One of the aspects of CGD that I value the most is that we colleagues do not always agree. Healthy debate fills the corridors (often at the expense of report-writing or other important tasks!) In that spirit, after Nancy Birdsall wrote from Lima last week that she’d been (happily) surprised to see microeconomic issues atop the agenda at the normally macro-heavy World Bank/IMF meetings, I now offer an alternative perspective from the meetings in the Peruvian capital: financial inclusion as a macro issue.
This was embodied by the panel discussion I took part in, entitled Financial Inclusion – Macroeconomic Dimensions and Multiple Goals. Other participants included Min Zhu (Deputy Managing Director of the IMF), Alfred Hannig (Executive Director of the Alliance for Financial Inclusion, or AFI), Raghuram Rajan (current Governor of the Reserve Bank of India), and Carolina Trivelli (former Minister of Development and Social Inclusion of Peru).
The panel touched on many areas covered by CGD’s Task Force on Financial Regulation for Financial Inclusion and brought greater understanding of what is often thought of as a microeconomic issue.
But it’s clear that bringing more people into the financial system means, at scale, greater savings which can be used for long-term investments, improved resource allocation and higher productivity, and a narrower gender gap through equitable access to financial resources.
The panel added some key insights that I list here:
Various countries have adopted different pathways for improved financial inclusion. For example, the Reserve Bank of India, headed by Raghuram Rajan, recently granted approval to 11 payment banks in India. These payment banks have been created to improve financial access by providing small savings accounts and payments/remittance services to low-income communities. Unlike traditional banks, they are expected to undertake more high-volume low-value transactions, but cannot engage in lending.
Financial inclusion can support economic growth through its effects at the household and firm levels. The accumulation of human capital is a key driver of economic growth. Access to finance by households can help increase savings for education and therefore, increases the accumulation of human capital. At the firm level, improved access to more diversified and cheaper sources of finance can help to decrease informality. As shown by recent research, informality can be a serious constraint to economic growth.
As technology evolves, pathways to financial inclusion are also likely to change. It is necessary to keep an open mind about innovations that drive financial inclusion (particularly innovations on digital financial inclusion, such as mobile money). It is important to let the market experiment while being carefully monitored under a well-defined regulatory framework. And countries have much to learn from each other’s experiences with different models of financial inclusion.
Financial stability is a necessary (but not sufficient) condition for financial inclusion. Financial crises hurt financial inclusion the most. During financial crises, banks tend to cut lending to risky borrowers, such as smaller enterprises. At the same time, household savings decrease as people lose their trust in the banking system, harming one of the main goals of financial inclusion, which is to increase aggregate savings. The opposite is not true: financial systems can be stable but still exclude many poor people.
There is an increasing recognition of the important role of regulation in balancing financial stability and financial inclusion. CGD’s Task Force, comprising some of the leading financial inclusion experts from around the world (including Njuguna Ndung’u, former Governor of the Central Bank of Kenya; Nachiket Mor, Board Member of the Reserve Bank of India; and Tarisa Watanagase, advisor of AFI and former Governor of the Bank of Thailand), will launch a report in early 2016, containing recommendations for improving regulatory frameworks governing financial inclusion. The report will highlight the importance of using regulation to increase access to finance while protecting financial stability, consumer interests and incentives for innovation.
More than 50 governments have signed the Maya Declaration, a commitment to reach financial inclusion targets. I’m glad to see an increasing recognition that financial inclusion has a macroeconomic effect on economic growth and financial stability.