This post is part of our Closing the Gap: Financial Inclusion blog series, which shares the views of selected experts and practitioners on different financial inclusion topics.
Recent successes in linking lower income clients to the formal banking system via mobile banking and agent solutions have shifted attention away from non-bank deposit taking institutions. Indeed, the use of modern technology can reduce the costs of service delivery and facilitate the availability of banking services in less densely populated areas. Yet, experience indicates that the roll-out and uptake of these innovative delivery channels is limited by the absence of suitable products and the banking sector’s interest in this market segment. While banks have started to explore delivering financial services to lower income segments of the population, these clients are not likely to become their core focus. Same for mobile network operators, who are mostly interested in increasing customer retention rates and offering additional income sources for their agent networks, but do not necessarily focus on providing a range of suitable financial products in a supervised setting. For both players, catering to otherwise unbanked segments of the population is more an add-on, something additional to explore in good times, but – let’s be honest - not a priority during bad times.
This is why cooperative financial institutions (CFIs) and other forms of member-based deposit taking institutions will continue to be important players in the financial inclusion space. Their market niche is developing suitable products for low to middle-income clients. They usually operate in areas that are otherwise under-banked, and bring added value by collecting deposits and “recycling” these funds through on-lending in the same geographic area. Being savings-based, they depend on the resources of their many poor to middle income clients, and thus have a natural and vital interest in this market segment. And in contrast to banks, CFIs continue and even expand their services to this market segment in times of crisis: For example, credit unions in the US have increased their membership by 4 million since 2007, while membership in Paraguay surged to 16 percent of the population when the banking sector largely withdrew from retail banking after the 2002 crisis.