Improving lives through financial inclusion
Half of the world's population is "unbanked". This means that 2.9 billion adults do not have the opportunity to save, get loans, manage their finances for the future, or grow their businesses.
Improving this situation in the Asia-Pacific was the topic of discussion at an APEC Public-Private Sector Forum on Financial Inclusion, held in Sapporo, Japan on 31 May.
Financial inclusion refers to the delivery of banking services such as savings, payment services, credit and insurance at an affordable cost to disadvantaged groups including the poor, women, migrant workers, rural communities and small businesses.
"In many APEC economies the percentage of the adult population with access to a bank account is still very low; with rates in Indonesia, Vietnam, the Philippines, Peru and Papua New Guinea below 40 percent," said Dr Julius Caeser Parrenas, Coordinator of the Advisory Group on APEC Financial System Capacity-Building. According to Lois Quinn a Senior Economist at the US Department of the Treasury, even in APEC's most developed members like the United States, "around 20 percent of adults in minority groups can be excluded".
The result is that large portions of society cannot save or get credit in order to improve their education, health or work prospects. Alternatively, it can force them to access credit at inflated prices in informal markets, for example loan sharks, which can lead to inescapable debt spirals.
Financial exclusion also acts as a handbrake on inpidual economies' growth, and can even undermine the sustainability of the global economy.
According to John West from the Asian Development Bank Institute, "The issue of financial inclusion is now more important than ever. Looking at the last decade of growth we can see three major imbalances. First, Asia's overdependence on exports to the US and China. Second, widening income gaps between the rich and the poor. And third, the environmental imbalance created by the disproportionate effects of climate change and pollution in Asia".
Importantly, financial inclusion can contribute to better equilibrium in these areas. When people gain access to credit and can financially plan, consumption increases and new industries, especially in the service sector, begin to grow which stimulates domestic demand. It also helps lift people out of poverty by providing economic opportunity through microenterprises. Moreover, services like microinsurance can act as an important social safety net for those affected by adverse environmental events such as flooding and storms.
In essence this means that financial inclusion contributes to balanced, inclusive and sustainable growth which are key components of APEC's New Growth Strategy for the region.
To date the best way to address financial inclusion has been through the provision of micro-finance. "In recent years the rapid growth of the microfinance sector has helped to promote financial inclusion, to the extent that, there are now around 103 microfinance investment vehicles with US$6.6bn under management" said Dr Parrenas.
In fact some of APEC's developing member economies have pioneered many of the most innovative solutions. Mr Eduardo Jimenez from the Alliance for Financial Inclusion, a global network of policy makers established with the support of the Bill and Melinda Gates Foundation, provided an example from the Philippines: "In the Philippines two mobile banking operations now have an estimated 71.2 million customers (almost 80 percent of the total population). Using these operators Filipinos can make purchases, deposit and withdraw cash, pay bills and make transfers using just their mobile phone."
However, as Mr Jimenez says "much remains to be done". To this end the Alliance for Financial Inclusion has developed six effective policies that can improve the roll-out, take-up and success of microfinance.
Financial identity: accessing financial services typically requires proof of identify through means such as passports, birth certificates and driving licences. However, this sort of documentation is often not available to many in developing economies. Alternate means therefore need to be developed to give people a transaction-based profile, for example by building and sharing a history of rent, utility and cellphone payments.
Mobile phone banking: mobile phone subscriptions have soared, including in developing economies. This offers huge potential for expanding financial access to remote areas and lower-income groups: especially as the average mobile phone transaction is estimated to cost only US$0.50, versus US$2.50 for those delivered through traditional brick-and-mortar bank branches.
Agent banking: allowing retail outlets such as shops and post officers to act as agents for banks greatly increases the geographical availability of financial services, and involves substantially lower set-up costs. For example, the Indonesian post office now provides payment services through its 3500 branches, 300 mobile service vehicles and 11000 village agents.
Channel and product persification: facilitating the expansion of services offered, from paying bills and simple savings schemes, to services such as microinsurance and salary and social welfare payments, greatly increases the utility of microfinance.
Public bank reforms: regulations should be put in place for more effective commercial provision of financial services. This ranges from creating scope for public and commercial banks to provide microfinance, to developing new systems for anti-money laundering and counter-terrorism financing prevention.
Consumer protection: finance education for consumers and industry supervision are essential to make sure the benefits of financial inclusion are not lost. In Peru, for example, interest rates dropped 15 percent in the first six months after a law requiring that the costs of services be published every day was introduced.
The view of experts at the Forum was that both inpidual economy and regional action on these issues would greatly advance financial inclusion in the Asia-Pacific.
Dr Parrenas from ABAC highlighted that in addition to contributing to APEC's New Growth Strategy, an APEC initiative on financial inclusion would complement the work of the G20.
And according to Dr Quinn from US Treasury, "APEC is uniquely qualified to tackle these issues... and coordinated action in the APEC Finance Ministers' Process on microfinance could blaze new pathways for financial provision to the poor and the unbanked."
The outcomes of the Forum were presented to APEC Senior Officials and Senior Finance Officials at their Workshop on the APEC Growth Strategy in Sapporo on 1st June.
The APEC Public-Private Sector Forum on Financial Inclusion is an initiative of APEC Senior Finance Officials and was organised by the APEC Business Advisory Group's Advisory Group on APEC Financial System Capacity Building in cooperation with the Ministry of Finance, Japan.