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.

A cormorant fisherman works for tourists' tips.
A cormorant fisherman works for tourists' tips. Photo by 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.

Women prepare fishing nets for their husbands' next ocean journey.
Women prepare fishing nets for their husbands' next ocean journey. Photo by 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.

Children in Vietnam use their mobile phones.
Children in Vietnam use their mobile phones. Photo by 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.

An Indonesian farmer picks his crop and smiles
An Indonesian farmer picks his crop and smiles. Photo by 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.

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.

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.


07 January 2016 Submitted by Letila Mia (not verified)

Quite an interesting and upbeat article Eric. I observe some of the strides being made by development partners/donors in inclusive finance have been informed by exciting developments in the Pacific and I look forward to hearing about these initiatives from CGAP in your future summaries.

10 January 2016 Submitted by Stephen Taylor (not verified)

Eric, thank you for this comprehensive reflection on the remarkable change in financial inclusion occurring over the last 20 years in the region. A few other perspectives on progress are offered.

Partnerships and cooperation. Common interests and challenges have given rise in recent years to the establishment of influential alliances working towards the goal of financial inclusion. Globally these include the G20’s Global Partnership for Financial Inclusion, Alliance for Financial Inclusion of global policymakers and regulators, and the multi-sector Better than Cash Alliance. Regionally, the APEC Business Advisory Council’s Financial Inclusion Caucus advocates to Asia’s leaders each year, and the Pacific Islands Regional Initiative has central bankers working together to ensure financial services are widely accessed in one of the least banked parts of the world. What began with the vision of a few several decades ago is becoming mainstreamed into policy and practice throughout the region.

Partnerships and linkages in the delivery of microfinance have also evolved and enabled a substantial increase in outreach of microfinance, two forms being agency networks established by financial institutions, primarily commercial and state banks, with myriad retail or trading outlets; and linkage banking by banks and microfinance institutions, pioneered in the late 1980s in India by MYRADA and NABARD (and advocated by the BWTP Network and FDC over many years), that now includes mobile network operators, savings and loans groups, and others. Similar to the original idea, but now with many more and new participants.

The shadow of overindebtedness. While there is a sense of great achievement in the number of people gaining access to finance over the last 20 years, there have been hard lessons too. The emergence of pockets of systemic indebtedness evidenced most publically in Andhra Pradesh in 2010 being a prime example. The tragic events associated with this period of rash lending and disregard to mounting credit risk remains a sobering lesson for financial services providers, policymaker and regulators alike.

Economic integration. While the early (beginning more the 40 years ago) success of microfinance in Asia revolved around several simple but disciplined credit and savings methodologies, disruptive technologies (i.e., digital finance, e-payments, integration with social networks), and business models (i.e., moves from transaction-based to fixed cost fee structures, peer-to-peer lending) have seen the pursuit of financial inclusion become a dynamic ecosystem with many players and creative approaches. The sustainability of traditional microfinance institutions and effectiveness of microfinance has been enhanced in recent years by weaving client-oriented microfinance services into the economic and social fabric of households, communities and countries. This diversification and linking of finance with economic opportunity and capability to realise the potential of individuals is illustrated by the diversification strategies of the early pioneers - ASA (ASA University Bangladesh), BRAC (bKash), and Grameen (Grameenphone). There are many other examples throughout the region.

Rise of women’s equality and leadership. Traditionally, women have predominated much of the microfinance client base in the region. A brief review of MIX Market data for Asia and the Pacific shows that for the 5,000 reporting entities in the region, almost one third (32%) of their board members, 35% of staff, and 81% of borrowers - are female. While equality is yet to be achieved, it is encouraging to see the number of women CEOs and senior executives now leading microfinance and mainstream financial institutions throughout the region.

South Pacific. The differences in economic, geographic, social and cultural circumstances of people and countries throughout the region is reflected in unique responses to the financial inclusion challenge. In contrast to Asia, Pacific Island countries are geographically dispersed with low density populations – and have one of the highest unbanked populations in the world that in turn pose distinctive physical and banking infrastructure challenges. The Pacific Islands have responded with a range of progressive interventions to these challenges: moveable property, secured transactions and personal property are increasingly being accepted in lieu of conventional collateral; new legal entities - ‘community companies’ - enable a business to be created and run for the benefit of the community rather than individual shareholders; many of the central banks have a formalised National Financial Inclusion Taskforce dedicated to the task; and Fin-Ed Fiji, developed several years ago, is a world best practice program integrating basic financial education within the school curriculum. As in other parts of the Asia Pacific region, the mobile phone has been a game-changer in the Pacific Islands, with a rapid rollout of mobile network services resulting in a remarkable uptake of mobile wallets and banks accounts (in the Solomon Islands, the number of people with a bank account doubled between 2011 and 2014).

Impact. Whilst there is increasing and a proper questioning of whether microfinance makes a difference, standing back and with the benefit of hindsight, one can only admire the spirit of both institutional and individual creativity and persistence that has resulted by and large, in remarkable progress over this period in providing opportunities for the poor and excluded.

19 January 2016 Submitted by eric duflos (not verified)

Dear Stephen, thank you so much for your great inputs. I am glad that you highlighted the regional collaborations which indeed have enabled much more knowledge sharing than in the past, partly thanks to the good work you and your colleagues have done. It is also great to hear more about the Pacific that so few people know of. Thanks again!

12 January 2016 Submitted by Dr. Vijesh (not verified)

Dear Eric,
Excellent Article ! Can I have your official email address please !

02 February 2016 Submitted by Paul Luchtenburg (not verified)

Thanks for the Interesting blog and insightful reflection on Financial Inclusion in the last 20 years.
Nice to think back as I also have some similar experiences as I arrived in Cambodia in Feb 1993. Microfinance in Cambodia in those days was kind of like the “wild west”. You could pretty much do whatever you wanted and it was a period of experimentation. Today Cambodia is the country often looked to as a success for Microfinance.
Some other areas of change has been a focus on client centricity and client protection which were greatly needed with the development of the Smart campaign.
Deposit/ savings and deposit taking have made advances from the days of just pushing credit.
Recent changes in the region include Myanmar which in 3 years went from microfinance being illegal to now 256 licensed MFIs.
Another change which we have seen are better ways to measure financial inclusion through the MAP (Making Access Possible) research which in Myanmar has led to the development of a financial inclusion roadmap approved by the government.
Despite advances there is still a long way to go for financial inclusion. I look forward to seeing what the future holds.

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