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> Posted by Elisabeth Rhyne, Managing Director, CFI
As regulators navigate the changes involved in financial inclusion, they must hold fast to first principles. The arrival of new technologies and new players, and in many countries, new mandates for financial inclusion and consumer protection, demand responses in regulation and supervision. Many of these responses are major departures from past practice. However, while the details of regulations and supervision may change significantly, familiar fundamental tenets remain to guide the way.
A task force of distinguished experts convened by the Center for Global Development under the joint leadership of Liliana Rojas-Suarez and Stijn Claessens puts forward three key tenets. First, if it quacks like a duck, treat it like a duck; second, let risk be your guide; and third, strike a balance between anticipation and reaction. (Of course, in regulator-speak these tenets sound different: functional similarity; proportionality; and a balance between ex-ante and ex-post regulation.)
The first principle suggests that regulators should look across providers of all types who are carrying out similar activities, whether banks, telcos, or small financial institutions, and ensure that one provider is not disadvantaged relative to another. This principle is especially important for regulators in determining whether mobile money should be telco or bank-led. It guides regulators towards a response that is agnostic about institutional form and focuses instead on understanding risks inherent in activities.
The Basel Committee on Banking Supervision has requested comment on a draft guidance document that for the first time addresses the responsibilities of regulators and supervisors in the context of financial inclusion. Given the potential impact of this guidance on regulators around the world, we invited Daniel M. Schydlowsky to review and comment. Dr. Schydlowsky is a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, and the former head of the Superintendency of Banks and Insurance Companies of Peru.
The draft guidance issued by the Basel Committee is unquestionably an enormous step forward. It identifies, describes, and qualifies how supervisors should behave in relation to financial inclusion. It also describes numerous particular situations that supervisors have to confront and suggests responses. It thereby provides the representative supervisor with what amounts to an encyclopedia of supervisory wisdom.
The guidance is comprehensive, it treats (almost) everything. That is its strength. But, it did not create an effective hierarchy of importance to guide supervisors as they confront their new mandate to generate financial inclusion. In what follows, some central issues are raised, which, in the opinion of this author, need to be incorporated into the guidance or highlighted to denote greater relative importance.
The Dilemma of the Supervisors
- Too much to do with too few resources: The supervisors have limited staff and many things to do, starting with making sure the financial system is safe, the books are kept properly, required information is supplied reliably and on time, and capital and other requirements are complied with. On top of this come new responsibilities related to financial inclusion. When reading the guidance, a whole second staff would appear to be needed to comply properly with what is suggested. It is absolutely imperative that the limited resources of the supervisor be factored into what is requested that they do.
Listen to our webinar on the Basel Committee’s guidance on financial inclusion regulation
> Posted by Center Staff
For the first time ever, the Basel Committee has issued draft guidance on financial inclusion, and invited comment. This guidance has the potential to influence the actions of banking supervisors across the globe. Today, the Center for Financial Inclusion held a webinar to explore this guidance. The webinar featured analysis by Dr. Daniel Schydlowsky, the former Superintendent of Banks in Peru, along with commentary from Dr. Njuguna Ndung’u, the former Governor of the Central Bank of Kenya, and Juan Carlos Izaguirre, a CGAP representative member of the drafting team for the Basel Committee.
The draft guidance report, formally titled “Guidance on the application of the core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion”, builds on the Committee’s Core Principles for Effective Banking Supervision. While the committee began working on financial inclusion in 2008, the report is the first major output from the Basel Consultative Group’s Workstream on Financial Inclusion, which was launched in 2012.
> Posted by Allyse McGrath, Senior Associate, CFI
Readers of the 2015 Global Microscope, which spotlights the quality of the policy environment for financial inclusion, often focus on the countries at the top of the pack. However, some of the largest improvements in this year’s report are happening towards the bottom of the ranks. This trend appears on a regional scale, with the Middle East and North Africa, the region with the collective lowest scores, showing the most improved scores in this year’s issue of the Global Microscope. In this region, Egypt serves as an example of a country making huge strides even though it’s not among the top 10 countries. In fact, it scores among the very lowest handful of countries.
Up two spots from 53 to 51 out of 55 total markets this year, Egypt improved its score in 7 of the 12 Microscope indicators. The 8-point jump overall can be attributed to many factors, most notably the government’s introduction of a new regulation which broadens financial supervisory to a burgeoning microfinance sector and its welcoming of new electronic payments experiments.
In November 2014, the Egyptian Government enacted Law no. 141, more commonly known as the “Microfinance Law”, which created provisions for regulating MFIs in the country, previously excluded from the legal framework. This law expanded the reach of the Egyptian Finance Supervisory Authority (EFSA) which now has control over issuing licenses to microfinance institutions in Egypt. After the law’s issuance in 2014, the number of MFIs in Egypt rose from 400 to 640. By the end of 2015, EFSA reported that it had issued 253 licenses. The law which is aimed at ensuring efficiency, transparency, and risk management also includes a list of “Executive Decrees” by which licensed institutions must abide.
> Posted by Ben Lebeaux and Jessica L. Cassel, Senior Communications Specialist and Staff Attorney, Accion
One of the fastest, most efficient ways to promote financial inclusion is to make sure that regulators create policy that encourages innovation and collaboration. Because regulators can singlehandedly affect everything from microfinance institutions to financial technology startups to credit bureaus, helping them make the best possible decisions is one of the best ways to help the two billion financially excluded people access savings accounts, credit, checking, insurance, and more.
That’s why the Microfinance CEO Working Group’s Model Legal Framework and Commentary for Financial Consumer Protection (MLF), published in the spring of 2015, is such a valuable tool. Regulators can use the MLF as a framework to either evaluate existing regulation or to adopt new best practices. Rather than reinventing the wheel, it allows policymakers to quickly find, adapt, and use the best available legislation.
Global law firm DLA Piper and its nonprofit affiliate, New Perimeter, were instrumental in creating the MLF. The firm’s dedicated team of roughly 20 lawyers has worked with the Working Group for the last two years, contributing nearly 3,000 hours of pro bono time to draft and refine the MLF. New Perimeter continues to support the project, traveling with Accion’s lawyers and financial inclusion experts to train Latin American regulators on the MLF, and plans to update it periodically.
We spoke with Sara K. Andrews, the Assistant Director of New Perimeter, and DLA Piper Associate Erik Choisy about how they got involved with the MLF, the work they did to support it, and why they dedicated such significant time and energy to support financial inclusion.
Accion: Tell us more about New Perimeter. Why did DLA Piper commit to providing international pro bono legal assistance?
Sara K. Andrews (SA): DLA Piper created New Perimeter in 2005 to expand the firm’s extensive pro bono programs beyond the United States, and to give our lawyers opportunities to address some of the critical issues confronting underserved regions of the world. One of our first projects was in Kosovo, helping to restore the country’s judicial and prosecutorial systems. Since then we have worked on over 100 multi-year pro bono projects involving more than 800 DLA Piper lawyers from across the firm.
> Posted by Elisabeth Rhyne, Managing Director, CFI
The following post was originally published last Friday on MasterCard’s Inclusion Hub.
When the Basel Committee speaks, everyone involved in the financial world pays attention. In their new report, it attempts to come to terms with financial inclusion.
As the global regulatory framework for banks, Basel III has no doubt featured in side conversations at Davos. Banking authorities around the world must make shifts to maintain the Committee’s concern with financial system stability, while opening the way for financial inclusion to advance. The new report is called “Guidance on the application of the core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion.”
….If that title grabs you, you might be one of those people who can actually read the document’s carefully worded prose.
In response to the guidance, I would like to share four broad observations, not so much about the specific guidance – which is generally sound – but about the challenges involved in adapting the work of banking authorities to the new world of financial inclusion.
The guidance is uneven in its coverage of new types of financial inclusion providers
The report goes deep on microfinance. It discusses, but has not yet fully explored, digital financial services, big data and new forms of consumer credit.
The implicit assumption throughout the report is that the biggest financial inclusion challenge is credit risk coming from small lenders. This underplays the extent to which financial inclusion also involves large non-financial corporations like telecoms companies and major retail chains. The techniques these players deploy may require supervisory approaches different than those for smaller institutions.
> Posted by Center Staff
The latest edition of the Financial Inclusion 2020 News Feed, our weekly online magazine sharing the big news in banking the unbanked, is now available. Among the stories in this week’s edition are: the Alliance for Financial Inclusion (AFI) released the 2015 AFI Global Policy Forum Report, distilling the happenings of the network’s largest and most diverse forum to date; new startup PayJoy is attempting to solve the financing problem surrounding the 2 billion individuals globally who have access to the internet but can’t afford a smartphone; The Guardian spotlights how mobile money supported healthcare workers during the fight against Ebola in Sierra Leone. Here are a few more details:
- The 2015 AFI Global Policy Forum brought together over 500 senior financial inclusion policymakers, regulators, international organizations, and private sector partners in Maputo, Mozambique. Highlights from the forum include the adoption of the Maputo Accord, making SME finance a larger priority for the network, and sessions on green finance and gender.
- PayJoy, beginning an initial roll-out in California, is offering an alternative to the tech industry’s equivalent of payday lenders who charge upwards of 500 percent interest on loans to buy smartphones. PayJoy covers 80 percent of the cost of a phone at 50 to 100 percent interest, and if individuals aren’t able to make their monthly installments, the phone locks until the payment is received.
- In Sierra Leone, payment to healthcare workers combating Ebola was originally largely disbursed inefficiently in the form of cash, resulting in incidences of workers not being paid for months at a time, which caused disruptions to both healthcare and public trust in the system. NetHope, a consortium of NGOs working in IT, enrolled workers into an automated mobile money-based payment system using an open source facial recognition software.
For more information on these and other stories, read the latest issue of the FI2020 News Feed here. This is the final issue of the News Feed. Though if you have any stories or initiatives that you think we should cover on the blog or via our other social media channels, email your ideas to Jeffrey Riecke at .
> Posted by María José Roa, Center for Latin American Monetary Studies, CEMLA
Central banks and bank superintendencies play a fundamental role in developing financial education and inclusion programs, either as members or leaders of organizing committees. In order to better understand the role of the region’s central banks in financial education and inclusion programs, the Center for Latin American Monetary Studies (CEMLA) and Banco de la República, Colombia, surveyed 23 central banks and 17 superintendencies in a study that provides a general overview of their financial education and inclusion programs.
Central banks are the main promoters of Financial Education (FE) programs in most countries of the region. These institutions make alliances or coordinate with other public and private players for developing such programs. The content and objectives of the FE programs in central banks have evolved, particularly after the recent financial crisis. Since the beginning, all the central banks have offered content regarding their history and main functions. They use this to strengthen the institution’s image, the effectiveness of monetary policy and build agents’ credibility in inflation expectations. However, after the crisis, some central banks began to consider broader content that would help the population make better financial decisions on a day-to-day basis. Besides better personal financial decision-making, some central banks also mentioned that financial education should also pursue broader objectives such as financial stability and economic growth.
The central banks offer a wide variety of programs and services, including general talks, web pages, educational material, contests and theater. The main target groups are primary and secondary school students, followed by the general public. The latter is linked to the fact that an increasing number of central banks are promoting the inclusion of FE in the school curriculum. In general, assessment of the programs continues to be an unfinished task for the region’s central banks, particularly when talking about experimental assessment.
> Posted by Sonja E. Kelly, Fellow, CFI
Time Magazine has just named Angela Merkel Person of the Year. In this post I hereby make CFI’s own designation: India is CFI’s “Financial Inclusion Country of the Year.” In the recently released Global Microscope 2015, India was the star performer. It improved its benchmarking score by more than any country (10 points on our scale of 1-100), rising in the ranking to fourth place overall.
The Microscope measures the quality of the policy, regulation, and institutional environment for financial inclusion, scoring 55 countries on 12 indicators, and then ranking them. The 2015 Microscope Benchmarking Model takes the report deeper, and shows year-over-year changes for individual countries (see table). While India is not the top scoring country (that honor has been held by Peru, Colombia, and the Philippines for several years), it is the country that has shown the most dramatic positive change, particularly in five areas: regulatory and supervisory capacity for financial inclusion, prudential regulation, regulation and supervision of credit portfolios, regulation of electronic payments, and market conduct rules.
Global Microscope 2015 Scores for India
For more information see the 2015 Microscope Benchmarking Model.
What did India do that increased its score in 2015? Building on important groundwork laid in 2013 and 2014, the Reserve Bank of India (RBI), the Prime Minister of India, and the financial sector worked together to implement important reforms.
> Posted by Sonja E. Kelly, Fellow, CFI
I want to let you in on a secret: the best part of the Global Microscope 2015 is a hidden gem. It’s called the Microscope Benchmarking Model (admittedly it might benefit from a better name), and it provides a user-friendly deep-dive into each country and indicator. With this tool, you can go beyond the report, with insights on questions that we may have neglected to cover in the narrative. And you can slice and dice the data to your heart’s content.
For example, where is the best place to be an insurance provider if you want to work with low-income populations? It’s India, actually, with Mexico, Peru, Colombia, Brazil, and the Philippines following. With two quick steps, the tool produced this map for me (click to enlarge):
The countries colored in red—including the Democratic Republic of Congo, Madagascar, Paraguay, and Tajikistan—are the worst places to be an insurance provider working with low-income populations.
So why is India the best?
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