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Country-specific scores across regulations that enable, promote, and prevent financial inclusion

> Posted by Liliana Rojas-Suarez and Lucía Pacheco

The following post was originally published on the Center for Global Development’s blog and has been republished with permission.

The most recent World Bank data on financial inclusion shows that by 2014, only 54 percent of the adult population in Latin America had an account at a financial institution. This compares to an average of 62 percent of adults worldwide and 70.5 percent for those countries with a similar level of income per capita (the region’s peers). In developed economies, 94 percent of adults have an account at a financial institution.

Many factors could be cited for the low ratios of financial inclusion in Latin America, but in a recent paper published at BBVA Research, that also came as a CGD working paper, we focus on the potential role of financial regulation. We assessed and compared the quality of the policies and regulations that impinge on financial inclusion in eight Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, and Uruguay). Peru and Mexico came out on top, with what appear to be the best regulatory frameworks for promoting financial inclusion. But even in these top performers, there is room for improvement.

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What the FCC’s net neutrality vote means for financial inclusion, fintech startups

> Posted by Elisabeth Rhyne and Vikas Raj, Managing Director of the Center for Financial Inclusion at Accion and Managing Director of Accion Venture Lab

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In a landmark ruling yesterday, the U.S. Federal Communications Commission (FCC), led by Chairman Ajit Pai, voted to end net neutrality — the requirement for internet service providers to treat all the content they carry equally regarding access, price, and speed/quality of delivery. This decision, overturning Obama-era internet regulations, is a big deal and may shape the way Americans experience the internet in the future.

It could have significant implications for financial inclusion, too.

Under the new ruling from the FCC, internet service providers (ISPs) may give preferential treatment to content from applications they favor — unlimited access, differential pricing, or faster/better download speeds — while slowing or even blocking other applications.

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> Posted by Center Staff

Remember the first time you tried to cook? Chances are you were nervous or at least apprehensive about how the food would turn out. If friends or family were in attendance, or, worse, were to eat what you were preparing, you were probably even less confident. Remember the second time you cooked? Or the third? Probably not. The more you actually got into the kitchen, the more your skills sharpened, and the more routine it became.

Using formal financial services for the first time, like cooking, can be intimidating – especially for people not used to interacting with formal institutions. Banks are big and complicated. A person of moderate means might feel that the bank will treat her as a low priority customer. And the notion of entrusting one’s livelihood to an unfamiliar entity is scary.

As part of CFI’s new financial capability project, we scanned the globe for the top innovations to help clients build their capability and make sound financial decisions. One of the behaviorally-informed practices we identified among these innovations as having great promise to affect changes in behavior is learning by doing, a strategy closely connected to effective, practical learning. Think of how much quicker your capability grew by actually cooking, than by reading a cook book.

Learning by doing, whether through technology-enabled simulations, or in real life with the supervision of front-line staff, enables customers to overcome the initial barriers to use that come with unfamiliarity and lack of confidence. Learning by doing offers customers the space to learn and get comfortable with financial products. This can be especially valuable for customer activation.

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> Posted by Susy Cheston, Senior Advisor, CFI

Visitors to our FI2020 Progress Report on Client Protection will have noted our poor math skills. (This is the section of the report that assesses global progress to date in advancing fair treatment for lower-income financial services clients.) We rated regulators a 6 on consumer protection and providers a 3—and somehow averaged those out to a 5. Our averaging skills make even less sense when you consider the three legs of the client protection stool—providers, regulators, and consumers—and realize that consumers are not even on the radar, rightfully earning a 1 at best in terms of their capacity to advocate on their own behalf. So why the optimism?

We were certainly swayed by the impressive momentum among a range of actors at the global level—including policy and private sector initiatives—toward improved consumer protection. But it’s what happens at the national level that really counts. The World Bank’s 2014 Global Survey on Consumer Protection and Financial Literacy reports that some form of legal framework for financial consumer protection is in place in 112 out of 114 economies surveyed. We are not so Pollyannaish as to think that having a legal framework is equivalent to having a regulatory and supervisory system that protects consumers well, but we do think it’s a good step in the right direction.

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The most exciting trends and startups in inclusive finance this year

> Posted by Vikas Raj, Director of Investments, Accion Venture Lab

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There has been a lot of buzz in the financial technology (FinTech) space over the last several months, with a high-profile IPO, several more apparently on the way, and more and more venture funding flowing into FinTech startups. Bold ideas for financial services innovation are getting more visibility – just this month, Australian Wealth Index (AWI) listed the 50 Best FinTech Innovators, and CFI’s Elisabeth Rhyne conveniently categorized the list so it’s easy to see at a glance where the innovations are.

At Venture Lab, we found the AWI list interesting but also felt it missed something significant: namely, that one of the biggest opportunities for FinTech is figuring out new solutions to include the billions of lower-income people who are today excluded from formal financial services. And it’s not charity that compels us to reach these customers – it’s good business. These customers represent a big market. In fact, they’re such a significant part of any emerging market’s customer base that any global providers with dreams of international expansion must cater to them if they want to succeed.

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> Posted by Kaj Malden, Consultant, PlaNet Finance China

For China’s young microfinance sector, which could benefit from more regulatory oversight and transparency, ratings have the potential to catalyze healthy growth. Efforts to incorporate ratings throughout the country’s market, however, have so far been largely ineffectual. A new report from PlaNet Finance China and Planet Rating, The Role of Microfinance Ratings in the Sustainable Development of China’s Financial Inclusion Sector, part of PlaNet Finance and Credit Suisse’s “Microfinance Robustness Program”, outlines how ratings could provide welcome growth and strengthening for Chinese microfinance, and describes the current obstacles that stand in the way.

Mainstream ratings systems evaluate creditworthiness of debt and financial products for companies. They also contribute to setting benchmarks for the wider financial services industry. Specialized microfinance rating agencies evaluate some of the same qualities traditional rating agencies do, but they are trained in microfinance and investigate other financial inclusion-specific indicators, such as social performance. Microfinance ratings function as institutional ratings, not credit ratings, as in the case of mainstream ratings. These more nuanced ratings for the microfinance sector first emerged in Latin America, where microfinance boomed in the late 1990s.

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> Posted by Jeffrey Riecke, Communications Associate, CFI

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Last week the Bangko Sentral ng Pilipinas (BSP) announced substantial increases throughout the country’s microfinance market: growth in the volume of loans dispersed to microentrepreneurs, in the number of microcredit institutions offering savings services, and in the return on equity of rural banks with microfinance operations. Concerning regulation and institutional support, the recently released 2014 Global Microscope found that the Philippines has the best environment in Asia for financial inclusion.

In 2014, loans extended to microentrepreneurs in the Philippines totaled P9.3 billion (US$209 million) as of June, according to figures reported by BSP Governor Amando M. Tetangco Jr. at the recent Citi Microentrepreneurship Awards in Manila – a roughly 7 percent increase over last year’s figure. On savings, in early 2012 only 22 banks in the country offered micro-deposit accounts. Now, 69 of the Philippines’ 183 banks with microcredit operations take deposits, with a total of 1.7 million micro-deposit accounts. Beyond credit and savings, 86 of the country’s institutions offering microcredit also provide microinsurance and 26 provide electronic banking services.

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> Posted by Sonja Kelly, Fellow, CFI

If there’s one thing we’ve learned in taking a close look at financial inclusion efforts around the world, it’s that context matters. That’s why we are excited to be part of the team releasing the Global Microscope 2014: The Enabling Environment for Financial Inclusion. The Microscope is carried out by the Economist Intelligence Unit (EIU) with sponsorship and guidance from the Multilateral Investment Fund of the IDB, CAF, and Citi. The Microscope evaluates the environment for financial inclusion in 55 different countries and provides powerful signals to policymakers in each country on their progress. Which countries topped the list and which have the most room to grow?

We’ll tell you, but first, it’s important to know what the results mean. Each country inspected in the Microscope is assessed on 12 indicators that consider best practices in national regulatory environments and institutional support for providers serving clients at the base of the pyramid. Indicators range from government support for financial inclusion, to supervision of microfinance and other financial products, the status of credit reporting, regulations governing mobile banking and, last but not least, consumer protection.

This year is an important one in the publication’s eight year history because the focus shifted from microfinance to the environment for financial inclusion, a process that involved adapting the framework to account for today’s diversity of providers and products. What we were surprised by, however, was just how little a difference this made in the rankings. We charted last year’s results on the microfinance environment against this year’s results on the financial inclusion environment and we found a very high correlation between the two (see figure below). Environments that are enabling for microfinance are often environments that are enabling for financial inclusion. Six countries from last year’s top 10 were in this year’s top ten. Read the rest of this entry »

> Posted by Michiel Sallaets, Communications Manager, Incofin Investment Management

To continue Sri Lanka’s development in its post-war, post-tsunami era, it’s essential that greater investments be made in the country’s agriculture sector and in its financial services for the base of the pyramid.

In Sri Lanka, about 80 percent of the population lives in rural areas. Agriculture is the main source of income for these people and many of them work at the smallholder level. Loans are necessary for farmers to adequately invest in seeds, fertilizers, tools, and other productive inputs. Loans can also prove instrumental in compensating for the occasional inadequate harvest. Yet, the proportion of people who have taken out loans in Sri Lanka in the past year is a dismal 9 percent. Only 22 percent of the population in the past year has saved in a financial institution.

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> Posted by Verónica Trujillo Tejada, Consultant, MIF/ Inter-American Development Bank

Building up a regulatory framework for the development of a microfinance market is a complex task. It requires taking into account a broad variety of topics as well as country specific needs and features. There are some internationally-applicable recommendations for the design of microfinance regulatory frameworks (CGAP 2012, ASBA 2010, and Basel 2010) but little is known about how different countries have implemented their guidelines or what the effects are of these rules in each market.

In the recently released paper “Microfinance Regulation and Market Development in Latin America,” published by the B.E. Journal of Economic Analysis & Policy, we analyze the relationship between microfinance regulatory frameworks in 17 Latin American countries and the corresponding markets’ levels of development.

One way to characterize microfinance regulations is as either general or specific rules. The general rules are devoted to regulating typical financial system issues, while the specific rules target microfinance products or institutions. Two other regulation classifications are protection rules and promotion rules. Protection rules have the goal of preserving financial system stability or protecting the financial consumer, and promotion rules aim to favor the development of microfinance services or institutions by softening the restrictiveness of the overall regulatory framework.

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Credit Suisse is a founding sponsor of the Center for Financial Inclusion. The Credit Suisse Group Foundation looks to its philanthropic partners to foster research, innovation and constructive dialogue in order to spread best practices and develop new solutions for financial inclusion.

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The views and opinions expressed on this blog, except where otherwise noted, are those of the authors and guest bloggers and do not necessarily reflect the views of the Center for Financial Inclusion or its affiliates.