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Gravatar: Weselina Angelow, WSBI

A journey in making small scale savings work

18.04.2016Weselina Angelow, WSBI

By the end of 2020, all 110 WSBI members set an ambitious plan. They aim to reach 1.7 billion customers and 400 million new transaction accounts by then. The work really kicks off this year, starting from a base level of 1.4 billion people who seek banking services from WSBI members every day.

It's news in a way, but it's also part of an evergreen story - WSBI's longstanding commitment to provide an 'Account to Everyone'. Twenty-five focus countries under the Universal Financial Access (UFA) need to address this most. We've set out through our member savings and retails banks to tackle the issue of the unbanked and underserved in 17.

Financial inclusion matters to an increasing number of players. With support of a sponsored Programme WSBI in 2008, wanted a fundamental question answered: what would it take to boost financial inclusion through the WSBI network of postal and savings banks? Driving WSBI's member support today to achieve the next set of UFA 2020 goals means taking lessons from this work on board.

The WSBI Programme aimed to increase formal savings services for poor people at 10 WSBI member banks across the globe. Active accounts swelled within five years from 1.2 million in 2008 to 2.8 million in 2015 in six of ten selected countries generating deep insights into the drivers and barriers of account usage.

Regular active account usage turned out to be much more difficult than first thought and account dormancy remained an elephant in the room. The core of the challenge was threefold: affordable pricing and low population densities put limits to the banks for providing a sustainable and accessible solution, plus there was a growing need to offer more convenient and intuitive services. Questions arose that demanded an answer. Two especially came to mind.

1. How do we add value to the way rural people already manage money informally?

Linking formal banking to village groups and replication the way people already manage money emerged as the most successful route to meet rural peoples' financial needs and close the proximity gap in remote Eastern Africa. Most of the cash in East Africa stays in villages, in a lot of places money circulates just within one kilometer of people's home and work, a member of a group would save $5-10 per month. Linkage banking with village groups became an arena to capture these high turnarounds of financial transactions and nontrivial amounts of savings.

WSBI member Postbank Uganda (PBU) adopted linkage banking in 2012: it linked its mobile banking platform not just to village groups but also to individual group members. PBU reaches out to 28,000 village groups so far. Without distorting the group model, PBU found a way to electronically replicate and link up with the group's existing savings and loan business. The result: a growing funding base and a threefold increase in PBU's active customer base.

2. How can segmentation of client data help us to predict people's' transactional behavior and address sustaining account activity after account opening?

Having a shared meaning of what defines an active account is paramount. WSBI's definition was any account that transacted in the previous six months. The Global Findex data shows a third of all adults doing any kind of saving during one year right up the development spectrum. Could it therefore be that customer's desired savings behavior to save occurs in bursts of activity followed by a quiet period before starting again and how much time passes between these periods?

WSBI member Kenya Post Office Savings Bank (KPOSB) developed an analytical model for the better understanding of the drivers of account activity. Together we looked at the periods when clients would normally reengage with the bank after a first contact has been made and whether getting messages out to clients by using local options could nudge their behaviour.

Trust in financial services offered to the unbanked an underserved depends hugely on the ability of service providers to invest time and resources into continuously gaining insights into the financial lives of the poor and translate these into convenient services. This takes time and can be costly, and it makes small-scale savings work much easier said than done. It's a journey where learning is a continuous process. Our newly produced video report highlights what bumps and discoveries we have found along the way.

Mapping Out the Future for Rwanda's Capital Markets

21.03.2016Jacqueline Irving, Director & Jim Woodsome, Senior Associate, Milken Institute

How should Rwanda develop its capital markets? This was the subject of a three-day roundtable discussion held last October in Rubavu, Rwanda. The roundtable was organized by the Rwanda Capital Market Authority (CMA) and the Milken Institute's Center for Financial Markets (CFM), with support from FSD Africa. Highlights from that discussion, including points of consensus and debate, are captured in the Milken Institute's new publication, "Framing the Issues: Developing Capital Markets in Rwanda."

Over the past decade, Rwanda has made considerable progress in achieving rapid economic growth and reducing poverty, supported by sound macroeconomic policies. Its business-friendly environment is now among the best in Africa. The government and its international development partners view deepening and diversifying the domestic financial system as essential to Rwanda's goal of transitioning to middle-income status.

Last year, the Rwanda Ministry of Finance and Economic Planning gave the CMA a mandate to produce a 10-year Capital-Market Master Plan (CMMP) to guide reforms to develop Rwanda's capital markets. An overarching goal will be to deepen capital markets so that they intermediate long-term finance for private-sector-led growth and meet the country's infrastructure and other socioeconomic needs.

The October strategic planning roundtable kick-started the process of mapping out capital-market reforms. The event gathered policymakers, regulators, issuers, investors, and capital-market experts from around the world, including senior officials from the government of Rwanda. The roundtable provided an off-the-record forum for frank and in-depth discussion about the opportunities and challenges Rwanda's capital-market stakeholders face, as well as how they can prioritize and sequence reforms. Participants also heard firsthand how other developing countries mapped out and launched their own capital-market reforms.

The roundtable covered core questions that will inform the drafting of Rwanda's Capital-Market Master Plan, including:

 

  • How should Rwanda develop its investor base, both domestically and regionally? What are innovative ways to mobilize household savings?
  • Can other nonbank financing sources-such as private equity, financial leasing, and even crowdfunding-help "incubate" firms for future listings?
  • How can Rwanda strike the right balance in accessing needed foreign-portfolio investment while guarding against risks of overreliance on this investment?
  • How can capital markets in Rwanda and its East African Community partners take a regional approach to attracting new listings?
  • Should the stock exchange target small and medium-sized enterprises (SMEs) in its outreach for new listings-and, if so, how?
  • What can Rwanda learn from other countries about the process of planning and implementing capital-market reforms?

Roundtable participants strongly agreed that an immediate and ongoing priority is for Rwanda to develop a pipeline of prospective listings. Targeted outreach -including education and technical assistance - is critical to increasing the number of firms willing to list. Cultivating a high-growth-potential corporate base could also serve as an incubator for future listings, as would developing the local venture capital and private equity markets.

 

Lessons shared by participants from other emerging markets underscored the importance of sequencing and developing capital markets to complement the banking sector, not compete with it. As an economy grows and becomes more complex, firms and households require a wider range of financial services - from banks as well as other financial intermediaries. Once larger firms begin to rely more on capital markets for longer-term financing, banks may increase lending further down the credit spectrum, to SMEs and households.

Well-functioning, appropriately regulated local and intraregional institutional investors are vital to developing a stable investor base. Several participants flagged the need to mobilize small savers across EAC markets, perhaps through a regional fund, which also would advance financial inclusion. The role of non-EAC foreign investors was more heavily debated, however - particularly the degree to which bond issuers should rely on foreign capital.

Regionalization emerged as a key cross-cutting issue. More cross-border listings and cross-border investment across the EAC's securities exchanges could help overcome local capital markets' impediments such as illiquidity, low market capitalization, and few listings. Greater cooperation across EAC capital markets in developing and sharing market infrastructure and intermediation services could unlock significant economies of scale. Throughout the roundtable, participants returned to the point that capital-market development should not be done for its own sake, but to spur growth of a diversified, inclusive economy that creates decent jobs and improves living standards. And, while best practices exist, there is no one-size-fits-all approach to developing capital markets.

This blog post was originally published on the Milken Institute's blog website. 

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About the Authors

Jacqueline Irving is a Director in the Center for Financial Markets at the Milken Institute. Previously, she was a senior economist at US Treasury, responsible for the migrant remittances and financial inclusion portfolio and a U.S. government delegate to the G20's technical working group on remittances.

Jim Woodsome is a Senior Associate, Program Research Analyst at the Milken Institute's Center for Financial Markets. In this role, he conducts research, organizes events and helps manage initiatives related to the Center's Capital Markets for Development (CM4D) program.

International Transmission of Shocks via Internal Capital Markets of Multinational Banks: Evidence from South Africa

30.11.2015Adeline Pelletier, Assistant Professor, Instituto de Empresa

It is well documented that global banks contribute to international shock transmission via cross-border lending. Yet, global banking has taken another form over the recent decades with the expansion of banks abroad via branches and subsidiaries. This expansion has especially happened from and to developing and emerging economies, as countries have opened up their banking sector to foreign investors (Claessens and van Horen, 2012).

Multinational banks operate internal capital markets through which they (re-)allocate capital between their headquarters and their different foreign affiliates in response to financial or real economic shocks. In developing countries where interbank and capital markets are underdeveloped and a large part of the population is unbanked, the ability to receive funding through internal capital markets at low cost and in large quantity might present a significant advantage for foreign banks' affiliates. However, as internal funding reallocation can alter the funding position of a bank's affiliate, this may in turn lead to adjustments in foreign affiliates lending in their host market, thus creating another channel of international transmission of shocks (Cetorelli and Goldberg, 2012).

Impact of a financial crisis on capital re-allocation inside banking groups

In a recent study, I explore this issue by using a novel database on banks operating in South Africa, which includes information on internal loans and deposits from and to the banking group.

In exploring the impact of the 1997 East Asian Crisis on capital re-allocation inside banks, I found that that South African affiliates belonging to banking groups with high exposure to East Asian Crisis countries (in terms of total banking assets of the group in crisis countries) experienced a significant drop in their net internal funding position during the crisis, relative to South African affiliates of less exposed groups. The South African foreign affiliates of highly exposed multinational banks both received less internal funding from their group during the East Asian Crisis period than before, and lent more to their group, relative to the affiliates of less exposed groups. This result suggests that parent banks of more exposed groups reallocated capital away from South Africa to support their affiliates in east Asia.

Exploring the link between internal capital funding and domestic lending

Do foreign affiliates that receive internal capital from their group expand their local bank credit? Using an instrumental variable technique, I found that a 10% increase in the outstanding volume of internal funding resulted in a 5.6% increase in the volume of mortgage advances. As such, foreign affiliates do not only use this extra capital to acquire government securities or to invest abroad, as it has been reported in Africa where banks are often highly liquid but lend relatively little domestically (see Beck, Maimbo, Faye and Triki, 2011).They also "pass it on'' to the local economy by expanding their domestic lending.

Policy implications

This study suggests that foreign affiliates have ambiguous effects for the financial stability of the host country. On the one hand, being part of a foreign group reduces the risk of bankruptcy of foreign affiliates by allowing for the reception of internal capital from the group.

On the other hand, internal capital markets are a channel through which financial crises are transmitted from one country to another, when abrupt capital reallocations inside the group take place. However, the strength of this channel will partly depend on the legal structure of the foreign affiliate. Indeed, the organisational form of the foreign affiliate, either as a branch or as a subsidiary will have an impact on the stability of the banking sector and the local supply of credit through the internal capital market channel, as branches are more integrated to their group via this channel than subsidiaries.

A potential policy implication of this research for bank regulators may be that favouring organisation of foreign affiliates as subsidiaries rather than branches, through specific banking regulations, may reduce the potential transmission of foreign crises via internal capital markets. One caveat, however, is that if a banking crisis occurs in the host country, a parent is fully responsible for all losses incurred under a branch structure. Under a subsidiary structure, a parent's obligations are only limited to the value of the invested equity, which makes it more likely to walk away from the operation (Cerrutti et al., 2007; Fiechter et al., 2011). That said, if a foreign affiliate has systemic importance for the health of the banking group, its parent is more likely to support it through transfers of internal liquidity, regardless of its organisational form.

Bibliography:

Beck, Thorsten, Samuel Maimbo, Issa Faye, and Thouraya Triki. 2011. Financing Africa: Through the crisis and beyond. Washington DC: World Bank.

Cerutti, Eugenio, Giovanni Dell'Ariccia, and Maria Soledad Martinez Peria. 2007. “How banks go abroad: Branches or subsidiaries?” Journal of Banking and Finance 31 (6):1669-1692.

Cetorelli, Nicola and Linda S. Goldberg. 2012. “Liquidity management of U.S. global banks: Internal capital markets in the great recession.” Journal of International Economics 88 (2):299-311.

Claessens, Stijn and Neeltje Van Horen. 2012. “Foreign Banks: Trends, Impact and Financial Stability.” Working Paper WP/12/10, IMF.

Fiechter, Jonathan, Inci Otker-Robe, Anna Ilyina, Hsu Michael, Andre Santos, and Jay Surti. 2011. “Subsidiaries or Branches: Does One Size Fit All?” IMF Staff Discussion Note SDN/11/0, IMF.

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This blog post is based on the MFW4A Working Paper Series "Internal capital market practices of multinational banks: Evidence from South Africa".

Adeline Pelletier is an assistant professor at IE. She was previously a postdoctoral researcher affiliated to the Centre for Economic Performance at the London School of Economics, researching mobile payment services for the unbanked. She obtained her PhD in Business Economics from the London School of Economics in 2014, with a thesis on the performance, corporate financial strategy and organization of multinational banks in Africa. Prior to her doctoral studies she completed a MPhil in Development Studies at the University of Cambridge (2011) and she also holds a MPhil in Economics from Sciences-Po Paris (2006).

Are Anti–Money Laundering Policies Hurting Poor Countries? – New CGD Working Group Report

30.11.2015Clay Lowery and Vijaya Ramachandran, Center for Global Development

In 2009, G-8 Leaders set a goal of reducing remittance costs to 5 percent within 5 years, roughly a 5 percentage point decrease. Instead, the cost of sending remittances from G-20 countries to "high risk" countries has stayed almost flat, and to "less risky" countries, has decreased slightly more than 1 percentage point.

Last month, the Financial Stability Board (FSB) - which coordinates and reviews the work of the international standard setting bodies in the area of financial regulation - published a report to the G-20 stating that in a survey carried out by the World Bank, roughly half of emerging market and developing economies have experienced a decline in correspondent banking services, which allows for banks to make and receive international payments.

In other words, despite the laudable G-20 policy goal of achieving more inclusive economic growth, there appears to be a disturbing trend of banking services declining or, at least, not becoming more cost effective for some countries. Why do we see these trends in remittance costs and correspondent banking relationships? A new CGD report - the outcome of a working group of policymakers, academics and individuals from the private sector - says that one reason (and we emphasize that it is not the only driver) might be that these trends are the unintended consequences of anti-money laundering / combating the financing of terror (AML/CFT) policies in rich countries.

Under current AML/CFT rules, banks are asked to prevent sanctions violations and assess and mitigate money laundering and terrorist financing risks, or face penalties. However, regulators sometimes send mixed signals about whether and how banks and other entities should manage these risks, which can result in simplistic risk assessment methodologies being applied by these entities. There may also be a chilling effect resulting from the imposition of legitimate fines on some large banks for egregious contraventions of AML/CFT rules and, particularly, sanctions laws. These factors, along with others, have led banks to adopt an understandably conservative position. This includes exiting from providing services to firms, market segments and countries that are seen as higher risk, including money transmitters, banks in poor countries and non-profit organizations.

Let us illustrate our findings with an example. In 2013, Barclays closed the accounts of nearly 90% of its UK-based money transfer organizations. It was the last large bank in the country willing to provide accounts to the money remitters that are a lifeline for migrants trying to send funds to families in poor countries. This wasn't the first time that a bank decided to withdraw nearly wholesale from the remittances sector - a process known as 'de-risking' (see Figure 1). Nor will it be the last.

At a time when remittances are worth more than three times total foreign aid flows, these kinds of actions could have a significant impact on individuals - and entire countries. It's not just migrant worker families that suffer from 'financial abandonment.' As stated earlier, banks in poor countries find themselves cut off from correspondent banking services: trade finance, clearing and settlement, cash management, and international wire transfers; while non-profit organizations (NPOs) are often unable to obtain banking services thereby hampering their work, especially those NPOs associated with 'high risk' areas that are often home to the world's poorest and most vulnerable people.

Figure 1: The Widespread De-Banking of Remittance Providers

Such unintended consequences are causing concern at the highest levels: both Federal Reserve Chairwoman Janet Yellen and Bank of England Governor and Financial Stability Board Chairman Mark Carney acknowledge the very real problems of de-risking. Standards setters, such as the Financial Action Task Force (FATF, the global standard setting body for AML/CFT), and regulators have acknowledged the existence of de-risking and are starting to work to address it. In the meantime, the losers are manifold.

Who are the losers?

  • Migrant workers and their families. For the remittance system to work effectively there must be a healthy money transfer sector. Money transfer organizations (MTOs) are seeing banking services denied, downgraded, or made more expensive. In other words, MTOs are pushed out of one bank and have to find another that may be more expensive, or based in a less transparent jurisdiction. This leaves only larger money transfer organizations with access to bank accounts, which can raise the cost of sending remittances. Industry bodies report that many smaller players have been forced to close, become agents of larger businesses, or even disguise the true nature of their operations in order to remain banked. Given that remittances from migrant workers total $440bn a year, a vital source of finance for poor countries might be affected.
  • People in post-disaster or conflict situations. Vulnerable people in post-disaster or conflict situations rely on non-profit organizations to deliver humanitarian assistance. However, NPOs are reporting difficulties in carrying out operations. For instance, HSBC closed the bank account of several NPOs including the Cordoba Foundation, a think tank that receives money from the UK government for work to prevent terrorism, saying only that continuing to bank the organization 'fell outside the bank's risk appetite'.
  • Small to medium-sized firms. These enterprises are crucial to the economy in poor countries but they often lack the credit they need to conduct operations, grow their businesses, and create jobs. To get access to this credit, they often need local banks to have the ability to conduct cross-border transactions to make and receive international payments. Unfortunately, developed country banks increasingly report withdrawing correspondent banking services from banks in high-risk jurisdictions, including many poor countries, reducing their access to the global financial system.
  • People in rich and poor countries alike. Public safety and economic stability in both rich and poor countries rely on financial regulators and law enforcement having visibility of transactions. However, such agencies increasingly find it difficult to track transactions. This is because MTOs who cannot send funds electronically begin to use potentially less transparent mechanisms like bulk currency exchanges. Transparency is also reduced when banks and businesses in poor countries have to send funds via banks operating in less transparent jurisdictions.

What can be done?

Our report puts forward five recommendations that would require action by national regulators, international standard setters, international organizations, and private institutions to work toward a solution. These are the first steps that must be taken toward solving the problem:

  1. Rigorously assess the unintended consequences of AML/CFT and sanctions enforcement at the national and the global level. The strength of the suggestive evidence detailed in the report requires a rigorous causal investigation of the unintended consequences of AML/CFT conducted by the relevant international institutions as specified in the report.
  2. Generate better data and share existing data between institutions. In order to assess unintended consequences rigorously, more and better data should be generated through private and public sector efforts that we elaborate upon in the report.
  3. Strengthen the risk-based approach. FATF should be congratulated for introducing and recently strengthening its risk-based approach. However, it needs to be implemented more extensively and more consistently.
  4. Improve compliance and clarify indicators of lower risk. Compliance procedures at many NPOs and MTOs must be improved so as to be more effective. At the same time, more needs to be done to recognize those NPOs and MTOs that do have effective systems in place, including better supervision of MTO sectors at the country level.
  5. Facilitate identification and lower the costs of compliance. National governments, banks and the World Bank should accelerate the adoption of new and existing technology such as Legal Entity Identifiers and biometric ID to facilitate lower cost customer identification, and enable "know your customer" compliance and due diligence while still protecting individual privacy.

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This post was originally published on the Center for Global Development website. 

Clay Lowery is a visiting fellow at CDG. He currently serves as Vice President for Rock Creek Global Advisors, an international advisory firm that assists clients to anticipate and seize opportunities in the global marketplace, while mitigating political and regulatory risk. 

Vijaya Ramachandran is a senior fellow at the Center for Global Development. She works on private sector development, financial flows, food security, humanitarian assistance and development interventions in fragile states.

Banking and Finance in Africa

16.11.2015Dhafer Saïdane and Alain Le Noir, Club des Dirigeants de Banques

For over a decade now, Africa has been experiencing a higher growth rate compared to the rest of the world. Many African countries are being strengthened by a wave of reforms in all sectors, which favours market mechanisms, the state's disengagement from the economic and social domain, and fair price. Yes, Africa is undoubtedly the world's next emerging market.

At the heart of Africa's economic growth is its financial system, considered to be one of the continent's brightest prospects. Indeed, Africa's banking system have showed better performance in 2014 (24%), six times the average return of European banks.

In an effort to unravel the mystery of Africa's growth and progress in the 21st century, we will be launching a new book entitled "Banque et Finance en Afrique: les acteurs de l'émergence", to be published under the Revue Banque edition. The publication, an initiative by the African Bankers Club (Club des dirigeants des banques et des établissements de credit d'Afrique), will feature comprehensive analysis of Africa's banking and financial sector, through collective works gathered from the continent's economic and financial experts. The book will be launched in January 2016, and includes a preface by Christian de BOISSIEU and Arnaud de BRESSON.

What does the current African landscape looks like? What are the strategies implemented by the major African banks? What is the status of pan-African banking and what is its future? What are the major challenges for the African banking regulator? What are the major challenges facing African banks in the next thirty years?

These are just some of the questions analysed in this book, which will also look to address other regulatory issues and their degree of adaptation, particularly in dealing with money laundering.

We believe that the economic development of Africa will be greatly facilitated by the free flow of ideas and research across the entire continent. This book aims to share those insights and builds on the experts' deep experiences and knowledge of the continent.

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Collective work under the direction of: 

Dhafer Saïdane, University of Lille North of France, SKEMA Business School, and Adviser to the African Bankers Club (Club des Dirigeants des Banques et Établissements de crédit d'Afrique); and

Alain Le Noir, Founder and Special Advisor to the President of the African Bankers Club (Club des Dirigeants des Banques et Établissements de crédit d'Afrique).

Take advantage of the special subscription offer available until November 30th, 2015. 

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