Two billion is a massive number that many of us find difficult to visualise. It was the number of monthly Facebook users just a year ago. It is the number of iOS devices sold by Apple worldwide. And it is the number of people globally who do not have a bank account. Around half of the ‘unbanked’ live in the Asia Pacific region, with financial exclusion at its highest among rural communities and areas with low to no education.
In an era of rising inequalities, regulators and policy-makers are looking for ways to not only make banking more accessible but to also transform the financial sector so that it can play an effective role in reducing the increasing wealth gap.
Designing effective policies
Many initiatives have been launched to tackle these challenges. For example, the IFC and the World Bank are driving ‘UFA2020’ (Universal Financial Access) which aims to provide all adults with access to a transaction account or electronic instrument by 2020, while the topic of financial inclusion remains at the forefront of many a conference agenda.
The Mekong Inclusive Growth Forum is another promising initiative. The 2018 edition recently took place in Bangkok and was devoted to producing key recommendations to foster economic growth among Mekong economies (Cambodia, China, Laos, Myanmar, Thailand, and Vietnam). The urgency of overcoming financial exclusion was a key area of focus for the two-day dialogue, with many citing the need to continue to foster grassroots initiatives.
Digital IDs were highlighted as an important tool to accelerate financial inclusion, as they enable mobile payments on 2G phones (see the report we have written on this topic). The need to update traditional Know Your Customer (KYC) frameworks was also discussed. Indeed, e-KYC can authenticate the identity of a potential customer, as well as transmit and/or store it through electronic or digital channels. Yet even with e-KYC frameworks and digital IDs fully rolled out, many communities – such as migrant workers – remain financially excluded and in need of cross-border remittances.
Leveraging capital markets
Clearly, there is no quick fix to this specific challenge, let alone the broader obstacles to inclusion. Many, understandably, call upon to financial institutions to make donations to pilot schemes. But while securing funding for initiatives that seek to tackle the issue on the ground is important, philanthropy should not replace policy reforms. Yet even this mindset misses what is potentially a much more significant opportunity for financial inclusion and broader economic growth: combining existing efforts with a top-down approach that seeks to unleash the potential of capital market development.
The argument here follows that broadening and deepening markets will widen the pool of available funding while also increasing cross-border flows. The development of classic bond re-purchase (‘repo’) markets, for instance, increases liquidity in local currency bond markets, expands pools of available finance – directing funds to much-needed infrastructure projects and reducing costs for governments, pension fund managers, and other long-term investors.
While money is not the only answer to ending financial exclusion, we should not underestimate the role of financing in providing infrastructure, clean water, and energy – all of which influence job creation and support healthy workers. Capital markets also enable SMEs to access a range of short- and long-term financing products and services, leading to their sustainable development by reducing dependency on aid organisations.
More advanced capital markets also free up other innovative sources of finance (i.e. private equity, venture capital) to develop the non-bank financial sector, including FinTech solutions designed to assist the under-banked and the unbanked. While non-bank financial institutions (NBFIs) or companies (NBFCs) cannot issue cheques or demand drafts, their ability to offer loans, even micro-loans, via digital and mobile platforms has created new channels for those without traditional bank accounts to participate in wealth-generating activities. However, the current potential of non-bank finance will always be limited by the extent of capital market advancement.
Some governments are hesitant to introduce more complex financial products, still wary of contagion risk, a hallmark of the 1997 Asian financial crisis. But this is where we must continue to emphasise the role of capital markets in providing risk management tools such as Over The Counter (OTC) derivatives which help firms meet liabilities and manage cash flows while also controlling risks. We must also point out that non-bank finance can also help protect those that partake against exposure to new risks while relieving the strain on incumbent banks and social funding by enabling products around savings, pensions as well as insurance.
Finding the right formula
For capital market development to succeed, standardising or making issuance documents interoperable would help issuers streamline multinational issues, increasing investors’ appetites to diversify through cross-border investments. More immediate, however, is the need to demonstrate the link between developed, robust capital markets and inclusive growth.
Small scale pilots to trial and monitor the introduction of more complex financial products, perhaps through regulatory sandboxes, could be one way to demonstrate their potential. Continued public-private dialogues and knowledge-sharing will also remain key as we are only just starting to join the dots to fully appreciate that the solution to financial exclusion is multi-dimensional.
Success is rarely achieved by progressing in a straight line, but the road is usually more manageable when we can better visualise not just the destination but how to most effectively navigate the course. As we strive for inclusion, ensuring we leverage the full range of tools available will maximise the rate of progress. And this must include leveraging capital markets to their full potential.
Photo by Ravi Roshan