Lecture 29 - The emerging industry of inclusive finance. The following will be discussed in this chapter: Building the infrastructure for inclusive finance, financial sector liberalization, what makes a good enabling environment, the architecture for inclusion, licensing rules, market-determined interest rates.
Summary of the Last Lecture • Private Equity for Microfinance • TIAA-CREF and ProCredit • Sequoia and SKS THE EMERGING INDUSTRY OF INCLUSIVE FINANCE • BUILDING THE INFRASTRUCTURE FOR PoorINCLUSIVE financial infrastructure has FINANCE: historically been one of the biggest barriers to inclusive finance in less developed countries As enabling conditions appear, however, far-reaching initiatives suddenly become feasible and financial institutions start new projects • BUILDING THE INFRASTRUCTURE FOR Within six years after the introduction of INCLUSIVE FINANCE: regulations allowing retailers to become banking agents in Brazil, the number of Brazilians with bank accounts nearly doubled • BUILDING THE INFRASTRUCTURE FOR Financial infrastructureFINANCE: means different INCLUSIVE things to different people We think of it as the shared building blocks that allow institutions to deliver services The building blocks include operating platforms such as ATM networks, smart card systems, and financial software • BUILDING THE INFRASTRUCTURE FOR TheyINCLUSIVE also include institutional FINANCE: arrangements, such as credit reporting bureaus, clearing and settlement systems, rating agencies, and collateral registries • BUILDING THE INFRASTRUCTURE FOR Many of the most important arrangements INCLUSIVE FINANCE: are devoted to getting information about clients, transactions, and institutions into the right places at the right times Other arrangements raise confidence about agreements between people or institutions • BUILDING THE INFRASTRUCTURE FOR The INCLUSIVE public and privateFINANCE: sectors have distinct roles in building strong financial infrastructure, and the best environments come from a well-functioning partnership between both While the public sector determines the regulatory framework— the rules of the game— • BUILDING THE INFRASTRUCTURE FOR the private sector builds market INCLUSIVE FINANCE: mechanisms like credit information and technology In the lecture that follow we will examine portions of this shared infrastructure that are especially important for financial inclusion: credit bureaus, payments systems, and the market infrastructure for investments • BUILDING THE INFRASTRUCTURE FOR In these areas the private sector takes the INCLUSIVE FINANCE: lead This Lecture departs, however, from the course’s otherwise exclusive focus on private opportunities for a brief digression on the role of government Agreement That Government Is Not a Provider • Government’s best role is to create a functioning market, not to provide financial services, particularly credit When government-run institutions compete with private institutions, it is tempting for governments to favor their banks at the expense of private providers Agreement That Government Is Not a Provider • In Andhra Pradesh, India, for example, state-government shutdown of microfinance institution offices in 2006 was ostensibly justified by inappropriate collections and interest-rate policies at the MFIs Behind the scenes, however, the action was prompted in part by managers of the state government’s microfinance program, who were angry over losing clients to private providers Agreement That Government Is Not a Provider • More generally, India’s regulatory environment favors public-sector banks as the preferred providers of inclusive finance, to the detriment of private actors, both mainstream banks and MFIs Legal Underpinnings • A legal framework that supports financial system operation will include secured transactions laws and collateral registries, land titling, ID systems, and consumer protection legislation Legal Underpinnings • South Africa, for example, has a regulatory body, the National Credit Regulator, dedicated to protecting consumers from unscrupulous practices Born in response to abuses in the consumer loan industry, the National Credit Regulator now ensures that responsible providers are supported and preserves the reputation of the sector as a whole Access vs Stability • Is there a trade-off between access and stability in the financial system? Some regulators have acted as if they thought so Traditionally, the mandate of regulatory authorities has been to preserve stability, a task that appears easier in a financial system with fewer participants Access vs Stability • Inclusive finance requires regulators to pay attention to institutions that serve many people even though monetary amounts may be insignificant Regulators usually think the other way around, on the theory that the large players determine the health of the financial system as a whole, measured by volume of funds, not people served Dedication to access with stability requires investment in supervisory Access vs Stability • A number of past experiments with opening too wide did not go well because they allowed unqualified players Too many players entered for supervisors to keep up with This was the case with rural banks in the Philippines and Ghana, community banks in Nigeria and Tanzania, and consumer finance companies in South Africa, India, and numerous other countries Access vs Stability • In most of these cases supervisors have had to backtrack, overhaul small institutions, close weaker ones, tighten regulations, and seek new partners to shore up the survivors Openness to Different Means of Risk Management • The informality of BOP clients requires regulators to be flexible in their rules for risk management Regulators not generally feel comfortable with informality, however For example, inclusive finance requires banks to accommodate clients lacking standard documentation, but efforts to move toward flexibility have been stopped cold by the rise of antiterrorism and related concerns Regulating for Inclusion: Branchless Banking • Examples from Banco Bradesco and its agents at Brazilian post offices, to the cell phone banking offered by Globe Telecoms, to Visa’s card systems, show the potential of technology to make microfinance much more inclusive very quickly Unfortunately, regulations not move as quickly Work is proceeding in different countries at different rates to allow these technologies to reach their full Political Risks • Because it reaches so many people, inclusive finance can be a very attractive political target, and the bigger it gets, the more attractive it becomes Attention to the political dynamics of inclusive finance is especially important for high-profile corporations getting into the sector Political Risks • High-level political support has sometimes given a major boost to inclusive finance At various times presidents of Mexico, Colombia, and Bolivia each signaled their interest in microfinance, helping to ensure the essential policy changes that created conditions for rapid growth The results of this kind of attention from responsible politicians can be incentives to encourage bank entry into inclusive finance Political Risks • Among such efforts, the subsidy auction program in Chile stands out as particularly well-structured Banks in Chile bid for temporary subsidies to serve low-income clients The subsidies help the banks move up the early learning curve, and when banks no longer need them, they phase out Summary • BUILDING THE INFRASTRUCTURE FOR INCLUSIVE FINANCE: ... Too many players entered for supervisors to keep up with This was the case with rural banks in the Philippines and Ghana, community banks in Nigeria and Tanzania, and consumer finance companies... unions and microfinance banks that specialize in serving lower-income people Licensing Rules • On the other hand, rules should not restrict inclusive finance to the smaller entities; larger banks... inclusive finance remains small and fragmented, often involving only the NGO and cooperative sectors Fortunately, an increasing number of emerging economies, including many in Latin America and Africa,