While on the surface level Lesotho appears to have some of the highest levels of financial inclusion in the region, issues regarding Basothos’ trust in their government and the financial sector in general, poor infrastructure that acts as a natural barrier to access. The high level of financial inclusion also does not unpack the quality of financial overall that consumers are receiving. The limited scope for increased inclusion will certainly impact the pace at which opportunities for growth and further inclusivity can be reached.

• Lesotho’s financial sector has experienced a number of problems of fraud, insolvency and mismanagement over the years, which may have contributed to a low level of trust in formal financial institutions. Over the past two decades, three major state-owned banks were closed due to prolonged and excessive losses.
• In the private sector, a large-scale pyramid scheme grew out of a funeral services company (MKM) in 2007/8. Several hundred thousand Basotho were enticed to “invest” with the promise of high returns. Most of them lost their money when the inevitable collapse came.
• The country’s geography and topography, combined with poor infrastructure, means that there are substantial access barriers for the two thirds of adults living in rural communities.
• Lesotho already boasts one of the highest levels of inclusion in the region, with just 19% of adults not financially served. This is largely driven by the very high usage of insurance – primarily informal and formal funeral insurance – amongst Lesotho adults. Similar to most other countries in the region, Lesotho has a high level of HIV/Aids infection and as a result life expectancy is very low. Hence, to save/insure for their funeral costs, most Basotho’s take a funeral insurance to help pay for these costs.

The small size of the economy and limited industrial base means that though most micro businesses in Lesotho are survivalist in nature and most farmers operate on a subsistence basis, entrepreneurship and farming nevertheless fulfil an essential role in generating livelihoods. Community-based financial services are a preferred way of functioning in society, rather than just a stop-gap measure in the face of formal exclusion. They not only extend the access frontier, but also fulfil an important social support role. There is limited indication of consumer protection concerns among small, community-based unregulated providers. Where consumer protection concerns have arisen, it is in larger financial service cooperatives or burial societies where the link to community-based self-management is broken. This contrasts to negative perceptions of formal financial institutions in light of high charges, as well as a history of failed state financial institutions. The cultural prominence of a decent burial, along with strong social structures has led to Lesotho having a very high penetration of funeral insurance, both formal and informal. Furthermore, the impact of poor health, largely due to high HIV/AIDS prevalence, is evident on household structures and creates unconventional intergenerational financial responsibilities (with grandparents for example looking after grandchildren, rather than being looked after by their own children). The health situation creates an imperative for targeted financial services (be it savings, credit or insurance) as a coping mechanism, as well as for low-cost payment mechanisms in order to send money to those affected.

The close link with South Africa makes it unsurprising that Lesotho has a high degree of financial integration with South Africa. This includes: sharing a currency, exchange rate and monetary policy; partially integrated capital markets and payments systems; a banking system that is closely integrated with that of South Africa; a high level of cross-border remittances (largely inward; and cross-border trade in financial services. Migrant labour has a central impact on household structures and livelihood activities. Those dependent on others for their main income source is the single largest target market segment, whilst many other adults also receive remittances as an additional source of income. Apart from the direct impact of remittances, the large migrant population also creates scope for other financial services targeted at the migrant worker population, such as repatriation funeral insurance and cross-border payment of dependents’ insurance premiums, retirement or other long-term savings, or cross-border payment of loans.

Strong policies but weak regulation

A strong financial inclusion commitment by the government is manifested in a variety of ways. Financial inclusion and access to finance are an explicit component of the National Strategic Development Plan. The Government has been actively collaborating with UNCDF and IFAD to establish the Support for Financial Inclusion in Lesotho (SUFIL) and Rural Financial Intermediation Program (RUFIP) projects. The Financial Sector Development Strategy (FSDS), approved by Cabinet in 2013, has financial inclusion as a major component. The objective of enhancing financial inclusion is to reduce vulnerability and increase income in the wider economy, thereby impacting on poverty reduction, employment and growth and, ultimately, enhancing welfare.

The Government of Lesotho has shown itself to be a willing partner in increasing financial sector inclusivity, and as such have been connecting a number of policy and regulatory dots to fill historical gaps. This includes the preparation of the FSDS, the 2012 Financial Institutions Act, the Credit Reporting Act, the new Payment Systems Act and the new Insurance Act. Though this represents significant progress towards a regulatory framework that increases financial access, a few key constraints certainly remain. For example, the implementation of new, inclusive legislation and the ability of financial institutions to take advantage of new opportunities are held up by the lack of regulations needed to give effect to this new legislation. In addition, the weak regulation of financial services provided by cooperatives and moneylenders have led to concerns over consumer protection and uncertainty regarding the ability to enforce future regulations.

FINANCIAL SECTOR AT A GLANCE

Lesotho boasts very high levels of financial access with just 19% of adults not financially served. This is mostly driven by the very high usage of insurance – primarily informal and formal funeral insurance – amongst Lesotho adults. While 62% of adults purchase funeral insurance, 38% of adults have a bank account and a further 23% utilize another form of formal financial service, meaning that 61% of Lesotho adults are formally included in the financial sector. A further 20% are only served by informal financial services.

Barriers to financial inclusion:

1. Fear of credit, with 66% of adults without credit citing it as their reason for not accessing credit, and 42% having concerns about their ability to repay the loan.
2. Lack of payslips and proof of income, given that only 14% are salaried workers. There is also a perception amongst most Basotho adults that they earn too little to qualify.
3. Products do not cater for irregular incomes. Many Basotho earn irregular income from farming, piece work and remittances, but most formal products are relatively inflexible.
4. Doorstep barriers. Many Basotho do not regard themselves as a target market for formal financial institutions particularly banks, perceiving them to be for higher income workers. Potential users therefore often do not even investigate the available options.
5. Proximity. As physical infrastructure is situated in urban centres, many clients have to travel to interact with the banks and other institutions which entail time and transport costs.
6. Expense / cost of bank accounts: The high costs associated with transaction and savings accounts (both real and perceived) are a significant barrier to usage for the low income population. The most frequently cited consideration when opening an account (by 33% of adults) is bank charges, while the high costs associated with cross border remittances sent via formal channels constitute a substantial portion of the value of the remittance sent.
7. Lack of mobile money awareness and education. A key barrier to take-up of mobile money is awareness of the channel and education around how it works and what is required from users
8. Lack of KYC exemption for low value bank transactions is a barrier to consumers as well as creating a non-level playing field for providers (both domestically and cross border). These could be aligned to requirements for mobile money.
9. Lack of excess income: Lack of excess income the primary reason for Lesotho adults not to save
10. Product features: formal insurance typically requires debit order deductions. This is problematic for the low-income (only 15% of those earning less than M500 per month have a bank account).
11. Negative perceptions of formal players in insurance, being seen by some as ‘thieves’, ‘crooks’ and ‘con men’ as due to perceptions that they either delay, avoid or depart from claims settlements. This is possibly as a result of strategies implemented by insurers to deal with fraud and false claims.
12. Consumer protection concerns stemming from inadequate market conduct during the sales process. One of the critical aspects highlighted is the provision of clear product information. There is also need to improve on simplicity in product information

At a macro level, the situation of Lesotho is plainly in need of significant, enforceable reform, and the following will require concerted effort at a policy and implementation level to encourage financial inclusion:

• Institutional reform. Lesotho Postbank and Boliba Savings and Credit are two institutions that are critical to the country’s financial inclusion efforts given their large customer bases among LMI populations in Lesotho. However, both suffer from weak governance and supervision that have fostered potential fraud and a lack of profitability that threaten depositors.
• Policies that explicitly address migrant workers. Currently there is a lack of policies that target the large number of Basotho migrant workers. Current remittance channels are not low-cost and there are few, if any, policies that incentivise migrant worker investment or saving in-country.
• Reducing costs. Greater formal savings can be supported through industry-wide strategies that reduce the cost of formal savings and enable mobile money to play an explicit role in deposit mobilisation.
• Leverage existing channels. Targeting defined groups of SMMEs and farmers requires a rethink of the role and mechanisms of delivery credit. Where relevant, government could leverage its involvement in value chains to incentivise private financial institutions to engage.

At a MESO level, key barriers include:

• Socio-economic conditions. Dependents, survivalist entrepreneurs, farmers, and those who do casual labour comprise most of Lesotho’s adult population. Their very low and irregular income profiles challenge formal eligibility, especially for credit.
• Physical conditions. The country’s geography and topography, combined with poor infrastructure, means that there are substantial access barriers for the two thirds of adults living in rural communities.
• Retailer monopoly of money transfers. Formalising the retailer payment model to allow retailers beyond Shoprite to offer cross-border and domestic money transfers would increase access to sought-after money transfer services for large numbers of customers, especially in rural areas.
• Concentration of financial service touchpoints and products in urban areas

From a customer perspective, barriers include:

• The adult population on the whole is already broadly served by financial services – no need to “fix what isn’t broken”
• High charges in the banking sector lead to negative customer perceptions and the use of bank accounts merely as “mailbox accounts” instead of a transaction or savings tool
• Eligibility requirements for savings accounts that necessitate difficult-to-obtain proof of employment and income
• Dearth of tailored, targeted products and services that appeal to and are suitable for groups as diverse as rural subsistence farmers and migrant workers in South Africa
• Adults in Lesotho already heavily utilize informal products and channels
• Lack of education and awareness of the benefits of financial services products and access

When filtering the financial inclusion priorities through the lens of actions most likely to contribute to poverty alleviation and economic growth as well as meet key target market needs, three core priorities of improvement were identified by the research:

• Directly improve household welfare through efficiency gains and risk mitigation
• Take small steps towards enhanced growth through highly targeted productive credit and inward investment promotion
• Leverage financial sector intermediation to support investment and growth