Taking banking to the people

Daniel Schydlowsky charts the strides some countries have made in taking the banking system to the grass roots, helping more to save and borrow

PUBLISHED : Thursday, 27 September, 2012, 12:00am
UPDATED : Thursday, 27 September, 2012, 2:36am

The 2008 financial crisis highlighted the importance of finance for the globalised economy. But 2.5 billion people worldwide still lack access to formal banking services, credit facilities or savings instruments. Bringing this largely ignored "missing market" into the formal financial system would enrich and strengthen the global economy.

The unbanked, who live primarily in developing countries, comprise nearly half the world's working-age population. This lack of access restricts their ability to buy goods and services, to borrow and save, or to invest in their future and that of their community and country.

Most global poverty-reduction efforts rely on "top-down" solutions - development-aid flows from rich to poor countries - that focus on education, food security and disease prevention. But improving access to the formal financial sector cannot be tackled with foreign aid or government handouts.

In general, home-grown solutions have proved more effective. While a single, universal solution will not work, understanding factors that are common across countries provides a way forward. For example, populations worldwide are embracing technology, particularly mobile services. However, people in the developing world frequently lack proper identification, a fixed address, or a formal employer.

In developing countries, an estimated 1.7 billion people own mobile phones but have no access to banking services. Harnessing this technology to expand financial inclusion would be empowering, particularly for smallholder farmers and merchants in rural communities, who could use their mobile phones to transfer cash, make retail purchases, deposit income and pay bills.

This would encourage saving, which is crucial to building a business and providing investment capital to others. And legal, regulated options for safeguarding savings and accessing credit would reduce reliance on the black market or the informal economy, where exploitation flourishes.

In Kenya, regulators have created the conditions for an innovative mobile-phone financial-services system to flourish. Since its 2008 launch, it has attracted nearly 14 million Kenyans - almost one-third of the population - who use it for money transfers, savings and other financial transactions.

Regulators and local private institutions can collaborate to create safe and accessible banking and credit instruments. That is how Brazil developed a regulatory framework that has enabled banks to bring an estimated 13 million Brazilians into the financial system. Similarly, a state-owned Indonesian bank, Bank Rakyat Indonesia, is providing microfinancing services to 30 million people, while in India, new "no-frills" savings accounts have attracted 12.5 million customers.

Financial leaders have already begun to spread the word about such progress, and the policies that enabled it, to bolster and expand financial inclusion.

If the world's 2.5 billion unbanked join the global economy, every industry will experience innovation and growth. Rather than waiting for solutions from advanced-country bankers, developing nations are leading the way to financial inclusion, dramatically reshaping the global economy in the process.

Daniel Schydlowsky is Peru's chief financial regulator. Copyright: Project Syndicate