20 Years of Financial Inclusion in East Asia and the Pacific
CGAP was founded twenty years ago. At about the same time, in November 1995, I landed in Lao PDR for what was going to be my first-long term involvement in financial inclusion in East Asia and the Pacific. My relationship with the region hasn’t stopped since. At that time Vientiane had only a few cars and a couple of small microfinance initiatives. In the last twenty years I have witnessed significant changes in the demand for, supply of and policies addressing financial inclusion in the region. As we look at regional trends, let us remember that the extraordinary economic growth of China has been a major engine for the rest of the region, and tends to skew all the regional statistics. Another specific feature of the region is its capacity to innovate in the area of technology such as digital finance.
Photo Credit: Lin Chen
Demand for financial services
Today, East Asia and the Pacific hosts 25 countries, and roughly one fourth of the World population, one-fifth of the world’s poor living on less than $2 per day, and one-fourth of the world’s unbanked adults. Since 1995 the East Asian population has become more urban, less poor, older and more financially included. For example, the number of rural people in China has dropped from about 70% in 1995 down to less than 50% today. However, Vietnam and Myanmar are still closer to 70% rural, and in Cambodia and Papua New Guinea the figure is more than 80% rural. Migration to cities has created new needs for transferring money and sending remittances from the cities back to urban areas. Additionally, there is still great unmet demand for financial services by farmers in the region.
The East Asian population has also become older thanks to the progress of health and economic development. It is expected that the old age population will triple from 2010 to 2050 to reach 25% of the East Asia and Pacific population. In Cambodia for example, life expectancy has increased from 58 to 72 in the past 20 years. An older population will likely create needs for more diverse savings and insurance services. It may also have negative effects on the adoption of high tech financial services for the aging population segments. At the same time we are seeing rapid adoption of smartphones in the region. In China for example, 80% of people access their internet through their phone. This dynamic will create opportunities for digital finance services.
Photo Credit: Loc Mai
Supply of financial services
The financial inclusion providers’ landscape has evolved from state banks, NGOs, microfinance programs, and cooperatives in 1995 to a broader range of providers that now includes microfinance banks, insurance companies, Mobile Network Operators (MNOs), payment companies and e-commerce and internet companies.
There are a few global success stories with the transformation of microfinance programs and NGOs into fully licensed and financially sustainable banks or deposit taking MFIs. This is the case for the example of ACLEDA Bank in Cambodia and CARD Bank in the Philippines. But commercial microfinance did not really take off in many countries in the region.
The relatively low take up of microfinance is due to the fact that state banks have remained the main engine for serving the unbanked in the region over the past 20 years, sometimes on a commercial basis like BRI in Indonesia and its Unit Desa. In 1995 BRI had about 14 million depositors whereas it now has over 40 million. Other examples of major state banks serving the under-banked segments in the region, often with significant subsidies, include the Postal Bank of China with its 400 million customers, and the Vietnam Bank for Social Policies with 7 million low income customers. In Thailand, an estimated 74% of the population is banked mainly through state banks such as BAAC and Government Savings Bank.
Photo Credit: Trung Vo Chi
The Role of Digital Finance
Mobile money was born in East Asia, not in Africa as one may expect. The earliest global contenders in the mobile money revolution that has transformed our notion of financial inclusion started in the Philippines. SmartMoney launched in 2001, and GLOBE launched GCash in 2004. It was only until a few years later that M-Pesa was born in Kenya. These earlier East Asian innovations did not reach the same scale or success as M-Pesa, but perhaps paved the way for future innovations.
China especially has become a hotbed of technology innovation. There, the combination of rapid smartphone adoption, high internet and social media usage and leading ecommerce and internet innovators like Alibaba and Tencent is creating a new branchless banking paradigm that could spread into the rest of the world. Thanks to traditional banks, innovation, and the deployment of 900,000 bank agents that disburse subsidies, China has made huge progress in serving the poor and the rural unbanked. The rapid expansion of bank accounts combined with innovations in digital finance partly explains how eight out of ten Chinese adults are now formally banked and that usage of formal financial services is relatively high in China.
Photo Credit: Yamtono Sardi
The Role of Savings
Over the last twenty years the region has been known as very savings-oriented due to local culture, and to the predominance of government savings banks serving unbanked segments. Microinsurance has also emerged in the past twenty years, with for example CARD Pioneer serving 5 million low-income customers in the Philippines. New payment services have also appeared for the unbanked and the under-banked such as GCash, SmartMoney and Wing in Cambodia, not to mention the Chinese Alipay and WeChat wallet.
Photo Credit: Khant Zaw
The role of the Government
In East Asia and the Pacific governments have probably more influence in the financial sector than in any other part of the world. For example, state-owned banks have played and continue to play a huge role. Although the figures are not available, I would not be surprised if over 80% of those adults who are banked in the region had an account with a state-owned institution. This is particularly true in countries that have been influenced by communism and socialism such as China, Vietnam, Myanmar, and the Lao PDR.
From a regulatory point of view, the region has seen important progress, with a few countries adopting conducive regulations for microfinance institutions, and more recently enabling regulations for the use of agents and e-money issuance. Bangko Sentral ng Pilipinas was one of the pioneers in the region, and Indonesia has recently introduced new regulations for agent banking. Several countries have also pioneered national strategies for microfinance and now are developing more comprehensive national financial inclusion strategies, with the support of donors such as World Bank and the UNCDF (Cambodia, Vietnam, China, Indonesia, and Myanmar are all examples here).
The region is also about to play a key role in international financial inclusion policies with China leading the G20 in 2016, and the Philippines leading the Basel Committee Group Financial Inclusion Workstream. This is not to mention that AFI, the global leading network of financial inclusion regulators, has been based in the region since it started in 2008.
Photo Credit: Elpidio Juan
So if you are wondering what will come next in financial inclusion in East Asia and the Pacific, my answer is pretty simple: look at what is coming from China with its plethora of new hybrid business models for doing internet banking. It’s the space to watch.