As India continues with its bank-led model for financial inclusion, experiences from other countries should be tracked for valuable lessons on the road ahead. This month's newsletter highlights recent international developments in financial inclusion. There are two lead stories: a) An interview with Felipe Lega of the Colombian Financial Regulation Agency where he explains why Colombia chose to go in for new legislation to allow non-banks a greater role in advancing financial inclusion and b) a news article from Bloomberg on Tanzania, where the poor are increasingly using mobile money for accessing banks and more advanced financial services.
Digital financial inclusion in Colombia at a turnaround: An Interview with Felipe Lega of the Colombian Financial Regulation Agency
Colombia has recently initiated legislation to allow non-banks to enter the low-cost electronic deposits market, with the aim of expanding access to digital financial services. Felipe Lega explains the motivation behind the move away from the bank-led model.
Colombia found that though it had successfully increased geographical coverage through mobile banking and banking agents and completed digitalisation of welfare transfers through banks, transaction activity was not increasing in the accounts.
In order to overcome this problem, legislation has been put in to set up new entities, the Sociedades Especializadas en Depósitos y Pagos Electrónicos that are not banks, but are regulated financial services providers subject to financial regulation and supervision. They need authorization prior to establishing their operations and must comply with governance (e.g., fit and proper requirements) and risk mitigation requirements (e.g., AML/CFT rules).
While Colombian legislation follows international best practices in setting up these non-bank entities (i.e. no intermediation of funds, liquidity and minimum capital requirements etc.), it has innovated though setting up deposit insurance for mobile accounts. This will give new customers an experience that is "risk and trauma free", says Lega.
Colombia is now exploring the need to regulate interoperability between electronic deposits and also examining the feasibility of allowing these new entities to be recognised as foreign exchange intermediaries.
Interestingly electronic payments already enjoy tax exemptions, a move that India could also examine as it incentivises a less-cash economy.
In Tanzania mobile operators have teamed up with banks to reach out to a customer segment that banks are typically not interested in. While here the mobile operator may seem to be playing the role of a business correspondent, the relationship between the mobile operator and bank is radically different from a bank-BC relationship. In the Tanzanian model, the mobile operator is independently sourcing business, and provides the account and the customer to the bank, which remains in the background.
The bank and the telco assess risk by looking at the customer's phone records and establish a credit limit; this data sharing allows the poor with no formal source of income to develop a credit history and be deemed credit worthy by banks. As Jeremy Ngunze, chief executive officer of CBA Kenya, notes, "This is significant in markets where credit rating is nascent or largely non-existent... The key is driving efficiency through automation and bringing down costs while making it possible to transact in amounts that would not be profitable in formal banking."
Tanzania has also leapfrogged the need for credit and debit cards; GSMA estimates that phones are used for about half of all cash transfers for bill payment in Tanzania, versus none six years ago.
Section I: Policy – the latest from India's policymakers
Pradhan Mantri Jan Dhan Yojana Website launched
Department of Financial Services, Ministry of Finance, October
Pradhan Mantri Jan Dhan Yojana Mission Document
Department of Financial Services, Ministry of Finance, October
Banking Renaissance: Inclusion, Innovation & Implementation
Shri S. S. Mundra, Deputy Governor, RBI, October 11, 2014
Role of Financial Sector in Spurring Growth and Expanding Financial Inclusion in North Eastern Region
Shri P. Vijaya Bhaskar, Executive Director, RBI, September 19, 2014
Financial Inclusion by Extension of Banking Services – Use of Business Correspondents
Pradhan Mantri Jan Dhan Yojana-Involvement of Cooperative Banks
Usage of ATMs –Rationalisation of number of free transactions - Clarifications
Section II: News and Views Digest – the latest from India and abroad
Goa will have 100% financial inclusion
Why Financial Inclusion in India Is Not Quite There Yet
Task Force on India Post to submit report by year-end: Centre
Here's bankers' take on financial inclusion
A fresh approach to financial inclusion
Leverage technology for financial inclusion: RBI Governor
Bandhan Bank may begin ops by early 2015;partners FIS for tech
Hughes India connects 12000 ATMs
Aadhaar an important tool for govt: Srikanth Nadhamuni, CEO, Khosla Labs
Making financial inclusion sustainable
Financial inclusion is an evolution
Reaching half of the market: women and mobile money – The example of Beam in India
Disruption is Simmering in Kenya
Financial Inclusion Histories
Reaching half of the market: women and mobile money - The example of UBL in Pakistan
Reaching half of the market: women and mobile money – the example of Nationwide Microbank in PNG
Regulation and the Potential for Low-Value Mobile Remittances: Addressing Exchange Controls
Gates Foundation Issues Mobile Payments Challenge: An interview with David Lubinski
Capacity Building Markets: Few and Far Between
CGAP's National Surveys of Smallholder Households
10 Myths About M-PESA: 2014 Update
Section III: Research – surveys and studies on expanding access to financial services
Extending reach: Mobile money in rural areas
Jennifer Frydrych and Hege Aschim, GSMA MMU, October 2014
How Can BC-MFIs Tap Household Savings?
Akhand Tiwari, Akhilesh Singh and Graham A.N. Wright, MicroSave, October 22, 2014
District Readiness Assessment (DRA) Tool: Expediting G2P Payments
Lokesh Singh and Ritesh Rautela, MicroSave, October 16, 2014
Operationalising Payments Banks for Inclusion
Policy Brief August, 2014
Direct Benefits Transfers for Inclusion
Policy Brief July, 2014
Financial Inclusion- Two priorities for India's New Government
Policy Brief June, 2014
In the media
Do we need banks for financial inclusion?
Domain-b.com, 17 October 2014
Column: Making PM Jan Dhan Yojana a game-changer
Financial Express, 01 September 2014
Will the new financial inclusion plan work?
Financial Express, 18 August 2014
Column: Fix Aadhaar, don't junk it
Financial Express, 27 June 2014
New legislation in Colombia marks the shift from the bank-led model
Moving beyond remittances
Competition helps improve access for unbanked households
Banks raise barriers to basic banking