FINANCIAL INTEGRATION AND INCLUSION: MOBILIZING RESOURCES FOR SOCIAL AND ECONOMIC DEVELOPMENT

Transcription

1 FINANCIAL INTEGRATION AND INCLUSION: MOBILIZING RESOURCES FOR SOCIAL AND ECONOMIC DEVELOPMENT DOCUMENTS PREPARED BY THE INTER-AMERICAN DEVELOPMENT BANK S VICE PRESIDENCY OF SECTORS AND KNOWLEDGE

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3 KEY STATISTICS 39% of the adult population in LAC has access to an account in a formal financial institution. Untapped market of 230 million adults without an account in the region. Less than 2% of adults in LAC reported using a mobile phone to pay bills or receive money. As of December 2013, Latin America was home to 13% of the world s live mobile money deployments, but more encouragingly had almost 20% of the planned deployments. It is expected that the bottom 40% of the population in LAC will see, on average, a doubling in income over the decade This signals a great potential to increase formal savings. INTRODUCTION Financial inclusion, broadly defined as the access and use of a set of adequate financial services by households and firms, is increasingly recognized as fundamental for development as it can help poor households improve their lives while also spurring economic activity. In particular, a greater access to financial services can contribute to: (i) poverty reduction, by decreasing vulnerability, (ii) an increase in the productivity of Micro, Small and Medium Enterprises (MSMEs), and (iii) greater formalization of firms. At the macro level, there is also evidence that an increase in access to financial services has positive effects on growth and inequality reduction. Despite these benefits, Latin American and the Caribbean (LAC) demonstrates great room for improvement in terms of financial inclusion. While already 39% of the adult population has access to an account in a formal financial institution, this implies that there is an untapped market of 230 million adults in the region. The population that is not participating in the formal financial sector relies in the informal sector to solve their financial needs. Poor households actively manage their financial lives to achieve multiple objectives using informal mechanisms or their own resources. Unfortunately, informal services tend to be more costly, insecure and insufficient. This reference document highlights the role of financial inclusion in the attainment of different development goals and delineates the way in which technological innovations and new business models, such as the use of non-traditional delivery channels and digital payments, can be instrumental in overcoming several of the obstacles that affect the supply and demand for financial services. Financial integration, broadly defined as the process through which a country s financial markets become more closely integrated with those in other countries, has deepened in recent times due the globalization phenomenon. It implies the elimination of barriers for foreign financial institutions from some countries to operate or offer cross-border financial services in others, thereby linking banking, equity and other types of financial markets. This document also discusses the role of the private sector in addressing the important market opportunity that represents the relatively large

4 unserved and underserved market in LAC. DIAGNOSTIC AND TRENDS The Importance of Financial Inclusion for Social and Economic Development The impact of expanding financial inclusion goes well beyond financial deepening and spans over a wide range of development goals. Financial inclusion can improve welfare and can contribute to the reduction of poverty, mainly through reducing the vulnerability of households that are poor or that have been recently lifted out of poverty. Specifically, financial services can reduce the impact of negative shocks by reducing volatility of cash flows, facilitating the maintenance of minimum consumption levels and diminishing potential needs of disinvesting in education or health, which are common coping strategies used by many poor households. Financial inclusion is also crucial for underserved MSMEs, as access to productive financing can be instrumental to increase productivity, sales, and job creation. Access to credit also contributes to greater formalization of firms, an important challenge that LAC faces. In this regard, several studies have also shown that there is a strong inverse relationship between the promotion of digital payments and the size of the informal sector in an economy. Moreover, the ability to transact digitally would facilitate the payment of public basic services and taxes, improving collection, reducing fraud and simplifying the payment for users while simultaneously reducing the need to maintain and transport cash, lowering operational costs for users. Financial Inclusion also matters from a macro perspective. In general, there is a positive relationship between financial deepening of a country and its growth and welfare, measured by GDP per capita. Moreover, several studies have shown that there is a link between financial inclusion and growth as well as reduction in inequality, notably since it disproportionately relaxes credit restrictions on lower-income segments. Given all these potential benefits, during the last years there has been a growing recognition by governments and international organizations of the importance of developing and adopting appropriate measures in support of greater financial inclusion. The creation of the Global Partnership for Financial Inclusion by the G-20 reflects the relevance of this topic in the global agenda of socio-economic reforms. Similarly, many countries are prioritizing financial inclusion in their national development strategies and have started to implement measures such as the use of electronic payment systems for governmental financial transfers and regulations allowing basic or simplified accounts that entail fewer requirements for opening and are thus more adequate for the unserved and low-income population. Many countries have even made specific commitments under the Maya Declaration, the first global and measurable set of commitments by developing and emerging country policy makers to unlock the economic and social potential of the poorest people through greater financial inclusion. Financial Inclusion in Latin American and the Caribbean (LAC) The LAC region still shows improvable levels of financial inclusion in spite of progress in certain fronts like microcredit and the expansion of non-banking agents, broadly defined as those retail or postal outlets contracted by a financial institution to process clients transactions. It is estimated that 39% of the adult population in the region have a bank

5 account, compared to 43% for other middle income countries, which have an average per capita income half that of LAC. In addition, it is estimated that 15% of households and 10% of firms have credit from a regulated financial institution. Importantly, not only the poor can be further included in the system (three-quarters of the adults in the bottom 40% of the income distribution in LAC do not have an account at a formal financial institution), but half of the adults in the top 60% are also an untapped market for financial inclusion. Access and use of other services are also areas with great potential for growth in LAC. In terms of savings, a quarter of adults in LAC reported saving any money during the last year, while only 9% reported doing so at a formal financial institution. Similarly, 28% of adults in the region have access to a debit card. In general, LAC still shows great space for growth in the use of digital payments. While the use of electronic payments is larger in LAC than for the aggregate of middle-income countries (10.3% of adults in LAC reported using electronic payments versus 5.4% of adults in middle income countries), the proportion of the population with access has the opportunity to be less concentrated in the richer and urban areas. Mobile payments in LAC are still emerging and currently a small percentage of the population are using them, with less than 2% of adults in LAC reporting using a mobile phone to pay bills or receive money, whereas this percentage reaches 16% in Sub-Saharan Africa. However, e-commerce in LAC is growing very rapidly and presents an important opportunity for the region. The region s total spending in e-commerce went from US$ 1.7 billion in 2000 to US$ 70 billion in 2013, representing a 4036% increase. Importantly, LAC shows an important gender gap in virtually all financial inclusion indicators. For instance, 34% of women have access to an account, versus 44% of men, and the probability of accessing one is 26% larger for men than women. In general, the gender gap observed in LAC is larger than the gender gap observed at global in the access to other financial services such as savings and debit cards. Finally, several studies also show that women-owned MSMEs face greater challenges in accessing financial services, notably higher collateral requirements. Margins for improvement Several demand and supply side constraints have historically affected a greater financial inclusion. From the demand side, the most important factors that can be addressed to promote financial inclusion in LAC are: (i) the high cost of services, both in terms of fees and the cost of accessing points of service; (ii) low and unstable income levels; (iii) complex regulatory requirements that potential new financial consumers find difficult to comply with; (iv) lack of financial products and services with an adequate value proposition for directs segments, (v) low levels of financial education; and (vi) cultural factors that may drive auto-exclusion. In terms of supply, addressing the following factors could further foster financial inclusion: (i) high operational costs due to a general lack of economies of scale for financial transactions relative to the value; and (ii) the difficulty to obtain reliable information on new or low-income clients which hinders the ability to assess risk. Furthermore, there is still work to be done to untangle the complex factors precluding a greater demand of financial services by the population. Opportunities The development of technological innovations and new business models can facilitate

6 overcoming several of the structural obstacles that affect the supply and demand for financial services. In addition, there has also been a growth of the middle class across LAC, leading to an increased demand for financial services and an improved business case for service providers. From the period comprised between 2002 and 2013, the number of people living in poverty has been reduced by 60 million (or decreased by almost 16 percentage points). The catalytic role of technology and innovative business models to facilitate financial inclusion has been widely documented. For example, pioneer efforts by many LAC countries in the use of non-banking correspondents or agents have improved physical coverage and helped to reach areas previously unserved due to the high cost of operating a bank branch. Nonetheless, by cutting costs even further, technology can make it feasible to reach an even broader population and can help expand operations in remote or sparsely populated rural areas. The delivery of financial services through digital channels, in particular through mobile, offer the greatest potential for reducing the costs of reaching a broader population and expanding operations in remote areas, while also enhancing the convenience of accessing the services, thereby tackling two of the main obstacles limiting financial inclusion. Indeed, the experience of countries where digital payments are more widely available suggests that this can be certainly a relevant and fast way of expanding access to financial services. Additionally, technological advances has also facilitated the availability and systematic use and analysis of new sources of information, both financial and non-financial, for estimating credit risks, thereby helping to tackle the traditional challenge of accessing information of new financial consumers. Credits scoring mechanisms based on cellphone and Internet usage represent an example of these emerging models. In the medium and long term, the availability of smartphones and mobile broadband also offer an important potential for expanding different types of digital financial services. For LAC, it is estimated that the number of mobile broadband subscriptions will rise to 500 million by 2017, compared to about 200 million in 2013 (and a population of 610 million). This projected high use of smart phones in the region gives LAC the potential to leapfrog other developing country regions, which have relied on SMS message systems for expanding access to financial services. In addition, with almost universal access to the web, the range and quality of services could improve in a fundamental manner. On the supply side, more data-rich services can help providers better assess risks using powerful analytical tools, as well as to develop more targeted and customer-centered service which would better fit the needs of customers. The Importance of Financial Integration for Economic Development The phenomenon of financial integration has increased significantly during the last decades. This is, to a great degree, a consequence of the increased globalization of investments seeking higher rates of return abroad and the investors will to diversify their portfolios. Many countries, especially developing and transition economies, have attempted to deregulate domestic financial markets. As a result of this, these nations have experienced significant increases in private capital flows. Some of the potential benefits to economic development from increased financial integration include consumption smoothing, investment growth in the domestic economy, enhanced macroeconomic discipline and increased banking system efficiency and financial stability.

7 Financial Integration in Latin American and the Caribbean (LAC) The Latin American Integrated Market (MILA) is the region s most notorious initiative of financial integration. It is the result of an agreement signed by the Santiago Stock Exchange, the Colombia Stock Exchange and the Lima Stock Exchange, who in 2009 started the process of setting up a regional market to trade equities from these three countries. The initiative began operating in May 2011, making it possible for investors from these countries to purchase and sell shares from the three stock markets through a local broker. The MILA s market capitalization as of December 2013 was US$ 601,953 million while the amount negotiated was US$ 6,330 million at the same date. One of the most important characteristics of MILA is the fact that none of the member markets sacrifice their independence or their regulatory autonomy. Currently, MILA is ranked first in Latin America for the number of listed companies, second in terms of market capitalization and third in terms of traded volumes. THE ROLE OF THE PRIVATE SECTOR Achieving a greater degree of financial inclusion closely depends on the actions of the private sector. While the role of government is broadly related to measures that are directed to (i) strengthen coordination and articulate all actors, (ii) complete financial markets, (iii) support technological innovations and new business models, (iv) improve the financial capabilities of both firms and households, and (v) provide an enabling regulatory framework; it is the private sector which ultimately provides most financial services. And while concerns related to low income levels affecting both demand and the risk-return perspectives of reaching the excluded population tend to be prevalent within some private sector players, the proportion of adults in LAC currently unserved or underserved rather represent a tremendous market opportunity for financial institutions and digital financial services providers. The private sector, in an effort to contribute to financial inclusion and integration in the region, could conduct the following actions: 1 TAILORING VALUE PROPOSITIONS FOR SEGMENTS THAT TEND TO BE MORE FINANCIALLY EXCLUDED SUCH AS WOMEN The women s market is huge, controlling an aggregate income estimated at USD$18 trillion, making 65% of consumer decisions, and representing 40% of the world s workforce and 50% of the population. Nevertheless, women are more excluded and underserved across the globe, facing an important gap in the access and use of different financial services relative to men. 2 DEVELOPING PROGRAMS INTENDED FOR FINANCIAL EDUCATION AND RESPONSIBILITY AMONG THE REGION S POPULATION IIn general, there are low levels of financial literacy and education amongst the region s citizens. This ranges from difficulty in understanding basic financial concepts (inflation, credit, interest rates, risk, and reward) and problems with money management to the general functioning of capital markets. As an example, surveys from many countries in the region (with the exception of Chile) indicate that less than half of the population

8 understands the concept of interest rates. 3 TAKING ADVANTAGE OF INCREASED TECHNOLOGY USE TO PROVIDE DIGITALLY INNOVATIVE PRODUCTS SUCH AS MOBILE PAYMENTS OPTIONS There are roughly 319 million unique mobile subscribers (and more than 631 million SIM connections) in the region. Furthermore, smartphone penetration is on the rise and is forecasted to reach 44% by These figures indicate the massive potential of the region s mobile industry. 4 INCREASE COORDINATION WITH PUBLIC SECTOR IN REGARDS TO REGULATIONS THAT COULD POSSIBLY HINDER EXPANSION OF USE OF FINANCIAL SERVICES VIA MOBILE As a result of the opportunities derived from the growth of the mobile payment industry, it is important for the private sector operators to be aligned with specific country regulations regarding mobile payments in order to ensure financial security in all transactions. 5 DEEPENING FINANCIAL INTEGRATION VIA COMPETITION AND KNOWLEDGE SHARING The private sector can also play an important role in the process of financial integration in the region. Although the public sector is ultimately responsible for creating regulatory frameworks that are conducive to financial integration, coordinated private sector initiatives that make full use of cross border business opportunities are also beneficial. Competition among market players and knowledge and best practice sharing between the private financial sector actors can also be the means to deepening integration initiatives.

9 IDB. Beyond Borders: The New Regionalism in Latin America, More information regarding the Global Partnership for Financial Inclusion and the Maya Declaration can be found at and Data is taken from The Global Findex Database, World Bank, 2012 Source: AméricaEconomía Intelligence. 12/pdf/Estudio_de_comercio_electronico_en_America_Latina_Mayo_2012.pdf Source: Economic Commission for Latin America and the Caribbean (ECLAC). As of December 2013, Latin America was home to 13% of the world s live mobile money deployments, but more encouragingly had almost 20% of the planned deployments. As of June 2014, there were 36 live mobile money deployments across the region, compared with 27 one year earlier as well as 19 more planned deployments. Source: GSM Association. The Mobile Economy: Latin America rica_2014.pdf For example, estimates for Colombia suggested that a financial transaction conducted by internet or by cell phone costs a financial institution approximately less than US$0.05 compared to over US$2 in a bank branch and US$0.50 from an Automatic Teller Machine (ATM). In Tanzania, for instance, the provision of mobile financial services helped to reduce the proportion of adults who were completely excluded from the financial system from 55% to 27% between 2009 and Smartphones and Mobile Money: The Next Generation of Digital Financial Inclusion, GSMA Discussion Paper, July Source: World Bank. Benefits and Costs of International Financial Integration. Policy Research Working Paper. 8/ _ /Rendered/PDF/multi0page.pdf Garcia, N., Grifoni, A., Lopez, J.C. and Mejía, D., (2013), Financial Education in Latin America and the Caribbean: Rationale, Overview and Way Forward, OECD Working Papers on Finance, Insurance and Private Pensions, No.33, OECD Publishing. GSMA. Mobile Economy Latin America Source: European Central Bank. Financial Integration in Europe. 2014