FinMark Trust and Financial Market Development in South Africa
CGAP’s focus note, Facilitating Market Development to Advance Financial Inclusion, presents FinMark Trust as a “facilitator” for financial market development in South Africa. A facilitator is an informed, trusted, independent and locally based interlocutor responsible for making sure that the needs of all parties in the financial system are met.
What exactly do we mean by this and how is it translated on the ground?
FinMark Trust entered South Africa in 2002 (with core funding from DFID) when the financial sector, government, Labour Council and community were negotiating the objectives and targets that would form the Financial Sector Charter. The Charter was a commitment by the industry to promote black economic empowerment and included financial access to the low-income market as one of its six pillars. The Charter was negotiated at the insistence of the government and committed policy makers to providing a facilitative regulatory framework to achieve the charter goals.
However, at the time neither the government nor the private sector were clear about the obstacles to operating at the bottom of the pyramid. FinMark Trust developed a rich evidence base of the regulatory obstacles to serving the mass market. This evidence base was used to inform and structure the debate on the best approaches to achieve greater access as mandated by the Charter.
The first major achievement was identifying and unpacking the limitations of the original Exemption 17 - which relaxed the requirement to identify and verify a client's residential address. This story, documented elsewhere, led to the issuance of the new Exemption 17 by the Minister of Finance (a key policymaker in advancing financial inclusion) and laid the pathway for the development of a practical and effective basic bank account, the Mzansi account. FinMark Trust played a critical role in engaging with the government and private sector to facilitate sufficient leeway to serve the mass market.
In parallel, FinMark Trust set out to tackle the absence of data demonstrating to the private sector and government the business opportunity in serving the bottom of the pyramid. Very little information was available for policymakers and providers about the market size and potential demand of low-income consumers. FinMark Trust initiated the FinScope Survey to address this knowledge gap in two ways:
- Speaking the language of the market: The FinScope Survey provides maximum insight into the financial needs, preferences and behaviour of people and is tailored to be optimally useful for those who want to enter new markets and roll out new products in retail financial services. It includes the whole population making it more attractive to private players.
- Providing a framework for a practical set of actions: The FinScope survey is usually overseen by a FinScope Survey Steering committee consisting of relevant financial inclusion policymakers, the national statistical authority and representatives from the private sector. This enables the data generated by FinScope to remain independent, further supported by FinMark Trust’s independence, and in turn allows it to be used in many cases to identify, formulate and implement financial services initiatives in countries by acting as a monitoring and evaluation tool.
FinScope, which has since been rolled out in 18 countries in Africa and three in Asia, played a critical role in shaking up the commercial players and injecting clear thinking into the regulatory debate. In South Africa, FinMark Trust mined consecutive FinScope survey data to determine the impact of a number of changes in the market, including the amended Exemption 17, the easing of regulatory requirements for international remittances, and the significant growth in entry-level transactional or retail bank accounts, as well as the funeral life insurance business – all targeted mainly at the previously excluded market. These changes have all played some role in advancing financial inclusion in South Africa, where FinScope shows an increase in formal financial inclusion from 55% in 2005 to 73% in 2012.
But how do you take this facilitator approach forward outside of South Africa?
Although the FinMark Trust experience in South Africa shows what is possible with a market facilitator, its work has not been solely limited to this country. Many major achievements in South Africa have been scaled up to the international level, informing global standards or approaches for facilitating inclusive financial markets (see here or here).
The country-level approach has since been replicated in the Southern African Development Community (SADC) by employing local country coordinators that are responsible for identifying needs and practical ways to advance financial inclusion. Their market knowledge makes them critical for any market facilitation process and they will play a significant role in the forthcoming Making Access to Financial Services Possible initiative developed in partnership with the United Nations Capital Development Fund and the Centre for Financial Regulation and Inclusion (Cenfri). FinMark Trust aims to build on the current work in SADC and take the market facilitation approach further in order to deliver a portfolio of financial services to the excluded and underserved population.
The approach is not fast or cheap - there is a need to align donors with the philosophy of facilitators like that of FinMark Trust which have demonstrated success in their “patience to pursue impact”.