The Microcredit Summit Campaign, as part of its 6 Pathways, is helping to highlight ways that digital platforms are helping to expand financial inclusion, especially for the extreme poor. We are pleased to share with you this Executive Summary of their research.
At the 18th Microcredit Summit this research will be included in the breakout session “The Digital Revolution and Financial Inclusion.” We hope to see you there!
>> Authored by Jorge Moncayo and Marcos Reis.
Jorge is an analyst at the Central Bank of Ecuador with a Master’s in Business Administration. Note: Citations below may be found in the full article.
Financial systems have a vital role in national economies. They provide savings, credit, payment, and risk management products to society. In this sense, inclusive financial systems — those with a high share of individuals and firms that use financial services — are especially likely to benefit poor people and other disadvantaged groups. On the contrary, poor people must rely on their limited savings to invest in their education or become entrepreneurs. In addition, small enterprises must rely on their limited earnings to pursue promising growth opportunities (Demirguc-Kunt and Klapper, 2012).
Lack of access to finance can lead to poverty traps and inequality (Galor and Zeira, 1993; Aghion and Bolton, 1997; Beck Demirguc-Kunt, and Levine, 2007) and, in the other direction, providing access to savings instruments can increase savings (Aportela, 1999; Ashraf et al., 2010a), productive investment (Dupas and Robinson, 2009), consumption (Dupas and Robinson, 2009; Ashraf et al., 2010b), and female empowerment (Ashraf et al., 2010b).
In 2012, the percentage of adults with access to banks in the rural and urban area in Ecuador were 35% and 45%, respectively (World Bank, 2012). In 2012, 35 percent of adults in rural areas and 45 percent of adults in urban areas of Ecuador had access to banks (World Bank, 2012). This means that, in both areas, less than half of the economically active population have access to financial services. In this scenario, it is important to increase the population’s access to financial services, especially in the rural sector of the country. This should be achieved through inexpensive mechanisms that facilitate easy access of citizens in order to achieve a dynamism in the economy, even in the most remote areas.
Despite Ecuador have a low proportion of the population with access to the banking system, the same does not apply to mobile phones. In 2013, there were more mobile phone lines than citizens in the country (MINTEL, 2013). In this scenario, Ecuador will host the first-ever state-run electronic payment system, the so-called Electronic Money System (Sistema de Dinero Electronico, in Spanish). Electronic Money (EM) will be issued by the Central Bank of Ecuador (CBE), denominated in American dollars and pursuant to the provisions of the country’s Financial Code. It will be stored and exchanged via electronic mobile devices only.
This system will be not-for-profit and provided at a low cost. The system will be administered by the CBE and thus avoid compatibility issues with different systems and phone operators. The EM can be used only with the individual key that the user will register with the CBE when activating its account. If the phone is lost, the user can block the account at any time by calling the contact center of the system.
The Electronic Money System does not require internet access or an account with a financial institution, and it can be redeemed for physical money at any time. Only Ecuadorian citizens will be able to open an account at the central bank for that. Each citizen will be allowed to be titular in one account and participate in other two. There is a ceiling of US $9,000 to be held in the account. There is no minimum. When you enroll in the system, a virtual account in the Central Bank is automatically opened. This account does not earn interest and allows you to make payments from the phone. The requirements for natural persons are only National Identification Number and a phone number.
The primary objective of the EM is financial inclusion. Thus, rates will be much lower than those prevailing in the banking system. They range from free services up to US $0.25. This is far below what the banking system charges. For instance, the activation of an account is free in the EM system and is charged up to $5.38 in the financial system. In addition, you need to pay up to $0.45 for a withdrawal in the banking system while in the EM the charge is one-third of it, $0.15.
The proposed system charges small fees because the program is not-for-profit. Besides, in contrast to countries where the services are provided by mobile operators and are restricted to transactions involving clients of the operator — though an extra fee is charged for those who want to make transactions with other operators — Ecuadorian citizens can use any phone operator and deal with any phone operator with no extra charge in their account.
It is important to note that the system introduced in Ecuador is very different from the creation of a parallel currency. Despite several headlines to the contrary, Ecuador’s Electronic Money System is dissimilar from cryptocurrencies like bitcoin. While the world’s most famous cryptocurrency is a digital token running on a decentralized (yet cryptographically secured) electronic network, Ecuador’s new project would be controlled by the government and tied directly to the local currency, the American dollar. The EM will be delivered only in physical exchange of money.
That said, the paper aims to discuss the introduction of the EM in Ecuador and its possible impacts in financial inclusion. It contributes to the literature in the sense that the EM is the first initiative in the world of a government-based mobile money, and this article is the first to analyze its impacts on financial inclusion in Ecuador.
The main findings are the following: i) the EM, in contrast to other mobile money systems in the world, will be organized by the central government and will not pursue profits in its operations. With that, it will be able to provide services at a very low cost to the consumers. However, the government should enable the creation of private competitors in the market — accompanied by a set of tight regulations — in order to guarantee that the consumers are maximizing their welfare choosing between the available options; ii) being organized by the government, consumers will not have to pay any extra fees to deal with different mobile operators. This represent a significant difference between the current mobile money programs that are offered by private companies; and iii) in order to foster financial inclusion in Ecuador, the government need to expand the program after the introduction of the EM is concluded and include other services in the system, notably, providing credit and facilitating the buying of insurance.
This article does not intend to discuss other impacts of the introduction of Electronic Money in Ecuador that are not directly related to financial inclusion nor have a broad discussion about financial exclusion in Ecuador; rather, it aims to dissect how the introduction of Electronic Money can affect financial inclusion in Ecuador. For that, the paper is structured as follows. After this brief introduction, Section 2 reviews the concept of financial inclusion and its determinants. In addition, it discusses the recent global expansion of the mobile money. Section 3 presents the main features of the electronic money, the first mobile money entirely operated by the government in the world, and section 4 analyzes the current situation of financial exclusion in Ecuador and identifies the possible roles for the electronic money to diminish it. Finally, section 5 concludes the article.
18th Microcredit Summit sessions
Join us in Abu Dhabi from March 14th to 17th for the 18th Microcredit Summit: Frontier Innovations in Financial Inclusion. Check out these measurement sessions and register today!
- Innovations in Measuring Social Impact
- Empowering Women through Financial Inclusion: Measuring our Impact
- Frontier Social Investing: Putting Impact First
- The “Health and Microfinance Partnerships against Poverty” training
- The “Introduction to the Universal Standards for Social Performance Management and the SPI4” training