Monday, September 1, 2014
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Banking on Financial Inclusion

LIMA – The 2008 financial crisis highlighted the profound importance of finance for the globalized economy. But 2.5 billion people worldwide still lack access to formal banking services, credit facilities, or savings instruments. Bringing this largely ignored “missing market” into the formal financial system would enrich and strengthen the global economy.

The unbanked, who live primarily in developing countries, comprise nearly half of the world’s working-age population. In some countries, as much as 90% of the population lacks access to the formal financial system. This impedes their participation in the global economy by restricting their ability to buy goods and services, to borrow and save, or to invest in their future and that of their community and country.

Most global poverty-reduction efforts rely on “top-down” solutions – development-aid flows from rich to poor countries – that largely focus on education, food security, and disease management and prevention. But improving access to the formal financial sector is a unique challenge that cannot be tackled with foreign aid or government handouts.

In general, homegrown solutions have proven to be more effective than externally imposed policies. While a single, universal solution will not work, understanding factors that are common across countries provides a useful way forward. For example, populations worldwide are embracing technology, particularly mobile services. However, people throughout the developing world frequently lack proper identification, a fixed address, or a formal employer.

Solutions that capitalize on trends or address widespread challenges are more likely to have an impact. A policy that works in one or two markets can then be shared, analyzed, and adapted for implementation elsewhere.

In developing countries, an estimated 1.7 billion people own mobile phones but have no access to banking services. Harnessing this technology to expand financial inclusion would be economically empowering, particularly for smallholder farmers and merchants in rural communities, who could use their mobile phones to access market-price data, transfer cash, make retail purchases, deposit income, and pay bills – all while tending their fields or shops.

This would encourage saving, which is crucial to building a business and providing investment capital to others. And legal, regulated options for safeguarding savings and accessing credit would reduce reliance on the black market or the informal economy, where financial exploitation flourishes.

In Kenya, regulators have created the conditions needed for an innovative mobile-phone financial-services system, M-PESA, to flourish. Since its 2008 launch, M-PESA has attracted nearly 14 million Kenyans – almost one-third of the country’s total population – who use it for money transfers, savings, and other financial transactions.

Regulators and local private institutions can collaborate to create safe and accessible banking and credit instruments. That is how Brazil developed a regulatory framework that has enabled banks to build a network of 95,000 banking agents. As a result, an estimated 13 million Brazilians – in all of the country’s nearly 5,600 municipalities, from the Amazon to the favelas (shanty-towns) of São Paulo and Rio de Janeiro – have been brought into the financial system.

Similarly, a state-owned Indonesian bank, Bank Rakyat Indonesia, is providing micro-financing services to 30 million people, while in India, new “no-frills” savings accounts have attracted 12.5 million customers. Other homegrown regulatory success stories come from Mexico, Peru, Bolivia, Uganda, South Africa, the Philippines, Thailand, and Mongolia.

Financial leaders have already begun to spread the word about such progress, and the policies that enabled it, in order to bolster and expand financial inclusion. The Alliance for Financial Inclusion (AFI) – a group (in which I participate) of central bankers, regulators, and finance ministers from more than 80 developing countries in Asia, Africa, Latin America, and the Middle East – is sharing knowledge to develop and implement effective policies.

In September 2011, at the AFI Global Policy Forum in Mexico, 17 financial authorities adopted the unprecedented Maya Declaration – a set of specific, measurable commitments aimed at increasing financial inclusion. Since then, seven more institutions have committed to the declaration, and more are expected to join before this year’s forum in Cape Town, South Africa, where experiences will be shared and progress assessed.

The Alliance understands that globalization is not a zero-sum game. Developing countries can benefit from the opening of markets to new trade and investment, while the developed world can benefit from the infusion of new customers, suppliers, and capital (possibly in the trillions of dollars). If the world’s 2.5 billion unbanked join the global economy, every industry will experience innovation and growth.

Rather than waiting for solutions from American, European, or other advanced-country bankers, developing countries are leading the way toward financial inclusion, dramatically reshaping the global economy in the process. Opening the financial system to the world’s poorest people will unlock their economic and social potential – to the benefit of all.

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  1. CommentedNicola Jentzsch

    The advantage for countries working together in AFI is that they can pursue the subject matter of financial inclusion from a micro- as well as macro-level. Micro-level in terms of understanding the reasons why people adopt mobile banking and therefore improve regulations. Moreover, at this level they can exchange on strengthening consumer protection, which will be key for robust mobile banking systems.
    At the macro-level countries share within AFI their knowledge on data gathering on financial markets. This will help to better understand, where the markets are heading.
    It is not only the peer-to-peer approach that makes this cooperation useful, but also the multi-level perspective that countries may take.

  2. CommentedJonathan Lam

    Gamesmith94134: Banking on Financial Inclusion

    “Opening the financial system to the world’s poorest people will unlock their economic and social potential – to the benefit of all.” Alliance for Financial Inclusion (AFI) is the best innovative idea on banking ever known since the macro-economic ruled and collapsed under the bridge of inequality and imbalance.

    It was the monetarist system that monitored growth in use of extended the credits that social justice for those unbanked was buried alive and financial capability for the polity was looted under the constraints of sustainability. I do not agree on austerity to maintain the balance of those credits and debts since they did not provide the sufficient proof on global poverty –reduction from its “top-down” solution.

    So far, I only saw the middle-class lost it strength to growth in carrying the debts that our government or central bank attempted to stimulate the economy with its liquidity or resolution to the international banking. Through the administration on macro-economic, it only muddled and jeopardized the revitalization or balance of payment from any reforms from the view of micro-economic; and the outlook on its anemic growth became the fixture to monetarist, just because it was unsustainable or imbalanced that most of human resources are misallocated from unemployment, and productivity of goods would become non-profitable to grow or produce.

    Relying on the “top-down” solution to access the formal financial sector is a unique challenge that cannot be tackled with foreign aid or government handouts through the present banking giants or central banks, since there are only write-offs or transfers that never touch the ground of the public or local businesses. Eventually, it only announced how equitable they are with its backing of real estates and credits (bonds worth nothing); and austerity programs work with debtors nations with higher unemployment and more anemic than revitalized.

    It is nice to hear someone would give a fresh look on the mobile banking and micro-financing through the alliance for financial inclusion or Maya Declaration that the non-banker can use our new mobile technology on their side to promote growth or even survive in the arid climate of our present financial world. Perhaps, there is an economic growth in a non-profitable way since we do grow on population and technology. Just in case, we are coming short on the disinflationary policy and failed government and central banks; such alternative becomes valuable to the survival of human races. Monetarism has no value if it does not work. How profitable we be in 2015, if Quantitative Easing continues without fallout of our currency exchange system?

    May the Buddha bless you?

  3. CommentedNathan Coppedge

    Some would say, that according to the disparity between the rich and the poor, banking in impoverished areas has no tenable reward. This is why earlier systems focused on labor and resource advantages in developing countries.

    In my view, where a nation possesses sufficient capital, where ever possible the focus should be on producing leverage for conceptual realities in economics. There should be real, tangible intellectual resources which serve as attributes for nations. This may mean securing intellectual property rights and interpreting with computers, or otherwise hard-wiring some sort of intellectual gimick into (at least) the national economic system. With cleverness, such a system as using quadra inversion properties could be marketed as benefiting overseas economies as well as ours. In financial crisis, the only necessary property for marketing such a tool is that it insures the permanence of a status quo for an economic system. Rationally, this should not be impossible. Rationally, the middle class is sometimes willing to sacrifice capital benefits for quality of life. Indeed, from a financier's vantage point it may appear that some of these capital resources are just aspects of a "different tier" of the structure of economics.
    The quadra inversion system is a way in which, through oppositeness, expenditures are automatically investments in another department. With the right cleverness, this does not have to look like a slight of hand. It could be a real economic system. Certainly it ought to apply to something or other, even if economists will not accept, based on a conservative framework, that it is an exclusive system or economic representation.
    Consider for example, the potential of tapping unused computing resources for some sort of intellectual benefit. What if it can be proven that intellectual benefits serve the economy? Surely there must be someone who has some idea, or development tool, that consistently generates money. So that is one form of investment. If the opposite is industry, it should be secured that industry serves computers, so that there is a circular investment. Surely this isn't too simple-minded, is it? How could there be a better idea, when there are such apparently simple problems as a debt crisis? Children are supposed to get over this stuff (the hard, legitimate way) by doing some elementary thinking.

  4. CommentedOlivier Chaussavoine

    Alliance for Financial Inclusion could be interested to know that a prototype allowing exchange of fungible exists. Even if this electronic market does not require a central value standard to express prices, it performs a competition between orders just like a modernized human barter market. This prototype called openbarter is nearly as liquid as a regular market; it could be used by central banks to exchange currencies without any intermediary.

  5. Commentededuardo cabral jimenez

    Interesting article, very relevant and concise. In the case of the Philippines, known as the 'texting capital of the world', the primary financial regulator (BSP) has clearly laid down the legal and regulatory framework so that the use of the mobile phones can flourish to support the needs of the unbanked to have access to varied financial services and products

  6. CommentedPeter Wickwire Foster

    Amazing to see the emerging and developing world taking the lead in this area. While Apple is just starting to talk about mobile financial services, the MFS culture is already a way of life in many places in Africa and Asia. It will be fascinating to see how it develops.

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