Facilitating Market Development to Advance Financial Inclusion
Over the past decade or so, largely in response to a growing understanding of the financial needs of the poor, there has been a dramatic shift in the focus of donors and DFIs from microcredit to the broader concept of financial inclusion: the provision of a range of formal financial services, including savings, payments and transfers, insurance, and credit. Donors have continued to play a critical role in supporting financial service providers and their innovations through direct investment and technical assistance. Donors’ appreciation of the particular needs of the poor with respect to financial services has translated into new efforts to support the poor as financial consumers through demand-side research, the development of financial capability training programs, and encouraging providers to design financial products and services that meet the needs of the poor. Some donors have focused on the enabling environment by providing continued advice and support to policy makers and regulators (regarding, for example, banks’ use of agents, nonbank electronic-money [e-money] issuers, and the adoption and enforcement of financial consumer protection rules). Others have supported development of financial system infrastructure, such as national payment systems. This multi-pronged approach—which we refer to in this Focus Note as a “market development approach”—aims to build markets that include and serve poor consumers, beginning in each market with an understanding of why such a market does not work for the poor.
Yet, notwithstanding significant donor support of financial inclusion efforts, globally there remain 2.5 billion adults who are currently excluded from the formal financial system.
Emerging evidence from countries benefiting from donor and DFI interventions that are coordinated, catalytic, and responsive to the market show significant increases in access to financial services. Given that markets are in a constant state of flux—with new providers and consumers continually entering and exiting and new regulators and policy makers acting and reacting—market responsiveness is best effected through the use of an independent actor that is close to the market and thereby able to monitor market developments on an ongoing basis. Such an independent actor can also be well-positioned to address the challenges and coordinate the efforts of donors and DFIs with varied priorities, pressures, and skills. In this Focus Note, we refer to such an actor as a “facilitator,” although its role is not merely passive—coordinating and gathering information—but active: designing and promoting catalysts to spur market participants (financial service providers, customers, policy makers, market infrastructure firms), as needed. It is this critical facilitation role, which could be undertaken by multiple coordinated facilitators, that distinguishes the market development approach from other approaches, including financial systems development and sector-wide systems programming. Donors and DFIs can themselves be facilitators, and they can—individually or jointly—support facilitators.
The remainder of this Focus Note explains the role of a facilitator and then discusses several areas critical to building financial markets that work for the poor: information, capacity building, incentives, and a well-designed enabling environment.