Vanuatu is a Y-shaped mountainous archipelago comprising four larger islands and eighty-three smaller volcanic and coral islands in the Melanesian region of the South Pacific Ocean. Spanning over 1,300 kilometres, these islands collectively cover a land area of 12,189 square kilometres. While many of Vanuatu's islands enjoy fertile volcanic soils, agricultural activities face significant limitations on some of the smaller outer islands and coral atolls.

According to the National Financial Inclusion Strategy 2018-2023 data of the 37 percent % adults with a bank account, and 10% access financial services from other formal providers such as credit unions, microfinance, insurance, mobile money, or finance companies. 20% of the adult population access financial services from informal sources.

The remaining 32% of adults are completely excluded from both formal and informal financial services. The financial inclusion rates in Vanuatu are lower than most other small nation Pacific Islands, with the exception of the Solomon Islands.

Vanuatu’s key financial challenges include limited access to digital financial services, very low usage of existing platforms, lack of financial literacy and the lack of financial resilience to external and internal economic shocks among the population.

Mobile Financial Services in Financial Inclusion

Mobile-based financial services (MFS) present an opportunity to bridge some of the gaps and overcome the unique barriers to financial inclusion in Vanuatu. Various countries around the globe encounter similar challenges of communication and distance in accessing formal financial institutions such as banks.

For instance, in Vanuatu, individuals may need to walk for hours and cross the ocean to reach a bank, while in countries like India, Bangladesh, Kenya, and Nigeria, it involves hours of travel by land, crossing rivers, and extensive walking.

The challenges of accessing financial services are similarly difficult for those residing in remote rural areas. According to an econometric modelling research by Vodafone Group, Vodacom Group, Safaricom and the UN Development Programme (UNDP), that analysed 49 countries across Africa, Asia, and Latin America, the countries with thriving mobile money services experienced up one percentage point higher annual GDP per capita growth rate compared to countries without successful or introduced mobile money platforms.

The study suggests that successful mobile money adoption in countries can lead to poverty reduction of around 2.6%, based on the correlation between economic growth and decreased poverty rates observed in prior World Bank research.

Drawing the global experience as captured by GSMA in SOTIR 20243, the West African Economic and Monetary Union (WAEMU), comprising Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo, has seen significant growth in mobile money usage. Between 2018 and 2022, over 110 million new mobile money accounts were opened, including 60 million since 2021.

This surge in financial inclusion, rising from 56% in 2018 to 71% in 2022, has been fueled by the increasing adoption of mobile money in the region, which has a population exceeding 137 million, with 60% residing in rural areas. The same report from GSMA identified that in 2019, the mobile money industry supported at least 13 SDGs, increasing to 15 by 2023. It now contributes to SDG 11 (Sustainable cities and communities) and SDG 12 (Responsible consumption and production) by enhancing digital payment access and financial inclusion, playing a crucial role in achieving the SDGs.

State of MFS in Vanuatu

Though introduced in 2011 originally and reintroduced in 2018-19, MFS are still not popular in Vanuatu, with only two providers offering very limited and expensive services. The MFS providers are the mobile network providers (MNO), Digicel and Vodafone, and both offer mobile money services - MyCash and M-Vatu respectively.

Both are being used as value-added services from the MNO’s with very low uptake (estimated by the Reserve Bank of Vanuatu at less than 1%) , and not as a fully functional tool for the unbanked population to get access to financial services. Because of numerous challenges within the sector, the MFS did not evolve in Vanuatu as it did in other parts of the world like Africa and South Asia.

Challenge 1: Lack of Regulatory Framework

For any service, the presence of a regulator and regulations are important to ensure standardisation as well as for the security of all the stakeholders. In Vanuatu, currently the specific regulatory framework for MFS is nonexistent. (This puts the whole MFS sector in a grey area because it is unclear what is permitted and what is not.

For any new service or change, approval is sought after on a case-by-case basis. This is certainly not an ideal scenario for any sector, let alone one that involves financial transactions. This also creates several pertinent and residual challenges for all the stakeholders.

For example, as there is no regulatory framework, the MFS providers charge fees through different mechanisms and these fees can be exorbitant. This scenario creates serious confusion among the consumers. For peer-to-peer money transfers, one MFS is charging based on the percentage of money being transferred and another is charging based on fixed rate depending on different slabs of amounts.

In another case, availing the service is challenging for the people because for every transaction, be it withdrawal of any amount of money or deposits, a government-issued ID cards are being requested. This poses a serious challenge for the everyday person as no-one is carrying government-issued ID cards all the time for these services.

Irrespective of the amount, even for a transaction of US$10, an ID card must be submitted. This onerous requirement contributes to the low usage of MFS in Vanuatu. A proper regulatory framework would provide a structured guideline for what amount of money or for which situations an ID card would be needed for a registered MFS account.

On the contrary if a person going to the bank for transactions of 1000 times higher, no-one is asking for an ID card. It seems that the self-proclaimed regulations of the MFS providers are working against the marginal population and their financial inclusion.

Furthermore, the protection of consumer data is not clear under the current practice. At present, the grievance addressing system is based on the mobile network operator’s own policies and procedures for SIM card related issues. However, this should never be the case for financial transactions. For financial transactions, the grievance addressing mechanism should be standard and the involvement of the regulator for appeal should be clarified to ensure that the consumers have the confidence in the system.

Challenge 2: Siloed MFS Ecosystems

This may sound quite staggering in 2024 but it is a fact that the MFS ecosystems in Vanuatu operates in silos. This means that the MFS systems are not connected with the conventional financial ecosystem of Vanuatu. This situation disincentivises the use of MFS by the consumers and businesses. At present, it is not possible to send money from any MFS in Vanuatu to any bank, even interoperability between the DFS providers does not work.

In rare cases, it is possible to send money from a bank to a mobile wallet. The prevailing situation is directly hindering the use of MFS by the consumers. In cases of receiving money in the MFS account, the only way to put money in the bank is to withdraw the money by paying an exorbitant cash-out fee and then go the bank to deposit the cash. This is never the ideal situation.

As there are more than 15,000 seasonal migrant workers mostly in Australia and New Zealand, they are sending a substantial amount of remittances back to Vanuatu every year, equivalent to 15.25% (World Bank 2022) of the national GDP. For the families living in the remote islands transferring the money to the bank is a challenge.

Many of the people literally need to cross the sea to go to a bank to access financial services. On the other hand, this situation is far from acceptable for the businesses who have the capacity and interest to receive MFS based payments. Over again even for the businesses the amount of time needed from the payment received at the point of sales to the money going to the bank could be one week or more.

There is a significant implication for businesses on cash flow in a situation like this. Although the money might be available in the mobile wallet, businesses or individuals may find it challenging to utilise it for supplier payments, salaries, or other expenses because most businesses do not accept payments through MFS due to the extended time required to transfer funds to bank accounts.

This has created a cycle of avoiding MFS for business payments due to the delay and high cost of cash out. It's astounding to consider: the money takes such a long time to reach the bank. At the end of the week, or after a certain period, someone in the MFS provider’s office manually performs accounting and sends a list with instructions to the bank to transfer money from the MFS provider’s account to the businesses' bank accounts. That something like this is still happening in 2024 is quite bizarre! This is certainly contributing to de-popularizing the MFS for businesses and individual consumers.

Challenge 3: The Weak Agent Network

The final critical challenge for the people to access MFS services is the agent network. As the MFS has little popularity and utility among the people, establishing and maintaining a strong network of MFS agents is an uphill battle. There are many reasons behind that and one critical one is the lack of viable business models for MFS agents.

As the agents find a lack of return on investment, they lose interest and engage in other businesses. On the other hand, the less than 1% population who actively use MFS do not find agents in nearby locations. This again creates another cycle of lack of available agents contributing to lack of interest among the consumers. This whole situation is again working as a barrier for the MFS to become popular as a complimentary financial service solution for the remote rural population.

The Way Forward

Despite the many challenges there is a silver lining. The United Nations Capital Development Fund (UNCDF) in Vanuatu developed a policy paper last year and engaged with the relevant stakeholders to address the challenges in the MFS ecosystem.

The relevant stakeholders are waking up to the fact that to achieve financial inclusion, the role of MFS must be much more effective, consumer-friendly and it must operate alongside the conventional financial mechanisms. As a proof of this awakening, with support from UNCDF, the Reserve Bank of Vanuatu (RBV) officially took the full responsibility of the regulating the MFS sector as the regulator in September 2023.

Another important development that took place in the same year was, the RBV adopting MFS as a tool for achieving financial inclusion. With the technical assistance of UNCDF, the RBV is working to develop a regulatory framework, operations guideline, and consumer protection policies. Also, by the end of 2023, the RBV introduced the national payment system to connect all the banks to transfer funds securely in real-time.

Once the policies are in place it will be possible to connect the MFS to the national payment system and break the siloed system of the MFS that currently exists. UNCDF is also working closely with the MFS providers to support them in building a robust network of agents and to make the business more viable from the agent’s perspective along with awareness creation.

Conclusion

There are substantial pieces of evidence from various sources that MFS can contribute positively to the financial inclusion and 15 SDG’s. There are also studies that show that MFS can contribute to the GDP growth positively. Though Vanuatu graduated from LDC status in 2020, it has a long way to go to achieve financial inclusion and consistent GDP growth. MFS can play a very critical role in supporting the efforts aimed at universal financial inclusion.

With encouraging developments in the MFS sector in Vanuatu finally taking place, it can be hoped that by the end of 2024, the MFS landscape in Vanuatu might look quite different and the sector should start positively impacting for the remote unbanked population.