The Year of the Dragon: More Innovation for Financial Inclusion?

The Water Dragon symbolizes new frontiers, changes and innovations. This could be good news for financial inclusion in China and the rest of the region.

East Asia and the Pacific host a variety of countries when it comes to financial inclusion. South Korea and Singapore boast excellent levels of financial inclusion whereas countries like Indonesia, the Philippines, or Vietnam still show limited access to the variety of services the poor need to manage their financial lives. I can see two challenges and opportunities in the region for the coming year.

In spite of ongoing reforms, governments exert high levels of controls on the financial sector in East Asia. The recent Financial Sector Assessment in China highlighted that all the large and joint stock commercial banks accounting for 83% of the total bank assets in 2010 were either partially or entirely controlled by the government. In Vietnam, the largest supplier of financial services to the poor is a state bank (Vietnam Bank for Social Policies), and so are the major financial inclusion players in Thailand. While state banks have had some success in financial inclusion, they are often not flexible enough to innovate, do not always understand and meet the financial needs of the poor, and tend to cost a lot to the state through large subsidies.

The second challenge is the increasing inequality between the rich and the poor. In spite of high growth and rapid poverty reduction in many East Asian countries, a large rural population is at risk of being left behind. In China, one can see growing gaps between the rich and the poor and between the urban and the rural populations. Income inequalities are rising to a point that could cause social instability. This trend makes it all the more important to reach poor people with sustainable financial services, especially in rural areas, to help prevent the gap from widening further.

But the region is well equipped to face these challenges, given that it is a cradle for innovation and new technologies. When it comes to innovative financial inclusion, the Philippines are known for being a global champion for mobile phone banking, and Malaysia for consumer protection regulations. Private companies such as Smart, GXI and Wing Money have played a significant role in putting technology at the service of financial inclusion and this is just a start. With over 420 million internet users, China is the largest internet user globally (according to ITU), and its spending in Research and Development has risen by 20% per year for the past decade. If state banks in the region pioneered new solutions for the poor through partnerships with innovative actors, they could play a much larger role in financial inclusion.

The year of the dragon is likely to bring better policies for financial inclusions, even though policy change does not happen overnight. Indonesia, South Korea and the Philippines already play a leading role in the new G20 Global Partnership for Innovation, and several countries are developing new regulations conducive to commercially-oriented microfinance institutions as well as national strategies for financial inclusion (e.g. Indonesia, Thailand, Vietnam). With a proportionate regulatory and supervisory framework for branchless banking and an opened door to new types of responsible private actors and attractive public-private partnerships, East Asian governments will significantly improve their response to the demand of the large portion of the population that still does not have access to basic savings, transfer, insurance or credit services.