A Review of Financial Inclusion 2012: Aligning for Real Progress
Our collective efforts to advance financial access for the poor made good progress last year. Providers and regulators around the world accelerated efforts to translate their better understanding of demand-side needs into new product and policy approaches. Business model innovation aimed at increasing reach and lowering costs continued apace, in particular through the use of new technologies. And leaders from nearly 40 developing countries and emerging markets with a combined population of 1.7 billion committed to advance financial inclusion domestically because they know that an inclusive, local financial system that reaches all its citizens is an important ingredient for economic and social progress.
Photo Credit: Siu H Ket
While there will be setbacks and while we will make mistakes, I think the stars have started aligning for real progress to be made in the next five years toward full financial inclusion – where everyone has the choice to access and use the broad range of financial services they need to improve their lives.
Better Meeting Underlying Client Needs
Over the past years, we sharpened our understanding of the financial services needs of poor households. Globally, an estimated 3 billion people live below $2 a day. They typically live and work in the informal economy, not by choice, but by necessity--often in multi-generational, multi-occupational households. In economic terms, they are producers and consumers at the same time. As such, they have a broad range of financial services needs to accumulate assets, create income-generating opportunities, manage risks, and smooth consumption. We know from the financial diaries literature that they are very active managers of their financial lives. They have to: they are vulnerable and have no margin for error. When they don’t have access to formal financial services, it doesn’t mean that they don’t use any. It means that they have to rely on the age-old informal mechanisms: family and friends, the rotating savings club, the moneylender, the pawnbroker, cash under the mattress, long-term savings in the form of livestock. These mechanisms are incomplete and can be very unreliable, risky, and expensive.
Last year saw increasing progress in translating this understanding into better product offerings and policy approaches. For example, a set of providers across the globe accelerated experimentation with innovative products that better match people’s savings needs and behaviors. Green Bank in the Philippines offered its SEED (Save, Earn, Enjoy, Deposit) commitment savings product, which enables clients to withdraw from the account only once their goal date or amount is reached. Jipange KuSave in Kenya tested the provision of interest-free loans with a third of the amount held back as savings. Opportunity Bank in Malawi has a commitment savings product for farmers that allows them to lock away their post-harvest pay-out and distribute it over the year to smooth cash flows. And Bancomer in Mexico started developing a savings product concept that mirrors the savings behavior of low-income Mexican households who literally use different cookies jars to separate savings for different future purposes.
Similarly, policymakers began recognizing that statutes on the books that ignore the reality of low-income families are of limited value. They started to incorporate demand-side insights into their approaches. In Mexico, for example, the financial consumer protection agency “mystery shopped” financial services to assess the validity its disclosure norms and found widespread misinformation that prompted a rethink of their approach. In the Philippines, consumer testing of credit contracts led to reforms to the Truth-in-Lending Act. And in Senegal, policymakers used consumer surveys to test and improve the functioning of dispute resolution mechanisms.
Some of the fundamental tenets of financial intermediation (e.g., the time value of money in savings and credit or the need for actuarially relevant risk-pooling in insurance) cannot be reinvented. But a lot can and must be done in product and policy design to better meet underlying needs and behaviors. Financial services providers and policymakers have started to learn from other fields, and each other, to make a real difference.
Continued Business Model Innovation to Increase Reach and Lower Costs
The business model challenges for providing different financial services to low-income households in the informal economy are quite different. For loans, they main economic challenge is to provide credit to people who don’t have a salary or other collateral and to manage credit risk and repayments. The ingenious innovation of the social collateral made the microcredit revolution possible and proved that poor people are creditworthy and can be served in a financially viable fashion at scale. For small denomination, high frequency savings, or domestic remittances by contrast, however, the main economic challenge is the need for ultra-low transactions costs. A lot of the business model innovation over the past years focused on increasing reach and reducing transactions costs well below the levels that would be associated with traditional bricks-and-mortar banking.
The iconic success of these efforts to-date is the mobile-phone-based money transfer service M-PESA in Kenya, which by now has 16 million customers. More than 80 percent of working-age adults in Kenya used a mobile phone to send or receive electronic money according to a 2011 survey. Last year saw growth in electronic money also outside of Kenya in other parts of East and West Africa and Asia. In Kenya itself, the ubiquity of a reliable, electronic retail payments system has made new business models viable which rely on collecting small user fees that would be prohibitively expensive to administer in cash. For example, M-Kopa recently launched a lease-to-own solar power energy device collecting daily payments of 40 shillings ($50 cents) through M-PESA. Similar products are offered to finance community-based water stations (Grundfos Lifelink) and crop insurance for farmers sold in small denominations per individual bag of seeds (Kilimo Salama). These examples of financial innovation for the poor are particularly promising because they link the potential benefits of an inclusive financial system tangibly to other development priorities such as climate change adaptation and local food security.
The real power of new technologies to change the way we do things often takes some time to unfold. In financial services, we now see emerging markets leapfrogging the developed world and its legacy systems. Providers in developing markets don’t speak of financial inclusion as a development objective or moral obligation. But they see the opportunity and the business imperative if they want to reach more than the affluent, urban middle and upper classes, and they are going to seize it.
Policymaker Commitment to Financial Inclusion
Policymakers know that the appropriate use and access to financial services improves household welfare. They increasingly appreciate that an inclusive financial system that reaches all citizens allows for more targeted and efficient execution of other social policies, for example through conditional payment transfers in education and health. As a result, a number of governments are switching their social payment transfers to electronic platforms. Policymakers also know that at the macro-level the depth of financial intermediation is positively correlated with economic growth and negatively with inequality as measured by the Gini coefficient.
As a result, policymakers at the global and national level last year ratcheted up their commitments to financial inclusion as an important element of their development agenda. Led by its emerging market members, G20 leaders have put their support behind financial inclusion. At the Mexico G20 summit last summer, 17 countries led by the Presidents of Chile, Indonesia, and Mexico publicly committed to advance financial inclusion. As part of the Alliance for Financial Inclusion (AFI), a network of Southern financial regulators, 35+ countries made similar commitments.
Policymakers face rapidly evolving technologies and a changing provider landscape. They need to weigh competing objectives and focus their limited resources. But an increasing number of them are determined to create the right enabling and protective environment.
Poised for Real Progress
Last year’s new Global Findex data confirmed that half of all working-age adults globally and more than three quarters of the poor are excluded form formal financial services. Across all regions and income quintiles, women are disproportionally affected. So are the young, the old, and rural populations.
Poor households in the informal economy are active manages of their financial lives, but whose needs are not met; financial services providers see the opportunity, but need to innovate more aggressively; and policymakers are committed to do the right thing, but need to accelerate their pace, I think the right connections can be made, and we at CGAP at committed to contribute so that we can collectively make real progress towards full financial inclusion over the next five years.
The 2012 CGAP Annual Report is now available online.