Financial Inclusion Now

KUALA LUMPUR – Making the financial system accessible to the world’s poorest people can unlock their economic potential, improve their lives, and benefit the wider economy. So it is no surprise that financial inclusion of the poor has become an important component of public policymaking. Central banks and regulators worldwide are taking the lead in making financial inclusion a priority, in addition to their traditional mandates of maintaining monetary and financial stability.

Financial inclusion is about providing an opportunity for the world’s 2.5 billion unbanked and financially underserved to participate in the formal financial system, thereby helping to lift them out of poverty and enter the economic mainstream. Greater financial inclusiveness promises a more cohesive society and more balanced growth and development.

Moreover, financial systems themselves stand to benefit from becoming more comprehensive and progressive. The additional consumers participating in the formal financial system will strengthen national economies and, in turn, enrich the global economy. Indeed, as developing countries move toward middle-income status, financial inclusion is a key component of continued progress.

In countries with high levels of financial exclusion, consumers are left to rely on unregulated informal services. These inferior substitutes often imply exorbitant costs for borrowers – and financing that is usually too short term for productive investment activity. Moreover, the lack of consumer protection and regulatory and supervisory frameworks exposes informal activities to vulnerabilities that can harm borrowers and jeopardize financial stability.

Increasing the availability of formal financial services to those who have long been denied them requires establishing a balanced regulatory framework. Oppressive, blanket regulation, which may be necessary in complex and unpredictable financial markets, may not be relevant in a rural community – or, worse, it may stifle efforts to promote financial inclusion.

Indeed, proportionality is an important aspect of regulation, enabling prudential measures that, rather than exceed or underestimate, are commensurate with the risks that need to be addressed. Little wonder, then, that high levels of exclusion in developing and emerging countries have prompted policymakers to embrace proportionate regulation, thereby gaining the flexibility to encourage innovation in the provision of financial services while preserving financial stability.

Bangladesh, for example, has adapted its financial regulations for microfinance institutions. This has helped to catalyze the growth of sustainable microfinancing to local women-owned enterprises. Kenya’s test and learn approach to regulation has unleashed the potential of mobile-phone-based financial-service delivery through M-PESA, which offers consumers a safe and convenient alternative to cash.

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