Who Makes the Rules for the Rules Makers?

In October of 2006 in Basel, home to the Basel Committee on Banking Supervision and several other financial sector standard-setting bodies, Johann de Waard of the Dutch Foreign Ministry (and member of CGAP’s Council of Governors) remarked with excitement to me and his Crown Princess, Her Royal Highness Princess Máxima, that we had just given him a peek at potentially one of the most fundamental developments in the global financial order since the Renaissance. He was talking about branchless banking – and specifically using retail agents and communications technology such as cell phones to reach with formal financial services millions of poor households who could never be served profitably with traditional branch-based delivery models.

Her Royal Highness had encouraged then-Basel Committee Chair Nout Wellink and others with influence within the Bank of International Settlements (BIS), to mount a ground-breaking seminar on regulation and supervision for financial inclusion under the auspices of the BIS’s training arm, the Financial Stability Institute, in partnership with the World Bank and CGAP. This was the first time the branchless banking innovations that inspired Johan’s comment had been systematically considered under Basel auspices.

Both the event as a whole and the branchless banking session in particular foreshadowed rapid and far-reaching changes in the global dynamics around both standard setting and financial inclusion. A vanguard of emerging market countries – at that time Brazil, India, South Africa, Kenya and Philippines – were experimenting with adjusting their regulatory and supervisory approaches to accommodate such innovations and were fast becoming the countries with valuable experience. In the period since, the global standard-setting bodies have shown increasing willingness to draw on such experience. This was underscored last year, when Princess Máxima and Nout Wellink convened the senior leadership of the five standard-setting bodies of greatest relevance to innovations in financial inclusion to discuss the topic – the first time they had gathered for such a meeting on any topic.

Why is this relevant to role of government in financial inclusion at the country level? Together, the normative standards and advisory guidance of standard-setting bodies such as the Basel Committee on Banking Supervision, the Committee on Payment and Settlement Systems, the Financial Action Task Force , the International Association of Deposit Insurers, and the International Association of Insurance Supervisors have significant influence on how many poor households get access to what range and quality of formal financial services at what cost. This is because they provide the basic framework within which country-level regulatory policy is made. In short, they make the rules for the rules makers.

At the same time, the relationship between global standard setting and country-level regulatory policy making is a dialectical one. While the standard setters make the rules for rules making at the country level, they are themselves country-led bodies, informed by the experience of their member jurisdictions and increasingly by non-member countries as well.

How can this relationship be harnessed in service of financially inclusive ecosystems at the country-level? Recent Mexican experience illustrates the great potential. In 2011, while holding the Presidency of the Financial Action Task Force, Mexico worked ceaselessly to see that organization’s first guidance on financial inclusion and financial integrity developed and approved. Simultaneously it adopted its own ground-breaking regulation providing for tiered bank accounts based on rigorous risk analysis, under which increasing levels of account functionality are associated with higher levels of oversight and due diligence. Furthermore, with encouragement from Princess Máxima in her capacity as the UN Secretary General’s Special Advocate for Inclusive Financial Sectors for Development and Honorary Patron of the G-20 Global Partnership for Financial Inclusion, Mexican President Felipe Calderon established a Council on Financial Inclusion that brought together into a permanent coordination body the consortium of Mexican policy making entities that came together to agree upon the regulatory framework for the tiered accounts. Now, as 2012 G-20 President, Mexico is well-placed to continue its leadership, translating its own experience with rules making and coordination for financial inclusion into a potent example, both for the standard-setting bodies of which Mexico is a member and to their other member countries who share Mexico’s interest in financially inclusive ecosystems.

Thus, a virtuous circle is established: country-level rules making in service of sound financial inclusion policy informs global standard setting, which in turn provides an improved framework for financially inclusive rules making at the country level.


24 August 2012 Submitted by Dr V.Rengarajan (not verified)

Financial inclusion – State role redefined – CGAP Focus note 76
While discussing on the creation of broader interconnected ecosystem of market actors and infrastructure needed for safe and efficient product delivery to the poor and for that purpose ,the role of government in development of financially inclusive ecosystem , it seems more focus has been given ‘how to deliver the financial services or make these services accessible to the poor’? only in the supply front ignoring or assuming many vital factors in the demand side. .Is delivery alone suffice? After delivery ? Taking the horse up to the pond but How to make it drink?

To put it succinctly, the whole purpose of such a delivered or accessed financial services most particularly micro credit would not be served since productive utility of the financial service is impossible without adequate supportive infrastructure for effective risk free credit absorption in the post delivery stage ? Many financial inclusion attempts regardless of its innovative delivery feature, has failed with too many assumption in the demand side of the given area/region. Known consequences – crisis be it ‘prime lending’ or ‘micro credit’ lending.
To elaborate further , financially inclusive ecosystem therefore calls for filling up of two types of infrastructure gaps viz., 1) financial infrastructure gap – in supply front for creating risk free delivery points or conduits (as stated in focus note) and 2) supportive physical capital infrastructure gap in the demand side for effective absorbing and ensuring risk free productivity of the delivered financial service or product for the poor.
It is therefore considered that state’s role assumes very significant in unbanked or under served area/region not only for creating a conducive financial ecosystem by creating necessary infrastructure for delivery of financial services but also equally in parallel the same gesture in terms of physical assets for productive functioning of the delivered services there by facilitating income increase and economic graduation of the poor and at the same time making the asset performing at institutional level also . To further probe on the details on functioning of financial product in Post delivery stage , these demand side supportive capital infrastructure for effective absorption of financial services could be conveniently and broadly classified as different forms of capital viz., physical capital infra, human capital infra, social capital; infra and others forms related to functioning of the delivered product.
Physical capital infra gap- Many area in rural front which are financially excluded regions and districts /villages suffer from low level of investment in roads, bridges, canals, power supply, market yards, and warehousing, .The absence of this leads to a general malaise in the local economy and disincentive for private investments in directly productive sectors. Absence of these basic physical infra affects the free movement of inputs and outputs, required for any economic IG activity financed in the given area and financial inclusion will not work. . In the case of India, a macro level scenario reveals that the persistence of low credit /deposit ratio of banking system in north eastern region over several decades explains the above fact. Like front and back end infrastructure in supply front, , these physical infra in the demand side, facilitates for smooth functioning of any economic activity like backward linkages – for arrival of inputs till production stage and forward linkages – for marketing movement of output after production stage – other wise specifically mentioning without good link road and transport and power in the given village /pocket., economic functioning of any IG activity would be crippled. Then the very purpose of micro credit service or financial inclusion will not be served except leading the delinquency. State intervention has therefore become inevitable to fill these infrastructure gap both in supply and demand sides while creating conducive financial eco system.
Human capital infra gap- Two vital prerequisites for financial inclusion are health and education in general and poor segment in particular .As a pre requisite to financial inclusion in poverty sector, access to health services helps the poor protecting from health vulnerabilities and livelihood risks .Educationally the facts like illiteracy, school drop outs, low skill, make the poor distinguishably with poor capability for productively use the financial services . Here again the state role assumes great in filling the gaps in health and education as a part of inclusive financial eco system
Social capital infra gap
As there is also general correlation between financial exclusion and under developed or defunct local community institutions This development of social capital like village/gram panchayat, SHG, federation, Farmers clubs, Mahila mandals (women clubs) JLGs, commodity cooperatives, local market/mandies, local welfare clubs/associations may go a long way in making financial inclusion more effective but also empowering the poor with ‘SMART’ power gained thorough these village democratic institutions towards helping themselves.
Other area of concerns which influence the successful financial inclusion mission, include low farm productivity, co-variant risk implications, poor marketing system, gap in lab to land approach with inputs shortage for high yielding varieties etc. and the state has the responsibility for addressing these concerns as a part of creation of eco system

In sum, what is emphasized here is success of financial inclusion largely hinges on well integrated infra system in both supply and demand sides for creating financially inclusive eco system without any gap both before and after delivery of financial services also Thus, the state has collective responsibility through their various development departments for ensuring such enabling eco system that helps sound financial inclusion policy works for the poor more particularly in developing countries.
Thank you for sharing my views
Dr Rengarajan

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