10 Priorities for Financial Inclusion
This article by Tilman Ehrbeck is cross-posted from CGAP's blog:
Half of working-age adults globally have no access to formal financial services.They typically live and work in the informal economy – not by choice, but by necessity. To create income-generating opportunities for themselves, manage risks, and smooth expenditures they have to rely on the age-old informal mechanisms such as borrowing from families and friends or the money lender, saving under-the-mattress or through rotating savings clubs, accumulating capital in vulnerable livestock, using informal money transfer services. These informal mechanisms can be very expensive and unreliable.
Because they recognize its importance for economic and social progress, global and national policymakers have made it a priority to advance financial inclusion so people can access and use the appropriate financial services that help them improve their lives. To make real progress, we at CGAP believe the field has 10 priorities over the next 5 years.
- Understand the impact of financial services on the lives of the poor. This is foundational. If what we try to advance doesn’t improve the lives of the poor, we are doing something wrong. A lot of effort is going into better understanding impact, which is good. We are learning from a new body of financial access evaluations, what works for whom and why.
- Translate client insights into better product offerings and service delivery. The financial diary literature has helped us understand that poor households in the informal economy need and use a broad range of services – savings, credit, insurance, remittances. The priority for us now is to translate our increasingly better understanding of how people manage their financial lives into new products and delivery models that work better for them. The recent examples of new commitment savings products that mimic people’s constraints and behaviors are an example of promising progress.
- Start better understanding traditionally un- and underserved segments. This is most importantly true for smallholder farming families. By livelihood, they are the biggest segment of people living below $2 a day globally – an estimated 500 million families. Traditional microfinance has not reached smallholder farming families because their incomes vary through the year and depend on agri-cycles and fluctuating food prices. They often live in areas that lack basic infrastructure and connectivity. Even recent advances in supply-chain based agri-finance reaches an estimated less than 10 percent of small holder farming families - those who are part of tight value chains of cash crops such as sugar or coffee.
- Continue pushing for technology-enabled business model innovation. Business model innovations, in particular leveraging cell phones, promise to reach more people at lower transaction costs with a broader range of products. Lower transaction costs through digitized financial services benefit clients directly. Better data that helps with underwriting and managing credit and insurance risk holds the promise of creating further client benefits.
- Create success stories for local-market provider eco-systems. The provider economics and the required competencies are very different between credit, savings, insurance, and remittances. No one set of providers will be able to deliver all services. What’s required instead is a local eco-system of providers with many points of service in the community, low-cost payment systems, and fewer well-capitalized and well-regulated entities at the financial markets backend to aggregate and manage risks.
- Support governments to catalyze domestic financial inclusion. Governments as owners or providers of hard and soft infrastructure such as physical outlets in remote areas or unique national IDs, as rules makers for the use of infrastructure, and as a big source of transaction volume for example through their own payment transactions with citizens can do a lot to catalyze this eco-system development.
- Strike the right balance between an enabling and a protective regulatory environment. To enable development of promising product and business model innovations, the regulatory environment needs to understand demand- and supply-side realities. The recent push towards risk-weighted Know-Your-Customers norms in Mexico and Pakistan with lower documentation requirements for smaller transaction sizes is a good example of pragmatic regulation aimed at increasing financial access. At the same time, regulation must ensure that consumers are protected, for example by requiring adequate pricing disclosure and recourse and conflict resolution mechanisms.
- Help forge new global consensus about how to balance financial inclusion and other policy objectives. Financial inclusion is not a standalone objective for global and national policy makers. They have to understand and optimize the linkages between inclusion, financial stability, integrity, and consumer protection. G20 leaders have begun addressing these linkages and will continue to work towards a better understanding under Russia’s 2013 G20 leadership.
- Ensure smart subsidies towards sustainable market development. Global donors and national governments who want to advance financial access realize that this has to be done in the context of a responsible market development effort. Subsidies towards this market development should be smartly targeted to provide public goods that individual market players might not easily coordinate around such as data exchange and infrastructure investments, or towards demonstration effects aimed at crowding-in other sources of capital and talent.
- Work towards an ambitious aspiration. Progress towards financial inclusion requires a broad-based effort across better tailoring to demand side needs, continued innovation on the supply side, and supportive policy and infrastructure environment. To galvanize and sustain momentum, we need to work towards a collective and ambitious aspiration where essentially everyone has the choice to access and use the broad range of appropriate financial services that they need to improve their lives. Nothing less should do.
CGAP is focusing its own contributions on these priorities and remains committed to be of service to the broader financial inclusion community.
The author is the CEO of CGAP. You can follow him @TilmanEhrbeck.