From Access to Success: Pathways to Financial Inclusion
Wednesday 6th June 2012 - 3:30pm - 4:30pm
Wednesday 6 June
How can business and government help the unbanked to overcome barriers to accessing financial systems and become a driving force of the economy?
To share bold ideas on how to scale up promising strategies and harness recent developments in the field of inclusive finance
Insights from the Session
- Financial inclusion is a win-win engine of growth, drawing more revenues into the formal system while tackling marginalization
- Financial exclusion and youth unemployment are linked – loans to start up SMEs in the MENA region are nearly impossible to obtain
- Many people in the developing world cannot get loans or accounts because they have no ownership deeds, legal jobs or credit histories to give banks the guarantees they need
- Financial inclusion and financial literacy are two sides of the same coin; the latter is essential for consumer protection
The past year’s turbulence in the MENA region has shone a spotlight on youth disenfranchisement and unemployment. Among Arab youth’s most prominent demands have been jobs and a stake in the economy. In this panel discussion, speakers said financial exclusion was at the heart of the uprisings. The Arab world has seen growth only for a tiny elite. The region’s banks monopolize GDP, but lend very little to SMEs. A dearth of jobs has combined with the near impossibility of getting credit to start a business to create a sense of hopelessness among the region’s young people. Achieving greater financial inclusion and drawing more people into the formal sector is not merely in the interests of the banks, it is an engine of economic growth.
A lack of regulation and documentation holds back financial institutions from reaching out to much of society. In the developing world, the majority of property owners lack title deeds to prove ownership and enable the guarantee of loans – in Egypt and Tunisia, that proportion reaches 90%. Most businesses also operate illegally. Credit ratings register about one person in ten in the Middle East. One big challenge is for banks to find new types of guarantee. One solution suggested, already tried out in Bangladesh and parts of sub-Saharan Africa, is to use psychometric tests to assess credit risk. The incentives for financial institutions to bridge this gap are clear. In Egypt, one panellist said, the informal sector is worth US$ 351 billion, more than the total of foreign direct investment in the country since Napoleonic times. That is money that cannot be collateralized or invested against.
But creative solutions are emerging. At the forefront is mobile-phone banking. Sub-Saharan Africa has forged ahead in this field. About 2.7 billion people worldwide do not have a bank account, whereas by the end of the year there will be six billion mobile phone devices in circulation. Banks and telecommunications companies are increasingly working in tandem to reach new customers, a relationship that benefits both sides as well as the consumer. One risk discussed by panellists, however, is that in the absence of careful regulation, the growing financial presence and reach of telecoms companies could create a powerful and unaccountable shadow banking sector.
Potential security risks are another trade-off; it remains to be resolved how terrorists could be prevented from exploiting such banking if it is to be made so accessible that it can reach an illiterate farmer. For that reason, some countries such as Hong Kong and Singapore are holding back until they feel the necessary security is in place.
Another challenge highlighted in the discussion was financial literacy which, research shows, goes hand in hand with financial inclusion. Vulnerable new consumers must be armed with information for their own protection as they join the market. Several participants and audience members voiced fears that mobile-phone banking would leave customers without the personal interface of traditional banking that might enable them to seek advice. Turkey, which has sought to distribute income more fairly in the past few years of growth and financial reform, has announced plans to tackle financial illiteracy as well as to diversify its products and services to reach the excluded.
One solution attempted in India and elsewhere with considerable success is to encourage banks to give school-leavers accounts when they graduate. This gives them a credit history and fosters financial literacy. One panellist advocated government legislation to force banks to make this easier. Making use of post office networks is another possibility in countries that have a large national network.
Panellists also discussed microfinance, as a form of credit that often targets the disenfranchised, especially women. The benefits are far-reaching, including the training programmes that often accompany such projects, creating jobs. But loans often fund consumption rather than investment. Incentives must be provided to reverse that trend and ensure that the money goes further for the borrower, speakers said.
This summary was written by Lucy Fielder. The views expressed are those of certain participants in the discussion and do not necessarily reflect the views of all participants or of the World Economic Forum.
Copyright 2012 World Economic Forum
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Keywords: 2012 World Economic Forum on the Middle East, North Africa and Eurasia, Istanbul, Bridging Regions in Transition, Turkey, Eurozone, Rising to the Growth and Employment Challenge, Banking, Finance, Marginalization, Unemployment, Youth
Jeroo Billimoria, Managing Director, Child and Youth Finance International, Netherlands; Social Entrepreneur
Mohamad Al Ississ, Assistant Professor, Economics, School of Business, American University in Cairo, Egypt; Global Agenda Council on the Arab World
V. Shankar, Group Executive Director and Chief Executive Officer, Europe, Middle East, Africa and the Americas, Standard Chartered, United Arab Emirates
Lars H. Thunell, Executive Vice-President and Chief Executive Officer, International Finance Corporation (IFC), Washington DC; Global Agenda Council on Youth Unemployment
Cevdet Yilmaz, Minister of Development of Turkey
Tracy Corrigan, Editor-in-Chief, Wall Street Journal Europe, United Kingdom
Group Executive Director and Chief Executive Officer, Europe, Middle East, Africa and the Americas, Standard Chartered, United Arab Emirates
Bachelor's in Physics, Loyola College, India; MBA, Indian Institute of Management. 1982-2001, with B...
Managing Director, Child and Youth Finance International, Netherlands
Social entrepreneur; founded six organizations, the latest being ChildFinance International, a globa...
Mohamad Al Ississ
Professor, Economics, AUC School of Business, Egypt
BA in Economics, Harvard; MA in Middle Eastern Studies, Harvard; MPA in Int'l Development, Harvard; ...
Minister of Development of Turkey
1988, BA (Hons) in Public Administration, Middle East Technical University, 1994, MA (Hons) in Inter...
Digital Editor, Wall Street Journal, USA
Former: Columnist and Assistant Editor, Daily Telegraph; Editor of Lex column, News Editor and Edito...