At the Pittsburgh Summit in 2010, the G-20 said it would create the Financial Inclusion Experts Group (FIEG) to expand access to financial services, including credit, to the poor. Nothing has happened so far and ACCION a leading microfinance specialist suggests its definition of financial inclusion to bring the debate forward.
While there may be a growing consensus on the importance of financial inclusion world-wide, ACCION admits that terms such as “banking the unbanked” and “branchless banking” are mere catch phrases and stresses the need to work on definitions. While poor people do save, borrow, and make payments like others, and do need well-suited products delivered responsibly, the post-contractual dimension of responsible financial services is still missing from the ACCION agenda.
Whereas we welcome the ACCION vision that only now realises that clients should be at the forefront of the strategy, and recognises consumer protection as a key element in a market-based system, it does not fully appreciate the need to ensure a quality service throughout the credit relationship. There is no mention of measures to ensure that financial inclusion is productive for the consumer and that it is fair and sustainable. ACCION seem more concerned with playing a numbers game by exclusively focusing on increasing the number of the financially included irrespective of how sustainable the services being provided actually turn out to be (instead the word sustainable is used in the context of “The driver of service expansion is economic sustainability for providers”) . We would welcome for example, if such microfinance specialists could encourage and support more empirical work on the outcomes for those persons they serve.
While disagreeing with their vision that being fully served means selling households not one type of formal financial service but all products on offer (ACCION four-product and excluded-groups lens), we agree with the usefulness of flagging markets showing rapid growth of consumer credit and proliferation of providers as potential market hot spots where consumer protection and financial education would be needed. The ECRC would be prepared to cooperate with ACCION’s Center for Financial Inclusion in helping it to frame a vision for financial inclusion that is shaped by access to suitable financial services that are provided along the lines of the ECRC principles of responsible credit. An ambitious vision for full financial inclusion should really have a greater quality component.
Financial Inclusion: What’s the Vision?
The Need to Agree On What Financial Inclusion Is
Financial Inclusion is emerging as a global hot topic. The G-20 has launched a Financial Inclusion Expert Group; the U.N. has appointed Princess Maxima of the Netherlands as Special Advocate for Inclusive Finance; and policy makers from India to Brazil to Mexico are publishing papers and holding conferences about how to get more services to more people. The Obama Administration is seeking to make a contribution to global leadership in this area.
While there is a growing consensus on the importance of financial inclusion, the same consensus does not exist around its definition. From “banking the unbanked” to “branchless banking,” a variety of catch phrases are sometimes used as near synonyms for financial inclusion, when in fact they describe specific aspects of a broader concept. At this early stage in the movement toward financial inclusion, getting the definition and the vision right matters because the definition will shape policy decisions and the vision will motivate action.
Poor people save, borrow, and make payments throughout their lives. But to use these services to their full potential—to protect their families and improve their lives—they need well-suited products delivered responsibly. Bringing this about requires attention to human and institutional issues, such as quality of access, affordability of products, provider sustainability, and outreach to the most excluded populations. A definition and vision with clear and meaningful objectives in all these areas can inspire leaders to take a comprehensive path towards full financial inclusion.
The Center for Financial Inclusion, through its Financial Inclusion 2020 Project, has been working to frame a vision for financial inclusion that is shaped by the recognition that access to suitable financial services is a critical enabler of quality-of-life improvements and economic development. Given the progress that the microfinance industry has made during the past two decades (bringing services to over 150 million new and previously excluded customers), and the prospects that new commercial players are opening for dramatic future growth, we believe that this goal is within the realm of possibility.
The Four Dimensions of Full Inclusion
The Center for Financial Inclusion proposes a simple yet multi-dimensional definition of financial inclusion:
Full financial inclusion is a state in which all people who can use them have access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial services are delivered by a range of providers, most of them private, and reach everyone who can use them, including disabled, poor, rural, and other excluded populations.
This vision puts clients rather than banks or technologies at the forefront. It recognizes that the financial-service needs of the poor have fundamental similarities to those of the better off. More specifically, when we look at inclusion, we focus on four core dimensions:
• What is provided: A full range of services, which includes a basic product in each of the four main areas: savings, credit, insurance, and payments.
• How it is provided: With quality—e.g., convenience, affordability, safety, and dignity of treatment—and with client protections operating.
• Who receives: Everyone who can use the services, including the poor, rural, informal, and groups who are often discriminated against (women, ethnic minorities, disabled).
• Who provides: A range of providers led by mainstream financial institutions, but also including organizations from the private, social, and government sectors.
How to Use the Vision
Adopting a broad vision helps keep the ultimate milestones in mind as the policy and action agenda are set:
• Continue striving to provide financial services to the hard to reach, still-neglected populations.
• Improve the quality of services. It is insufficient to count someone as “included” who receives only a single service or whose service is expensive, inconvenient, or unsuited to his needs.
• Highlight consumer protection as a key element in a market-based system.
More practically, the existence of a consensus vision is helpful in organizing players and making policy choices. Such a vision:
• Points toward roles for multiple actors, with government providing a supportive environment.
• Keeps the market in mind. The driver of service expansion is economic sustainability for providers.
• Draws attention to providers like microfinance institutions that seek out harder-to-reach segments.
• Provides a framework for evaluating specific actions—“How significantly does X contribute to the ultimate vision?”
Without a comprehensive vision, policy makers tend to focus on what is easiest to measure and regulate—often one or two products and one or two providers (especially mainstream commercial banks).
The Vision Applied – Mexico
The CFI ‘s Financial Inclusion 2020 Project team put our definition and vision to the test by applying it in Mexico. We asked: What would it take for Mexico to achieve full inclusion by the year 2020? When we apply our four full-inclusion lenses to Mexico, we can see the power of a comprehensive definition.
Using our four-product and excluded-groups lenses, we found that while 55 percent of all Mexican households access at least one type of formal financial service, only 5 percent can be counted as fully served. Despite the rapid growth of consumer credit, Mexico is not currently on the path to full inclusion by 2020. Services to the most excluded segments are simply not growing fast enough, and that includes the poor, the rural and the informal who make up two-thirds of the population.
Mexican policy makers are excited about the potential of mobile and agent banking to bring payment services to excluded rural locations, but a close look at the institutional landscape through our multiple-provider lens revealed barriers of infrastructure and location of retail outlets in Mexico’s rural areas, leading us to conclude that the financial inclusion challenge cannot be solved by delivery channels alone.
Applying our quality lens led us to flag the rapid growth of consumer credit, where new providers are proliferating, as a potential market hot spot where consumer protection and financial education would be needed.
Finally, a close examination of excluded populations led to the observation that while the number of poor households will fall only slightly over the next decade, the depth of poverty will diminish as millions of families will leave extreme poverty behind. With slightly more discretionary income such families can begin to afford financial services, opening the possibility for the private sector to serve them. We estimated that full inclusion could bring a potential $6 to 8.5 billion revenue pool into the financial sector.
These and other observations begin to suggest pathways for Mexico to reach full financial inclusion by 2020, with a strategy that mobilizes all the relevant providers and stakeholders together with government actors.
A Final Word
Full inclusion by 2020 could be within sight in a number of countries. As global financial systems are being re-thought, an opportunity emerges for world leaders to promote the ambitious vision for full financial inclusion within the decade, using a concept that keeps the needs of clients at the center. Financial inclusion is like a jigsaw puzzle. Only when all the puzzle pieces are in place does the image become clear. World leaders say they want to pursue financial inclusion. It makes sense to get the whole picture right. The goal is ambitious, but it is within the realm of the possible.
About the G20: Established in 1999, the Group of Twenty (G20) finance ministers and central bank governors brings together “systematically important” industrialized and developing economies to discuss key issues in the global economy. The G20 is made up of finance ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, the UK and the US. The European Union is the twentieth member of the G20.
About the Financial Inclusion Experts Group (FIEG): The Financial Inclusion Experts Group (FIEG) was created at the G20 Leaders Summit in Pittsburgh in September of 2009. The objective of FIEG is “to support the safe and sound spread of new modes of financial service delivery capable of reaching the poor and, building on the example of microfinance, will scale up the successful models of small and medium-sized enterprise financing.” FIEG’s agenda is divided into two sub-groups: Access through Innovation (ATISG) and small and medium-sized enterprise (SME) finance.
CGAP: “G20 Identifies nine principles for innovative financial inclusion, action plan expected in November,” June 28, 2010: www.cgap.org/p/site/c/template.rc/1.26.13722/
CGAP: Consumer Protection Regulation in Low-Access Environments: Opportunities to Promote Responsible Finance, February, 2010: www.cgap.org/p/site/c/template.rc/1.9.42343/
Consumer Protection Regulation in Low-Access Environments: Opportunities to Promote Responsible Finance
By Laura Brix and Katharine McKee
Responsible finance is much in the news these days, as the fallout from irresponsible financial practices and products in the United States and other developed markets continues to affect global finance. Regulatory failure clearly played a role in the meltdown of the financial system. One silver lining of the global financial crisis is that more attention is being paid to financial consumer protection. Debates in the legislatures and central banks of countries with sophisticated financial markets are highlighting the link between protecting financial consumers and stable, efficient markets. Restoring consumer confidence in the financial system is a key priority.
Are consumer protection problems and solutions currently under consideration relevant for developing country policy makers, or are the markets, products, providers, and consumers too different? This Focus Note seeks to answer this question, drawing on consumer protection diagnostics of various types carried out by CGAP in more than a dozen countries, widespread consultations with regulators, review of research and experience in developing and developed countries, and Financial Inclusion 2009 cross-country survey findings. It cites significant examples, as well as evidence of their effectiveness (where data are available).
Consumer Protection Regulation (PDF, 408KB)