By Clive Mphambela
The drive for Financial Inclusiveness (FI) has taken centre stage in developing economies particularly in the last twenty years. The G20 Nations, as well international development institutions such as the World Bank, amongst many others, are assisting the process through their various arms and programs and have endorsed FI as a global development agenda. Many national governments have also adopted FI as a domestic policy objective.
There is general consensus that in pushing for broader and deeper financial inclusivity, economies will generally not only improve the wellbeing of the previously unbanked or financially excluded sections of society, but that of society as a whole. However, there is also recognition that pushing for broader financial inclusion in most cases also comes with risks and trade-offs as any financial inclusion agenda will impact other areas in various ways, not all of them positive. However, dialogue and research on how FI impacts areas such as the integrity and stability of financial markets, as well as consumer protection issues continues to flourish and this Indaba is clearly one such forum that will promote our collective understanding of what the issues involved are.
Defining Financial Inclusion, Financial Stability, Financial Integrity and Consumer Protection.
The four terms :Financial Inclusion-(FI), Financial Stability-(FS),Financial Integrity, and Financial Consumer Protection have varying definitions, depending on the context. According to the 2011 White Paper prepared on behalf of the Global Partnership for Financial Inclusion-GPFI titled “Global Standard Setting Bodies and Financial Inclusion for the Poor: Toward Proportionate Standards and Guidance”, the terms are defined generally as follows:-
• Financial Inclusion is “a state in which all working age adults have effective access to credit, savings, payments, and insurance from formal service providers”. In this context “effective access’ incorporates elements of convenient and responsible service delivery, at a cost affordable to the customer and is also sustainable for the provider, with the result that financially excluded customers use formal financial services rather than existing informal channels.
• Financial Stability is generally understood to refer to a lack of financial instability.
• Financial integrity is used by many to refer to the broad to the absence of financial crimes such as:- money laundering and the financing of terrorism, financing the proliferation of weapons of mass destruction, fraud, theft, corruption, forgery, and others.
However the term can be used in a more focused sub-set of financial crimes.
• Financial Consumer Protection is essentially concerned with the market conduct of financial service providers in their interaction with customers on an ongoing basis.
Understanding the Linkages between the various I-SIP elements.
The interactions and linkages between these various elements of a financial system are complex and will not always pull in the same direction. A holistic “multi-stakeholder” approach is often required to reach an optimal framework that balances the broader socio economic agenda of achieving high levels of financial inclusion whilst at the same time maintaining adequate financial stability, high levels of consumer protection and preserving the long term integrity and sustainability of the financial system.
The challenge for financial regulators therefore is to consider how to optimize the linkages among these four distinct policy objectives – financial Inclusion (I), financial Stability (S), financial Integrity (I) and financial consumer Protection (P) (collectively I-SIP).
It has been found that in many cases, it appears that the I-SIP objectives may be mutually reinforcing and interdependent, building a strong case for synergistic pursuit of the various objectives. For example long-term financial stability, for example, cannot be achieved without high levels of financial inclusion, that is coupled with effective financial consumer protection as well as adequate laws and practices that prevent financial crimes.
What is the Link between Financial Literacy and Financial Inclusion and Consumer Protection?
Financial Education and Financial Literacy Programmes are key pillars and tools for building strong consumer awareness (protection) by giving out knowledge of the safe use of financial products to improve consumers’ economic well-being. Financial Literacy/Education can lead to greater Financial Capability and therefore better support Financial Inclusion. Such programmes however, still need adequate levels of both industry level self-regulation as well as supervisory and prudential regulation, supported by a well-meaning legislative framework.
Greater FI improves Financial Stability
For example, it is accepted that greater FI contributes to financial stability because FI policies guide the formation of fair, safe and stable financial markets in a jurisdiction. Less than fully effective inclusion can, and has been shown to lead to financial sector instability.
An inclusive financial sector: -
• Will have a more diversified, stable retail deposit base, which can increase systemic stability. Similarly, greater inclusion will increase the diversification of lenders’ loan portfolios away from large borrowers, thereby reducing systemic and concentration risks.
• Is more likely to have greater political legitimacy and thereby decrease the risk of political and social instability, which in turn could lead to financial instability.
• And has greater potential to enhance economic stability, which itself is an essential component of financial stability.
• Will more likely promote a stronger monetary and economic policy transmission mechanism leading to greater economic efficiency.
Similar pairwise outcome linkages can be posited between financial inclusion and financial integrity and also between FI and consumer protection.
• Greater Financial Integrity is also likely to promote increased trust in financial institutions and the system as a whole, therefore encouraging more usage and greater levels of financial inclusion. This in turn boosts savings levels as well the smoother functioning of credit markets. The reverse relationships also applies.
• Greater financial stability builds consumer trust and confidence in the financial sector as a whole, making it more likely that individuals will want to use formal systems.
• Greater financial stability also positively impacts economic factors (such as inflation and interest rates) that can lead to reductions in prices, potentially making financial services more affordable to poorer people thus increasing participation in formal markets (greater FI) by stimulating demand.
However, concrete evidence of these multiple linkages has generally not been systematically collected, often leaving policymakers to make competing choices between the different policy objectives (for example between higher inclusion, on the one hand, and greater financial stability on the other). Thus trade-offs among the I‐SIP objectives are not inevitable, but synergies are also clearly achievable.
What can Policy Makers Can do to Balance the Seemingly Competing I-SIP Objectives?
There is increasing consensus that, a framework that pursues the I-SIP goals at the level of outcomes, can result in greater synergies where the goal of broader Financial Inclusion should reinforce the other three objectives of Stability, Integrity and Protection, and is in turn be reinforced by them.
There is therefore need to consider the four I‐SIP objectives collectively rather than independently, as is commonly the case, so that linkages among them can be optimized. However optimization of linkages is not an easy process and is not likely to occur by itself without the explicit intervention by policymakers.
Optimization of linkages requires a clear articulation of policy objectives, and the gathering and sharing of data and its analysis across agencies to assess the risks and benefits of various I‐SIP objectives as well as broader policy objectives of economic development, increased welfare, increased market efficiency.
Regulators must however seek greater private sector input as well as input from consumers themselves, and also institute ongoing monitoring, evaluation and adjustment of policies.
How can Policy Makers Measure the Impact of Financial Inclusion Policies?
Policy makers can utilize various monitoring and evaluation tools to measure the efficacy of financial inclusion policies but generally they should cover the following bases:-
• Regular Periodic Financial Literacy Surveys and tracking Studies
• Promoting academic institutions that continuously assess the financial landscape.
• Measuring Mobile Penetration Rates (Impacting Mobile Money)
• Measuring Bank density and bank account penetration.
• Tracking insurance penetration.
Amongst many variables.
Clive Mphambela is a Banker. He writes in his capacity as Advocacy Officer for the Bankers Association of Zimbabwe. BAZ expressly invites other stakeholders to give their valuable comments and feedback related to this article to him on firstname.lastname@example.org or on numbers 04-744686, 0772206913