NAIROBI — If Africa’s middle class is to expand and realize its potential, then financial institutions, regulators, NGOs and donors need to focus stimulation efforts on the lower middle-class. This segment is called the “cusp” or “floating” group in the economies of sub-Saharan African nations. Cusp populations neither live on the edge of survival, nor have a secure place in the middle class. Financial institutions and policymakers can achieve that secure place and create a true middle class for sub-Saharan Africa by developing healthy credit markets.
That’s the view of policy analysts from Financial Sector Deepening Africa (FSD Africa), a nonprofit that supports financial sector development in sub-Saharan Africa. Officials like Central Bank of Kenya governor Patrick Njoroge also embrace this view. The organization sees what is occurring in the cusp segment of the population as an answer to the question, “What has happened to the ‘Africa Rising’ story?”
In that story, which dates back to a 2011 study by the African Development Bank Group (AfDB), Africa’s middle class was seen as large and rapidly growing, with about one-third of Africans making up the class. Though, subsequent studies and a closer reading of the AfDB report show that a stable middle class makes up only about 3.3 percent of the African population. Much more of what the AfDB report counted as the middle class was made up of a “floating” sub-class, whose members are at constant risk of falling into poverty. Recent growth in the overall middle class, according to FSD Africa, has come from people shifting from absolute poverty (income of less than $2 per day) into this floating or “cusp” group (income of between $2 and $5 per day). This cusp group makes up about 25 percent of Africans today.
FSD Africa says financial institutions, regulators, NGOs and donors need to create “healthy” credit markets for the cusp group. Through healthy credit markets, these people can move into Africa’s middle class. Healthy credit markets make it relatively essay to obtain credit at an affordable cost. Lenders strategically focus on long-term success, offer a variety of credit vehicles that match borrower needs and the system provides value to both borrowers and lenders.
FSD Africa specifically recommends that:
- Regulators in constrained markets work to expand the use of credit products using low-cost, low-risk electronic channels.
- Donors facilitate experiments in peer-to-peer lending, such as P2P lending through eBay.
- Regulators and banks turn to e-arbitration for small financial disagreements.
- Regulators use digital identification and digital asset registries to replace outmoded manual systems.
- Regulators and lenders provide “learner’s licenses” for credit so borrowers get used to how credit works.
- Regulators introduce new rules for lenders to control predatory lending practices.
- Donors help develop tools to actively remind borrowers of their debt service, such as a credit card that lights up in red when a balance hits its limit.
Actions like these, according to FSD Africa, will help create the kind of healthy credit markets that will enable the “cuspers” over the next decade to move into Africa’s middle class.
– Robert Cornet