Banking and Capital Markets

Rural banks can accelerate financial inclusion in Southeast Asia. Here's how

In Southeast Asia, rural banks by definition are traditional banks that serve farmers, fishermen, workers or communities away from the highly-dense metropolitan cities in a country.

In Southeast Asia, rural banks by definition are traditional banks that serve farmers, fishermen, workers or communities away from the highly-dense metropolitan cities in a country. Image: Unsplash/Beth Macdonald

Moises Benedict Carandang
Vice-President, First Circle Growth Finance
Anton Carlos
Head of Customer Success, First Circle
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  • Southeast Asia is home to more than 660 million people, with at least 70% of consumers unbanked or underserved and many SMEs still preferring cash.
  • The region's financial services industry is ripe for innovation and evolution, and key to this will be rural banks, which cover underserved communities.
  • By partnering fintech companies with rural banks, initiatives can drive financial services innovation and better serve customers in all areas.

With more than 660 Million people living in Southeast Asia, this culturally rich and diverse region is considered as one of the fastest growing regions in the world with a projected GDP of $4.7 trillion by 2025.

As many experts have noted, the region’s financial services industry is ripe for financial innovation and evolution. But as of 2019, at least 70% of the consumers remain ‘unbanked’ and ‘underbanked’ and 70% of small- and medium-sized enterprises (SMEs) still prefer to accept cash payments.

Individuals and SMEs are still adjusting to the different financial technology, or fintech, solutions being offered in banking, credit, payments and remittances – a trend which accelerated due to the pandemic.

Financial inclusion is still at the forefront of different initiatives in the region with the raise of digital banks offering a wide range of financial services and other banking-as-a-service (BaaS) solutions.

However, one key segment that is rarely talked about is how fintech firms can join with traditional rural banks to significantly improve the financial inclusion in the region.

Rural banks can help improve financial inclusion

In Southeast Asia, rural banks by definition are traditional banks that serve farmers, fishermen, workers or communities away from the highly-dense metropolitan cities in a country. By design, rural banks are physically well-positioned to respond to the existing financial gap given their geographic advantage and expansive network.

In the Philippines alone, as of end-December 2018, there were 472 rural banks and cooperative banks with a network of more than 3,600 offices and branches spread around the country.

"Today, rural banks have room to build on the relationships and market familiarity they have established with their rural communities. It is strategically possible for financial technology or fintech to enhance these relationships"

V Bruce J Tolentino et al in 'Enabling Rural and Agricultural Finance for Inclusive Development in the Philippines'

These traditional rural banks are poised to bring the biggest disruption and impact to the industry, but how can digitizing these age-old banks and processes help accelerate the financial inclusion in the region and what support will these players need?

Digital financial services in Southeast Asia. rural banks
Digital financial services in Southeast Asia Image: Bain & Company

Rural banks experienced in underserved areas

Rural banks were established to service the unbanked and are strategically located in far-flung and rural areas of a country. These banks have years of experience serving the underserved sectors like small businesses, farmers, fishermen and remote communities.

Through constant exposure to the problems of the unbanked sector, rural banks have a rich understanding of different problems being experienced by the people on the ground.

As stated by Bangko Sentral ng Pilipinas (BSP) Assistant Governor Arifa A. Ala from our interview with her, “Engaging the unbanked in the development of financial solutions presents multiple opportunities for fintech firms.

"First, it allows fintech firms to gain a deeper understanding of the financial landscape and digital literacy of the communities they intend to serve.

"Second, with greater participation by the end users in the development of the solution, challenges on building trust and getting the buy-in on tech products/services may be alleviated…”

Various fintech firms and initiatives can work closely with rural banks to drive digitalization of these traditional rural banks with foundational understanding of what the end users want for, and need from, their financial services.

Marrying these two worlds of fintech and rural banking will increase adoption rates of the unbanked and underbanked, given that these solutions were worked and developed closely with them.

Regulators as partners in banking change

Regulators have a significant role helping drive the financial inclusion through their direction and mandates. But by creating specific rules and guidelines around supporting rural banks and its evolution will encourage more rural bank players to take the leap into digitizing their processes/services for their customers.

One key example of this is the Philippines' central bank's Rural Bank Strengthening Program (RBSP), which launched in May 2022. This memorandum has four clear and key points that it aims to achieve:

  • A strengthened capital base
  • A holistic menu of five time-bound tracks, all aimed at ensuring that rural banks that continue to operate have adequate capital to support their operations and effectively comply with regulatory expectations
  • Incentives and capacity building interventions to promote successful undertakings
  • Review and enhancements of existing regulations to ensure consistency in policy approach and direction

Partnerships to cater for unbanked

An example of the RBSP in the works is the pending application of First Circle, a fintech firm specializing in SME financial services, for investment into a rural bank. Marrying an established fintech firm in First Circle with a long-standing rural bank has the potential to a specialized banking institution catering to underserved markets.

Acting under the clear guidance and support of the BSP, First Circle has the opportunity to permanently elevate local communities fulfilling the strategic aims of the central bank.

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Another example is the Vietnam Bank for Social Policies, established in 2002 by the government to offer a full range of financial services to the poor at preferential terms and subsidized rates.

By complementing this with other regulations that promote financial digitalization and inclusion throughout Southeast Asia, rural banks are given proper guidelines and clear support on how to take the next step forward into their journey.

This also enables these traditional rural banks to veer away from their textbook definition of only servicing farmers, fishermen, workers and so on, and instead compete with bigger and more modern banks.


What is the Forum doing to improve the global banking system?

The path forward for rural banks and microfinance institutions is clearly laid out in front of them. With their vast experience with the unbanked and regulators giving a helping-hand, it is time for these players to spearhead the drive for financial inclusion.

As V. Bruce J. Tolentino et al stated, “Clearly, there are opportunities and niches in rural and agricultural finance that rural banks are uniquely suited to exploit. The next reform must enable rural banks to shed the vestiges of their origins in supply-led finance and positively embrace the digital innovations enabled by the Fourth Industrial Revolution.”

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