Beth Rhyne’s recent review of the Davos report “Guidance on the application of the core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion” articulately and clearly present some of the chief benefits of the Davos meeting as well as outline some of the important work that still largely remains in context of framing regulations to support achieving full financial inclusion.
The Campaign, like the Center for Financial Inclusion, has a mission that focuses on ensuring that as financial inclusion strategies are developed become the prime means of moving forward the global agenda to end poverty, that these strategies are sure to include those who are among the hardest to reach populations. This will take a mix of new and innovative programs as well as, as Beth Rightly phrased it, a reinvention of how regulatory frameworks facilitate those programs.
At the 18th Microcredit Summit, the Campaign is organizing, in partnership with the Arab Monetary Fund (AMF) and the Arab Gulf Fund for Development (AGFUND), a special meeting of Governors of central banks throughout the Arab region to discuss recent progress in achieving this redefined shape and meeting their financial inclusion mandates. With participation from key stakeholders like GIZ, CGAP, and others, we will be facilitating a deep discussion on the importance of many of the key issues that Beth has raised. Learn more about this side event, called “Implementing National Financial Inclusion Mandates.”
We encourage you to read her assessment on where Davos has brought the regulatory sector and what roads and challenges lie ahead for it. Furthermore, if the topic really grabs you, the Davos report is open for public comment until March 31, 2016.
The following article was posted on MasterCard’s Inclusion Hub.
Davos Should Consider Basel III Impact on Inclusion
Elisabeth Rhyne | January 22, 2016
At Davos, concern about fintech is dominating financial providers’ discussions; Basel III isn’t far behind. Tougher controls can lead to a pull-back from small-dollar bank accounts, reducing the access low-income people need. Elisabeth Rhyne, Managing Director of the Center for Financial Inclusion at Accion, breaks down the challenges of adapting regulators’ concerns to the new world of financial inclusion
When the Basel Committee speaks, everyone involved in the financial world pays attention. In their new report, it attempts to come to terms with financial inclusion.
As the global regulatory framework for banks, Basel III has no doubt has featured in side conversations at Davos. Banking authorities around the world must make shifts to maintain the Committee’s concern with financial system stability, while opening the way for financial inclusion to advance.
….If that title grabs you, you might be one of those people who can actually read the document’s carefully worded prose.
In response to the guidance, I would like to share four broad observations, not so much about the specific guidance – which is generally sound – but about the challenges involved in adapting the work of banking authorities to the new world of financial inclusion.
The guidance is uneven in its coverage of new types of financial inclusion providers
The report goes deep on microfinance. It discusses, but has not yet fully explored, digital financial services, big data and new forms of consumer credit.
The implicit assumption throughout the report is that the biggest financial inclusion challenge is credit risk coming from small lenders. This underplays the extent to which financial inclusion also involves large non-financial corporations like telecoms companies and major retail chains. The techniques these players deploy may require supervisory approaches different than those for smaller institutions.
Granted, it may be too soon to have fully formed guidance for all of these emerging areas, but it is important for the committee to implement distinct efforts to examine each of these new areas, in addition to the attention it pays to the important problem of how to supervise small financial institutions and credit providers that are not fully regulated.
Proportionality is an important principle – but doesn’t yet translate well in actual guidance
The idea behind proportionality is that the rigor of controls should be commensurate with the risks to be mitigated.
Given the small amounts of money involved in financial inclusion – both in terms of individual accounts and smaller financial service providers – proportionate should mean simpler in many cases.
Instead, proportionate seems to be synonymous with “tailored.” The guidance discusses tailored mitigation strategies for specific risks that arise with financial inclusion, but spends much less effort considering how to simplify.
There are two exceptions. For AML/CFT (anti-money laundering, anti-terrorist financing regulation, based on guidance from FATF), the recognition of low risk leads to tolerance of simpler KYC (know-you-customer identification) hurdles for small-value accounts.
For supervision of smaller financial institutions that cater to the poor, like credit unions or microfinance institutions, it allows for more offsite or “auxiliary” supervision: for instance, working with associations to take on some supervision tasks. For the most part, the report advocates quite stringent controls.
This has a big impact on financial inclusion: the small margins involved in accounts for low-income clients mean that tougher controls can lead financial service providers pulling back, reducing access.
Must access come only if new customers and new services have the same degree of protection as those already served? Let’s debate this important question. I can think of good arguments on both sides.
Financial inclusion places an enormous burden on banking authorities to master new skills and activities
Supervisors are asked to take on new roles: for example, more market monitoring, learning about new business models and technologies, collecting demand side data, coordinating across multiple government agencies, and extending their oversight to new entrants previously beyond their mandate.
Many of these roles are not just additional to current activities; they require different competencies. The challenge may overwhelm banking authorities in smaller or less developed countries. Though it would be great if supervisory agencies developed all the recommended competencies, they will need a lot of help to do so.
The institution-by-institution supervision that is the bread and butter of supervisors looks like only one piece of what’s needed for financial inclusion, as the recommended focus shifts towards more market-level surveillance.
Consumer protection gets more attention, but it is still a bit of a foster child
The Basel Committee’s document raises consumer protection issues. It notes that maintaining consumer confidence in the financial system is an important prudential concern that justifies consumer protection regulation.
What remains elusive is clarity about how to divide responsibilities between those responsible for prudential supervision and those responsible for protecting consumers. It’s no wonder, given the great overlap in the span of concern. The prudential section of the guidance covers issues ranging from over-indebtedness in the marketplace and fraud prevention, to the value of analyzing complaints information, data security risks and depositor protection for mobile money.
The guidance states that countries need to have an entity with a direct consumer protection mandate, whether within the prudential regulator or not, and urges cooperation among agencies. Like much of the guidance contained in the new document, this kind of inter-agency coordination is easy to recommend — but hard to do.
Regulators must reinvent themselves for financial inclusion
At the end of the day, I am left with the sense that although this guidance reflects a process still in progress, the Basel Committee has made an urgent effort to come to terms with the changes shaping the financial sector of the future.
Organizations involved with financial inclusion policy and regulation, like the Alliance for Financial Inclusion, the World Bank, and the Global Partnership for Financial Inclusion, must support regulators around the world to reinvent themselves for the tasks ahead.
In fact, everyone involved may now provide their own opinions: the document is open for public comment until March 31, 2016.