Financial Inclusion- News and Views - November 2014
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.
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
The Indicus Centre for Financial Inclusion was launched in 2011 to distil and disseminate information on accelerating the poor’s access to high-quality financial services. The Centre is supported by the Bill & Melinda Gates Foundation. http://www.indicus.net/icfi