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Insight: The criticality of financial inclusion in developing countries
The principle of financial inclusion poses a policy challenge on a scale and with an urgency unique to developing countries, which house nearly 90 percent of the world’s population without access to banking services
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he principle of financial inclusion poses a policy challenge on a scale and with an urgency unique to developing countries, which house nearly 90 percent of the world’s population without access to banking services.
Access to sustainable and secure financial services contributes directly to higher incomes while reducing the vulnerability of the poor.
Bringing more people, and therefore more money, into the formal financial system can lead to overall economic growth and increased stability in developing country economies. Policymakers in developing countries have an important role to play in creating the conditions for improved access and in unlocking the economic potential of their populations.
Leaders worldwide are recognizing the potential of a more inclusive financial services sector, and the issue is emerging as a priority — notably featuring prominently on the G20 Seoul Summit agenda for this November.
The recent financial crisis, with its roots in the developed world, has triggered a fundamental rethinking of the role of governments and central banks in restoring financial stability. For those advancing financial inclusion policies, this has created opportunities to reinvigorate and drive reforms that foster economic resilience but that are also more inclusive to a wider range of the population. Post-crisis opportunities to promote financial inclusion hinge on finding a careful balance between financial openness and regulations that limit the risk of financial instability.
The 60 developing country central banks and regulatory bodies that constitute the membership
of the Alliance for Financial Inclusion (AFI) have identified a number of common trends and barriers
that need to be addressed in order to institute comprehensive and actionable policy frameworks for financial inclusion in their own countries.
Emerging trends include the recognition that the role of policymakers is changing and that their leadership is important in forming financial inclusion strategies; that microfinance can be used as an entry point for improving access to the formal system; that new technology provides channels and opportunities for reaching the poor; that savings are the fundamental building block of financial inclusion; and that banks have an important role to play in reaching the poor with their
services.
In terms of barriers for the poor, there are two sides to the coin. Supply-side barriers include transaction costs and regulatory frameworks that hinder the quantity and quality of financial products and services. On the demand-side, barriers include lack of national identification systems, inability to track an individual’s financial history, low levels of financial literacy and the absence of appropriate consumer protection mechanisms.
A commitment to financial inclusion can help developing countries come into compliance with international standards such as those issued by the Financial Action Task Force (FATF). Smart policies for inclusion can reinforce the twin objectives of stability and financial system integrity which regulators constantly strive for.
Developing countries must determine their own financial inclusion objectives, policy approaches, and targets, rather than have these imposed upon them. The key to a successful financial inclusion strategy lies in allowing developing countries to identify what works best for them and then empowering them in implementing it.
Peer learning and exchange is increasingly being identified as a crucial way to leverage proven solutions for policymakers in these nations. Across the world, best practices and innovative approaches to financial inclusion are gaining traction, not just locally, but by being migrated to other nations who are customising them to suit their own, specific agendas.
In Indonesia, for example, Bank Indonesia, as the central bank, has launched a national microsavings movement “TabunganKu” to mitigate the challenges facing the unbanked segment. A low penetration rate of banking services coupled with very high barriers to access has resulted in a burgeoning “informal” financing sector which undermines societal welfare, especially in rural areas. TabunganKu is aimed at fueling people’s desire to save, and uses financial literacy as the pathway to financial empowerment.
The programs’ greatest success lies in the fact that it overcomes the two key barriers to providing banking services to low income segments of the country’s considerable population. By stipulating fee waivers and keeping balance requirments to a minimum, TabunganKu has resulted in a surge of newly banked customers — 500,000 and counting, with cumulative nominal savings of around Rp 400 billion.
And within a very short period of time, it already has traction with about 70 commercial banks and over 1000 rural banks. Future plans for the program include harnessing the potential of mobile phone banking, through which it is hoped that the savings movement will literally be at citizens’ fingertips.
A global policy response based on leadership from developing countries, closer international cooperation, and strong and coordinated partnerships between relevant public and private sector stakeholders at national and international levels, is critical in supporting countries at all levels of policy development. It is after all these nations, where the challenge of financial inclusion is the greatest, and consequently, the need to implement robust programs is the most acute.
Darmin Nasution is governor of Bank Indonesia and Alfred Hannig is executive director of Alliance for Financial Inclusion (AFI)
