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Christine Lagarde
Photo by IMF/Stephen Jaffe

Does broadening financial access to large segments of the population pose risks to financial stability? Not necessarily, according to recent remarks by IMF managing director Christine Lagarde. Increasing access to basic financial transactions such as payments does not threaten financial stability, especially when appropriate supervisory and regulatory frameworks are in place. In fact, with the right regulatory supervision, increased access to financial services can result in both micro and macro benefits. Recognizing the macroeconomic and regulatory dimensions of financial inclusion, CGD and the IMF joined forces for a seminar to kick off the IMF Spring Meetings 2016.

Both CGD and the IMF have been actively engaged in rigorous research centered on financial inclusion. CGD recently published a report on how regulation can improve financial inclusion. The IMF has produced a study investigating the linkages between financial inclusion and macroeconomic benefits. The seminar provided a unique opportunity for the merger of these two areas of expertise.

While there is clear micro-level evidence for the benefits of financial inclusion in improving the daily lives of large segments of the population, the evidence for macro benefits of financial inclusion has been less clear. Lagarde’s opening remarks highlighted the main question motivating the first panel: is the concept of financial inclusion even macro-relevant? In other words, does increasing access to financial services make a difference at the national or global level? In short, yes. Previous evidence by the IMF has shown that inclusive growth could lead to tangible macroeconomic benefits, such as higher GDP and lower income inequality.

Watch Christine Lagarde’s comments on the macroeconomic benefits of financial inclusion from 6:30-8:17 in this video.

What is less clear is the link between financial inclusion and financial stability with respect to credit access. Credit can play a crucial role in helping the poor cope with poverty. However, unchecked credit access could also harm financial stability. The 2010 microfinance crisis in Andhra Pradesh, India is often cited as the prime example of such an instance. However, appropriate regulations and checks are critical to ensure that financial stability is preserved as credit access is broadened. In fact, Lagarde noted in her opening remarks: “Using information on supervisory quality in about 100 countries from the Financial Sector Assessment Program, we find that when supervision is of high quality, broadening credit access actually leads to an increase in financial stability.”

Watch Subir Gokarn and Aslı Demirgüç-Kunt discuss the risks of broadening credit access from 43:19-46:00 in this video.

The first panel also tackled ways to lower barriers to financial inclusion for traditionally marginalized groups, particularly women. Despite broad advances in improving access to basic financial services, the male-female financial inclusion gap has remained persistent. IMF’s Subir Gokarn and Gates Foundation’s Gargee Ghosh highlighted the role of attitudes and trust as key barriers to the uptake of financial services by marginalized customers. Product design is crucial to overcome such behavioral biases and to ensure that financial products are catered to the particular needs of consumers (also discussed in this CGD blog post). While the panel talked about the role of financial literacy and branchless banking in addressing some of the barriers faced by women, IMF’s Ratna Sahay went a step further, emphasizing a bolder approach to address the gender gap and recommended greater involvement of women in the supply side as financial services providers.

Watch Ratna Sahay discuss ways to reduce the gender gap in financial inclusion from 56:32-58:13 in this video.

Liliana Rojas-Suarez
Photo by IMF

The second panel kicked off with an opening presentation by CGD senior fellow Liliana Rojas-Suarez on the recently published CGD report on regulations for improving financial inclusion. Her presentation laid down the key principles and areas of focus for regulatory improvement to further financial inclusion without compromising financial regulators’ traditional mandates of stability, integrity, and consumer protection. The discussion of financial inclusion as a key policy objective alongside the traditional mandates of regulators is a big step forward in itself.

Watch Liliana Rojas-Suarez present CGD’s recent report on how regulations can improve financial inclusion from 7:05-9:54 in this video.

Any conversation about financial inclusion is incomplete without discussing the role of technology. Digital advances have played a major role in expanding financial services to previously underserved sections of the population. However, they have also introduced new risks through new products, players, and models. One important challenge for regulators is to not fall behind the technological curve, as noted by Nicola Véron, senior fellow at Bruegel. However, at the same time, regulators have to be cautious about not regulating prematurely, which could stifle innovation. The CGD report recommends striking a balance between ex ante and ex post regulations, where clear rules are specified ex ante but with the option for ex post intervention as services and providers evolve.

Watch Stijn Claessens talk about how to strike a balance between ex post and ex ante regulation from 27:13-29:00 in this video.

In line with another recommendation from CGD’s report, the panelists emphasized the need for greater coordination between different regulatory and supervisory agencies, both financial and non-financial ones. Tim Adams, president of the Institute of International Finance, pointed out that there is enormous fragmentation in the regulatory and supervisory space. Echoing these concerns, Tilman Ehrbeck, partner at Omidyar Network, took note that we are unlikely to see movement in the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) space until the regulatory and supervisory jurisdictions are in alignment.

Watch Tim Adams and Tilman Ehrbeck discuss the need for greater coordination between regulatory and supervisory agencies from 1:08:40-1:10:15 in this video.

The event concluded with closing remarks by CGD’s Nancy Birdsall, who drew attention to how financial inclusion has come a long way. The attention towards financial inclusion in both domestic and international agendas shows the increasing recognition of financial inclusion, especially digital financial services, as a key development tool. She also underscored the importance of data, particularly real-time data to bring financial services to underserved populations. By the end of the event, it was clear that advances in financial inclusion are fast-moving due to technology and will continue to require attention in times to come. The future of financial inclusion depends on how regulators and policymakers interact with these rapid technological advances driving financial products.

Watch Nancy Birdsall’s closing remarks on the future of financial inclusion from 1:26:19-1:28:06 in this video.

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.