Africa Finance Forum Blog
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Financial inclusion has become a contributing factor to the achievement of the Millennium Development Goals (MDGs), particularly MDG1, which promises to eradicate extreme poverty and hunger. The MDGs also include a gender-specific target for achieving full and productive employment and decent work for all. MDG3 is aimed at promoting gender equality and empowering women, and includes a specific reference to women's economic empowerment. Globally, women account for 66% of the labour force and have played a major part in the growth of small businesses. Women entrepreneurs, in particular, are contributing significantly to economic growth by creating jobs and generating revenues. Yet, women-owned businesses' access to credit remains difficult.
In rural areas of Africa, women constitute the largest percentage, 70% of the rural labour force that derives their livelihood from subsistence agriculture. A large number of these farmers aspire to employing better production techniques that can lead to increased output. However, they are dealing with challenges of access to capital that would enable them re-invest their businesses. Only thirteen per cent (13%) of rural people obtain loans from banks for re-investing in agricultural production. This lack of access to finance for the poor, particularly for rural women is attributable to a number of factors including, the location of their businesses and banks' perception of agricultural lending as risky business. Currently, there a few products for agricultural lending tailored to suit women's needs and to couple this, the lending criteria employed by banks is complicated for women. Moreover, the reality in most African countries is that women lack access to and control of land, which serves as collateral for bank loans. There exists also a fear by women to walk into banks and/or financial institutions due to the language barrier. The list can be endless: Mobility restrictions due to the geographic spread of homes across large areas; low levels of education and business training that hampers skills in record keeping, business plan preparation and general management of the business. All of these barriers affect the performance, growth and sustainability of women's enterprises.
In addition to these barriers, the New Faces New Voices (NFNV) Uganda Chapter, a Graca Machel Initiative, identified specific gaps for rural women in terms of access to finance including: little or no formal education, inadequate training on formal financial literacy, women being perceived as housekeepers and not fit to participate in economic activities and poor infrastructure in rural areas.
Against this backdrop, and in an effort to address the challenges of women's access to finance in rural areas, NFNV Uganda Chapter, in partnership with the Uganda National Entrepreneurship Development Institute (UNEDI) began implementing a Financial Inclusion model through the Savings and Villages Enterprises (FINISAVE), a financial cooperative model aimed at increasing the availability and size of finance in remote areas. The FINISAVE Model is based on two schools of thought: (i) People do earn some income but need to be guided on responsible spending and on investments that fall within their income; and (ii) collectively pooling resources together for improved household incomes while working hard on key productive value chains. The FINISAVE model was pilot tested in Lwengo District, with more than 125,000 women entrepreneurs, and a total of 250,000 men and women in 465 villages benefitted from this initiative.
We noted the following during implementation: (i) The sharing of costs through a public-private-civil society partnership has assisted in addressing the lack of infrastructure in women accessing financial institutions in rural areas; (ii) through the formation of savings and investment village based groups that is linked to a commercial bank via mobile banking, women in rural areas are able to work in profitable and sustainable investment cooperatives; (iii) the model underscores a paradigm shift in the cultural and traditional beliefs that a woman is a mere house labourer. This was done through a high-level business and financial literacy training programme, which encouraged communities to move towards self-discovery, a mind-set change, enabling a woman to identify opportunities around her. These women, who had previously not seen the inside of the bank, can now confidently walk into a bank with clear knowledge of the banking services, products and their rights as consumers.
Looking forward and from what we have learnt from this process, regulatory authorities and financial institutions should:
- regulate agent banking services shifting from a corporate culture to a pro-poor service delivery that is context specific;
- create rural women guarantee and production material subsidy funds;
- embrace and highly promote the policy of public-private civil society partnerships in financial service delivery;
- design products that can be accessed by all categories of the female clients especially those at the lowest financial strata;
- build capacity to serve women as a special segment by developing new finance models specifically geared towards increasing access to finance. The proposed initiatives should address the gendered factors that constrain the growth and sustainability of rural women's businesses.
- There must be a mind-set change and paradigm shift that the rural populace are merely recipients of corporate responsibility to financial institutions and that poverty is part of the package for rural communities in Africa. This will be a missed opportunity, as the rural populace are credible, vital contributors to the economies in Africa.
In a panel in a recent IFC/MasterCard Foundation conference in Johannesburg, Mark Flaming of MicroCred reminded us that there is a tension running deep in all regulatory discussions of digital financial services (DFS) for financial inclusion, and that is between the banking and payments traditions. These are differentiated regulatory pillars that are deeply ingrained institutionally as separate departments within every central bank, and as separate committees within the Basel structure at the top of the global regulatory food chain. The two traditions are increasingly encoded legally, as more developing countries are passing payments systems laws distinct from banking laws.
Payment system departments within central banks have an instinctive understanding of network effects, so they tend to be friendly to an inclusion agenda that promises to connect more people to payment networks. Also, their general aspiration is to increase the share of transactions that happen in real time and reduce credit and counterparty risk, so digital financial inclusion platforms are in fact supportive of their system stability objective.
Banking supervision departments, on the other hand, tend to take a much more cautious approach. They tend to worry much more about financial depth relative to the volume of economic activity rather than the size of the population. Their supervisory resources are much more overworked given the inherently more complex and untransparent business of banking, and tend to look at technology, service and business model innovation with more suspicion, as things that could potentially get out of hand. The global financial crisis has of course given them ample evidence to support this instinct. They are more focused on protecting what is (risks) than on pushing the frontiers (opportunities).
So which side of the regulatory house should own, or at least take the lead on, financial inclusion for the masses in developing countries? Things have moved fastest in countries that have given it to the payments side, which tends to be more in tune with infrastructure-light digital service platforms and more comfortable dealing with a broader range of players. Under a new type of e-money issuer (EMI) license, they are letting non-banks (and in particular mobile operators, but also electronic top-up specialists and independent retailers), offer basic transactional services to those for whom traditional banking services are too costly, inconvenient, or simply unavailable.
But this has been the problem: payments people very reasonably worry that this foray into proto-banking risks tipping their side down a regulatory slippery slope that may lead to the kind of burdensome prudential and consumer protection regulation that mires the banking side. One way to avoid this has been to sharpen the differences between electronic money and banking services - so that putting money in an electronic money account is made to feel very different to putting money in an electronic bank account.
Accordingly, EMI licenses in many countries carry tough restrictions such as precluding payment of interest on saved balances, imposing lower account caps, banning their marketing as savings accounts or using the term banking at all, banning the bundling of credit offers even if they are funded externally to the EMI, and excluding them from deposit insurance. But this just seems like an overly limited banking option for the poor: financial inclusion ought to be more than payments.
This sharp distinction between EMIs and banks has also introduced regulatory arbitrage opportunities between banks and EMIs, insofar as the payments and banking supervision departments set different standards for service functions common to both, such as requirements for account opening, e-channel security, and contracting of retail stores as cash in/out agents. In some countries, this has made it easier for mobile operators rather than banks to offer basic financial services to the (traditionally excluded) mass market.
I argue in a new paper that the next round of regulatory reforms for financial inclusion needs to address both these issues. By neglecting savings, the current practice does not serve a full enough vision of financial inclusion.
Firstly, EMIs licensed under payments system frameworks need to be unencumbered from unjustified restrictions. In particular, they should be able to offer savings services on the same basis that banks do. For the essence of banking is not the mere act of taking deposits (which is easy to supervise), but rather the reinvestment of those funds in a way that entails credit and liquidity risk (which is not so easy to supervise). Accordingly, EMIs serving the poor should be reinterpreted as narrow banks - institutions that take deposits from the public and manage customer accounts on the same terms as banks do, but that do not intermediate the corresponding funds. Because narrow banks don´t themselves place bets with depositors´ money, they should remain firmly in the payments pillar.
Secondly, regulation should aim not only to introduce new types of competitors, but also to create a more level playing field between players licensed under banking and payments pillars when they perform similar functions in similar fashion. Banking regulators need to be much more open to adopting the kinds of regulatory practices that payments regulators employ routinely when real-time technology platforms are used in a way that minimizes credit and counterparty risks. A key element here is cash in-cash out (CICO): it should not be any more difficult for banks to engage third-party CICO outlets than it is for EMIs, provided that all transactions happen securely on the bank´s technology platform in real time.
Ignacio Mas is an independent consultant on mobile money and technology-enabled models for financial inclusion. He is also a Senior Research Fellow at the Saïd Business School at the University of Oxford, and a Senior Fellow at the Fletcher School's Centre for Emerging Market Enterprises at Tufts University. Previously, he was Deputy Director of the Financial Services for the Poor program at the Bill & Melinda Gates Foundation, and Global Business Strategy Director at the Vodafone Group.