Rachel Willcox 31 Oct 2017 12:38pm

Accounting for the world

Opening up financial services to the planet’s poorest makes good economic sense, but with two billion people still financially excluded, much remains to be done. Rachel Willcox reports

Caption: A World Bank report revealed the number of people with bank accounts has grown. Photography: Rob Crandall/ Alamy Images

Access to useful and affordable financial tools and services by the world’s poorest people has increased dramatically over the last few years, and yet more than half of the adult population and 300 million businesses are excluded from the formal financial system. Despite pledges to plug the gap, financial inclusivity remains a political pipe dream.

Credit where it’s due; according to the World Bank’s most recent Global Findex report, the number of people worldwide with a bank account grew by 700 million between 2011 and 2014, up 10 percentage points over that three-year period to reach 62% of the global adult population.

That still leaves two billion financially excluded, forcing the poor in developing economies to depend on informal mechanisms such as moneylenders for credit at high rates of interest; to use substitutes such as livestock or gold as a form of savings; or to pawn assets in emergencies.

The need for modern mainstream financial systems that are fit-for-purpose for everyone regardless of their income has long been on the political agenda and the World Bank has set an ambitious target of achieving universal access to transaction accounts by 2020. Intellectually at least, the rationale is clear: financial inclusion is essential for anyone wanting to participate fairly and fully in everyday life. Access to a bank account to store money or send and receive payments is the basic building block in allowing people to manage their financial lives and acts as a gateway to other financial services.

Without access to appropriate mainstream financial services, people pay more for goods and services and have less choice. What’s more, inclusive financial systems provide individuals and firms with greater access to resources to meet their financial needs, such as saving for retirement, capitalising on business opportunities, and confronting shocks. Therefore, the knock-on effects of exclusion are not just financial but also span education, employment, health, housing, and overall wellbeing.

“Every adult should be connected, in the right way and at the right price, to the regular, and therefore regulated, financial system. It makes economic as well as social policy sense,” says Sir Sherard Cowper-Coles, chairman of the Financial Inclusion Commission.Economists maintain that financial inclusion has a multiplier effect in boosting overall economic output and contributes to reducing poverty and income equality at a national level.

The World Bank’s umbrella statistics hide the fact that some groups are far more financially excluded than others, in particular the rural poor and other remote populations, as well as informal micro and small firms. Forcibly displaced populations present one of the most pressing financial inclusion challenges as almost 80% of adults in Fragile and Conflict-Affected States are outside the formal financial system.A progress report submitted to leaders at the G20 Summit in Hamburg in July last year highlighted that financial inclusion of women is pivotal to helping them help themselves and their families climb out of poverty or avoid the poverty trap altogether, in the light of World Bank figures that show the financial inclusion gender gap is not significantly narrowing; 58% of women have an account, compared to 65% of men.

Margaret Miller, the World Bank’s global lead for responsible financial access, explains: “The gender gap is still something we need to work on. There’s a relationship between the fact that women aren’t as well represented as men in the formal workforce so it’s harder for them
to get established with a formal financial relationship.”

As of mid-2016, 58 countries had set ambitious goals through the Maya Declaration Commitments and made promoting financial inclusion a national mandate, and more than 30 had either launched or were developing a national strategy. Yet the reality is that many of the world’s poor would benefit from financial services but cannot access them due to market failures or inadequate public policies.

Globally, 59% of adults without an account cite a lack of enough money as a key reason, which implies that financial services aren’t yet affordable enough or designed to fit low income users. Other barriers to account-opening include distance from a financial service provider, lack of necessary documentation papers, or cultural issues such as a lack of trust in financial service providers, and religion.

Countries that have achieved most progress toward financial inclusion have encouraged competition allowing banks and non-banks to innovate and expand access to financial services. Digital financial technology and mobile payments technology are seen as key to opening up financial services to many low income households and microenterprises in developing economies.

Bearing in mind there are more mobile phones than adults in most African countries, the combination of the digitisation of cash-payments and mobile-based financial services offers convenient and affordable access, even to remote areas. Meanwhile digital IDs make it easier than ever before to open an account and greater availability of customer data allows providers to design digital financial products that better fit the needs of unbanked individuals.

Gerard Ryan, CEO of loan company International Personal Finance, says: “One of the biggest challenges is educating regulators and politicians about the role non-bank institutions play in providing credit to consumers typically underserved by mainstream banking.”

Miller adds: “In some instances the challenges revolve around legal and regulatory reforms to make sure there’s a healthy level of competition among providers, and having the right incentives for sharing data in a responsible way and the ability to evaluate risk.”

While just 1% of adults globally say they use a mobile money account and nothing else, in sub-Saharan Africa, 12% of adults, representing 64 million people, have mobile money accounts and 45% of them only have a mobile money account. “Using mobile phone technology means we are able to reach people we couldn’t reach before. But not everyone will accept mobile money. There are still technological, institutional and regulatory hurdles to overcome, but it represents an enormous opportunity,” says Miller.

“People may be far away from a bank branch and they may feel culturally unwelcome or it may not have a value proposition that’s attractive to them,” explains Rachel Balsham, deputy CEO of MSF Africa, which provides mobile money services across the continent. “Mobile money is a leaner, simpler access point compared with formal financial services. But there’s a stickiness to habit. The real competition is cash.”

For some providers, addressing financial exclusion has been a corporate social responsibility exercise rather than part of their core business. However, other financial services providers are actively vying for a slice of the financial inclusivity pie – and for commercial rather than altruistic reasons. “There is an awareness that there are billions of people who are potential customers. The issue is how to reduce the obstacles to serving these people,” says Miller.

Arnaud Ventura is president of microfinance provider Microcred. Of the company’s 700,000 clients – mostly micro entrepreneurs in China and Africa accessing small loans to develop their businesses – Ventura says around half have never had a prior relationship with a financial institution. In Madagascar the percentage drops to single digits. Two years ago, Microcred started the move towards digital provision of financial services and while the company anticipates 80% of clients will access services digitally over the next five years, fewer than 20% do now. “In many countries clients are poorly equipped – not all have a phone – and the capacity to provide services in a digital and non-digital way is a challenge.”

Balancing the needs of the world’s poorest with commercially-viable products and services tailored to their needs, that also offer wider benefits to society, is proving a hard nut to crack. It’s not simply about creating a market with innovative and competitive financial products that meet the needs of this market, but also making sure they are accompanied by appropriate consumer protection measures and regulations to ensure responsible provision of financial services.

Fifteen years have passed since the microfinance concept was spawned as a poverty reduction tool and it now has an estimated value of $60bn-100bn, serving 200 million clients, but its results have been mixed. Critics cite modest benefits associated with microcredit, over-indebtedness, and a trend toward commercialisation that is less focused on serving the poor.

“There are lessons to be learnt by policymakers and regulators from the recent growth in the microfinance industry across the developing world, with lending rates of 27%-plus for loans to pay for products that will not yield a return,” says Mark Campbell, director of international capacity building at ICAEW. “It is important to ensure the poorest do not face a growing burden of debt.”

Ventura admits there are ethical issues at play: “We don’t lend to anyone who doesn’t have the capacity to repay. They may be poor but they are very capable of understanding the cost and the benefits of our services. We focus on responsible lending but there are some players in the market that have no interest in the social agenda.”

At the same time, the rapid pace of technological change is a challenge to regulators looking to support cross-border payments against a backdrop of increased exposure to money laundering, terrorist financing, fraud and other financial crimes. Effective safeguards need to be in place if the benefits are to be sustainable and to the advantage of society as a whole, experts warn. Campbell says the Institute’s capacity-building projects in more than 25 countries highlighted the role of financial inclusion in strengthening societies and nations. “At the same time we realise that policies must address the risks to the poor as well as the benefits,” he warns.

The prospect of financial products and services aimed specifically at the “subprime” market may send shivers down the spines of those whose memories of the global financial crisis are all too fresh. But the economic risks at play are small. “The very poor represent a very large number of people but the amounts of money we’re talking about are very small – so this couldn’t have a systemic impact on the economy. This is not at all about credit. Our approach is about access to transaction services and payment,” says Miller.

In anticipation of the publication of the World Bank’s next Global Findex study, due out in the spring, some huge financial inclusion challenges remain, not least making sure everyone has valid identification documents and a low-cost, accessible means for them to be authenticated – the focus of the World Bank’s ID For Development project.

Miller is bullish about the progress likely to be unearthed. But she reiterates that collaboration between providers and industry associations and having good regulatory systems in place is key to making sure that products are provided responsibly and sustainably. At the same time, good financial literacy among consumers is critical. “Your first defence is consumers who know when something feels too good to be true. That’s hard when they are new to financial services. Being able to complain and walk away is a really powerful thing,” she says.