African financial sector’s billion-dollar blind spot

Africa’s largest economic grouping is the informal sector, which regularly turns over billions of dollars and is often the largest employer, but it is largely ignored by formal financial structures. Of this grouping, often undocumented, forcibly displaced persons form a considerable segment. They generate almost $30bn annually and participate in over 50% of the labour market. But they remain invisible. Can they be brought in from the cold? By Bathsheba Asati and Tito Mbathi of the Amahoro Coalition.

Walk far enough from the centre of any African city and the bank branches thin out, the paved roads end, and the formal economy gives way to something larger, more dynamic, but often ignored by the financial systems built to serve the centre – this is the periphery.

The periphery – referred to here as the economic activity that lies outside the reach of formal financial systems – encompasses groups that are either geographically, institutionally, or documentarily distant from the economic centre.

The periphery is larger than most financial or political models acknowledge, yet remains economically vibrant. The rural smallholder whose land generates income but carries no formal title deed, or the urban migrant whose business turns over thousands of dollars each month but cannot satisfy a loan officer’s documentation requirements are examples of the periphery in action. These groups sit beyond the remit of traditional finance despite possessing just the economic capacity that finance claims to exist to unlock.

Among the most concentrated and excluded of these populations are Africa’s displaced. According to our research in The Opportunity in Displacement: Africa’s Untapped Investment Frontier, over 43.1m forcibly displaced people (FDPs) generate an estimated $27.7bn in annual income, participate in labour markets at a 56% rate, and save at levels comparable to continental averages. Yet formal financial institutions treat them as invisible, which leaves a significant commercial gap.

The documentation problem

One of the primary reasons that the periphery is overlooked by financial institutions is due to a lack of formal documentation. The continent’s financial sector imported its frameworks from economies where stable addresses and national IDs are baseline assumptions. In contexts where those assumptions do not hold, the frameworks collapse, and financing becomes impossible.

As such, an enormous share of the continent is left out. Approximately 500m people in sub-Saharan Africa lack proof of legal identity, yet 83% of sub-Saharan African economies require government-issued identification just to open a bank account.

These are not, for the most part, FDPs but residents of the broader periphery where formal systems have never been able to extend their reach.

Thus, the same obstacles that lock out a trader on Kampala’s outskirts also lock out a refugee in Kakuma. The documentation gap follows the geography of informality, cutting across migration status and creating a clear structural barrier that results in systematic market failure.

Evidence suggests that this exclusion is not created by displacement, but the crisis intensifies it. The documentation challenges for those without a stable living environment, let alone a formal address, are greatly multiplied.

According to our research, in displacement zones there is an estimated $2.7bn in potential formal savings trapped in informal channels, with a further $500m in credit demand going unmet by formal institutions. The institutions turning these customers away decline viable customers whose creditworthiness their own frameworks cannot evaluate.

The first institutions to build systems that can evaluate those in the wider periphery, including forcibly displaced persons, will capture massive new markets while everyone else sits on the sidelines.

An intriguing example where private sector actors have been able to capitalise on the wide underserved population base comes from Uganda.

UGAFODE Microfinance opened a branch inside Nakivale, one of Africa’s oldest refugee settlements, after securing special permission from Uganda’s central bank to accept refugee ID numbers as a credit bureau reference in place of national identification.

The institution now serves roughly 10,000 economically active refugees, with default rates on refugee loans running at just 6%, on par with its wider portfolio. Through their flexibility, they were able to prove a viable and commercially successful business model in an area most funders had overlooked.

The adaptation premium

MyBucks is not the only enterprise to have unlocked these markets. One thing that all of these institutions share is that they were able to recalibrate their assessment frameworks from a first-principles approach, rebuilding around authentic predictors of repayment.

They set aside the inherited assumptions about creditworthiness and tested which indicators correlate with a customer’s ability and willingness to repay in Africa.

This is exemplified by Inkomoko, a leading financier across East African displacement contexts. The company achieves 95%+ repayment rates while deploying over $10m annually.

Their specific approach involved reconstructing credit assessment around authentic signals for repayment, such as business cash flows, community reputation, and demonstrated savings behaviour, etc. Logically, these indicators are far more reliable than basic business documentation.

What the aforementioned companies understood well is the commercial logic of working with FDPs, a fact that is widely underappreciated.

For one, FDPs offer concentrated markets for businesses, with many FDP settlements possessing populations greater than 10,000, with some of the continent’s largest exceeding 250,000.

Such customer density, without the geographic dispersion that drives up acquisition costs, presents significant opportunities, especially in rural areas. A single branch or agent network positioned within a camp can reach a customer base that would require dozens of dispersed branches to replicate.

Moreover, demand patterns are generally predictable, and building social trust within the tight-knit communities common in settlements creates prohibitive switching costs.

The commercial logic

For financial institutions, multiple factors make adapted models commercially compelling beyond the market size, with three of the most significant as follows:

• First-mover advantages are substantial: Early entrants build loyalty and help shape the regulatory frameworks that latecomers must then navigate.
• Counter-cyclical resilience matters: Consumption in displacement contexts is driven by diversified income sources and community solidarity networks largely disconnected from host economy cycles. This provides a meaningful decorrelation from the pressures affecting traditional customer segments.
• Scalability accelerates: Platforms built for non-standard documentation can serve adjacent populations (e.g. informal workers, rural smallholders, urban migrants) all facing the same exclusions at lower marginal cost.

The opportunity of creating models for the periphery extends beyond displacement contexts alone. There is a continent-wide credit market failure, highlighted by our 82% informal borrowing rate.

Displacement settings offer a sandbox to build and prove solutions that can later be scaled to address broader problems, extending through the periphery. The institutions that succeed in the next phase of Africa’s growth will be those willing to build for all, not waiting for the periphery to conform to systems designed for the core.

This is the conversation we’ll be continuing at the African Forum on Displacement in Addis Ababa this November, where we’ll be unpacking both the scale of this opportunity and the commercial models already proving it out. If you’re working to close the gap between the core and the periphery, or want to understand where the next viable market lies, we’d welcome you at the table.

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