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Financial Sector

Capping the Bank-Fund Annual Meetings: Chiding Ethics Lapses, a Spokesman for an Even Higher Authority

Christopher Colford's picture



Amid the week-long procession of buttoned-down, business-suited speakers who commanded the stage during the Annual Meetings week of the World Bank and International Monetary Fund, the most thought-provoking comments may have come from someone who was not outfitted in business attire at all – but who was instead wearing a clerical collar.

It seemed fitting that the remarks by (some might say) the week’s most authoritative participant occurred on a Sunday morning, at an hour when many Washingtonians habitually heed an authority even more elevated than the Bank and the Fund. The major attraction at the IMF’s day-long “Future of Finance” conference was the Archbishop of Canterbury, Justin Welby, whose stature lent a special gravitas to the already-serious tone of the Fund forum’s focus on scrupulous ethics as a bedrock principle of sound capitalism.

On a panel with some of the titans of worldly finance – including the leaders of the IMF and the Bank of England – only someone of Welby’s ecclesiastical renown could have stolen the show. Although he did his down-to-earth best to try to avoid upstaging his fellow panelists – quipping, “I feel rather like a lion in a den of Daniels at the moment . . . slightly nerve-wracking” – the leader of the worldwide Anglican Communion was clearly the marquee draw for the throng that packed the Jack Morton Auditorium, spilled beyond the extra overflow rooms and jammed the adjoining corridors.

Citing the need for “heroism in the classic sense” to overcome the spirit of “recklessness” that recently pervaded much of the financial industry, Welby called for a return to “ethical and worthwhile banking.” He urged everyone working in finance to aim to “leave a mark on the world that contributes to human flourishing.”

Welby – himself a former financier, who traded derivatives and futures before he joined the clergy – recounted the misgivings of the mournful bankers whom he had interviewed while serving as a member of the U.K.’s Banking Standards Commission in the wake of the 2008 financial crash. Welby recalled the lamentations of a deeply penitent banker who had been “broken by the experience” of leading his bank to ruin: In retrospect, reasoned the banker, “you can either have a big bank that’s simple, or a small bank that’s complex, [but] you cannot have a big complex bank and run it properly. . . . If only we had kept things simple.”

Welby’s call for the highest standards of conduct in the financial sector was matched by the exhortations of his fellow panelists – including IMF Managing Director Christine Lagarde, who reminded the audience that every financier must see himself or herself as “a custodian of the public good.” Lagarde's message was underscored by Bank of England Governor Mark Carney – who also leads the global Financial Stability Board – who deplored the pre-crash “disembodiment and detachment of finance” from the rest of the economy.

Only by upholding the most exacting ethical standards, said Largarde and Carney, can financiers rebuild public confidence in the financial sector – confidence that, in Lagarde's words, “builds over time and dies overnight.”

The regrets voiced by the panel’s private-sector financiers contributed to the panel’s almost confessional tone.

“If we can’t get the basic incentives right, it’ll be hard to get the right outcomes,” said Philipp Hildebrand, who had served as a senior central-bank official during the financial crisis before returning to the private sector. He reflected that “with wrong incentives, you end up with a wrong business model,” which in turn attracts “the wrong kind of people” who are prone to take excessive risks. Thus he underscored the need for “a personal transformation” within the spirit of every business leader.

Putting an even sharper point on the source of the problem, longtime financier Kok-Song Ng regretted that “a virus entered the system” in the years leading up to the crash, as financial firms deliberately recruited profit-driven “mercenaries” to run their trading desks. Those firms ignored the explosive risks being taken by their hired-gun traders, because they succumbed to “the great temptations for those in ‘the money world’ to want to make a quick buck” no matter how dangerous their tactics might be.

PISA data on financial literacy: Unanswered questions on developing financial skills for the broad student population

Margaret Miller's picture

A few weeks ago, the results of the OECD’s PISA (Programme for International Student Assessment) module on financial literacy were revealed, with Shanghai taking top honors in this category – just as it has in the last two rounds (in 2009 and 2012) on the traditional academic curriculum (reading, math and science).
 
This is no coincidence, as the OECD results and many other studies suggest a close relationship between education levels and academic performance in math and reading comprehension and scores on financial literacy tests.
 
In the PISA report, the correlation coefficients between financial literacy scores and performance in mathematics and reading were 0.83 and 0.79 respectively across 13 OECD countries in the survey sample. For high performers like Shanghai and New Zealand, these correlations were even stronger: 0.88 for mathematics, 0.86 for reading.

While waiting for general improvement in academic performance is one path to improved financial literacy, the urgency of addressing financial skills for today’s youth has led many educators and policymakers to look for more immediate steps that can be taken, including financial education interventions at school. The PISA results, however, don’t include an assessment of the value of possible financial literacy curricula, due to the “limited and uneven provision of financial education in schools.” That factor makes comparisons across countries difficult, as described in the report.

Lessons learned from policymakers on how to establish a financial consumer protection supervision department

Jennifer Chien's picture

Financial consumer protection has become a hot topic among financial-sector policymakers in recent years. Consumer protection is increasingly recognized as a critical complement to financial inclusion, particularly after the global financial crisis.

Enabling consumers to understand what financial products they’re buying, and enabling them  to “comparison shop” among providers, can lead to safer access to financial services as well as to broader financial stability.

As a result, many policymakers around the world have been putting in place laws and regulation on financial consumer protection, as evidenced by the Global Survey on Consumer Protection and Financial Literacy. At the same time, international organizations have issued guidelines and principles on designing financial consumer protection policy and regulatory frameworks, such as the G-20’s High-Level Principles on Financial Consumer Protection and the World Bank’s Good Practices on Consumer Protection and Financial Literacy.

But less guidance exists on the tricky question that immediately follows new laws and regulation: How do you implement and enforce these new rules? Policymakers have many considerations to juggle, from legal and technical issues to practical and operational concerns. Unclear legal mandates, limited supervisory capacity, the different skill sets required of staff, the need for supervisory tools adapted to financial consumer protection, and the relationship with prudential supervision – these are just some of the many questions facing regulators who are seeking to establish a financial consumer protection supervision department (“FCPSD”).

The latest technical note from the Financial Inclusion and Consumer Protection team at the World Bank (“Establishing a Financial Consumer Protection Supervision Department: Key Observations and Lessons Learned in Five Case Study Countries”) seeks to shed light on this area of growing concern. Surveys and interviews were conducted with financial consumer protection supervisors in Armenia, the Czech Republic, Ireland, Peru and Portugal to gather concrete, practical insights from the experiences of these countries in setting up FCPSDs.

There is obviously no “one size fits all” approach to establishing a FCPSD, as the right approach will be highly dependent on country context. Nevertheless, the five case study countries highlight a few common obstacles and lessons learned.

New Data and Momentum for Financial Inclusion in Paraguay

Douglas Randall's picture



Paraguay’ s progress towards developing a National Financial Inclusion Strategy received a boost of energy and analytical rigor last week, as the Central Bank released new demand-side data describing the current state of financial inclusion for the country’s 4.8 million adults.

According to the EIF (Encuesta de Inclusion Financiera) data, 29 percent of adults in Paraguay have an account at a formal financial institution, 28 percent of adults use a mobile money product, and 55 percent use some type of financial service (including both of the former but also credit, insurance, and other payment products). This puts Paraguay below the average for account penetration in Latin America (39 percent as of 2011), but suggests that the country is a regional leader in the expansion of mobile financial services.

The EIF was conceived of last fall when the Paraguayan authorities, eager to paint a comprehensive and up-to-date picture of financial inclusion in their country, expanded the Global Findex questionnaire to cover additional topics including financial capability, insurance, and domestic remittances. Efforts were also made to align the EIF questionnaire with the unique financial-sector landscape in Paraguay, which features a strong cooperative sector and a fast-growing mobile financial service industry led by mobile network operators (MNOs) Tigo and Personal.

The resulting EIF data, collected in late 2013 in partnership with the World Bank and Gallup Inc., represents a valuable update and extension of the 2011 Global Findex.

On June 4, the data and related analysis were presented to the public by Santiago Peña, board member of the Central Bank of Paraguay, in an event that included key stakeholders such as the Minister of Finance, the President of the Cooperatives regulator (INCOOP), the World Bank Resident Representative, and representatives from the public and private sector as well as a wide range of civil society actors.

The data and event – described in detail the next day on the front page of a national newspaper – also served to renew momentum toward the development of the National Financial Inclusion Strategy. The authorities plan to use the EIF data to define targets, identify priority populations, and develop policy actions. The data will also act as a baseline from which to measure progress and as a means to hold the government accountable for its financial inclusion commitments.

#Housing4All

Simon Walley's picture

The Global population growth numbers forecast for the coming years can be extremely daunting, with 2 billion more people on our planet by 2050. When one considers that each of these global citizens will require shelter, health care, education, sanitation, transport, the numbers become even more formidable. Looking at housing needs alone, for the period 2015-2020, global population will grow by 350 million people, amounting to around 70 million new households each requiring a home. Breaking down the numbers annually means 14 million new houses. Based on a conservative estimate of $30k per unit, the total investment needed per annum over coming years is $420 billion. This is a large number but only around 0.6 per cent of global GDP . There are additional costs naturally associated with getting infrastructure and services to new houses, such as roads, water, and sanitation. A recent McKinsey study estimates that in 16 large emerging markets alone there is a $600-700 billion market for affordable housing. Nevertheless, with the right systems in place this level of new investment should be feasible. 



So why do we still have market failures in the housing sector which are in plain sight of many emerging market cities in the form of slum housing? Where can the money come from for housing investment? How will it reach the population which is going to need it the most in sub-Saharan Africa and parts of Asia, which will see the most rapid population growth and urbanization?

Drifting Toward Plutocracy: Inexorable Concentration of Capital Undermines the Drive for 'Shared Prosperity'

Christopher Colford's picture

Like seismic waves rippling outward after a tectonic shift, reverberations are roiling the economic-policy landscape after the U.S. launch of the groundbreaking new analysis by Thomas Piketty, the scholar from the Paris School of Economics whose landmark tome – “Capital in the Twenty-First Century” – has newly jolted the economics profession.

Any Washingtonian or World Bank Group staffer who somehow missed the news of Piketty’s celebrated series of speeches and seminars last week – in Washington, New York and Boston – received an unmistakable signal this week about what an important intellectual breakthrough Piketty has achieved. President Jim Yong Kim on Tuesday cited Piketty while putting the issue of economic inequality at the top of his list of priorities during his review of the Spring Meetings of the Bank and the International Monetary Fund. Noting that he was already about halfway through reading Piketty’s “Capital,” President Kim sent a clear message that the skewed global distribution of wealth, as analyzed by Piketty and emphasized by many officials at the Bank and Fund's semiannual conference, should be top-of-mind for policy-watchers at the Bank and beyond – indeed, at every institution that hopes to promote shared prosperity.

Piketty’s scholarship is now receiving widespread acclaim as a landmark in economic analysis, and is being recognized both for its “exhaustive fact-based research” and its sweeping historical perspective. More of a patient dissection of hard data than a political roadmap, Piketty’s book has quickly become the subject of multiple praiseworthy reviews, notably in the New York Times and the Financial Times. One usually level-headed Bloomberg View analyst, recoiling from the “rapturous reception” accorded to the book, may have gone slightly overboard this week in asserting that Piketty's insights had been greeted by American liberals with “erotic intensity.”

Predictably, Piketty's book has also quickly become the target – “Piketty Revives [Karl] Marx,” blared a Wall Street Journal headline; “Marx Rises Again,” warned the New York Times’ lonely conservative scold – of the whack-a-mole ideological purists in laissez-faire Op-Ed columns, who forever seem tempted to equate modern-day liberalism with long-gone Leninism. Eager to publish denunciations of any idea, however modest, that might justify (heaven forfend) tax increases on stratospheric income-earners and the top-fraction-of-the-One Percent, the free-market fundamentalists on the Wall Street Journal’s editorial board – unabashed cheerleaders for plutocracy – have opened up one of their trademark barrages via their Op-Ed columns (“This book is less a work of economic analysis than a bizarre ideological screed”; “The professor ought to read ‘Animal Farm’ and ‘Darkness at Noon’ ”). The Journal's jihad clearly aims to demean or discredit anyone who might flirt with such Piketty-style notions as restoring greater progressivity to the tax code. (Egad: Progressive taxation? Next stop: Bolshevism.)

More efficient ways to transfer remittances are emerging. Are migrants and their families ready to benefit from them?

Massimo Cirasino's picture

The price of sending international remittances has reached a new record low in the first quarter of 2014. The global average cost of sending money across borders was recorded at 8.36 percent. This figure is used as a reference point for measuring progress toward achieving the so-called “5x5” objective – a goal endorsed by the G8 and G20 countries – to reduce the cost of sending remittances by five percentage points, to 5 percent, by the end of 2014.

Most indexes of international remittance costs – published by the World Bank in the new, ninth issue of the Remittance Prices Worldwide report, which was released on March 31 – indicate good progress in the market for remittances.

The global average cost is significantly lower when weighted by the volume of money that flows in each of the report’s country-to-country pairs. The weighted average cost is now down to 5.91 percent, following a further decline in the last quarter. For the first time, the weighted average has fallen below 6 percent.

Nearly one-third of the remittance-sending countries included in Remittance Prices Worldwide have now achieved a reduction of at least 3 percentage points. Those countries include such major sources of remittances as Australia, Canada, Germany, Italy and Japan. This is also the case for 39 out of 89 of the remittance-receiving countries.

Knowledge-Sharing Boosts Development Know-How, as Practitioners and Policymakers Meet in Mombasa

Qursum Qasim's picture

Karibu Mombasa!

With those words, the World Bank Group’s network on Financial and Private Sector Development (FPD) this week kicked off a major knowledge and learning conference on development in Mombasa, Kenya. More than 250 participants – private-sector innovators, government policymakers and development practitioners from throughout the Africa region as well as from the Bank Group’s headquarters in Washington – came together to share ideas about cutting-edge innovations in delivering services; to brainstorm with colleagues on development strategy for Africa; and to consider new tactics to help meet the practical, everyday needs of Africans.

Delivering strong value for the Bank Group’s client countries was the theme of Klaus Tilmes, the network’s Acting Vice President, as the group envisioned the impending FPD transition into two new Global Practices: Trade & Competitiveness and Finance & Markets. Inclusive growth and inclusive finance – which are vital elements in achieving the Bank Group’s mission of eliminating extreme poverty and building shared prosperity – are the twin and complementary themes through which the two new practices will aim to help their clients meet the development challenge.

Promoting inclusive growth and creating jobs – as engines of growth, as key areas of cooperation between the public and private sectors, and as the backbone of the Bank Group’s approach to promoting a world free of poverty – was the conference’s first-day theme. In this context, youth and female unemployment are priority issues for Kenya and for other African countries – from the perspective of equity, certainly, but also from the perspective of social cohesion.

Increasing the Impact of Financial Education: Approaches to Designing Financial Education Programs

Andrej Popovic's picture



Recent evaluations of a number of worldwide financial education programs reported widely varied outcomes. While some found evidence of effectiveness, others reported mixed or no evidence. Yet an increasing number of developing countries are putting financial education strategies in place or are expanding financial education programs. The quality of design of such strategies and programs is therefore crucial.

Financial education programs can be ad hoc targeted interventions, aimed at addressing specific financial education gaps, or they can be more comprehensive approaches through financial education or literacy strategies that aim to address a number of priorities. Regardless of the approach – which depends on the local context – financial education programs have a higher likelihood of greater positive impact if they are based on reliable diagnostic tools and focused on clearly defined and sequenced priorities.
 
Over the past two years, the Financial Inclusion and Consumer Protection team at the World Bank Group has conducted substantial technical and diagnostic work in the area of responsible finance. For example, we have developed methodologies for financial capability surveys and impact evaluation, and we have conducted a series of diagnostic reviews in the area of consumer protection and financial literacy on a global scale.

Financial Inclusion Up Close in Rwanda

Douglas Randall's picture

You don’t have to spend very long in Rwanda before you start to be impressed by the financial inclusion landscape in this country – not only by the progress made over the past several years, but by the scale of ambition for the rest of this decade and beyond.

The government has set a target of 90 percent financial inclusion by 2020 and the evidence of progress toward this goal is everywhere: Advertisements for mobile-money products are painted and plastered onto almost every available surface and, if you know what to look for, it doesn’t take long to spot an Umurenge Savings and Credit Cooperative (Umurenge SACCO) – Rwanda’s signature financial inclusion initiative.

Six years ago, the 2008 FinScope survey found that that 47 percent of Rwandan adults used some type of financial product or service, but just 21 percent were participating in the formal financial sector, which was at the time made up mostly of banks but which also included a handful of microfinance institutions and SACCOs.

Largely in response to these figures – and in particular to the large urban/rural divide illustrated by the data – and the government set out to establish a SACCO in each of the country’s 416 umurenges, or sectors. The Umurenge SACCO was born.

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