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Banking for billions: Increasing access to financial services


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This report, written by the Economist Intelligence Unit and commissioned by Barclays, examines the steps required to increase levels of financial inclusion around the world. It is based on two main strands of research: first, a series of in-depth interviews with leading experts and practitioners, and second, a programme of research into current levels of financial inclusion and efforts to improve the situation around the world.

The author of the report was Sarah Murray and the editors were Melissa Carson, Rob Mitchell, Chenoa Marquis and Monica Woodley. We are grateful to the many people who have assisted with our research.

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Banking for billions: Increasing access to financial services

  1. 1. Social IntelligenceBankingfor billionsIncreasing accessto financial services
  2. 2. ContentsBarclays Social Intelligence SeriesBarclays is collaborating with independent experts to Contributors 03build and disseminate knowledge on key global social andenvironmental issues. See: Foreword 04We welcome your feedback. or write to the address below Executive summary 05Banking for billions Introduction 07This report, written by the Economist Intelligence Unit andcommissioned by Barclays, examines the steps requiredto increase levels of financial inclusion around the world. It 1 The problem 09is based on two main strands of research: first, a series ofin-depth interviews with leading experts and practitioners, 1.1 Who are the financially excluded? 10and second, a programme of research into current levels offinancial inclusion and efforts to improve the situation around 1.1.1 Case study – gender and exclusion 11the world. The author of the report was Sarah Murray andthe editors were Rob Mitchell, Chenoa Marquis and Monica 1.2 Where are the financially excluded? 12Woodley. We are grateful to the many people who haveassisted with our research. 1.2.1 Underbanked adults in the US 12 1.2.2 Global access to loans 13IntervieweesJacqueline Novogratz, founder and chief executive, Acumen 1.2.3 Global access to deposit accounts 13Fund Elizabeth Littlefield, chief executive officer, ConsultativeGroup to Assist the Poor (CGAP) Stuart Hart, management 1.2.4 Banked status in the UK 14professor and chair of the Center for Sustainable GlobalEnterprise, Johnson School of Business, Cornell University 1.2.5 The causes of underbanking in the UK 15Vidar Jorgensen, president of Grameen America Bridget vanKralingen, microfinance initiatives, IBM Jyrki Koskelo, vice 1.3 What prevents financial inclusion? 16president for Europe, Central Asia, Latin America and theCaribbean, and global financial markets, International FinanceCorporation (IFC) Martin Holtmann, head of microfinance, 2 Towards a solution 19International Finance Corporation (IFC) William Reese,president and chief executive officer, International Youth 2.1 Banking in Africa 20Foundation Julie Katzman, general manager, MultilateralInvestment Fund Veronika Thiel, researcher, New Economics 2.1.1 The growth of microfinance investment vehicles 21Foundation Kadita Tshibaka, president and chief executiveofficer, Opportunity International Mary Ellen Iskenderian, 2.2 Beyond credit 22president and chief executive officer, Women’s World BankingDavid Morrison, executive secretary, United Nations Capital 2.2.1 Case study – employment first 23Development Fund (UNCDF) Andrew Devenport, chief 2.3 Technology: making critical connections 24executive, Youth Business International Dr Gerhard Coetzee,general manager, Micro Enterprise Finance, Absa 2.3.1 Wizzit banking and payment transactions 24This report was prepared in good faith by the Economist 2.3.2 Mobile phone versus bank accounts in selected countries 25Intelligence Unit (EIU). Neither the EIU nor Barclays BankPLC, nor their employees, contractors or subcontractors, 2.3.3 Case study – the regulation challenge 27make any warranty, express or implied, or assume any legalliability or responsibility for its accuracy, completeness, or any 2.4 Achieving financial literacy 28party’s use of its contents. The views and opinions containedin the report do not necessarily state or reflect those of the 2.5 Tapping into remittances 29EIU or Barclays Bank PLC. Barclays Bank PLC is authorised 2.6 Case study – from government to people 30and regulated by the Financial Services Authority and is amember of the London Stock Exchange. Barclays Bank PLC 2.7 The role of policymakers 31is registered in England No. 1026167. Registered office: 1Churchill Place London E14 5HP. 3 The conclusion 32 3.1 How the credit crisis has affected microfinance 33 3.1.1 Finance generates wealth 33 Social Intelligence 03
  3. 3. banking for billions: increasing access to financial servicesForewordIn the many communities where Barclays does business, we have found that the most vulnerable peoplein society are often those who also have the most limited access to financial services. Access to banking andsavings accounts, credit and insurance are essential for enabling economic activity. The critical issue is how toextend financial inclusion to more of the world’s population. Barclays commissioned the Economist Intelligence Unit to provide an overview of global access to financialservices today and explore future prospects. Its findings are contained in this report. The World Bankestimates that in some countries, fewer than 10 per cent of people have access to financial services of any kind.As this report shows, the repercussions of financial exclusion are just as evident in developed countries; life isharder and more expensive for those who cannot use a bank account to manage payments, or save securely orbuild a credit record to get a loan at competitive rates. At Barclays, we have focused our attention on increasing access in both developed and emerging markets.We are developing dedicated products and services, as well as working in partnership with other organisationsthat provide affordable alternatives, for those who cannot access mainstream financial services. Our entry-level banking customer numbers are growing rapidly; in 2009, our customers in this categoryincreased by 16 per cent to a total of 3.2 million accounts across Sub-Saharan Africa, including South Africa,and basic bank accounts in the UK. We are pioneering new approaches to micro-enterprise finance in SouthAfrica, using innovative delivery models and risk management techniques to provide services to markettraders and other underserved entrepreneurs. In 2009, we committed to a global partnership with the non-governmental organisations (NGOs) CAREInternational and Plan International in order to accelerate access to basic financial services. This importantthree-year initiative aims to reach more than 500,000 people across Africa, Asia and South America andrepresents a £10m commitment by Barclays. The partnership combines their experience and understandingof local communities with our financial expertise. As this research shows, efforts to increase access to financial services have succeeded in bringing manymore people into the financial system, but there is still a long way to go. Further progress will require banksand other financial institutions working with NGOs and policymakers to create innovative solutions and asustainable platform to increase financial inclusion internationally. At Barclays, we will continue to invest ininitiatives to ensure that the benefits of banking reach a larger proportion of the global population.Marcus Agius, Chairman, Barclays04 Social Intelligence
  4. 4. Executive summaryA strong consensus has emerged that increased levels large number of stakeholders, including the privateof financial inclusion – through the extension of credit and sector, government, policymakers and non-governmentalprovision of bank accounts, savings schemes and insurance organisations. Moreover, there are numerous barriers thatproducts – have the potential to reduce global poverty and prevent further progress on financial inclusion, including: a lacknurture economic development. this is especially true at a of education; out-of-date regulation and policies; and culturaltime when technology is providing new, scalable delivery mistrust of formal financial providers.mechanisms that bypass many of the problems associated It is clear, however, that there is a strong groundswell behindwith physical financial infrastructure. efforts to improve financial inclusion. In this report, we examine But the picture is a highly complex one. the ability to current trends and assess some of the main challenges andimprove financial inclusion depends on the interaction of a opportunities. Key findings include the following: he cycle of exclusion is T  inancial exclusion is a global issue F could lead to further exploitation of the powerful and self-reinforcing the numbers are starkest in the unbanked, already a vulnerable group.Poverty results in financial exclusion, and developing world – the World Bank others welcome the investment, seeingfinancial exclusion reinforces poverty estimates that, in some countries, fewer any opportunity for greater financialstill further. the transaction costs of than 10 per cent of people have access inclusion as a good one. In the comingbeing excluded are often high, because to financial services of any kind. But even years, institutions will need to strike aindividuals must pay extra fees as non- in developed countries the harsh realities delicate balance between profit-makingaccount holders. And, without access to of exclusion are just as real. In europe, and social responsibility.deposit products, customers must store the financially excluded range from ansavings in unsecure places, increasing estimated one per cent of the population  he global economic T the risk of loss or theft. More generally, to as high as 40 per cent in Poland and downturn has had an impactfinancial exclusion can prevent access to 48 per cent in Latvia. In the uK, about As the global financial crisis began tohealthcare, education and employment, 890,000 people are estimated to be develop, there were hopes that financialall of which reinforces the poverty cycle. unbanked, and in the us the figure is inclusion initiatives might be sheltered about 28 million. from the shock to the broader financial inancial inclusion is about F sector. But it is now clear that credit much more than small loans  echnology will bear fruit, T and funding risks now loom large forMicrocredit has helped to prove that but will also bring challenges the microfinance sector too. one resultthe unbanked and underbanked can Mobile telephony, smart cards and may be a greater emphasis on savingsbe worthy and reliable consumers of electronic transfers have already made rather than credit. But the main effectappropriate financial services. now huge inroads in banking. the need for of the crisis may be that policymakersother needs like insurance, transactional new approaches to the provision of are spurred to increase their efforts toaccounts, payment services, financial finance is leading innovation and helping promote financial and savings are starting to be to expand the reach of financial servicesmet by non-profits, governments and and reduce costs for customers and  olicymakers need to tread lightly P even commercial banks around the world. providers. Mobile phone technology may Policy measures to increase financialMeanwhile, savings – and a safe place to present a lifeline to the unbanked, but it inclusion can have a powerful effect,put them – are seen by many as the most can also be a headache for regulators, but must be considered carefully incritical means toward poverty alleviation who often have difficulty keeping pace order to prevent counterproductiveand the expansion of financial inclusion. with innovation. outcomes. Policymakers’ most importantIn some countries, up to 40 per cent of roles will be to: create and empowermonthly household income is saved, but  he commercialisation of financial T the institutions and legal systems thatit has been estimated that up to 20 per inclusion is not without controversy support financial services and protectcent of informal savings in rural Africa are A growing number of financial institutions consumers; collect information; andlost through fire and flood. see the opportunity to attract new promote competition. customers – albeit small-scale ones – through new products and services in developing countries. critics fear this Social Intelligence 05
  5. 5. banking for billions: increasing access to financial servicesGurah, easternKenya, where themobile phone isproving a popularway to accessbanking services 06 Social Intelligence
  6. 6. IntroductionThe ability to open a bank account or take out a loan is something that many people take for granted, yetalmost three billion people in developing countries have little or no access to formal financial services.Globally, the gap remains large too – on average, only about 26 per cent of the world’s population has access toformal financial services, according to the World Bank. The big question for policymakers and institutions ishow to extend financial inclusion to the other 74 per cent. Governments and policymakers now broadly consider access to savings accounts, credit and insurancefacilities to be critical to the health of a society and essential for the expansion of economic opportunity. For the purposes of this paper, financial inclusion is defined as the ability to access transactional accounts,savings accounts, loans and insurance in order to participate in the economy. However, while most people think of the financially excluded as existing purely within the informalsector (economic activity that is neither taxed nor monitored by a government and is not included in thatgovernment’s gross national product) this does not tell the whole story. Millions of factory employees work onpayroll but have no access to banking and still get their wages in cash. Informal channels are also associated with extortionate loan rates, barriers to saving and a lack of protectionagainst unforeseen calamities such as fire, theft, illness or a death in the family. In addition, they can denyindividuals the opportunity to make meaningful improvements to their livelihoods through small businessor other investments. Many stakeholders believe that technology will play a vital role in expanding financial inclusionworldwide. Technology will certainly be an important factor, particularly in regions such as Africa, wheremobile telephone penetration has expanded more rapidly than physical banking infrastructure. Mobilebanking has also proved successful in countries such as the Philippines and South Korea. It is highly unlikely,however, to be a panacea, as access to transaction services does not equate to access to full banking services. In this report, we examine the financial inclusion story as it now stands, both in developing and developedcountries. We then look at examples of initiatives designed to address the problem from around the world,and assess the most promising approaches from both the private and public sectors. Finally, we consider whatthe next wave of innovations in targeting exclusion might bring. Social Intelligence 07
  7. 7. banking for billions: increasing access to financial services08 Social Intelligence
  8. 8. 1. financial inclusionThe problem:in both high and lowincome countries,not having accessto savings accountsand loans stiflesbusiness andexacerbates hardship Social Intelligence 09
  9. 9. banking for billions: increasing access to financial serviceswho arethe financiallyexcluded?Financial exclusion and poverty the unbanked will often find it more time,” says vidar Jorgensen, presidentare linked in a self-reinforcing cycle. difficult to access other services, such of Grameen america, a non-profitindividuals who work in the informal as healthcare, education and even microfinance organisation. “When yousector have incomes that are often employment. this leaves them without don’t have a cheque account, you haveunpredictable and unreliable. even a access to the tools and opportunities to do a lot of running around just tosmall crisis, such as injury or illness, that are necessary to pull themselves make payments.”can quickly lead to significant financial out of poverty and become part of Moreover, payments that are notproblems. debts escalate and may be the real economy. “the impact is made through traditional means canserviceable only by selling household tremendous when it comes to just the often be more expensive, which againpossessions or paying extortionate basics of life,” says Kadita tshibaka, reinforces the cycle of poverty. “there’sinterest rates charged by illegal or president and chief executive of an annual poverty premium of aboutunofficial lenders. “in times of crisis – opportunity international, one of the £1,000 in the uK,” says veronika thiel,such as the current global economic world’s largest and longest established a researcher in the access to Financedownturn, or when global food prices networks of microfinance institutions. team at the new economics Foundation,spiked – borrowers often have to make “We’re talking about being able to a think-tank. “everything becomesthe choice between putting food on the feed oneself, send children to school, more expensive if you don’t have atable and repaying the loan,” says Mary have shelter, have affordable healthcare bank account.”ellen iskenderian, president and chief – everyday needs depend on financial the lack of a bank account can evenexecutive of Women’s World Banking. inclusion.” hinder employment prospects. some“often, they will choose to repay the these are not issues that are companies may be reluctant to takeloan because access to capital is still exclusive to developing countries. in on an individual to whom they cannotso constrained and they have so few Western economies, where food and make automated credits because theyoptions.” the need to repay lenders shelter are often taken for granted, life will have to make complex alternativereinforces poverty because, in many is much harder and more expensive for arrangements for payment of theircases, borrowers will be forced to sell individuals without access to formal salary. perhaps less overtly, companiesvital assets, such as the family business, financial services. “the problem with may also be suspicious of employeesjust to generate cash for the loan. poverty is that it takes up all your who lack access to banking services.£1,000The estimated additional annual costs forUK individuals without a bank account10 Social Intelligence
  10. 10. financial inclusioncaSe STUdygender and exclusionFinancial exclusion rates are generally higher for some african countries, women have no formal propertywomen than for men. in Zambia, for example, 68.4 per cent of rights and are barred from having land titles. this giveswomen are financially excluded compared with 64.4 per cent them no collateral with which to secure a bank loan; if theirof men, according to Finscope, a survey of financial inclusion husband signs for the loan on their behalf, their autonomyconducted by the FinMark trust. efforts to improve financial may be curtailed. Moreover, many cultural and familyinclusion, for example through the provision of microfinance, restrictions remain in place. in Malawi, for example, a wifehave often been targeted at women. the fact that one of the whose husband dies has to surrender her possessions –world’s leading microfinance institutions is called Women’s including all financial assets – to his family.World Banking is symbolic of the role that gender plays in “it’s a tangle of issues when you talk about women’sfinancial exclusion – it is estimated that women make up some economic empowerment,” says the WWB’s Ms iskenderian.80 per cent of the world’s microfinance clientele. “For example, savings are quite often a positive force in in many countries, the financial exclusion of women women’s lives. However, it’s not just about the financeshas been enshrined in law. regulations such as those that or economics – there’s a whole set of other things.” tobar a woman from opening a bank account without her illustrate this point, she cites the example of women whohusband’s permission were once commonplace. “in the mid- take out micro-loans with a compulsory savings component1980s, we saw a lot of countries, particularly those colonised attached to the account. this can create problems forby the French, moving away from napoleonic law under women when their husbands get wind of the savings. “Hewhich women were considered in the same categories as would force, often with physical violence, the women tominorities and the mentally distressed,” explains Jacqueline withdraw the savings and pay down the balance rather thannovogratz, founder and chief executive of acumen Fund, continuing to save,” she says.a new York-based non-profit venture fund that uses in some countries, it remains difficult or culturallyentrepreneurial approaches to tackle global poverty. “that unacceptable for a woman to work, let alone to take out a loanhas changed from a structural perspective quite radically and start a business. “in some cultures, women aren’t expected Boarded-up houses in Detroit, usa,throughout the world.” today, many of these regulations to leave the household,” says Ms novogratz. “so you might showing thathave been altered, but this historical precedent has left a have perfect regulation at the financial institution level, but financial exclusion is an issue in thelegacy of gender-skewed exclusion. need a different way of accessing those women who aren’t able West and not just the even more problematically, some restrictions persist. in to walk through the streets.” developing world Social Intelligence 11
  11. 11. banking for billions: increasing access to financial services where are the financially excluded? While the highest proportion part of migrant communities: “to get a and other service providers, such as of the unbanked live in the world’s loan in this country, you need income cheque cashers and payday lenders. poorer countries, financial exclusion and collateral, and our customers have one problem often encountered is also a widespread problem in more neither regular income nor collateral.” in attempts to assess the scope of developed economies. the financial immigrant status, demographic the problem is that estimates of the crisis has exacerbated this situation, divides such as age, and economic and numbers of financially excluded are not as many households have found employment status, all contribute to consistent. in the Us, some 106 million themselves unable to refinance their the problem. individuals are underbanked, according mortgages or access loans to buy And while the rate of access to to the Center for Financial services household goods. “our customers financial services may be considerably innovation (see chart below). however, are excluded all the time, regardless higher in developed countries, many the Federal Deposit insurance of the credit crunch – this is business households remain underbanked – that Corporation, which protects deposits as usual for them,” says grameen is, lacking an account at a mainstream in Us bank accounts, estimates that America’s Mr Jorgensen. Many of the financial institution, or using a there are 28 million unbanked and 45 Us’s unbanked individuals, he adds, are combination of mainstream banks million underbanked people in the Us. Bank account ownership a survey of underbanked adults in the US Do you currently have If you do not currently have a If you have not had an account a bank account? bank account, have you had an account in the last six months, have you ever in the last six months? had a bank account? 100 100 100 83% 80 80 80 60 60 60 49% 51% 0% 48% 48% 41% 40 40 40 source: ‘the CsFi underbanked 17% consumer study: 20 20 13% 20 Underbanked consumer overview and marketsegments fact sheet,’ 0 0 0 CsFi, June 2008 checking savings none checking savings none checking savings none 12 Social Intelligence
  12. 12. financial inclusionGlobal access to creditthe number of bank loans in a country correlates to economic development bank loans per 1,000 adults 50.0 or fewer 50.1- 300.0 300.0 - 800.0 800.0 or more No data source: Consultative group to Assist the poor (CgAp)Global access to savingsthe number of deposit accounts in a country correlates to economic stability deposit accounts per 1,000 adults 500.0 or fewer 500.1- 1,000.0 1,000.1 - 2,000.0 2,000.1 or more No data source: CgApSeven countries have fewer than 1 ‘the CsFi underbanked consumer study: Underbanked100 deposit accounts per 1,000 adults consumer overview and market segments fact sheet,’ CsFi, June 2008 Social Intelligence 13
  13. 13. banking for billions: increasing access to financial services 2 Financial Services Across Europe, the figures vary widely Commission. In the UK, the extent of the the banked by demographics and also Provision andPrevention of Financial by country, with financial exclusion problem is such that the government explain the reasons behind individuals’ Exclusion, European applying to one per cent or less in launched a Financial Inclusion Task unbanked status. In October 2007, the Commission, Directorate-General Denmark, Belgium, Luxembourg, and Force in 2005, which is charged with government renewed its commitment to for Employment, the Netherlands while in Poland, the monitoring government progress the issue with a new Financial Inclusion Social Affairs and Equal Opportunities; figure is 40 per cent and in Latvia, and making recommendations. The Fund of £130m to cover the periodInclusion, Social Policy 48 per cent, according to the European following charts show the breakdown of between 2008 and 2011. Aspects of Migration, Streamlining of Social Policies, March 2008 Banked status marginally banked/fully banked status by various demographic subgroups in the UK (%) all 7 93 England 7 93 country Scotland 8 92 Wales 10 90 Men 5 95 sex Women 9 91 18-24 5 95 25-44 3 97 age 45-64 7 93 65+ 24 76 HH income 16 84 £10k-£20k 7 93 £20k+ 1 99 key owned outright 6 94 owned with a mortgage 1 99 tenure Marginally banked privately rented 5 95 socially rented 21 79 Fully banked working status Source: ‘Access to financial services by working 2 98 those on the margins of banking,’ not working 13 87 British Market Research Bureau retired 15 85 (BMRB), 2006 14 Social Intelligence
  14. 14. financial inclusionUnderbanking causesreasons behind unbanked individual status in the UK Base: all Respondents without an active Bank account n = 431 Reasons outside Respondent’s contRol 33% Refused by bank/BS due to uncreditworthiness 11% Refused by bank/BS due to lack of adequate proof of ID 3% Don’t have enough money 20% Reasons within Respondent’s contRol 68% Prefer to use Post Office Card Account 19% Rely on using partner’s account 19% Prefer to manage cash-only budget 18% Never needed an account 15% Use savings account 7% Rely on bank account of someone other than a partner 2% Other reason 19% The Treasury-sponsored UK Financial exclusion, and two million people are Levels of financial exclusion also tendInclusion Taskforce is trying to reach two unbanked4. In developing countries, the to increase with age. Governments facinggroups it has identified as marginally proportion of financially excluded rises ageing populations must ensure thatbanked: individuals who do not own (either dramatically. The World Bank estimates older age groups continue to have accesssolely or jointly with a partner) a current that in some countries fewer than 10 to financial products that are appropriateaccount or basic bank account (although per cent of people have access to formal for their stage in life. One problem isthey may have a post office card account or financial services. In Cambodia the figure that financial products can exclude thea savings account) and households in which is 20 per cent, in Ghana 16 per cent, in over-50s, many of whom remain active fora bank account is not available, or is not Nicaragua and Tanzania just 5 per cent. far longer than their parents did. Anotherused for day-to-day money management. Despite economic progress in many of issue is that an expanding population of The taskforce’s fourth annual report, these regions, financial inclusion remains older people will include more individualspublished in December 2009, found that unevenly spread. The difference in the with physical and cognitive difficulties,about 890,000 individuals in 690,000 extent of financial inclusion between making it harder for them to access somehouseholds do not have access to a bank developing countries can be striking. Some financial products.account of any kind, down from 2.1 million African countries have relatively high rates A recent report by Age Concern5, a UKindividuals in 1.4 million households the of inclusion: for example, 47 per cent of the charity, identifies a number of obstaclesyear before. This sharp reduction may be population of Botswana and 39 per cent that may prevent people from buying theas much to do with the way the taskforce of Gabon has access to financial services, types of financial products that will suitcounts the unbanked as any actual while the figure for South Africa is 63 per their needs in later life. These includereduction. Whereas previous surveys cent – a considerably higher proportion technological and cultural barriers forincluded people who did not state whether than in many other Sub-Saharan countries. those who may be wary of buying financial 3 Access to Financial Services by thosethey had a bank account or not, the most Financial exclusion is unevenly spread products over the internet, and financial on the Margins ofrecent survey only counted those who within countries as well. There tends to barriers such as high premiums for Banking, prepared for the Financial Inclusionpositively affirmed they did not have an be a significant rural-urban divide, with individuals over a certain age. Taskforce by BMRBaccount. When respondents who did not financial institutions facing a significant Some older people also face physical Social Research, November 2006state whether they had an account were challenge in reaching remote rural barriers that restrict access to financialincluded, the number of unbanked was populations. The distinction between services, such as when branch visits are 4 Financial Inclusion: The Way Forward.1.85 million, rather than 890,000. the formal and informal economies can required. The UK’s Financial Inclusion Task HM Treasury, Meanwhile, the Financial Inclusion often be somewhat blurred. For example, Force found that 10 per cent of people over March 2007Centre, a British think-tank, estimates some workers may be employed on lawful the age of 65 were likely to find it difficult 5 An Inclusivethat more than five million households terms but be paid in cash without formal to use ATM machines, compared with just Approach to Financial Products, Ageare seriously affected by financial payslips or proof of income. one per cent of 16-24-year-olds. Concern, 2009 Social Intelligence 15
  15. 15. banking for billions: increasing access to financial serviceswhat preventsfinancialinclusion?The image of The financiallyexcluded as poor individuals living on The vastness of africaone or two dollars a day who are forced reaching Africas remote populations is the challengeto keep their money under a mattressand borrow from loan sharks is a vastlyoversimplified one. The factors behindthe inability to access formal financialservices are not always obvious. “one simple but widespread problem United States of Americais lack of an iD because [at a minimum] 9,372,180 sq kmit’s what you need to have a bank Indiaaccount,” says David morrison, executive 3,166,830 sq kmdirector of the United nations capitalDevelopment fund (UncDf), which Argentinainvests in the world’s least developed 2,766,889 sq kmcountries. in many developed countries,where it’s routine to present a driver’slicence for something as simple as Western Europe 4,939,927 sq kmopening an account at a video rentalstore, the value of that iD is often takenfor granted. Africa 30,301,596 sq km geography is also an issue. not alltopographies lend themselves to the Other named countriesdevelopment of traditional banking 29,843,826 sq kmsystems, leaving their populationsunderserved when it comes to financial China 9,597,000 sq kmproducts. “We are investing in researchin the South Pacific because thereyou have small island states wheretraditional banking models don’t makesense,” says mr morrison.Not all topographies lend themselves tothe development of traditional banking16 Social Intelligence
  16. 16. financial inclusion1 in 3,000When the war ended in the DemocraticRepublic of Congo, there were 20,000bank accounts among 60m people. Twoyears later there are still only 200,000 Dr gerhard coetzee, general Unexpected disruptions to banking to find work on a temporary basis aremanager of micro enterprise finance services, such as natural disaster highly unlikely to benefit from formalat absa (majority owned by Barclays), or war, can mean a sudden and financial services, and the itinerantagrees. “africa is one of the continents sometimes protracted shift in personal nature of their lifestyle makes it difficulton which it’s most expensive to serve circumstances. Roughly half of the for them to have consistent access tomicrofinance clients because of the UncDf’s client countries are post-conflict basic services, such as current accountsreality of the continent – basically, the states – particularly in africa – in which and savings.main cost is geography,” he says. The formal systems have partially or entirely meanwhile, in more developedsituation is different in countries such collapsed. mr Tshibaka points to the economies, migrant workers, illegalas Bangladesh and india, Dr coetzee conflict in Darfur, which caused the or recent immigrants and asylumsays, because the population density displacement of more than one million seekers often operate outside formalis higher: “no one will argue that the people, as a prime example. economic systems, effectively barringmethodologies of asia won’t work The crippling effects of war on the them from access to formal financialin africa because we’ve seen them availability of even basic banking services services. in some countries, theseworking in africa – but the interesting linger long after the conflict is over, as populations are growing. in the US, forthing is we’ve never built up to the has been shown in the Democratic example, between 1970 and 2007 thenumbers in the institutions in africa Republic of congo (DRc). “Two years foreign-born population rose from 9.6that you have in asia.” grameen has ago when the war ended there was million to 38.1 million, with immigrantseight million clients in Bangladesh, while a population of 60m in DRc, but only from latin america and the caribbeanequity Bank in Kenya – perhaps the 20,000 formal bank accounts, of which accounting for more than half of thisbest-subscribed in africa, according to 10,000 were dormant,” says Jyrki Koskelo, population (54 per cent) comparedDr coetzee – has three million. vice president for europe, central asia, with 18 per cent in 1970.6 Displaced people, whether as a latin america and the caribbean, “There are recent immigrants whoresult of war or natural catastrophes, and global financial markets, at the largely don’t trust their banks, or peopleconstitute large populations for whom international finance corporation (ifc), who have misused bank accountsaccess to formal financial services an investment arm of the World Bank. intentionally or unintentionally and are nois lacking. over the last decade, aid “Today, while the market has grown at a longer allowed them,” says mr Jorgensenagencies have moved away from very fast rate to 200,000 bank accounts, of grameen america. language can also 6 Immigrantstreating refugees as dependants and this still leaves most people in the be a barrier. “it’s not just people putting and the Currentfocused on fostering self-sufficiency country financially excluded.” money under mattresses and it’s not Economic Crisis: Research Evidence,among these communities – so Transient or migrant populations also just driven by interest rates,” says ms Policy Challengefinding ways to give them access to represent a significant proportion of the novogratz. “it’s also driven culturally, and Implications, migration Policythe financial tools to support that self- financially excluded. Rural dwellers in by people not feeling comfortable even institute, Januarysufficiency has been a challenge. developing countries who come to cities walking through the doors of a bank.” 2009 Social Intelligence 17
  17. 17. banking for billions: increasing access to financial services18 Social Intelligence
  18. 18. 2. financial inclusionTowards a solution:banks are finding newways to connect withcustomers, usingmobile technology,micro-investmentmodels andbranchless banking. Social Intelligence 19
  19. 19. banking for billions: increasing access to financial services Efforts havE long been made to In the 1970s, Muhammad Yunus, a very low default rates, by holding the address financial exclusion in developing Bangladeshi banker and economist, whole group collectively responsible countries. from the 1950s, subsidised started looking for a more practical for the loan. Whenever one individual credit programmes run by agricultural way to help the poor. he made his first was unable to make a repayment, the development banks made loans targeted transaction in 1976, lending Us$27 to others in the groups would make up at specific communities, but these were a group of 42 villagers who needed to the shortfall. But this rarely happened not without their problems. repayment buy raw materials for the bamboo stools because each individual felt a strong rates were usually low and many of the they made and sold. obligation to the group and would funds found their way to more affluent he found that by giving loans to consequently make every effort to farmers, rather than to the very poor. groups of borrowers he could ensure repay their share. Banking in Africa providers of finance to low-income categories by number of African clients (at 2006) Savings, SME loans, debit credit cards, forex, mobile banking, internet Individual banking group, education housing loans, leasing, insurance NBFIs * savings 2.5 million NGO MFIs Commercial 1.9 million Banks Individual 5.6 million group savings Village savings Savings, money loans transfer, pensions groups Post Banks Credit Unions/ 4 million Co-operatives 13 millionsource: ‘Diagnostic to action: Microfinance in africa’, africa Savings, individual Microfinance action loans, housing loans, forum, 2007. life insurance * note: nBfIs are non-bank financial institutions 20 Social Intelligence
  20. 20. financial inclusion today, the microfinance industry is a a moneylender profiting from the poor. comprise 42 per cent of MIv investors, global movement whose institutions serve others argue that evidence of commercial followed by retail investors at 34 per cent, about 80 milllion people in developing success will encourage more enterprises public investors at 21 per cent and other countries, according to the World Bank. to enter the business of lending to MIvs at 3 per cent. the survey predicted While micro-loans were traditionally the financially excluded, and that this that performance of MIvs would drop offered by non-profit, non-governmental free market approach will increase below 3.5 per cent by the end of 2009. organisations (ngos), commercial banks financial inclusion more quickly than if however, the number of MIvs and are now exploring possible opportunities improvement efforts were left entirely in their total assets has continued to grow for microfinance offerings, as seen in the the hands of the non-profit sector. strongly. they grew by 31 per cent in chart opposite, illustrating the different Microfinance investment vehicles 2008, much slower than the 72 per providers of microfinance in africa. (MIvs) are perhaps the more acceptable cent growth of 2007, but still impressive the commercialisation of microfinance, side of the commercialisation of considering the overall economic however, is not without controversy. In microfinance, and they have seen huge picture. foreign capital investments in 2007, Compartamos, Mexico’s biggest growth over the past few years. MIvs are microfinance passed the Us$10bn mark microfinance bank, launched a hugely investment vehicles focused on investing in December 2008, with more than half 1 MIV Performance successful initial public offering that in microfinance. they provide returns of this managed by MIvs. the survey and Prospects: divided the microfinance community. to investors and are independent of the found that MIvs continued to grow at an Highlights from the Critics said that the bank, which was MfIs they fund. according to CgaP’s annualised rate of 16 per cent during the CGAP 2009 MIV Benchmark Survey, charging interest rates of at least 2009 MIvs survey1, institutional investors, first half of 2009 and there were very few CGAP September 79 per cent a year, was no better than foundations, ngos and networks fund redemptions as a result of the crisis. 2009 Growth of microfinance investment vehicles MIVs have continued to show strong returns despite the effects of the global recession Number of MIVs total assets growth120 100% 103100 92 80% 72% 68%80 75 80 60% 6260 key 58 43 40% All MIVs40 36 31% CGAP Survey: 40 29% participating 30 MIVs 25 23 20%20 source: MIV Performance and Prospects, CgaP 0 0% september 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 Social Intelligence 21
  21. 21. banking for billions: increasing access to financial servicesbeyond creditMicrocredit is JUst one piece of for financial inclusion, as the bulk of its as the “forgotten half” of microfinance.the broader financial inclusion puzzle. population still inhabits rural areas and lives there are several barriers to offeringincreasingly, governments, donor in extreme poverty. the 2006 Finscope savings services, not least the substantialorganisations and others are recognising country survey found that more Ugandan operational costs involved in managing athat a range of financial products – adults used microinsurance than traditional large number of small savings transactionsincluding current accounts, savings insurance (4.6 per cent, against 3 per cent), to which depositors want easy access.accounts and insurance policies – is also suggesting that microinsurance products regulation is much stricter for organisationscritical to promoting social and economic may be better suited to the needs of the taking deposits, to ensure depositors’welfare. this requires the participation of a population. the Finscope report observes money is kept safe. And initiatives arewhole range of stakeholders, from private that a major stumbling block to increasing limited by the costs and other challenges ofsector banks and the providers of general the penetration of insurance products into reaching customers. in Malawi, for example,business infrastructure to governments lower-income brackets is simply that the opportunity international has a fleet of fiveand policymakers. opportunity cost of channelling disposable armoured trucks to take banking services to Many innovative products are now income into insurance products remains too rural poor.emerging. in india, icici Bank offers high to make it viable for the very poor, even such challenges have led to theinsurance products to low-income and rural with the introduction of microinsurance. increasing popularity of community-customers that include health and weather still, savings accounts are what many managed services. recognising that mostinsurance, while in Malawi, opportunity believe will be most critical to poverty MFis tended to emphasise credit andinternational has developed a weather- alleviation and the expansion of financial were not licensed to take deposits, VsLindexed insurance product in partnership inclusion. “We’ve definitively proven the (Village savings and Loan) Associationswith the World Bank. this type of insurance poor can be banked and can repay,” says tried a different approach. rather thanmitigates the devastating consequences WWB’s Ms iskenderian. “But the poor also expose customers to credit risks, theyof drought or excess rain and also helps save and, in many of the countries in which intermediate small local pools of capital tofarmers to access credit, as banks that we work, up to 40 per cent of monthly satisfy the cash management needs ofmight have been unwilling to lend to “risky” household income is saved. so having a individual households. the savings createdcustomers (farmers who would not be able safe place to save is a tremendous need on can then be used to offer small loans,to make repayments if a drought destroyed the part of low-income populations.” providing communities that previouslytheir crops, for example) now see these in the absence of deposit accounts, were financially excluded with a first stepborrowers as creditworthy. individuals are forced to keep savings in from using more risky informal savings Microinsurance is a risk transfer device insecure places and risk losing them to mechanisms to more formal financialcharacterised by low premiums and theft or disaster. some would-be savers services. the model was launched by aidlow coverage limits, and designed for may be inclined instead to purchase a agency cAre international in Niger in 1991,low-income people not served by typical tangible asset, such as a cow. the trouble and is now being used by almost onesocial or commercial insurance schemes. with such assets, however, is that their million participants in Africa, Latin Americaits ultimate goal, as outlined in 2008 owners may have trouble selling them and Asia.research conducted by FinMark trust, or have to sell them at a loss at the time Meanwhile, some microcreditis “to enable the poor to mitigate their when money is needed. institutions, including Bank rakyatmaterial risk through the insurance market there is a huge appetite among poor indonesia (Bri), have conducted marketin order to reduce vulnerability.” A case populations for secure savings and related research on the demand for savings,study in colombia, where microinsurance financial products. Having savings boosts which has enabled them to build popularis distributed mainly through two large people’s confidence and offers them products. At Bri’s local banking system,co-operatives, La equidad and solidaria, comfort. several studies have indicated that there were about six times as manyshows that non-traditional channels can be ownership of assets has more beneficial deposit accounts as loans in 1997; at itsmuch more effective than the conventional effects than income levels – including on Bank dagang Bali, the ratio was 30 to model at offering coverage in wealth, health, and political participation. Meanwhile, the more it learned about itsareas where there has previously been little Mr Morrison, of the UNcdF, says that customers’ saving needs, the more Brior no penetration. Between them, the two savings are the product in highest demand itself benefited. Between 1973 and 1983,co-operatives account for 62 per cent of the when peace breaks out after conflict. the bank’s first 10 years of operation, itcountry’s formal microinsurance market. However, the demand has largely gone mobilised Us$17.6m; between 1984 and Uganda presents a special problem unmet. saving has often been described 1996 it mobilised Us$3bn.22 Social Intelligence
  22. 22. financial inclusion caSe Study employment firstThere are Those for whom microfinance is not an option, the whole microfinance industry was built on commercial CGaP provides rural Bangladeshisince a prerequisite for access to even the most basic financial principles of not giving anything away,” says Ms Littlefield. women with grantsservices is access to some kind of regular income. This group “But finance and financial services don’t tend to create in a microfinance scheme aimedis on the lowest rung on the poverty ladder. “The excitement economic opportunity so much as grow what already exists.” at people on thearound microfinance has enabled governments to feel that all William reese agrees. as president and chief executive of lowest rung on the poverty ladderthey need to do is stimulate microfinance and be done with the International Youth Foundation, which works to strengthenthe problem,” says elizabeth Littlefield, chief executive of the education, health and work prospects for children and youngConsultative Group to assist the Poor (CGaP), an independent people, he argues that financial inclusion should be extendedpolicy and research centre housed at the World Bank and to more young people. But 15- to 25-year-olds tend to bededicated to advancing financial access for the world’s poor. unemployed (at two or three times the rate of adults over 25)“That leaves out one billion people,” she says. To reach those which means first helping them find a source of income thatpeople, CGaP is experimenting with a graduation methodology generates the cash to be banked. “The challenge is how to getfirst developed by BraC, a Bangladeshi microfinance more young people into some sort of sustainable employment,”organisation. The BraC programme has “graduated” 800,000 he says. “Financial services and financial literacy are veryhouseholds from safety-net schemes to microenterprises since important for all people, but they are a function of whether orthe programme launched in 2004. not you have the money to manage.” CGaP asks villagers to identify groups of women they deem Mr reese’s comment refers to young people, but carries athe poorest in their community and then provides them with broader point – that financial products, even informal ones, aregrants for current income (such as a chicken) and an asset not everything. It can be argued that a steady, reliable income(perhaps a goat that can produce baby goats, which can be or job needs to come before a bank account and that, in somesold) plus training in how to manage those assets, save money communities, lending schemes are getting ahead of themselvesand eventually apply for a loan from microfinance institutions. by developing banking options before supporting more“This kind of programme is new and pretty heretical, because employment opportunities. Social Intelligence 23
  23. 23. banking for billions: increasing access to financial services technology: making critical connections The rapid developmenT and send money to other mobile users then, via a mobile phone banking facility, adoption of mobile phone technology by text message. The system works be transferred to others or used to buy in developing countries has vastly through airtime resellers, who, in addition airtime. Clients receive a linked debit card outpaced the implementation of costly to taking cash to top up mobile phones, supported by the masterCard system, landline infrastructure. as a result, other can also load them with cash value. This which can be used almost anywhere industries are now looking to mobile can be transferred to another user, used to draw money or pay for goods and telephony to help leapfrog other types to pay for goods or reconverted into cash services. While Wizzit serves mainstream of infrastructure-intensive systems such by the airtime agent at another time. customers, microfinance specialists see as bank branch networks. in Kenya, for in South africa, Wizzit has rolled this as another possible way of extending example, the m-pesa mobile money out a successful model through which banking services to clients who are more transfer service means users can deposit money is deposited into a savings or remote. The chart below explains the cash through their mobile phones and transmission account; the money can different uses of Wizzit. Mobile banking in South Africa how Wizzit users conduct banking and payment transactions, per month electronic Bank Transfer pay Store accounts Set up debit order note: Figures based Set up Stop order Cash Withdrawal money Transfers on average number Cheque deposit mini-Statement Balance inquiry of transactions of pay electricity Cash deposit each type conducted Buy airtimemonthly, weighted by the number of users who say they conduct Total them. not all users conduct all types of transactions. The “average basket” should be viewed as All bAnking the mean usage trAnsActions 12.8 3.7 2.7 1.7 0.8 0.8 0.7 0.7 0.5 0.4 0.4 0.2 0.1 among surveyed users, rather than a profile of a typical Wizzit user. row two shows all transactions trAnsActionsvia all Wizzit channels, using wizzit 9.3 2.6 1.9 1.3 0.7 0.5 0.5 0.5 0.5 0.4 0.3 0.1 0.1 including mobile phone, aTm and (All chAnnels)partner bank branches.row three shows only Wizzit transactions trAnsActionsconducted via mobile using wizzit 6.6 2.6 1.9 0.1 0.1 0.5 0.4 0.4 0.2 0.2 0.2 0.1 0.0 phone. Source: ivatury and pickens (mobile phones) (2006) 24 Social Intelligence
  24. 24. financial inclusion mobile phones are just one of many documentation is necessary to open such as South africa, Kenya, Zambiatechnologies now emerging that could an account. This assists illiterate and Uganda. “The potential isgive the financially excluded more people by eliminating the need for monumental,” says elizabeth littlefield,effective methods to manage their form filling while protecting against chief executive of CGap. “Globally, itmoney. Smart cards and other forms fraud. in malawi, for example, where is estimated that there are one billionof cashless transaction devices are tradition demands that a widow has people in emerging markets who don’tbeing seen by policymakers and non- to surrender all her possessions to have a bank account but who do have aprofit organisations as cost-effective her dead husband’s family, biometric mobile phone – so that’s a billion peopleways to broaden the reach of financial fingerprint readers make it more difficult right there that would like to use theirtransaction services. in the maldives, for relatives to withdraw funds from mobile phone for banking services.” Thefor example, CGap is working with the the widow’s bank account. chart below shows the prevalence ofgovernment to spread the use of debit These and similar technology mobile phones in africa and in a range ofcards for payments in a country made solutions are seen by many experts developing countries.up of hundreds of small islands, where as a huge opportunity to accelerate The feedback on such services isfishermen have to get on a boat just to the expansion of financial inclusion, hugely positive. “We did a survey of thereach a physical bank branch and teller particularly to remote and rural areas. m-pesa users to figure out how this wasto cash cheques or deposit money. Certainly, the concept has already changing their life,” says ms littlefield, opportunity international uses proved highly successful in many “and 83 per cent of the respondentsbiometric technology in its services, countries, including the philippines, said not having m-pesa would have awhich means that no identification South Korea and african countries large negative impact on their life.”Using mobile phones as a banking platformpenetration of mobile phones and bank accounts in selected countries gross nAtionAl income mobile bAnked per cApitA (us$) penetrAtion (%) (%) mexico 7,310 54.71 25 south AfricA 4,960 77.06 46 brAzil 3,460 56.03 42 AlgeriA 2,730 65.95 31 chinA 1,740 34.71 42 philippines 1,300 49.18 26 Sources: GSma (regulatory Framework for egypt 1,250 27.35 41 mobile Banking). Gni per capita from World Bank (2006). nicArAguA 910 32.62 5 mobile penetration from GSmas Wireless intelligence. indiA 720 14.76 48 population banked from honohan (2007). only China and india pAkistAn 690 32.64 12 show higher banking penetration than mobile penetration. kenyA 530 19.92 10 rapidly growing mobile penetration in both countries means bAnglAdesh 470 15.03 32 that it is probably only a matter of time before they fit the pattern. Social Intelligence 25
  25. 25. banking for billions: increasing access to financial services50%The reduction in costs to banks ofdelivering financial services when usingmobile banking instead of branches Mobile banking services can represent operating costs and therefore lowering One project that may prove usefulsignificant cost savings to the client. the high interest rates microfinance was launched in February 2009 byServices like M-Pesa have driven down institutions have to charge to cover the the UK government’s Department forthe cost of banking for users, who no cost of administering such small loans. International Development. Dubbedlonger have to travel long distances to Other problems can arise from use FAST (for “facilitating access to financialdeposit or withdraw money, by five to 10 of antiquated systems. “One institution services through technology”), thetimes. “You can’t only look at the cost told me that on their spreadsheet when three-year, £1.4m project will supportto serve – that only takes account of the they get their 500th client the first drops the introduction of “branchless banking”point of view of the institution – but you off the edge – so they can’t do any in several developing countries, andmust also look at the cost for the client,” analysis or cross-selling,” says Bridget track its progress. If it is shown to work,says Dr Gerhard Coetzee, who oversees van Kralingen, who leads microfinance it will be rolled out more broadly. FASTthe microfinance division of Absa. “How initiatives at IBM, which is helping the also plans to carry out research into howfar do they have to travel to get to their Grameen Foundation develop an open- to spread the technology, and help tonearest service point? How long do they source microfinance software platform. develop industry standards to regulate it.have to wait in queues? What is the The system, called Mifos, streamlines However, technology alone cannotopportunity cost because they are not lending processes and cuts operational solve financial exclusion. Although theat their business or farm?” and technology costs for microfinance adoption of mobile phones and other Even in South Africa, which probably institutions. “Another microfinance technology in developing countrieshas the highest number of bank organisation said that when they go to has been impressive, penetration is farbranches proportionally in Africa, Dr see donors for more funding, it takes from universal. For those individualsCoetzee says, it can cost 30 rand (about them a month and a half to estimate who do not own mobile phones or haveUS$4) to get to and from a bank in their consumption of capital,” says Ms access to the internet, the problems ofGauteng, a well-developed province. van Kralingen, “so we see an incredible financial exclusion remain, and could in“For some clients on the eastern demand for this.” fact become even more entrenched. Inseaboard it costs 70 rand to get to the If these lower costs can be captured, addition, technology-based solutionsbank, and that’s very costly.” that means micro-lenders can extend can be unreliable and subject to CGAP has found that mobile banking their services to more borrowers at lower glitches, especially in countries wherecan lower the cost for banks of delivering costs. “The big challenge over the next technological know-how may befinancial services by more than 50 per few years will be how to use technology lagging behind other countries. Finally,cent. That represents a huge saving to reduce the costs and improve the some commentators have argued thatto financial institutions, which may be service,” says the IFC’s Mr Koskelo, regulation has been slow to catch upreluctant to invest in branch networks. “and then by doing that come up with with technological innovation, andIn turn, IT also has the potential to mechanisms where it is feasible to bring suggest that consumers may lacktransform what goes on behind the sustainable services to a significantly the protection they need from mobileteller’s counter, dramatically cutting larger segment of the population.” payments and other services.26 Social Intelligence