Paving the way for financial inclusion

Financial services can provide an on-ramp to greater financial stability and opportunities for longer-term prosperity

For many people, opening a bank account or applying for credit is easy, convenient and taken for granted.

For others -- almost one third of the world’s population – it is a difficult and sometimes daunting task. Some 2.7 billion adults are “unbanked.” That means they do not have the opportunity to save, get loans, manage their finances and grow their businesses through formal or secure financial services.

“A bank account in and of itself is not magic. It will not, in and of itself, alleviate poverty. But financial services can provide an on-ramp to greater financial stability and opportunities for longer-term prosperity,” says Jennifer Tescher, President and CEO of the Center for Financial Services Innovation in the United States.

Improving financial inclusion in the Asia-Pacific region was the subject of a recent seminar in San Francisco. Organised by US Treasury and the San Francisco Federal Reserve Bank as part of the APEC Financial Inclusion Initiative, it gathered financial policy makers and other experts from around the region to further work on increasing access to financial services. This includes delivering financial services such as savings, payment, credit and insurance at an affordable cost to disadvantaged groups including the poor, women, migrant workers, and rural communities.

“The workshop brought together experts from across the region to drill down to the practical level to indentify the common features of the successful initiatives of several APEC economies,” says Lois Quinn, chair of the APEC Financial Inclusion Initiative, and senior economist and financial systems advisor at the US Treasury. 

The February seminar followed a meeting of APEC Finance Deputies, who discussed the economic outlook and policy challenges for the APEC region. The Deputies Meeting, which included presentations by the International Monetary Fund and other groups, noted the two-speed economic recovery from the global financial crisis between advanced and emerging economies. Officials shared concerns about unemployment levels in advanced economies and the potential for overheating in emerging economies, especially due to rising food and commodity prices.

More work to be done

The picture of financial inclusion has been improving in recent years, World Bank research shows. Economies contracted in 2009 as a result of the global financial crisis – but access to formal finance in developing economies grew. Sixty-five deposit accounts were added per 1,000 adults in 2009, representing a 4.3 percent average growth in the number of deposit accounts.[1]

Experts agree, however, that much more work needs to be done, including in the Asia-Pacific region. Fifty percent or less of the adult populations in Indonesia, Papua New Guinea, Peru, the Philippines and Viet Nam have savings accounts, the research shows. In the United States, the world’s biggest economy, some 30 to 40 million households are un- or under-banked, says Ms Tescher.

Access to a range of financial services is a fundamental tool for helping families climb out of poverty and improve their livelihoods. It allows parents to send their children to school because they have access to the right savings products. It enables people to save and borrow to build their assets and provies them with much greater resilience to economic shocks. It also deters some from resorting to informal markets, including loan sharks, which can lead to inescapable debt spirals.

For micro, small and medium-sized enterprises, it can be vital, says Julius Casaer Parrenas, Co-ordinator of the private sector Advisory Group on APEC Financial System Capacity-Building.
 

“Small and medium enterprises (SMEs) employ over 70 percent of people in most economies in the region,” Dr Parrenas says. “Various surveys indicate that access to finance is the most serious constraint they face, especially with respect to two key issues: credit information and legal frameworks for secured lending.”

Increasing financial inclusion is important not only for individuals, families and businesses but the economy as a whole. When people can plan financially, consumption increases and new industries begin to grow, which stimulates domestic demand. It also reduces the income gap between rich and poor. And financial services like micro-insurance can act as an important social safety net for disastrous events like flooding and storms. 

In essence, financial inclusion contributes to balanced, inclusive and sustainable growth which are key components of APEC's growth strategy for the region, adopted by Leaders at their annual meeting in November last year.

“Financial exclusion prevents the economy from achieving sustained growth based on broad participation of the population in economic activities. It also prevents the achievement of balanced growth in the region,” Dr Parrenas says.

Innovative solutions

To date, the most successful way to address financial inclusion has been through the provision of micro-finance. The practice of lending small amounts of money to help people get out of poverty through building their business has become a global phenomenon. But in recent times, it has also drawn criticism for how much interest has been charged by some institutions, how much profit is being made and what constitutes exploitation of the poor.

Dr Parrenas says while micro-financing is still one of the best models for improving financial inclusion, it must be accompanied by adequate regulations - including a robust consumer protection framework and adequate credit information sharing systems.

Innovations in technology and service delivery have also seen successful new policies, such as mobile phone banking. Mobile phone subscriptions have soared, particularly in developing economies, offering huge potential for expanding financial access to isolated areas and lower income groups. Mobile phone transactions are often lower than those at traditional bank branches. In the Philippines for example, two mobile banking operations have an estimated 71.2 million customers out of a population of 90.5 million.[2]

Allowing retail outlets and post offices to act as agents for banks has made it possible to expand financial services access to remote areas and at lower costs. In Peru, the number of agent banks has increased from 1,900 in 2007 to 7,219 in 2010.[3] 
 

“In the past, some banks have tried to serve the underbanked by making small tweaks to existing products or distribution channels. Those efforts have largely failed because they didn’t put the consumer at the center,” says Ms Tescher.

“However in the last 5-10 years, a new generation of financial services and technology providers has begun to take shape. These providers are actively working to serve the underbanked, and are creating competitive forces to encourage banks to join in. In other cases, these providers are partnering with banks in innovative ways.”

Dr Quinn says the insights gained at the San Francisco seminar from such successful approaches will prove useful. “Armed with this information, financial authorities and policy makers across APEC will be better equipped to tailor their financial inclusion action strategies to their needs.”

Michael Kaplan, chair of APEC’s Senior Finance Officials' Meeting, summarises: “Under the APEC Financial Inclusion Initiative, finance ministry, central bank and financial supervisory authorities from across APEC are working together to develop concrete and practical guidance for government action to reach underserved individuals, households and self-employed entrepreneurs.”