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This article was first posted in the World Economic Forum Blog on 23 August 2013
Making the financial system accessible to the world’s poorest people can unlock their economic potential, improve their lives, and benefit the wider economy. So it is no surprise that financial inclusion of the poor has become an important component of public policymaking. Central banks and regulators worldwide are taking the lead in making financial inclusion a priority, in addition to their traditional mandates of maintaining monetary and financial stability.
Financial inclusion is about providing an opportunity for the world’s 2.5 billion unbanked and financially underserved to participate in the formal financial system, thereby helping to lift them out of poverty and enter the economic mainstream. Greater financial inclusiveness promises a more cohesive society and more balanced growth and development.
Moreover, financial systems themselves stand to benefit from becoming more comprehensive and progressive. The additional consumers participating in the formal financial system will strengthen national economies and, in turn, enrich the global economy. Indeed, as developing countries move toward middle-income status, financial inclusion is a key component of continued progress.
In countries with high levels of financial exclusion, consumers are left to rely on unregulated informal services. These inferior substitutes often imply exorbitant costs for borrowers – and financing that is usually too short term for productive investment activity. Moreover, the lack of consumer protection and regulatory and supervisory frameworks exposes informal activities to vulnerabilities that can harm borrowers and jeopardize financial stability.
Increasing the availability of formal financial services to those who have long been denied them requires establishing a balanced regulatory framework. Oppressive, blanket regulation, which may be necessary in complex and unpredictable financial markets, may not be relevant in a rural community – or, worse, it may stifle efforts to promote financial inclusion.
Indeed, proportionality is an important aspect of regulation, enabling prudential measures that, rather than exceed or underestimate, are commensurate with the risks that need to be addressed. Little wonder, then, that high levels of exclusion in developing and emerging countries have prompted policymakers to embrace proportionate regulation, thereby gaining the flexibility to encourage innovation in the provision of financial services while preserving financial stability.
Bangladesh, for example, has adapted its financial regulations for microfinance institutions. This has helped to catalyze the growth of sustainable microfinancing to local women-owned enterprises. Kenya’s “test and learn” approach to regulation has unleashed the potential of mobile-phone-based financial-service delivery through M-PESA, which offers consumers a safe and convenient alternative to cash.
There are many other examples of successful implementation of proportionate regulation that have resulted in greater financial inclusion without compromising financial stability. In Malaysia, agent-banking regulation (which safeguards consumers’ interests while supporting financial institutions’ business models) has led to the expansion of branchless banking to reach previously unserved rural areas.
Similarly, Mexico’s “tiered” approach to financial access – according to which requirements for opening bank accounts are proportionate to risk, with low-value accounts subject to higher transaction restrictions – has expanded access to basic accounts, while mitigating the risk of money laundering. And Pakistan and Indonesia, by basing capital requirements for microfinance institutions on the size of the population that they expect to serve, are enabling these institutions to serve distinct market niches sustainably.
Policymakers in many countries have recently been considering the role of financial standard-setting bodies (SSBs) in advancing financial inclusion. In particular, they are focusing on the specific challenges that arise when applying supervisory standards in a developing country that is pursuing financial stability and inclusion.
Although global standards supposedly reflect the principles of proportionality, they provide insufficient guidance for the national regulators, banking institutions, and financial-sector assessors who are trying to apply them effectively in diverse environments. This lack of contextual clarity has led to excessively conservative interpretations of the regulations – and thus to the creation of unintended barriers to financial inclusion. Addressing this will require input from policymakers with practical experience applying international standards, particularly in emerging economies.
At the same time, in order to ensure continued progress toward financial inclusion, representatives from developing and emerging economies must play a greater role in shaping future standards. The Alliance for Financial Inclusion, a network of central bankers and financial policymakers from more than 80 developing countries, is already contributing to more effective and proportionate global regulation by facilitating increased engagement with SSBs. This September, Malaysia’s central bank will advance the process by hosting AFI’s Global Policy Forum.
Zeti Akhtar Aziz has been Governor of Bank Negara Malaysia (the central bank) since 2000.