Youth barriers to financial inclusion
Fostering Alternative Know Your Customer (KYC) for Younger Youth in Tanzania
Contributing Authors: Irene Madeje Mlola (Interim Executive Director) and Anna Jubilate Mushi, (Head of Gender and Youth), FSDT
“Younger youth offer a unique opportunity to be capitalized on, but at the same time they face unique challenges that need an exceptional eye and approach to address.”
Neema is a 16-year-old, living in rural Katavi Region, with her grandmother. She dropped out of school after her parents passed away and has been helping her grandmother with household expenses through her local food vendor business, also known as ‘Mama Lishe’. Neema has been engaging in this business since she was 15, and her business has been growing every year. Neema’s dream is to one day upgrade from her stand at the market area to owning a proper restaurant at the busiest part of the market area with high foot traffic. Currently, she depends on her profits and some help from her cousins to grow, but this will not be enough for her to reach her goal soon enough. She currently stores the profit she makes at home in a ‘Kibubu’ only because she is under age to qualify for a bank account or mobile wallet. To have either or both requires her to have a national identification number, which at the moment is only attainable starting at 18 years of age. Her grandmother has also never had a bank account or own a mobile phone because she did not have the right documentation. Therefore, two years’ worth of savings is currently in Neema’s Kibubu. At the same time, Neema could really use an affordable loan product to fast track her dream of growing her business. Neema’s challenge in accessing much needed formal financial services is commonplace among many younger youths in Tanzania.
According to the 2018 National Population Projections for the year 2021, younger youth between the ages 15 and 24 account for 35% of the adult population. FinScope Tanzania 2017 indicated that 63% of these youth aged between 16-24 years old, which is a focus of this paper, are economically active – 27% in farming, 10% in business/trade, 21% in casual labor, 5% employed mostly informal. This age group is better educated compared to any other population, with higher numeracy and literacy levels, and they are more technologically savvy, but less likely to own smart phones. Formal borrowing (from banks, MFIs, and other financial institutions) remains low as they mainly borrow from family, friends, and other informal mechanisms. However, for those owning a mobile phone, mainly male youth, do borrow and save through their mobile money wallets, which has helped to advance their digital transaction footprint, a key enabler to accessing formal credit from financial service providers. Unlocking opportunities for this segment to start or expand their economic activities to earn a living and prosper will contribute fundamentally to their development.
The Tanzania National Youth Policy (2007), currently under review, defines youth as a young woman or man between the age of 15 to 35 year; while the Law of the Child Act (2009) defines a child as a person below 18 years old. It is worth noting that while the Act is focusing on protecting the welfare of a child or a young person, which is very important, the policy is more progressive in terms of acknowledging the need to have a holistic and sustainable development approach for youth, starting from 15 years. The policy recognizes the youth as key drivers of economic growth, and the progress of our society is determined by how much we invest in their future.
Building on from the policy definition, youth have been identified in the Tanzania Development Vision 2025, Five Year Development Plan III, as well as the Zanzibar Strategy for Growth and Reduction of Poverty III (MKUZA III), as a generation of potential, which if not attended to, may result in negative economic impact. The National Financial Inclusion Framework 2018-2022 and Financial Sector Development Master Plan 2020/21-2029/30 underscore this fact and acknowledge the need to prioritize initiatives that will have an impact on the lives of the youth to promote their improved well-being and empowerment, using finance as an enabler. Furthermore, the National Youth Agriculture Policy 2016-2021 recognizes low youth participation in agriculture, despite being the largest employment sector nationally, and has put in place strategic objectives to make agriculture attractive to the youth, including the need to facilitate land acquisition and accessibility for agriculture investments, such as financial resources for youth to invest in agriculture.
While discussing youth it is important to recognize that when one is young, they have more freedom to test boundaries in terms of what works and what doesn’t and discover endless opportunities. Creating an enabling environment for these dynamic youth to thrive will mean improved opportunities for them to capitalize on. By the time they reach 25 years and above, they will be better placed to gain more meaningful engagement and derive value from economic activities. They will have better ability to mitigate shocks, risks, and plan well for the future. Therefore, intentional approaches are required if we are to redefine and optimize this age group for sustainable development of Tanzania.
Mirroring on the youth aspirations largely informed by studies such as the Tanzania Integrated Labor Force Survey of 2014, over 50% of Tanzanian youth aspire to have their own businesses and venture into entrepreneurship. Looking deeper into this aspiration, those not in any form of institutional setting and between 16 to 24 years have challenges in producing any form of identification, let alone the required documents for a business-related account or loan, such as a Tax Identification Number (TIN), Business License or audited accounts. Youth between 16 to 17 years cannot even produce National Identification numbers or voters ID since they are not eligible and yet a significant number is already active in the economy.
On the same note, agriculture is recognized as the main sector for youth employment. However, FinScope Tanzania 2017 noted that only 15 % of rural youth aged between 16-24 years personally own land, 4% have core-ownership with just 7% having title deeds. Similar trends can be observed even among rural youth, as the Rural Youth Inclusive Finance Study of 2019 points out; lack of assets and proof of ownership that could be used as collateral for credit acquisition provides a key challenge. Due to prevailing gender inequalities in regard to land ownership, female youth of the same age are more likely to be further excluded.
Similar trends can be observed while assessing overall financial inclusion levels in Tanzania. Despite reaching 65% by 2017, 33% of youth aged between 16-24 years are totally excluded from the financial system. Even those considered included, their financial health is very low. They mainly utilize mobile money; however, they are not diversified in their financial services uptake. Their financial behavior is very much centered around cash flow management and basic transactions partly because of low levels of responsive use cases.
Looking at the above information and commitments by the Government, there is no doubt that younger youth offer a unique opportunity to be capitalized on, but at the same time they face unique challenges that need an exceptional eye and approach to address them.
On the other hand, financial inclusion by enabling youth access and usage of relevant financial products and solutions offer a great opportunity to unlock the younger youth potentials and improve their livelihoods through job creation and income generation. Cognizant to this, there has been a strong call to promote a financial sector in which stakeholders understand the needs and behaviours of youth and take appropriate and corrective actions. Nonetheless, venturing in financial services for youth, especially those aged 16-24 years, is considered a difficult and tricky segment to serve, as many do not fulfil the regulatory requirements. Many of the youth, especially under 18 years out of school youth, do not fulfil standard Know Your Customer (KYC) requirements on their own and do not have assets that qualify as collateral, resulting in lack of products, solutions and use cases that respond to their financial needs and aspirations.
Identification serves as a primary Know Your Customer (KYC) for an individual to access and benefit from formal financial services. This is clearly stipulated in the Anti Money Loundering (amendment) regulations of 2019 and does inform other relevant regulations pertaining to KYC in the financial ecosystem. While in the absence of national identity card, a citizen can use a passport, birth certificate, voters’ registration card or driving license to open a bank account; the national identity card serves as a commanding KYC. Similar trend is noted for those accessing financial services through mobile money wallets. Recent measures by the Tanzania Communications Regulatory Authority (TCRA) require every sim card holder to register their sim card(s) with their national identity number.
In Tanzania, a person is eligible to acquire national identity number/card, voters ID or driving licence when she/he reaches 18 years of age. While the move to use national identity numbers to acquire sim cards is welcomed, 16- to 17-year-olds out-of-school youth are totally excluded. Yet their main mode of transaction is through mobile phones. Alternatively, parents and guardians can be used to register sim cards or open bank accounts for this age group. However, the out-of-school younger youth are the likes of Bodaboda drivers and Machingas who have migrated from the rural areas and getting a parent or a guardian to register a sim card or open a bank account on their behalf is next to impossible. Exploring alternative digital identification for this segment linked with National Identification Authority (NIDA) to enable smooth onboarding and acquiring of national identity number by the time they reach 18 years old is of paramount importance.
On a related note, while youth aged 18-24 years are eligible to acquire national ID, those not in formal institutions face considerable challenges in accessing services related to ID acquisition. According to FinScope Tanzania 2017, only 4% of 16- to 17-year-olds had some form of ID, while for 18- to 24-year-olds it was at 68%. The main form of identification for the 18- to 24-year-olds back in 2017 was the voters ID. Recent measures by TCRA to ensure every sim card holder has registered their sim card(s) with the National ID might have significantly increased the number of youth in this age group holding a National ID. Nonetheless, lack of time because of nature of work/business they engage in; lack of financial resources to cater for transport costs and other ID acquisition processes which may require finances; lack of information and awareness on the importance of ID and how to go about it and; youth (mainly female youth) mobility and freedom restrictions to travel outside home, especially if ID offices are far from their localities, limits significant uptake by this age group.
Global evidence has proved that digital ID (alternative and standards) and access to phones to be a key enabler to younger youth economic empowerment and improved well-being. With digital footprints, it provides financial service providers with an opportunity to design digital wallets with use cases that can promote the younger youth’s ability to save, borrow and absorb shocks. It also increases younger youth’s ability to be visible and establish financial history, which unearth future possibilities such as using the information as alternative collateral since many do not have assets.
Considering the power of a digital ID to transform the lives of younger youth and potential it has to their economic growth; identification authorities such as NIDA and Registration Insolvency and Trusteeship Agency (RITA) need to consider coming out with alternative and adequate identification for youth below the age of 18. Connected to this, Financial and telecommunication regulatory authorities such as Financial Intelligence Unit (FIU), BoT and TCRA need to consider reviewing their regulations by potentially introducing tiered KYC procedures to accommodate those that have been left behind. A Sandbox approach to test what is possible can be a good starting point to help solve this puzzle.
At the same time NIDA need to ensure youth intentional ID acquisition process is put in place. Context specific and deeper understanding of different segments of youth to help unearth realities faced by different groups is of paramount importance to inform a responsive approach. Characterization of these youth will lead to designing a less cumbersome registration processes.
Lastly, mobile network operators have proven to be more popular among younger youth, strategic partnerships with them to ease registration and ID acquisition process will increase uptake of alternative and standard digital ID by younger youth.