Speech at Conference "Financial Inclusion: The Next Move Forward"
Your Grace, Excellencies, ladies and gentlemen, I'm very happy to be here today.
The City of London is one of the world’s leading financial hubs. What happens here has an impact that extends far beyond the boundaries of the U.K. and Europe. So it is of great significance that you place financial inclusion at the heart of economic development and equitable growth at the heart of this conference. We share a common goal. Therefore it is a pleasure for me to be here with you today.
Inclusive finance for development is now broadly understood to mean all adults and firms having access to credit, savings, payments, and insurance from formal providers at a reasonable cost.
Over the course of the last five years, significant progress has been made. Millions of people have gained access to the financial tools they need to improve their lives and take advantage of opportunities. Many international banks and other institutions represented in this room make key contributions to financial inclusion by offering a broad range of services. The momentum behind financial inclusion is building around the world.
However, 2.5 billion adults–that’s half the adults in the world–and hundreds of millions of micro, small, and medium-sized enterprises are still excluded from the formal financial system. They do without even the most basic financial services that you and I rely on every day. No bank accounts. No cash machines. No safe way to save money. No insurance, remittances, payments. And no credit beyond what they can borrow from family, friends, or very unreliable providers. As a result, these people find themselves trapped in poverty.
Without formal financial services, families struggle with complicated, informal, risky, and expensive tools in order to make ends meet. This can cost them up to 20 percent of their cash yearly. And did you know that every year 100 million people fall back into poverty because of unforeseen medical costs? Savings accounts and health insurance could prevent this.
While financial exclusion is most prevalent in developing countries, it is also a challenge in advanced economies such as the U.K. and other European countries, including the Netherlands. According to the World Bank, the U.K. ranks ninth worldwide in terms of banking inclusion. But despite efforts to address the issue–still nearly two million adults here do not have a bank account. And, as in the Netherlands, we know that many families here have inadequate savings to buffer financial shocks, driving them into debt.
Also, many of the 5.2 million small and medium businesses in the U.K. lack the financing they need to grow. SMEs account for six out of ten private jobs in this country and for almost half the turnover in the private sector. But financing for SMEs has fallen over recent years. The same has happened in the Netherlands, where both financing and equity investments for SMEs have become a real challenge.
New ways of finance have been seen–crowdfunding, reborn credit unions, and even local community development institutions have proved to be a solution for some, but they are nascent and need more capacity, resources, dissemination, and improved regulation.
We need to give this more attention and learn from each other, from our successes and failures in the Netherlands and the U.K.
And it does spur job creation, equitable growth, and innovation, and it benefits everyone: businesspeople, workers, consumers, and investors alike.
Over the last five years, financial inclusion has been high on the international agenda. Influential examples include the World Bank’s call for universal access to financial services by 2020 and the UN’s attention to the issue in its discussions to frame a new global development agenda, and even in the G20. It is important that these efforts continue to be supported at all levels, so that we can establish an environment that is even more conducive to deepening financial inclusion around the world.
So what are the “next moves forward” that we need to see over the coming ten to fifteen years?
I would say that the next move forward in financial inclusion will be driven by innovation, led by the private sector in partnership with many other stakeholders.
Cutting-edge products developed by the private sector have already allowed services to reach millions of financially excluded people. Examples are mobile financial services and branchless banking through points of sale, telephone agents, and the Internet. In Africa, Latin America, Asia, and other regions, these innovations are spreading the benefits of financial inclusion further, faster, and more evenly than ever before.
Major players with physical and virtual distributive reach such as Cargill, Unilever, and Coca-Cola are likely to become part of the mix. Cargill, for example, already does business with 70,000 individual farmers in Zambia, and they are already doing direct credit lending in cooperation with development banks. So I think these new types of partnerships need to be repeated.
E-commerce companies expanding into financial services such as the Alibaba Group in China can potentially reach even more people and businesses in other countries. All these innovations offer opportunities to scale up financial services through existing and new channels.
Last year, I visited Peru, Colombia, India and China as part of my work as the Secretary-General’s Special Advocate. I was able to talk with a wide range of private- and public-sector representatives about the tremendous efforts underway to bring households and businesses into the formal financial system. Each country has developed its own road map, adopted supportive policies and regulations, and is encouraging public-private partnerships and innovations.
Countries like Colombia, India, and China have proven themselves successful at substantially reducing poverty. In fact, in China, efforts to bring households and businesses into the formal financial system have contributed enormously to the country’s economic rise and to the welfare and well-being of the Chinese people. Also now in India, new regulations making a payment bank possible offer great opportunities to include 650 million people who are now excluded from formal financial services.
However, efforts to further advance inclusive finance in the years to come will face a number of challenges. One will be to ensure that regulators are able to keep up with these innovations. It will be equally important to make certain that increases in access to formal financial services are accompanied by appropriate measures to protect consumers and to prevent fraud.
For example, new digital delivery mechanisms hold much promise for promoting financial inclusion, but they often involve actors other than regulated banks, such as mobile network operators and sales agents. In many cases, consumer protection and privacy regulations applicable to those players are not yet in place. There is the risk that fraud or privacy breaches could severely set back progress in inclusion, so we will have to watch out for that.
Thus, over the next few years I envision major strides as the various standard setting bodies—and other regulators such as those for telecoms—work together to tackle all these challenges.
Moreover, bringing millions of new customers into the formal financial system will require that even greater efforts are made to ensure that they are financially literate and thus have the basic skills to make careful decisions. In this regard, financial services providers have a role to play in terms of designing their policies and products, and how they distribute and promote their own financial services. This is a very important issue.
I know this is a matter that has received a lot of attention here in the U.K. over the last few years, and I am sure you can appreciate the importance of this matter of financial service providers in less-developed and emerging markets.
Regarding the complex issue of terrorism finance and money laundering, I am aware of the steps some international banks have taken to reduce the risks associated with offering services in many lower income countries. I realize this has been driven by some high-profile cases and clearly there are many complicated factors at play. But it is also certain that a move to exit markets in order to reduce these risks could result in greater financial exclusion. If this happens, vast numbers of people could be relegated to expensive, informal solutions that make it impossible to trace transactions or identify suspicious patterns. This leaves us all worse off, with exclusion and less transparency.
This would be particularly disappointing since the standard setting bodies have made great strides over the last few years in adopting more flexible approaches. A case-by-case, risk-based approach by international banks should not entail wholesale withdrawal from entire markets.
Making the next move forward in financial inclusion, we should never forget that responsible finance is essentially about mutual benefit. Client-centricity is key. It means acknowledging, understanding, and acting in accordance with the interests of the end user. Products and services offered by banks and other financial services providers ought to be designed according to client needs.
I am pleased that many of you here today are already making important contributions to expanding services to the financially excluded. Whether you are designing and providing appropriate and innovative financial products for unserved clients, or sharing your tremendous experience and know how. Whether you are helping to educate the public about financial products and strengthening consumer protection regimes, or working with regulators on the issues I mentioned today.
It is my hope that financial inclusion will allow greater numbers of households and small businesses all around the world to become stakeholders in a sustainable and growing global economy. And I stand ready to help.
Thank you.