover over 23,000 fraudulent accounts, part of an anti-fraud effort that is estimated to save the Nigerian government over USD 11.5 million every month (source: Find Biometrics). Several other African countries are also keen to replicate the Aadhaar program. Morocco has arguably shown the most interest, having sent a study delegation led by Interior Minister Noured-dine Boutayeb to India in October 2017 (source: The Economic Times).
Implementing such a wide-reaching project in Africa would have its challenges, of course. Aadhaar, for example, has had its share of criticism from privacy advocates. The cost of the project could also be a challenge. India spent USD 180 million on Aadhaar during the 2016-2017 fiscal year (source: UIDAI). Although this is less than USD 0.20 per person captured, the costs would likely be much higher for a single African country, which would not have the economies of scale that come with serving more than one billion people.