As mobile banking and other technological innovations fuel the expansion of financial services in many developing countries, a new World Bank Group report urges policy makers to focus on products that benefit the poor, women and other vulnerable groups the most.
No-frills savings and payment accounts, for example, offer a safe place for people to store and transfer money and help them maintain a relatively stable living standard. Evidence, however, is mixed on microcredit and micro-insurance products.
“When well designed, efforts to foster financial inclusion can be an effective way to empower people,” said World Bank Group President Jim Yong Kim. “Whether you are a public sector financial regulator or a private sector bank, it is in your interest to get everyone access to financial services. This is good for the world and will help us end poverty.”
The 2014 Global Financial Development Report: Financial Inclusion, is the most comprehensive report yet on the topic. It comes as policy makers are pushing to reach the world’s unbanked – 2.5 billion people who make up about half of the world’s adult population. More than 50 countries recently set targets to improve financial inclusion. Last month, Kim announced a new initiative to provide universal financial access to all working-age adults by 2020 – with the help of technological innovations such as e-money accounts and e-mobile wallets.
Progress in Financial Inclusion
Mobile banking has played a key role in expanding financial inclusion among low-income populations in countries such as Kenya, the Philippines and Tanzania. Brazil increased financial access to people living in remote areas by promoting technology-based “correspondent banking” – financial services provided on behalf of banks by retails stores, gas stations, and agents on motorcycles and boats on the Amazon River.
The poor benefit the most from technological innovations, which make financial services cheaper and easier to access, the report says. Low-income economies, especially those with remote, sparsely populated areas, have much to gain from allowing the provision of financial services outside of established bank branches.
Many countries have made progress in expanding account use among the poor, women, youth, and rural residents, even without tapping into advanced technology. Some policies have proven to be especially effective, such as requiring banks to offer low-fee accounts, waiving onerous documentation requirements and using electronic payments to deposit government assistance into bank accounts. South Africa, with a public-private framework, increased the number of bank accounts by six million in four years. Brazil’s regulatory reforms led to a dramatic expansion of places offering financial services – now in every municipality in the country.
Challenges in Expanding Financial Inclusion
But challenges remain. While several countries have quickly rolled out basic bank accounts for the unbanked, in some cases, millions of those accounts have remained dormant. Even more troubling, without healthy competition and effective regulation, credit is often overextended to people not qualified to receive it. And promoting credit without regard to cost actually exacerbates financial and economic instability, the report shows
Low-income countries face particularly daunting challenges. Thirty percent of the adults there saved in 2011, compared with 58 percent in high-income countries, according to analyses of the World Bank’s Global Findex database included in the report. And 11 percent of adults there saved using a bank account, compared with 45 percent in high-income countries. In addition, about 9 percent of the adults worldwide originated a loan from a formal financial institution, but those in developing countries are three times more likely to borrow from family and friends than from banks.
“Financial services are out of many people’s reach because market and government failures pushed the costs of these services to prohibitively high levels,” said World Bank Director of Research Asli Demirguc-Kunt, who co-authored the report. “In many cases, the services are unavailable because of regulatory and legal hurdles.”
Addressing Market and Government Failures
To promote financial inclusion responsibly, the report urges policy makers to improve the standards for information disclosure and support innovative, well-designed financial products that address market failures, meet consumer needs and overcome some behavioral hurdles. For example, commitment savings accounts, where access to cash is possible only after a period of time or after a goal has been reached, can promote savings. And if well designed, index-based insurance, which links payouts to a well-defined index, such as the amount of rainfall or commodity prices, reduces moral-hazard problems, because payouts reflect a measurable index beyond the control of the policyholder.
Policy makers can also improve financial access by embracing new technologies, which not only include mobile banking, but other innovations such as borrower identification based on fingerprinting and iris scans, the report says. They should, however, strike a balance between providing incentives for the development of new payment platforms and requiring them to be open to competition.
Responsible financial inclusion also requires consumers to better understand finance. The study finds that standard, classroom-based financial education aimed at the general population has little impact. But financial education can be effective during key moments of a person’s life, such as when starting a new job or when applying for a mortgage loan. People also learn better when financial messages are delivered though social networks and engaging channels, such as soap operas, according to evidence highlighted in the study.
The World Bank Group is committed to supporting countries in their efforts to bolster access to finance. It currently conducts financial inclusion projects with public and private partners in more than 70 countries.