By Elissa McCarter, Vice President for the Office of Development Finance, CHF International
This article originally appeared in Microfinance Focus.
On September 30, 2011, by Presidential Decree, the Mexican Government created the National Council for Financial Inclusion as part of its commitment to designing and implementing a financial inclusion strategy that works to improve the quality of life of Mexico’s low-income population. According to the Ministry of Finance, the number of Mexicans with a formal savings product in 2009 had substantially increased over the preceding five years.
According to Juan Manuel Valle, Head of the Banking, Securities and Savings Department at the Ministry of Finance, this progress largely resulted from amendments to the legal framework and implementation of specific policies allowed through expanding the supply of diverse financial products to increase supply, while at the same time taking appropriate measures on financial education and consumer protection to address demand.
For example, to enhance competition, the Ministry of Finance created a new category of banks with less stringent licensing and prudential requirements to promote the entry of new competitors to the banking system. Amendments to the legal framework introduced banking agents and mobile financial services, which help lower operating costs while expandingaccess and usage.
The Ministry of Finance introduced rules requiring bank statements to clearly disclose the costs of financial services, and banks are required to offer basic deposit accounts with no fees. And Mexico is not alone in the effort. According to Tim Lyman at the Consultative Group to Assist the Poor, “a vanguard of emerging market countries” including Brazil, India, South Africa, Kenya and Philippines have adjusted their regulatory and supervisory approaches to allow for greater innovations in financial inclusion. In fact, Lyman points out that “more than 45 countries have drafted financial inclusion strategies, and more than 100 countries track key inclusion indicators.”
There are 78 countries which have now joined the global Alliance for Financial Inclusion (AFI), a membership network of regulators launched in September 2009 to create better standards and share best practices in regulation for greater financial inclusion. So where are the Arab countries?
Not surprisingly, the AFI has just three members from the Middle East and North Africa (MENA): the Central Bank of Syria, the Central Bank of Yemen, and the Palestinian Monetary Fund. These are the only countries that have recently introduced good, or passable, legislation in microfinance. Syria and Yemen have the only microfinance legislation in the region that allows for a specialized microfinance deposit-taking bank, with lower capital requirements and prudential regulations that model good practices. Unfortunately there is just one such bank in each country. The Palestinian Monetary Authority just released a draft regulation allowing for three types of microfinance entities – nonprofit, for-profit, and public shareholding companies. None of these allow for deposit taking – i.e., they are credit only institutions – but the regulations are at least an improvement from the past.
The situation in other countries is less optimistic. Egyptian lawmakers had drafted new microfinance legislation nearly four years ago that was never passed. Tunisia has just recently released a new law, but it is not yet publicly available. Jordan and Iraq have recently introduced laws with so many gaps and limitations that they in effect will deter future private investment in the industry rather than promote it.
With one of the largest and fastest growing networks of microfinance providers in the MENA region, at CHF International, we have day-to-day experience with the legal and regulatory environment for microfinance providers in the Arab world. Sadly, the region experiences mostly inertia and a lack of expertise in this area, depriving many borrowers of services that could drastically improve their lives. The idea of social enterprise and socially responsible investing has yet to take root in the region.
As the Arab world experiences inaction in themicrofinance arena, financial inclusion continues to catch on globally at rapid speed. In2010, the G-20 recognized financial inclusion as one of the key pillars of the global development agenda. It introduced the G20 Principles on Financial Inclusion. If only Arab leaders would adopt these nine principles, too, there might be another Arab Spring to talk about.
The following changes could make a serious difference to social investment in the region:
1. Leadership: Cultivate a broad-based government commitment to financial inclusion to help alleviate poverty. Arab governments need the next generation to take up leadership. It was apparent at the World Economic Forum at the Dead Sea on Youth and Entrepreneurship last November that the only new and refreshing ideas came from those under 30. Optimism and hope is a necessary ingredient to change. One cannot truly effect change unless willing to say “what if” and “why not?” They were the ones worth listening to, because they could be open to leaving the past and focusing on the future. So why not have at least one young change maker representing the voice of the majority and growing in each newly elected government?
2. Diversity: Implement policy approaches that promote competition and provide market-based incentives for delivery of sustainable financial access and usage of a broad range of affordable services (savings, credit, payments and transfers, insurance) as well as a diversity of service providers. Arab governments need good legislation that will pave the way for more and different types of financial service providers, with products that go beyond just indebting poor clients. The should visit Mexico, and then model their own Council, taking the very best of rich experiences from emerging markets countries that have introduced positive laws that promote financial inclusion.
3. Innovation: Promote technological and institutional innovation as a means to expand financial system access and usage, including by addressing infrastructure weaknesses. Arab leaders should embrace technology and allow for models of branchless banking to take root. Cell phone usage is rampant and inclusive across the Middle East. Banking trails far behind. It is the wave of the future and the infrastructure and platform might be developed with purely private sector investment and initiative, if proper incentives and framework were put in place.
4. Protection: Encourage a comprehensive approach to consumer protection that recognizes the roles of government, providers and consumers. In a credit-only microfinance culture, with no credit bureaus, Arab governments are leaving it to the whim of providers themselves to deal with self-regulation and monitoring. Much is being done with the SMART campaign and other initiatives, on a voluntary basis. But governments should take heed of the disasters seen in Bosnia, Pakistan, Morocco. Low-income families deserve better.
5. Empowerment: Develop financial literacy and financial capability. Appropriate subsidies and investment in organizations that develop skills must accompany an expansion in financial services. Women are coming out in force as protestors to express their voice. They should also have access to good information. It doesn’t have to be a complicated process. Invest in the young people in their schools and after school programs, social media outlets and online courses, and empower them to teach their mothers and fathers.
6. Cooperation: Create an institutional environment with clear lines of accountability and co-ordination within government; and also encourage partnerships and directconsultation across government, business and other stakeholders. Leaders should be willing to stick their necks out and say “yes”. In the turmoil and uncertainty we see across the region, in the midst of change, there is an opportunity for a few to step up and lead for the sake of the future of their countries.
7. Knowledge: Utilize improved data to make evidence based policy, measure progress, and consider an incremental “test and learn” approach acceptable to both regulator and service provider. In an age of wide internet access and information flow, and greater mobility, Arab leaders should look well beyond their neighbors to inform themselves on best practices in regulation for financial inclusion – like looking to Mexico.
8. Proportionality: Build a policy and regulatory framework that is proportionate with the risks and benefits involved in such innovative products and services and is based on an understanding of the gaps and barriers in existing regulation. An informed review of existing policies and how they measure up to best practice regulations elsewhere would be a huge step in the right direction. For any financial inclusion agenda to take hold, this needs to happen.
9. Framework: Consider the following in the regulatory framework, reflecting international standards, national circumstances and support for a competitive landscape: an appropriate, flexible, risk-based Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime; conditions for the use of agents as a customer interface; a clear regulatory regime for electronically stored value; and market-based incentives to achieve the long-term goal of broad interoperability and interconnection. At the end of the day, market-based microfinance, that attracts investment, protects against risks, protects the consumer, and yet leads to massive growth and inclusion, is where the region needs to go.
There are many opportunities in the Arab world at this time of change to positively impact their low-income populations. Inertia, sadly, can only lead to a loss of the grassroots social change that empowers the economically vulnerable.
Maybe if the leaders in this region seize the moment and learn to “speak Mexican,” we will see the changes needed to make a long-term difference.