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Task Force on Regulatory Standards for Financial Inclusion
Increased financial inclusion—greater access by the poor to the use of payments, deposits, credits, insurance and risk-management services—can improve the opportunities and welfare of people living in poverty. This CGD Task Force seeks to identify needed regulatory changes to increase financial inclusion by encouraging innovation and the use of new technologies, especially those related to digital finance, while protecting consumers and financial stability.
An enabling regulatory and supervisory environment can drive innovation to more effectively bring financial services to the bottom of the pyramid. The experience of Kenya, the Philippines, and other countries has shown remarkable progress, particularly on digital financial inclusion. However, that has not been the case for many other countries where inadequate regulations continue to affect the business and value proposition to promote financial inclusion. For example, excessively tight regulators’ entry and licensing requirements could prevent mobile network operators from using their extensive business networks to extend access to payments services to millions of cell-phone subscribers. Likewise, inadequate competition rules might result in oligopolistic behavior by financial or nonfinancial service providers, which would in turn keep the cost of financial products above what they would be in a competitive environment.
In light of our previous work and recognizing the crucial role that an effective regulatory framework can play in improving financial inclusion, a new CGD Task Force seeks to identify and address the concerns and challenges of regulators, with the goal of encouraging the adoption of needed reforms for financial inclusion. The key questions that the Task Force aims to address include the following:
What are the most common regulatory deficiencies that constrain both financial and non-financial institutions in serving large segments of the population?
How can central banks advance financial inclusion while preserving the traditional mandates of financial stability and integrity?
What is the right regulatory framework that levels the playing field between regulated financial institutions and non-financial firms (such as mobile network operators) offering payment products? What should the global standard be?
What type of national and international regulations are needed to ensure that KYC rules are consistent with the objectives of financial inclusion?
How can regulators ensure the development and secure operation of an electronic retail-payment system that all financial services providers can use at fair prices?
The Task Force is led by CGD senior fellow Liliana Rojas-Suarez with Stijn Claessens, Senior Advisor at the Federal Reserve Board, as co-chair. The Task Force comprises leading experts from around the world with deep knowledge of the challenges for designing and implementing regulations for improving financial inclusion. The Task Force has met three times: in February and November, 2014 and in June 2015. A report with their conclusions and recommendations was launched in March 2016. The accompanying brief can be accessed here.
In the following map, you can learn about events across the globe where the report has been featured, and gain access to recorded conferences, presentation slides, and more.
Some of the background papers for the report are as follows:
Thorsten Beck Professor, Cass Business School and Tilburg University.
Massimo Cirasino Manager of the Financial Infrastructure Service Line and Head of the Payment Systems Development Group of the Financial Inclusion Practice of the Financial and Private Sector Development Vice Presidency (FPD).
In November 2015, CGD published a report on the unintended consequences of anti-money laundering policies for poor countries, focusing on three groups: migrant workers who send remittances to their families, vulnerable people who are displaced by conflict or natural disasters and are in need of foreign assistance, and businesses that rely on cross-border trade. Since then, the international community has made several efforts to address the problem of financial exclusion created in part by these policies.
In spite of recent progress in the usage of alternative financial services by adult populations, Latin America’s financial inclusion gaps have not reduced, relatively to comparable countries, and, in some cases, have even increased during the period 2011-2014. Institutional weaknesses play the most salient role through direct and indirect effects. Lack of enforcement of the rule of law directly reduces depositors’ incentives to entrust their funds to formal financial institutions. Indirectly, low institutional quality reinforces the adverse effects of insufficient bank competition on financial inclusion.
CGD continued its commitment to the subject of financial inclusion with the release this March of Financial Regulations for Improving Financial Inclusion. As co-chairs of the Task Force that produced this report, we are enthused to see much alignment between the High-Level Principles of the G20 and the CGD Task Force report.
Keeping in mind the low levels of financial inclusion in the country, the Indian authorities have developed a broad strategy to improve access to financial services, as outlined in the report by the Committee on Comprehensive Financial Services for Small Business and Low Income Households, led by Nachiket Mor. Among the committee’s recommendations, payments banks are one innovative tool to further India’s goal of greater financial inclusion.
The rise of digital technology has nurtured a growing industry around the world in financial services that benefit the poor, from mobile payments and money transfers to micro-savings and mobile-based crop insurance. But as the financial landscape evolves to include these disruptive innovations, new players and new business models could bring fresh risks to individual users and to financial systems. So how should policymakers respond?
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.
Poor regulation is a key obstacle to financial inclusion. An enabling regulatory environment is critical for creating incentives for businesses to offer innovative financial services to the poor, and for underserved customers to take up formal financial services.
While exciting new technologies for mobile money transfer deservedly make the headlines, there's a drier aspect of financial inclusion that doesn’t get as much attention: regulation. Liliana Rojas-Suarez visits the CGD Podcast to explain how better regulation can improve both financial inclusion and financial stability.
As recently as 2011, only 42 percent of adult Kenyans had a financial account of any kind; by 2014, according to the Global Findex, database that number had risen to 75 percent. In sub-Saharan Africa, the share of adults with financial accounts rose by nearly half over the same period. Many other developing countries have also recorded gains in access to basic financial services. Much of this progress is being facilitated by the digital revolution of recent decades, which has led to the emergence of new financial services and new delivery channels.