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. Join the conversation by tuning in on Thursday, April 19 or ask a question now in English, French, Arabic or Spanish.
Millions in the developing world are blocked from economic opportunity by their limited access to financial products and services. Consequently, financial inclusion is increasingly a policy priority for governments and financial regulators, many of whom see it as a complement to their financial stability goals. To date, over 60 developing countries have committed to financial inclusion reforms. But experience has taught us that putting expansion of financial services as a priority is only a start, and that there are other factors to consider in order to move forward towards full financial inclusion that benefits individuals, firms and the economy:
A commitment to strategic reform is needed: Surveys confirm that comprehensive reform programs and clear mandates can accelerate progress towards financial inclusion. Regulators with a financial inclusion strategy are likely to have more financial inclusion activities under their purview and more resources and staff dedicated to working on these matters. Robust regulatory frameworks (which, for example, provide a flexible or graduated approach to addressing concerns regarding Anti-Money Laundering and Financing of Terrorism) can more effectively catalyze the private sector response that is needed to expand financial inclusion. For example, reforms that strengthen financial infrastructure underpin the introduction of low cost and lower risk products and delivery models that are critical to expanded financial inclusion.
The most effective strategies are informed by ‘demand side’ data: Increased access to finance does not necessarily imply increased usage of financial services. Financial inclusion targets and reforms should be informed by ‘demand side’ data on the type and design of financial services that households and firms need, and the ways in which they can access and use those services. World Bank enterprise surveys, household surveys, and the new Global Findex survey, can be used to provide this critical information.
Financial Inclusion should be ‘Responsible’: Responsible Financial Inclusion can lead to stronger positive impacts and lower risks at the level of the individual, the firm, financial institutions, the financial sector, and the economy. The impacts of financial inclusion can be reduced—or even become negative--when new consumers are not well-protected and able to make informed decisions about new financial services, or when new products or institutions not well monitored. This was clearly illustrated by the sub-prime housing loan crisis in the US, the recent payments protection insurance ‘scandal’ in the UK, and microcredit repayment crises in India, Morocco, and elsewhere.
Therefore, financial inclusion strategies need to include sufficient focus on responsible finance, with financial capability and consumer protection as central themes. The World Bank’s Good Practices for Financial Consumer Protection, and the G20 High Level Principles for Financial Consumer Protection can be useful reference points and resources. The World Bank is also working to identify effective Financial Education approaches, and techniques for measuring Financial Capability, with support from the Russia Trust Fund for Financial Literacy and Education.
A Guidance Note on Financial Inclusion Strategies is currently being prepared for the Mexico Presidency of the G20 in 2012.
The road to financial inclusion can be long and challenging, but models for accelerating that journey are emerging, and concerted actions at country level can speed up the journey. Consequently, comprehensive, multi-year, tailored support is needed to match the comprehensive, multi-year and country-specific nature of financial inclusion strategies and reform plans. The World Bank is committed to being a partner to countries and other organizations in closing the gap and reaching full financial inclusion, every step of the way.
The Authors are Director and Practice Manager for the World Bank’s recently established Financial Inclusion Practice which provides knowledge, technical support and financing for financial inclusion reforms and projects in the developing world. Currently, the Practice includes more than 170 specialists working on financial inclusion with over 60 countries. Technical resources are available on key components of financial inclusion strategies, such as credit reporting, payment systems, remittances, consumer protection, financial capability, SME finance, financial inclusion data and impact assessment frameworks.