Over the past decade, regulations in emerging financial markets have undergone many changes that have raised both optimism and concern within the financial inclusion community. The good news first: there is an unprecedented consensus among standard setters, policy makers and regulators that financial inclusion is an important objective. Close to 90 countries have publicly committed to promoting financial inclusion, and there is growing interest in innovative regulatory approaches, such as regulatory sandboxes or innovation units. Today, there is a fairly good understanding of how to regulate financial services in a way that enables financial inclusion.
The bad news is that potentially harmful government interventions have made a comeback in recent years. These include interest rate caps in places like Cambodia and Kenya, mobile money taxation in countries like Uganda and restrictive data localization requirements. The latest Banana Skins survey of perceived risks to financial inclusion lists “political risk” third, the highest position it has held since the Centre for the Study of Financial Innovation launched the survey 10 years ago. Funders can help create enabling regulatory environments for financial inclusion and mitigate the risk of misguided government interventions. We know that funders make important contributions to regulatory reform in developing countries, but we believe they could achieve even more by equipping policy makers with the systems and processes to respond appropriately to the challenges in their fast-evolving markets.
Funders’ current support for regulatory reform
Support for regulatory change represents a small but important share of funders’ overall commitments. According to the 2017 CGAP Funder Survey, funders dedicate 2 percent of their global commitments to improving the regulatory environment for financial inclusion. This percentage might seem small, but we are still talking about $670 million across 157 projects in 64 countries and 52 multicountry or global projects. When we look at projects that focus specifically on digital financial services (DFS), the share of projects that aim to improve regulatory frameworks amounts to 7 percent.
Multilaterals are the most active funders in policy reform projects, both in terms of volume and number of projects, with foundations and bilateral agencies being the next most active. And CGAP’s survey shows that funders are using different approaches to support regulatory reforms, depending on their mandate and financial instruments. The most frequently used instruments are grants, which include technical assistance and capacity building, and loans. Although 75 percent of all policy commitments go to governments, many funders support advocacy organizations, research centers, market facilitators or associations that can stimulate and inform regulatory change in their target markets.
The survey also shows that funders are focusing on countries where regulatory change is most needed. Almost 70 percent of the funding goes to the 22 countries with the least enabling environment for financial inclusion — those scoring less than 50 in the EIU’s Global Microscope. Sub-Saharan Africa, where mobile money has boosted account ownership, is receiving the most attention in terms of number of projects, while the Europe and Central Asia region ranks first in terms of value of commitments.
It is important to recognize that money is not all that counts when it comes to stimulating regulatory change. A small amount of support at the right time can have big impact. Even if no checks are signed, engaging with policy makers and regulators can make a difference. For example, funders can share data or experiences from other countries that can help shape opinions of policy makers.
A systemic approach to regulatory reform for sustained impact
Though funders dedicate significant resources to supporting regulatory reform, we don’t know much about the impact of their interventions. There could be several reasons for this. It could be that funders simply aren’t investing enough in measuring impact. It could also be that they don’t have the tools and systems in place to measure whether regulatory changes have been enforced and changed the behavior of market actors. Or it could be because it is difficult to measure the impact of policy projects (CGAP’s regulatory impact assessment in Pakistan offers a simplified approach). One thing we can say, however, is that funders could have a more sustained impact by supporting adaptive regulatory reform systems that enable regulators to deal effectively with the challenges emerging in fast-evolving markets. Helpful interventions include building a country’s capacity for market monitoring, establishing vibrant dialogue between private and public sectors and supporting targeted policy research.
Of course, this is easier said than done. As many funders have told us, adopting a systemic approach would require them to expand their time horizons beyond the three to five years typical of their development programs. Funders seem to struggle with a trade-off between efficiency (achieving a certain regulatory reform in a short period of time) and effectiveness (ensuring the reform is implemented and leads to the intended changes in the market). But this does not need to be a trade-off if we take a longer-term perspective. Supporting better regulatory reform processes might seem inefficient in the short run, but in the long run it improves efficiency by minimizing the need for funder support. It also improves effectiveness because regulations driven by partner countries through a participatory approach are more likely to lead to expected market impact.
It is an important time for funders to engage in this work. With financial services markets being disrupted by technology, regulatory frameworks need to be adapted frequently to account for new players, new business models and evolving risks. And because DFS span several regulatory fields, such as finance, money laundering and data protection, regulatory reforms are becoming more complex, and regulators will need to define new processes. It is time to take a longer-term perspective and support more adaptive and efficient regulatory reform systems in partner countries.
Over the coming months, CGAP will conduct further research and create peer-learning opportunities for funders and implementers on how to facilitate regulatory change processes, with a focus on regulations that enable DFS. We will look more closely at different approaches and lessons learned by funders, advocacy organizations and facilitators. Please share with us your experiences and challenges in stimulating regulatory reforms in the comments section below.