Workshop on Financial Inclusion

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Workshop on Financial Inclusion APEC 2013 23
24 May 2013 North Sulawesi- Indonesia
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Regulatory Framework to Promote Financial
Eligibility of Poor Households and SMEs
Workshop on Financial Inclusion APEC 2013 23
24 May 2013 North Sulawesi- Indonesia
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Presentation Outline

• The Financial Exclusion Problem
• The Concept of Financial Eligibility
• Role of Regulation
• Regulatory Experience of Selected Countries
• Conclusions

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An Acute Global Problem
Financial Exclusion Figures
Billions

• Note According to latest available data, the
  adult population now is about 5.08 billion

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An Acute Global Problem
Asia is home for 59 of the Unbanked Adults
Millions
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MSMEs in Emerging Markets
Estimated Number of MSMEs
Millions
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MSMEs in Emerging Markets
Do not use financing from financial institutions
at all want it
70

• 85

• 85

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MSMEs in Emerging Markets

• Many formal SMEs are unserved or under-served
• 45- 55 of 25 million to 30 million formal SMEs
  do not have access to formal institutional loans
  or overdrafts
• Over a quarter of the formal SMEs do not even
  have a bank account
• Estimated credit gap for formal SMEs in East Asia
  alone is in the range of 250 billion to 310
  billion
• Source Stein P. et al. (2010) . Two Trillion
  and Counting.
• Source IFC and Mckinsey and Company Study (2010)

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A Diverse Group

• The Financially Excluded are a diverse group
• disadvantaged and vulnerable groups
• low income households
• Poor people without permanent residential address
• handicapped persons
• undocumented migrants
• women-owned SMEs
• SMEs in rural areas
• Newly established SMEs

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Self Reported Barriers
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Financial Eligibility

• Lower income people and most SMEs are categorized
  as unbankable partly because they are unable to
  meet the requirements of banks for account
  opening, saving or credit.
• If a SME must submit a tax return to borrow from
  a bank, those without tax returns are made
  ineligible.
• If regulations do not permit financial
  institutions to accept movable assets as
  collateral for loans, most SMEs will not be
  eligible to borrow

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The Role of Regulation

• If the regulatory approach is not risk-based,
  negative impact on the poor
• A risk-based approach is key to financial
  inclusion
• Taking a Risk-Based Approach to AML/CFT
  safeguards
• Simpler KYC norms/CDD measures for small value
  accounts
• Flexible type of documentation that are within
  reach of poor people
• Applying a Progressive or Tiered KYC/CDD
  approach

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Pro-Poor Regulatory Measures India

• Reserve Bank of India (RBI) regulation in the
  early 1990s allowed banks to open savings
  accounts for Self-Help-Groups (SHGs)
• 60 of the SHGs faced challenges in complying
  with KYC norms
• In March 2013, RBI simplified KYC norms for SHGs
• Verification of all SHG members no longer
  required
• For credit access, no separate KYC if
  verification has already been done for savings
  account

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Pro-Poor Regulatory Measures India

• AML/CFT regulations authorize banks to open Basic
  Savings Bank Deposit Account (BSBDA) without
  normal identification documentation
• Only customers signature or thumb print and a
  self-attested photo is needed
• BSBDAs as of 31 Dec 2012-171.43 million

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Pro-Poor Regulatory Measures Philippines

• Central Bank regulations relaxed identification
  document requirements
• Allowed banks to accept documents that are within
  reach of poor people
• Barangay certification or certification of a
  local leader is accepted as proof of
  identification and residence

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Pro-Poor Regulatory Measures Philippines

• Philippines required SMEs to provide tax return
  and audited financial statement
• Most SMEs financially ineligible
• In early 2012, Central Bank exempted small
  enterprises from these requirements increasing
  financial eligibility of the SMEs

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Pro-Poor Regulatory Measures Fiji

• Identification document can be provided by a
  suitable referee
• Suitable referees include village headmen,
  religious leader and
• Official of the Fiji Sugar Corporation sector
  office for sugar cane farmers and laborers

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Pro-Poor Regulatory Measures South Africa

• Regulation provides for a form of simplified CDD
  for products meeting specific requirements
• No need for the verification of residential
  address
• This exemption enabled banks to launch the Mzansi
  account

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Pro-Poor Regulatory Measures Mexico

• The Transparency Law of 2007 made it mandatory
  for banks to offer a fee-less basic deposit
  product
• Financial authorities (CNBV, SHCP and Banxico)
  joined efforts to identify regulatory barriers to
  financial inclusion
• Major barrier identified was the undifferentiated
  implementation of KYC requirements

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Pro-Poor Regulatory Measures Mexico

• In 2011, Mexico reformed its legal framework for
  AML/CFT
• Established a system that divides bank accounts
  into four levels
• Introduced simplified KYC and CDD requirements
  for account opening that are tiered in line with
  risk levels
• By July 2012, the number of level 1-3 bank
  accounts reached a total of 9.4 million

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FATF and pro-Poor Regulations

• FATF recommendations strongly support adoption of
  RBA to AML/CFT safeguards
• Revised FATF recommendations allow for simplified
  CDD measures with a lower risk of ML and TF
• FATF encourages regulators to consider applying
  Progressive or Tiered approach to KYC/CDD
• FATF Recommendations provide adequate flexibility
  for pro-poor regulation
• But some countries are yet to take advantage of
  this flexibility

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SSBs New Outlook on Financial Inclusion

• Since the call from G20 Leaders in 2010 for
  Standard Setting Bodies (SSBs) to find ways to
  promote financial inclusion significant progress
  has been to make the SSBs more sensitive to FI
  issues.
• The Alliance for Financial Inclusion (AFI) and
  other Implementing Partners of GPFI have been
  promoting dialogue with SSBs and FATF and BCBS
  have issued guidance papers.
• The 5th G24-AFI Policymakers Roundtable on
  Financial Inclusion, held on 17 April 2013
  endorsed a proposal for SSBs to participate in
  peer learning to support countries in
  implementing balanced policies.

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Conclusion

• Regulatory framework has a profound impact on
  financial eligibility of poor households and SMEs
• But regulators struggle to keep abreast of new
  technologies and business models
• SSBs have advocated a risk-based approach to
  balance financial stability/integrity with
  financial inclusion.
• Peer learning through AFI plays a critical role
  in helping countries to implement balanced
  regulatory frameworks

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Discussion