Growth Week 2011: Ideas for Growth Session 7 - Finance


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Growth Week 2011: Ideas for Growth Session 7 - Finance

  1. 1. Banking in every community Ignacio Mas International Growth Week London, 21 September 2011 1
  2. 2. The success of M-PESA in KenyaIn just 3.5 years… (data as of Sep 2010 based on Safaricom data) • 13 million users = 50% of the adult population • More transactions than Western Union does globally • 60% of e-payments by volume, 2% by value • 20,000 cash merchants = 20x the number of bank branchesIn just 2.5 years… (data as of Nov 2009 based on panel data from Billy Jack & Tavneet Suri) • 70% of households had at least one M-PESA user, including 50% of unbanked and 60% of rural households • 3% of people surveyed don’t know about M-PESA • Closing it would have a large negative impact on 91% of users
  3. 3. 3 A service platform delivering many benefits to all Banks Microlenders Government services Family & social Utility companies networks Youth Distributors & supply chainsHouseholds Control Entrepreneurs Innovation Convenience “The new banking Simple Accessible Mass market hygiene factors”
  4. 4. 4 Making financial services relevant for all MAKING E-MONEY HELPING PEOPLEBUILDING BRIDGES TO CASH DIRECTLY USEFUL, DAILY ACHIEVE THEIR GOALS Gov’t Electronic money P2P Int’l 0110010100 Individual G2P B2C P2Cash Online Store Cash Merchant Merchant Merchant Downstream Business Cash B2BCash ↔ Electronic value Electronic ↔ Electronic Electronic ↔ Psychology• Convenience = location • Network effects = larger • Customer insight =• Trust = brand, consistent is more useful (as well motivations, practices experience as cheaper) • Service presentation =• Viability = volume per store • Pain points of cash = intuitive, easy to use willingness to pay
  5. 5. 5 Savings as deferred payments (or installments) • People save for a purpose: Mobile phone menu: time-bound or goal-based MONEY TRANSFER • Financial services are TIME Phone # ________ installment plans for planned Amount ________ purchases or expenditures:I want a credit (postpaid) or savings PIN ____________bicycle! (prepaid) (Value date _____) (Purpose_______) • Any savings product can be constructed as a package of transactions across space Rent (real-time payment) and time due! (deferred payment) • How to maintain a conversation with your Now customers, when the Here Bicycle Village back SPACE interaction is remote (on a shop home phone)?
  6. 6. Mobile MoneyRegulatory IssuesLSE, September 21, 2011
  7. 7. Mobile money - A wave of experiments• Till 2006: half a dozen new trials across the world• 2007: Kenya: M-PESA starts and booms• Today: 119 deployments – 96 planned ones, most in Africa, Asia• Hence there is regulatory concern, but little experience (or data)
  8. 8. Thinking about regulation whenbusiness models allow to recompose delivery systems• Unbundling Banking by function/service – Exchange of forms of money – Storing money – Transferring money – Investing money
  9. 9. Risks and regulatory response Function Risks Conduct Regulation Prudential Regulation Exchange Fraud No, No just commercial law Storage Inaccurate records, Yes, including No Theft regulation of agents Transfer Transmission errors, Yes No Accounting errors Investment Investment failures, Yes Yes Systemic risks
  10. 10. Systemic risk: Basic ways of running a system• As a “Safe deposit box”• Investing in central bank paper (narrow bank)• Investing in banks and beyond…
  11. 11. Systemic Risk: Topics for investigation• Nature of runs and policy/management responses under each basic model of running the system• Deposit Insurance: Allow deposit insurance or allow provider to determine investment strategy or provider becomes deposit insurer• Resolving distress – operational separation and transfer to new ownership• Scenarios for reaching scale/systemic importance
  12. 12. Competition Issues• Telecommunications and interconnection• Cash-in/cash-out system: – critical mass – free entry – exclusivity• Two-way access among account providers – Voluntary – Mandated (access charges)• Unbundling payment platforms – SIM card – USSD – Applets
  13. 13. Anti-money-laundering• Strategic posture: Encourage people to leave the cash economy• Graduated KYC requirements – Identity check – Transaction limits: amount, frequency – Suspicious Transaction Reporting
  14. 14. Monetary Policy• Monitoring schemes• Simulation of size of effects• Transmission mechanism…
  15. 15. Consumer Protection• Mobile money: operational integrity• Micro-credit: – Reasons for over-indebtedness – Competition and interest rate levels – Bubbles without the profit motive (e.g. Bosnia)
  16. 16. Financial Innovations and Market Development Shyamala Gopinath
  17. 17. Financial Innovation, Development and Economic Growth• What causes what?• Whether financial development really leads to economic growth? – If so, under what circumstances – Are there any pre-requisites for financial development to have a positive impact on growth?
  18. 18. Financial Development• Theoretically, financial development should lead to economic growth – Enables more efficient allocation of capital – Encourages savings and investments – Reduces transaction costs – ‘Completes’ markets – Addresses information asymmetries – Enables better risk management
  19. 19. But, has innovation been beneficial?• Paul Krugman, Princeton U., 2009 “[It’s] hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.”• Paul Volcker, Princeton U., 2009 “How many other [recent] innovations can you tell me that have been as important to the individual as the automatic teller machine, which in fact is more of a mechanical than a financial one?”
  20. 20. Good and Bad Innovations• Based on the motive ? – To get around regulations – Avoid tax – Manage revenues/assets/liabilities• Based on the impact ?• Some innovations could have turned bad simply because they were ahead of times – Shallow understanding of the product
  21. 21. Timing and innovation• Innovation in an unripe environment could lead to bad results• While innovation can expedite development of markets to an extent, a basic framework is absolutely necessary for innovation to have positive impact
  22. 22. Basic Framework required• Reasonable sophistication of participants – Financial literacy• Sophistication should not be concentrated in a few participants – skewness• Sound legal framework for dispute resolution – No ambiguity in law• Robust market infrastructure• Reasonably liquid and deep cash market
  23. 23. Derivatives in less liquid cash markets• When the cash markets are not reasonably developed, derivatives can be counterproductive• Derivatives trade as standalone products – No linkage with the underlying – No beneficial impact on cash markets• Skewness of participants’ sophistication – Leads to mis-selling• More caution required
  24. 24. How to separate ‘good’ products from others• Very difficult• Could be based on the motives for usage – Speculation Vs hedging – But can hedgers survive without speculators?• Could be based on the sophistication of participants• Strict controls on leverage and speculation
  25. 25. Financial Innovation- Indian example• Gradual and calibrated introduction of sophisticated products• Market making permitted only for select set of regulated participants – Banks and Primary Dealers• Only hedging was permitted for others – To contain speculation• Emphasis on suitability and appropriateness
  26. 26. Financial Innovation- Indian Example (2)• Focussed development of market infrastructure (DvP, CCP etc) – To enhance transparency and – To address counterparty credit risks• Consultative policy making – Taking into account participants’ awareness and preparedness
  27. 27. Growth of Non-banking Sector- Concerns• Contribution to financial development in EMEs• Hetrogeneous nature• Scope of regulation• Dealing with regulatory arbitrage• Optimal regulation of non-banking finance companies• Public interest issues
  28. 28. Thank you