ASIA
26 March 2014
Financial inclusion in Asia -- some solutions
One great challenge for Asia's development is improving access to formal financial institutions like banks. Fortunately many initiatives are underway to improve "financial inclusion" in the region.
One great challenge for Asia's development is improving its citizens' access to formal financial institutions like banks, credit unions, cooperatives, or post offices. Fortunately many initiatives are underway to improve "financial inclusion" in the region.
But before we explore this excellent work, we must recognize that exclusion from the formal financial sector is just one of the many "exclusions" from which poor people suffer, in both rich and poor countries.
Most notably, there is the so-called "digital divide", meaning the unequal access to information and communication technologies, especially the Internet. But poor people also have unequal access to, or are excluded from, clean drinking, sanitation, health and education services, electricity, energy and many more things. In short, part of the lot of poverty, is exclusion from opportunity.
All that said, exclusion from the formal financial sector is a critical challenge, because such exclusion makes it difficult for people to save, obtain credit, receive wages or government payments, invest and start a business, and send/receive remittances to/from family and friends. And it is an especially great challenge in Asia. In East Asia, only 55% of adults have access to the formal financial sector, while the figure drops to a mere 33% in South Asia.
World Bank research suggests that there is much that can be done to improve financial inclusion. Among the most important reasons why people don't have an account in a formal financial institution are: formal financial institutions are too far away; they are too expensive; a lack of necessary documentation; a lack of trust; and religious reasons.
Financial inclusion is not just an issue for developing countries. Many of the increasing number of migrants based in developed countries also suffer from lack of access to formal financial services. This is particularly relevant for migrants’ remittances. The World Bank estimates that in 2012, Asian countries received $223 billion in migrants' remittances, more than half of the total remittances received by the developing world, with India, China and the Philippines being the largest recipients.
But it is widely acknowledged that there are vast additional sums of unreported remittances as people carry money in their pockets, send it with relatives/friends, or use other informal means -- because it is too expensive to send by the formal financial sector.
Fortunately many initiatives are underway to improve "financial inclusion" in the region by organizations like the Asian Development Bank Institute, APEC Business Advisory Council, Asia Pacific Finance and Development Center, Banking with the Poor Network, China Association of Microfinance, Citi Foundation, and the Foundation for Development Cooperation.
What are the most important initiatives?
The early growth of microfinance institutions (MFIs) was funded largely by grants and soft loans from donors. And the focus of these early years was on providing very small loans for working capital to urban and village microenterprises.
Microfinance services have since expanded beyond microcredit to include also savings, insurance and money transfer. Some MFIs are able to finance their operations through microsavings. And some like the Bangladesh-based SafeSave orient their operations to offering poor people reliable tools to manage their money, rather than financing microenterprises.
The microfinance industry has witnessed remarkable growth and improving profitability, even though market penetration is small compared with its potential. This has increased microfinance’s attractiveness to financial institutions and investors, and has changed views on its viability. Thus, microfinance services are now not only provided by MFIs, but also by private commercial banks which are attracted by microfinance’s attractive risk/return profile and its status as socially responsible investment. Some MFIs have been diversifying their funding sources, by borrowing from banks.
As microfinance continues to expand, there is a need to adapt existing regulations for the benefit of greater financial inclusion. Reports of harsh collection practices, suicides, over indebtedness, and high fees highlight some of the critical issues. Effective prudential regulation is necessary for deposit taking financial institutions as well as their clients.
At the same time, microfinance remains hampered by high transaction costs, due to the high cost of collecting and disbursing small amounts of cash to a large number of people – whether these small payments are for savings, credit or insurance.
Mobile phone banking has proved to be a powerful tool for financial inclusion in the Philippines, a country where only 27% of all adults have an account with a formal financial institution. Indeed, 15% of Filipino adults report using mobile money in the past year, the highest of all Asian countries, according to the World Bank.
In the Philippines, the mobile phone industry serves all income groups, with more than 60% of the population having mobile phones. Smart Communications and Globe Telecom are the leading telecommunications companies in the Philippines and have respectively the following electronic money products “Smart Money” and “G-cash”. There are now 8 million users of the e-money products Smart Money and G-cash, and a substantial growth in banks offering mobile banking.
Mobile phone banking presents challenges to regulatory capacity, as it cuts across various regulatory domains including banking, telecommunications, payments systems and anti-money laundering.
Branchless banking took off first in Brazil starting a decade ago, spurred chiefly by two large state-owned banks and a unique partnership between private bank Bradesco and the national postal service. In Asian countries like Bangladesh, Laos, Nepal, and the Philippines, more than 10 percent of account holders already report using bank agents.
South Asia is now a fertile ground for for branchless banking, with 33% of its population benefiting from basic payment and banking services. The State Bank of Pakistan has issued a full set of regulations that lay out clear and practical guidelines around branchless banking and mobile payments. Recent moves by the Reserve Bank of India have substantially eased the ability of banks to appoint retail outlets as business correspondents.
Indonesia is also a market well suited to branchless banking. Difficult geography, with over 18,000 islands. An enormous population of 240 million. Only 20% of its population with an account at a formal financial institution. But a thriving mobile sector. Until today, mobile money or branchless banking services have seen only limited uptake, in large part because of regulatory obstacles. In recent months, the Central Bank (Bank Indonesia) removed some requirements regarding cash-out for mobile money, but this week it took a further step by releasing Guiding Principles for Branchless Banking. These Principles are not a full authorization for banks to use agents to extend services. Instead, Bank Indonesia will authorize a limited number of banks to conduct services through agents in pilot areas during 2013.
There are many options that are being worked on or explored to establish citizens' financial identity. Information sharing can help to bring people into the mainstream financial system by using alternative data such as utility payments, cell phone bills and rental and remittances payments. Credit information reporting systems can be established involving private sector players. Biometric automatic teller machines are a new innovation for targeting the unbanked population. Using thumbprint and voice guidance in ATMs reduces literacy requirements to a considerable extent.
The Bank of Indonesia has launched the Financial Identification Project (FIP) to provide unique financial identity number (FIN). The FIP is expected to produce a more effective and efficient approach to facilitate a better and easier financial access for the society, especially to those who do not have any access to banking services, micro, small, and medium enterprises, and the productive poor households.
Even where citizens theoretically are able to have access to the formal financial system, many do not avail of that access. Indeed, in developing economies some 10% of adults with a formal account report making no deposits or withdrawals in a typical month, where as in high-income economies only 2 percent report this.
In order to avail of financial services, people must understand them. And this can be a challenge for people who are unfamiliar with financial services, and who may be faced with complex financial products.
Many citizens are also vulnerable to seductive financial marketing, and even trickery by financial agents. This is an equally compelling reason for financial capability and financial education.
Promoting and facilitating financial capabilities for children and youth is important to create financially responsible citizens for the future. Where financial capability and financial education programs are undertaken in partnership with the financial sector, the fine between financial education and marketing must be respected.
Many Asian countries have active programs of financial capability and financial education. For example, Malaysia's financial literacy program has a three-pronged approach which targets the general public, primary and secondary students, and rural folks, women and university students.
The Organisation for Economic Cooperation and Development runs an International Network on Financial Education, which involves strong Asian participation.
Given that financial literacy is low in all developing countries (and many developed countries), consumer protection is a critical partner to financial education.
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com
But before we explore this excellent work, we must recognize that exclusion from the formal financial sector is just one of the many "exclusions" from which poor people suffer, in both rich and poor countries.
Most notably, there is the so-called "digital divide", meaning the unequal access to information and communication technologies, especially the Internet. But poor people also have unequal access to, or are excluded from, clean drinking, sanitation, health and education services, electricity, energy and many more things. In short, part of the lot of poverty, is exclusion from opportunity.
All that said, exclusion from the formal financial sector is a critical challenge, because such exclusion makes it difficult for people to save, obtain credit, receive wages or government payments, invest and start a business, and send/receive remittances to/from family and friends. And it is an especially great challenge in Asia. In East Asia, only 55% of adults have access to the formal financial sector, while the figure drops to a mere 33% in South Asia.
World Bank research suggests that there is much that can be done to improve financial inclusion. Among the most important reasons why people don't have an account in a formal financial institution are: formal financial institutions are too far away; they are too expensive; a lack of necessary documentation; a lack of trust; and religious reasons.
Financial inclusion is not just an issue for developing countries. Many of the increasing number of migrants based in developed countries also suffer from lack of access to formal financial services. This is particularly relevant for migrants’ remittances. The World Bank estimates that in 2012, Asian countries received $223 billion in migrants' remittances, more than half of the total remittances received by the developing world, with India, China and the Philippines being the largest recipients.
But it is widely acknowledged that there are vast additional sums of unreported remittances as people carry money in their pockets, send it with relatives/friends, or use other informal means -- because it is too expensive to send by the formal financial sector.
Fortunately many initiatives are underway to improve "financial inclusion" in the region by organizations like the Asian Development Bank Institute, APEC Business Advisory Council, Asia Pacific Finance and Development Center, Banking with the Poor Network, China Association of Microfinance, Citi Foundation, and the Foundation for Development Cooperation.
What are the most important initiatives?
Microfinance
Microfinance is a very powerful instrument for improving financial inclusion. It originated in Latin America about 40 years ago. It then achieved global recognition in Bangladesh through the Grameen Bank, whose founder Muhamad Yunus, won the Nobel Peace Prize in 2006. It has also taken off substantially in India.The early growth of microfinance institutions (MFIs) was funded largely by grants and soft loans from donors. And the focus of these early years was on providing very small loans for working capital to urban and village microenterprises.
Microfinance services have since expanded beyond microcredit to include also savings, insurance and money transfer. Some MFIs are able to finance their operations through microsavings. And some like the Bangladesh-based SafeSave orient their operations to offering poor people reliable tools to manage their money, rather than financing microenterprises.
The microfinance industry has witnessed remarkable growth and improving profitability, even though market penetration is small compared with its potential. This has increased microfinance’s attractiveness to financial institutions and investors, and has changed views on its viability. Thus, microfinance services are now not only provided by MFIs, but also by private commercial banks which are attracted by microfinance’s attractive risk/return profile and its status as socially responsible investment. Some MFIs have been diversifying their funding sources, by borrowing from banks.
As microfinance continues to expand, there is a need to adapt existing regulations for the benefit of greater financial inclusion. Reports of harsh collection practices, suicides, over indebtedness, and high fees highlight some of the critical issues. Effective prudential regulation is necessary for deposit taking financial institutions as well as their clients.
At the same time, microfinance remains hampered by high transaction costs, due to the high cost of collecting and disbursing small amounts of cash to a large number of people – whether these small payments are for savings, credit or insurance.
Mobile banking
Mobile technologies can facilitate access to financial services, such as cash deposits and withdrawals, third-party deposits into a user account, retail purchases, over-the-air prepaid top-ups using cash in the user’s account, transfer of cash. That there over 1 billion people in emerging markets today who do not have a bank account but do have a mobile phone, shows the potential.Mobile phone banking has proved to be a powerful tool for financial inclusion in the Philippines, a country where only 27% of all adults have an account with a formal financial institution. Indeed, 15% of Filipino adults report using mobile money in the past year, the highest of all Asian countries, according to the World Bank.
In the Philippines, the mobile phone industry serves all income groups, with more than 60% of the population having mobile phones. Smart Communications and Globe Telecom are the leading telecommunications companies in the Philippines and have respectively the following electronic money products “Smart Money” and “G-cash”. There are now 8 million users of the e-money products Smart Money and G-cash, and a substantial growth in banks offering mobile banking.
Mobile phone banking presents challenges to regulatory capacity, as it cuts across various regulatory domains including banking, telecommunications, payments systems and anti-money laundering.
Branchless banking
One way to achieve better financial inclusion is to take banking transactions outside of banking halls and into agents like post offices, retail commercial outlets, lottery kiosks, pharmacies, etc, which exist in every village and every neighborhood.Branchless banking took off first in Brazil starting a decade ago, spurred chiefly by two large state-owned banks and a unique partnership between private bank Bradesco and the national postal service. In Asian countries like Bangladesh, Laos, Nepal, and the Philippines, more than 10 percent of account holders already report using bank agents.
South Asia is now a fertile ground for for branchless banking, with 33% of its population benefiting from basic payment and banking services. The State Bank of Pakistan has issued a full set of regulations that lay out clear and practical guidelines around branchless banking and mobile payments. Recent moves by the Reserve Bank of India have substantially eased the ability of banks to appoint retail outlets as business correspondents.
Indonesia is also a market well suited to branchless banking. Difficult geography, with over 18,000 islands. An enormous population of 240 million. Only 20% of its population with an account at a formal financial institution. But a thriving mobile sector. Until today, mobile money or branchless banking services have seen only limited uptake, in large part because of regulatory obstacles. In recent months, the Central Bank (Bank Indonesia) removed some requirements regarding cash-out for mobile money, but this week it took a further step by releasing Guiding Principles for Branchless Banking. These Principles are not a full authorization for banks to use agents to extend services. Instead, Bank Indonesia will authorize a limited number of banks to conduct services through agents in pilot areas during 2013.
Financial identities
One reason why lower income segments of the population and small and medium enterprises may have difficulty accessing formal lines of credit is because they do not have a financial identity (or even any identity, if they lack a birth certificate) or a financial history. In Asia, some 60% of births are not registered on their birthday and many never at all.There are many options that are being worked on or explored to establish citizens' financial identity. Information sharing can help to bring people into the mainstream financial system by using alternative data such as utility payments, cell phone bills and rental and remittances payments. Credit information reporting systems can be established involving private sector players. Biometric automatic teller machines are a new innovation for targeting the unbanked population. Using thumbprint and voice guidance in ATMs reduces literacy requirements to a considerable extent.
The Bank of Indonesia has launched the Financial Identification Project (FIP) to provide unique financial identity number (FIN). The FIP is expected to produce a more effective and efficient approach to facilitate a better and easier financial access for the society, especially to those who do not have any access to banking services, micro, small, and medium enterprises, and the productive poor households.
Financial capability and financial education
Financial capability and financial education are necessary both to enable citizens to make use of their access to the financial system, as well as to empower them to make sensible financial choices.Even where citizens theoretically are able to have access to the formal financial system, many do not avail of that access. Indeed, in developing economies some 10% of adults with a formal account report making no deposits or withdrawals in a typical month, where as in high-income economies only 2 percent report this.
In order to avail of financial services, people must understand them. And this can be a challenge for people who are unfamiliar with financial services, and who may be faced with complex financial products.
Many citizens are also vulnerable to seductive financial marketing, and even trickery by financial agents. This is an equally compelling reason for financial capability and financial education.
Promoting and facilitating financial capabilities for children and youth is important to create financially responsible citizens for the future. Where financial capability and financial education programs are undertaken in partnership with the financial sector, the fine between financial education and marketing must be respected.
Many Asian countries have active programs of financial capability and financial education. For example, Malaysia's financial literacy program has a three-pronged approach which targets the general public, primary and secondary students, and rural folks, women and university students.
The Organisation for Economic Cooperation and Development runs an International Network on Financial Education, which involves strong Asian participation.
Consumer Protection
Consumer protection policies are necessary to address technical and delivery security, reduce predatory lending and increase disclosure of information, facilitate efficient dispute settlement, enhance data protection and improve comparability of offers. The key elements are transparency, fairness, responsibility and fair recovery practices.Given that financial literacy is low in all developing countries (and many developed countries), consumer protection is a critical partner to financial education.
Some concluding comments
These private and governmental initiatives to improve financial inclusion in Asia are very impressive, and no doubt having very positive effects. But serving the poor with finance services faces many of the same challenges that finance does in advanced countries, namely facilitating innovation, implementing the right dose of regulation to address systemic risk and consumer protection concerns, and most fundamentally ensuring that the financial system serves the real economy, rather than resulting in casino capitalism.Author
John WestExecutive Director
Asian Century Institute
www.asiancenturyinstitute.com
REFERENCES:
- Asia-Pacific Forum on Financial Inclusion: Approaches, Regulations and Cross-Border Issues. Shanghai, China, 25-27 June 2012.- Asli Demirguc-Kunt and Leora Klapper, 2012, "Measuring Financial Inclusion: The Global Findex", World Bank Policy Research WP 6025.
- Promoting Financial Inclusion through Innovative Policies
- OECD's International Network on Financial Education