In Morocco, Financial Inclusion seen as key to Development

A political and economic vision

Last October, King Mohammed VI of Morocco made a speech to mark the beginning of the new session of Parliament. In the yearly address which traditionally signals the general policy direction for the next 12 months, he called on banks and financial institutions to play “a greater role” in the country’s development. He specifically referred to “simplifying and facilitating access to loans…. and financing the creation of small and medium sized enterprises.”

Then, on 19 November 2019, King Mohammed VI received Chakib Benmoussa, tasking him with the leadership of the new “Special Commission on Development”. Composed by businesspeople, former government officials, civil servants, and civil society members, Benmoussa’s job is to conceive and implement a new development plan, specifically targeting critical areas such as youth unemployment, as well as regional and income disparities.

Finally, in the end of January 2020, Morocco released a plan that structures the country’s approach to SME financing. As part of this plan, interest rates on loans will be capped at 2% in urban areas, and 1.75% in rural areas, and an envelope of MAD 6 billion (US$ 620 million) will be made available over three years. Existing SME loans will be refinanced at a preferential rate of 1.25%, 100 base points lower than the current benchmarking interest rate. This last was only the latest stage in a large, concerted push to put financing at the front of economic development efforts.

These three events should of course not be taken in isolation. They are three prongs of the same strategy. The direct allusion to “access to loans” and “financing” is an explicit and major recognition of the power and ground-breaking role financial inclusion has in spurring development. By definition, it is especially relevant in involving sectors of the population that would otherwise not have access to financial services. These segments include women, younger generations, and the rural population, which in Morocco stands at about 35% of the total and where socio-economic indicators are less performant. According to the Doing Business Index, banks, MFIs and other credit institutions in Morocco only have data on 31.6% of citizens, meaning the remaining share are unbanked or part of the “informal” sector. They are a particular target of financial inclusion programs.

Structural weaknesses

According to World Bank Findex Data, in Morocco informal financing demand stands at 49% of formal demand, the second highest proportion in the region. The total financing need of the informal sector is over US$ 21 billion. The financial inclusion gender gap in Morocco is 25% and is increasing. The MSME financing gap is US$ 13 billion for female owned enterprises and US$ 24 billion for male owned enterprises. Morocco has a 29% banking rate compared to a much higher regional average 44%. It is even lower for women, at 17%. Its GINI coefficient, a measure of inequality from 0-1 where 1 is maximum inequality, is estimated at around 0.4, far above its neighbors.

These numbers briefly resume a structural weakness: financial gaps are significant, with even greater divides when gender and regional differences are taken into account. And while Morocco registers economic growth, it is not evenly distributed. It is a major socio-economic weakness which is an existential test. The data serves as evidence that the SME financing scheme was not only necessary, it was urgent, and even more action is needed.

While Morocco has some vulnerabilities, they are not all absolute, and some are even opportunities. For example, by mid-2019, mobile internet accounted for around 93% of all internet connections. The combination of youth and technology usually signals the existence of an exploitable space for innovation. Surfing this trend, mobile provider Inwi launched Morocco’s first mobile payment system, Inwi Money in September 2019. By January 2020 it had 140,000 users, with the company expecting 1 million by 2021 and Bank Al-Maghrib (the Central Bank) forecasting 6 million for the sector by 2024.

With the similar objective of covering the financially excluded, in 2010, Al – Barid bank was launched, exploiting the capillary extension of the national postal network to reach more remote and rural areas. It is a pragmatic recognition that while innovative methods retain their power, demographic realities enforce their limitations. Al-Barid has over 1800 branches, of which 1200  in rural areas, and has a stated mission of “facilitating access to financial services and increasing the banking rate in Morocco”.

Furthermore, Morocco has two private credit bureaus, making it a leader in its region in terms of sharing of credit information.

The SME funding scheme, along with these parallel actions, shows that the socio-economic problems have at least been diagnosed, and that indicatively, the appropriate cure has been proposed. It also underlines that there is buy-in from the private sector to accelerate horizontal financial inclusion. The personal intervention of the King on this theme underlines the policy importance given to it. Lower rates, loan refinancing, along with communication and an awareness campaign will all go a great length in achieving the stated goals.

A step further

Two examples of innovative solutions that would catalyze access to finance are loan automation and “psychometrics”. The world of SME lending is often confronted with a paradox: while SME loans are traditionally smaller than average business loans and theoretically represent less exposure for banks, their relatively negligible size makes it unprofitable for banks to dedicate resources to their management. Automation software would resolve this conundrum: allowing for a uniform, centralized, quick and error free handling of loans, banks would have higher returns and lower costs, while SMEs would have more access to loans. Platforms such as these would handle the loan process from inquiry until recommendation, eliminating manual review as well as paperwork, and leaving the final decision to the underwriter.

Psychometrics is a second example of how groundbreaking technology can dramatically accelerate financial inclusion. Individuals who take out loans to fund their SME activity face yet another seemingly unsolvable vicious cycle. How to build a credit history for when one completely lacks one, with banks often reluctant to expose themselves to the perceived risk of lending to the unbanked? While not everyone has a credit history, everyone has a personality. Psychometrics builds a risk profile based on personality traits and emotional reactions analyzed as a result of expert built and approved psychological tests. A 3-5-minute quiz testing notions such as maturity, responsibility, the concept of “limits”, feelings about the future and self-perception suffices to accurately map these traits and expand them into models for consumer and SME risk prediction. These then are integrated into lending systems to expand customer bases. With additional risk profiles, lending can increase.

Morocco has been at the forefront in promoting financial inclusion, using new technologies as well as traditional methods, and highlights the complementarity between pursuing noble goals such as financially empowering-low income segments with profitability for traditional and non-traditional lenders. Of course, the next step is to introduce the most advanced solutions to truly achieve universal coverage and give a chance to those who despite all formal efforts remain unserved, underserved, or still part of the informal sector. In an economy dependent on sectors particularly vulnerable to external shocks, like tourism and agriculture, a robust SME ecosystem would only increase systemic resilience.

Nelson Madeddu

Global Consultant, Creditinfo Group.