Innovative Financial Inclusion - GPFI

IntroductionThe G20 commitment recognises the over two billionadults around the world who do not have access to formalor semi‑formal financial services – nearly 90 per cent ofwhom live in Africa, Latin America, Asia and the MiddleEast. 2 Most people are already aware of how greateraccess to basic financial services through microfinancecan transform lives and improve welfare. Awareness isgrowing that access to a wider set of financial tools, suchas savings products, payment services (both domesticand through international remittances) and insurance(including micro‑insurance directed at the needs of thepoor), provides poor people with much greater capacityto increase or stabilize their income, build assets, andbecome more resilient to economic shocks. 3Barriers for poor people to access appropriate financialservices include socio‑economic factors (e.g., education,gender and age, low and irregular income and geography),regulatory factors (e.g. provision of identity documentation)and product design factors (e.g., minimum accountbalances).4 Some major barriers financial service providersexperience when expanding appropriate services to poorpeople are the cost of providing those services and findingthe regulatory space to innovate. As a general rule,transaction costs do not vary in direct proportion to atransaction’s size. Thus serving the poor with small valueservices is simply not viable using conventional retailbanking or insurance approaches.The focus of the Access through Innovation Subgroup(ATISG) is on innovative methods to improve access to12345G20 Leaders Statement (2009).Chaia et al (2009).Helms (2006).For example: Johnson and Nino-Zarazua (2009)Roodman (2009).financial services. A key source of innovation is thecapacity of technology to reduce costs and overcomeother barriers to the provision of sustainable financialservices to the excluded. With nearly three billion mobilephones currently in use around the world, and numbersgrowing rapidly, 5 the costs of communications andinformation technology are shrinking. This presents anunprecedented opportunity to use technology to addressfinancial exclusion. Technological innovation can changethe cost and access equation, making it economicallyviable for financial service providers to reach poor andisolated individuals and communities.Financial sector policy and regulation is critical to the useof technology to promote financial inclusion. Increasingnumbers of countries with large excluded populations arepioneering policy and regulatory innovations that openspace for financial inclusion and similar new approachesto the delivery of formal financial services. This is allowingpreviously excluded customers access to an increasingrange of basic financial services.Innovation in delivery and design of financial servicestargeting the poor and the excluded presents challengingpolicy and regulatory issues. Global awareness of thechallenges and barriers and hands‑on experience withpolicy, regulation and supervision is limited. Industryinnovation has thus far frequently outpaced the capacityof policymakers to respond. Policy and regulatoryresponses therefore need to focus on articulating flexibleapproaches that can accommodate further innovationand multiple and competing objectives.The G20 FIEG Sub‑Group on Access through Innovationis focusing on innovations that have the potential to reducetransaction costs and reach the excluded. In particular,the Sub‑Group has explored policy and regulatoryapproaches aimed at: (i) fostering the safe and soundadoption of innovative, low‑cost financial service deliverymodels; (ii) helping provide a framework of incentives forthe various bank, insurance and non‑bank actors involved,while ensuring fair conditions of competition between allfinancial service players; and (iii) fostering affordablefinancial services that respond to customer’s needs inboth quality and range.IntroductionAgainst the backdrop of the global financial crisis andeconomic downturn, G20 summit agendas have focusedon securing financial stability and rebuilding the trust ofeconomic agents, especially consumers. The establishmentof the Financial Inclusion Experts Group (FIEG), and itstwo sub‑groups on Small and Medium‑sized EnterpriseFinance and Access through Innovation, at the PittsburghSummit in September 2009 recognised the mutuallyreinforcing policy objectives of financial stability, financialinclusion and consumer protection. G20 Leaderscommitted to improving access to financial services forthe poor by supporting the safe and sound spread of newmodes of financial service delivery capable of reachingthe poor. 11

The first phase of the Sub‑Group’s work through to June2010 has focused on analysis of recent experience andlessons learned, as well as the preliminary identificationof general principles. The outputs of this first phase ofwork are incorporated in this synthesis report, includingthe one page statement of recommended “G20 Principlesfor Innovative Financial Inclusion” for consideration at theToronto Summit. The second phase of the Sub‑Group’swork will continue through to the G20 Leaders’ Summitin Korea. This work will promote successful regulatory andpolicy approaches through the further development andimplementation of the general principles identified in thefirst phase, keeping in mind the distinct country conditions.The ATISG sees the role of the G20 in this space as beinga catalyst for the wide range of ongoing work to reach thefinancially excluded. By highlighting the importance offinancial inclusion, G20 leaders will inject additional energyand commitment into the drive to increase access tofinancial services for poor people.Structure of the ATISG ReportThe nine ‘G20 Principles for Innovative Financial Inclusion’are the heart of the ATISG’s work to date. These principlesare a reflection of the conditions conducive to spurringinnovation while protecting stability and consumers. Theyare not a rigid set of requirements but are designed tohelp guide policymakers in the decision making process.They are flexible enough so they can be adapted todifferent country contexts.innovative financial inclusionThe principles have been carefully distilled from thecomprehensive survey of the members of the Alliance forFinancial Inclusion and the in‑depth regulatory diagnosticstudies undertaken by CGAP in countries exhibitingleadership on financial inclusion (attached in Annexes 1and 2). Each principle is illustrated by short case studiesfrom countries in the aforementioned studies thatexemplify the principle, to give policy makers confidencethat others have put the principle into action and havefound it important. 6 There has been a wide process ofconsultation and endorsement as is outlined in Appendix1 and the reports of three of the key consultations areattached at Appendix 2.2Before elucidating these principles, the report providesthe rationale for the G20’s commitment to this globalchallenge by providing an overview of the research andexperience that relates to innovative financial inclusion.This includes data on the scale of financial exclusion; theimportance of financial inclusion for both economic growthand poverty alleviation; the critical role of consumerprotection and financial capability in access to financialservices; and the nature of good practice regulation, whichthese nine principles follow.Most of the world’s poor arefinancially excludedBetween 2.1 billion and 2.7 billion adults, or 72 per cent ofthe adult population in developing countries, do not evenhave a basic bank account. 7 This is the simplest way tomeasure financial access. The number of people withaccess to the broader range of financial services coveredin this report, such as payments services (national andinternational) and micro‑insurance, would be even lower.The map and graph below shows regional variations inaccess. In general, the poorest regions have the lowestlevel of access to bank accounts, although some countrieshave been able to adopt policy responses that haveallowed higher levels of financial inclusion than would beexpected given their state of development. The importanceof leadership in establishing a policy framework to improveaccess is captured in Principle 1.The map also shows significant variation across countrieswithin regions. The highest rates of exclusion are generallyin non‑G20 countries, which highlights the importance ofcooperation and outreach as the G20 takes the initiativeand provides support in this area. However, there aresignificant disparities across even G20 countries, withfinancial exclusion rates ranging from around 55 per centfor China, South Africa and Brazil, through to four per centfor Canada. 86 The International Association of Insurance Supervisors (IAIS) Joint Working Group on Microinsurance also contributed two of the cases.Appendix 4 has more information on the IAIS.7 The 2.1 billion number is an FAI estimate based on usage numbers from Chaia et al (2009). The 2.7 billion is a CGAP estimate based onsupply numbers from CGAP (2009a).8 These figures have been taken from Demirgüç-Kunt, Beck and Honohan (2008) because it is essential to use the same sources when makingcross country comparisons and this is the most recent comprehensive source of comparisons. It should be noted, however, that there aresignificant disparities between sources even in the relative levels and rakings of access in different countries. For example, Demirgüç-Kunt,Beck and Honohan (2008) indicates that the percentage of adults with access to formal financial services was 46 per cent in South Africa,10 per cent in Kenya and 15 per cent in Zambia, whereas the FinScope surveys in the same mid-decade period found access levels of57 per cent in South Africa, 27 per cent in Kenya and 23 per cent in Zambia.

Figure 1: Global differences in households with accounts in financial institutionsFraction ofHouseholds 2020–4040–6060–80 80Figure 2: Proportion of households with an account in a financial institutionPERCENT (%)10080High6075th percentileMedian4020Low25th percentile0Sub-SaharanAfricaEast AsiaEurope &Central AsiaLatin America &the CaribbeanMiddle East &North AfricaSouth AsiaIntroductionNote: Figure 2 shows the highest and lowest national percentages within theregion as well as the medians and quartiles, for the countries in each region.Source: Finance for All? based on work by Patrick Honohan (2007)3

Financial inclusion is a driver ofeconomic growth andpoverty alleviationInclusive financial sector development makes twocomplementary contributions to poverty alleviation:financial sector development is a driver of economicgrowth which indirectly reduces poverty and inequality;and appropriate, affordable, financial services for poorpeople can improve their welfare. 9They are complementary because financial inclusionenables the previously excluded to connect to the formaleconomy and contribute to economic growth, 10 whileeconomic growth facilitates the inclusion of more peoplein the economy and in the financial system. 11Poor people need access to appropriate,and affordable financial services 12A crucial problem for poor people is that their income isnot only low, but also irregular and unreliable. For example,an an

Financial sector policy and regulation is critical to the use of technology to promote financial inclusion. Increasing numbers of countries with large excluded populations are pioneering policy and regulatory innovations that open space for financial inclusion and similar new approaches to the delivery of for