Finance: Research, Policy and Anecdotes

Reshaping the Future for Financial Inclusion

I just came back from Abidjan where I gave a keynote at an event co-organised by the Alliance for Financial Inclusion, BCEAO and the Ivorian Ministry of Economy and Finance on “Reshaping the Future for Financial Inclusion”.

 

It is quite interesting to note how the discussion on access to financial services has changed over the past 15 years. In the early to mid-2000s, the focus was on microcredit, branch expansion and NGOs offering financial services to the bottom of the pyramid.  Now the discussion is on digital finance, the role of telcos and a broad suite of financial services for previously unbanked population segments.  Most importantly, while we had few if any data in the early 2000s, we have an abundance of data now, with the main important sources being the Financial Access Survey and the Global Findex.  The Alliance for Financial Inclusion has also been collecting data from its member countries on different policy actions in the area of financial inclusion. In on-going work, we are trying to explore correlations between these policy actions and changes in financial inclusion, to be published later this year.  

 

As always at these conferences with lots of practitioners I learned a lot and gained new insights. With all the (justified) excitement about digital finance overcoming geographic barriers to access to financial services, the access to mobile technology in rural areas still depends on physical infrastructure, a challenge we might easily forget.  One important topic that came up again and again is the persistent gender gap.  As I wrote in an earlier blog entry, this might be partly driven by persistent gender norms across the globe. But do we have to take these norms for given or can specific financial products actually influence such gender norms? There is evidence that access to financial services can result in female empowerment, but can this in turn help reducing societal gender biases? Or is it rather part of a broader educational and cultural agenda? More questions for research!

 

One (still) important barrier is the lack of identification.  Large population shares in many developing countries do not have the necessary documentation (passports, driver licence etc.) to allow them to easily access formal financial services but also build up a financial history that can be used across financial institutions. Technology has helped in the identification challenge and – partly through social media, mobile phone use etc. – has allowed to compile lots of information on (potential) clients. Countries as diverse as India and Uganda have taken on this challenge successfully, with positive repercussions for financial inclusion.  But where it is easy to collect and use data, Big Brother is not far.   So it is not just about portability of data, but also sovereignty – it is the individual who owns his/her data and should have corresponding rights on their use by third parties.  A clear tension and challenges for market participants and regulators.

 

A relatively new topic is that of green financial inclusion - how can financial services contribute to climate change mitigation and adaptation at the bottom of the pyramid?  As often with new topics there is quite some definitional confusion on products and services, different players and their roles and the extent to which regulators and central banks should get involved.  More concerning for me is the idea that prudential regulatory tools are being used for non-prudential purposes. Freely based on the Tinbergen principle (“achieving the desired values of a certain number of targets requires the policy maker to control an equal number of instruments”), non-prudential policy tools might be better positioned to target more directly green objectives without compromising financial stability! Further, while it is impossible to understate the importance of addressing the environmental externalities and the public good character of fighting climate change, we should not forget the lessons from decades of failed financial repression in the form of directed and subsidised credit, tools that might look attractive in the area of green finance. However, there are also positive lessons from development banks acting as second-tier institutions to help expand financial inclusion – maybe a similar role can be envisioned in the area of green financial inclusion. I have not formulated my thoughts completely in this area, but this seems one of the big challenges going forward- how to address an important market friction and challenge for humanity, while taking into account lessons learned.