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Final project
- 1. Financial Inclusion in Gloria SUBMITTED TOWARDS FINAL PROJECT FOR THE MOOC RELATED TO UNLOCKING INVESTMENT AND FINANCE IN EMERGING MARKETS AND DEVELOPING ECONOMIES
- 2. The Scenario I am a government official in the Ministry of Finance in an imaginary Emerging Market country named Gloria, whose currency is called Glory (1 US Dollar (USD) = 70 Glories) The year is 2014. Gloria’s economic and demographic characteristics are similar to India in 2014. A new government has just been elected One of its major planks in the general election was financial inclusion The Government has declared that one year from now, i.e. from mid-2015 commercial banks need to be able to roll out zero-balance bank accounts for people earning less than 50,000 glories per annum 60% of the bank transactions are carried out by public sector banks and the Ministry of Finance is accountable for their financial health
- 3. The estimated financing need The bank accounts should target women as the priority customer and each bank account should have the following features: Zero balance A debit card using the payments interface promoted by the Central Bank of Gloria Accident insurance worth two years annual income of the account owner or the main bread-earner of the family with an upper cap of 50,000 glories An overdraft facility for account owners who act as small entrepreneurs to the extent of 5,000 glories Target is to open 100 million accounts over two three years, with public sector banks accounting for 80% of the target, i.e. 80 million accounts From inception to operation, it would take about 60 USD to setup the infrastructure, open and maintain each account, bringing the total expense to 60* 80 million = USD 4.8 billion, the estimated financing need
- 4. Sources of finance available and mode of access The major sources of finance available are: Domestic Public - Government of Gloria (GoG) can infuse capital in the public sector banks However, if the total amount is sourced in that manner, the Government will fall foul of the Fiscal Responsibility Act since fiscal deficit would be much greater than the 3% of GDP cap that the Act imposes on the government in normal economic circumstances While the GoG’s debt to GDP ratio is about 60%, it’s credit rating is not low enough for the interest rates to be really cheap. So, while debt can provide partial funding, it cannot be used as the sole source Private - Private sector banks can be coaxed and cajoled to increase their targets from 20 million accounts to 40 million accounts since they can source money from Gloria’s strong equity market International Public - Ask for Official Development Assistance (ODA) from friendly nations like Japan and USA who would be willing to help out in such a noble cause Private - Partner with international institutions like IFC to tap sources like impact investors who would be interested through the equity infusion route
- 5. How to address barriers to get impact investors to invest? The impact picture Promoting financial inclusion in one of the largest economies of the world, especially for women The returns picture Public sector banks average profitability has been about 8% over the last five years, much better than the returns available in developed markets The risks picture International executives have rated Gloria as excellent on political stability, macroeconomic conditions and the regulatory environment. However, they have concerns with the legal environment since it takes a long time to enforce contracts in case there is a breach Apart from taking IFC’s help in working with the private investors, GoG can use MIGA’s insurance products to provide guarantees to impact investors in case their investment run into any legal hurdles