Can regulation promote financial inclusion?


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Economic literature shows that financial systems support livelihood enhancement and economic development by offering savings, payment, credit and risk management services to households and firms. Saving accounts allow households to manage risk, absorb shocks, and plan for emergencies. Affordable financial services enable individuals to access health and education to improve their living standards. Access to payment mechanisms and checking accounts also support core business operations and boost productive investment and consumption.

In recent years, the development community has increased its interest in financial inclusion. The World Bank Group called for achieving Universal Financial Access by 2020 at the 2013 World Bank Group-IMF Spring Meetings. The G20 also committed to advanced financial inclusion through the implementation of the G20 High-Level Principles for Digital Financial Inclusion. At the country level, about two-thirds of the national regulatory and supervisory agencies worldwide are directly supporting financial inclusion by easing entry barriers to non-traditional financial service providers, increasing consumer protection standards and improving financial literacy. In 2015 Ghana adopted the Guidelines for E-money Issuers, allowing both banks and non-bank institutions to issue electronic money (e-money). In 2015 Mozambique established a legal framework to regulate agent banking activities, allowing agents to provide a wide range of financial services, including cash deposits, cash withdrawals, bill payment, transfer etc. to those who are in need. In 2014 Tanzania enacted dedicated legislation to regulate microcredit activities and microfinance companies.

In spite of global commitments and country level initiatives, financial systems still fall short in many developing countries. To date, 1.7 billion adults around the world don’t have access to basic financial services such as savings and checking accounts. In high-income economies 94 percent of adults have an account at a financial institution. In low or middle income countries, however, the share is 63 percent (Figure 1). Common obstacles include physical distance from providers, lack of trust or lack of necessary documentation. Businesses also face constraints. More than 200 million micro, small and medium enterprises in developing economies are either financially unserved or underserved due to lack of collateral, limited or no credit history and their informal status.


Such figures have motivated researchers to better understand the mechanisms to improve financial inclusion. A number of studies have focused on the role of regulation in supporting financial service providers and new delivery channels. Regular onsite supervision is found to increase average loan size – thus reducing outreach to small borrowers – but decrease the share of lending to women. Regulations on e-contracting, consumer protection and interoperability can support the development of mobile banking services. Institutional quality and credit information sharing are found to improve bank branch and ATM penetration, as well as deposit accounts per capita.

A common pitfall of the mentioned literature is to focus on few specific regulatory features to examine its association with financial inclusion. Two trends point at the need of a more comprehensive framework to examine the regulation versus financial inclusion linkage. First, the importance of non-bank financial service providers such as deposit-taking MFIs and financial cooperatives is rising in developing countries. Second, there shows rapid emergence of new financial services delivery channels such as agent, mobile and electronic banking. Such trends have great potential for financial inclusion but imply new and more complex sets of rules to ensure their success.

In our recent paper we test the hypothesis that policy makers can facilitate financial inclusion by enacting more friendly regulations. The paper proposes a broad index of regulatory quality for financial inclusion covering the non-traditional delivery models – e.g. branchless banking – and actors – e.g. non-bank lending institutions. In these domains, regulations worldwide present obstacles to financial inclusion (Figure 2).

We find that individuals are more likely to have an account at a financial institution in countries that adhere to a higher number of regulatory good practices. Incremental improvement of regulatory frameworks doesn’t seem to have significant impact. Only when a country improves its regulatory framework greatly, so that its standing on the regulatory index jumps from the first to the fourth quartile, does the probability of individuals within this country having an account at a financial institution increase.


Raian Divanbeigi

Raian Divanbeigi, Economist, Global Indicators

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