Keynote speech by ADB Vice-President Stephen P. Groff on 10 September 2013 at the ASEAN Financial Literacy Conference, Bandar Seri Begawan, Brunei Darussalam.
Distinguished guests, ladies, and gentlemen: I am honored to be here today to keynote this important conference on financial literacy across ASEAN. I would like to thank this year’s ASEAN Chair Brunei Darussalam for the usual fine arrangements for this opening session. President Nakao was looking forward to addressing you today, but as we are right between the G20 Summit and APEC Finance Ministers meetings, his schedule has been extremely tight. I hope I can be an adequate substitute.
Financial literacy means different things to different people. The 2008/09 global financial crisis underscored just how important financial literacy is to financial stability. For example, if people in advanced economies knew how to make informed financial decisions and understood the risk-return of subprime mortgages—and the complex instruments used to trade these assets—the “Great Recession” might not have been so “great”. This financial illiteracy—the drive for higher returns and lack of consumer protection for those who suffered—brought a heavy price to the entire global economy.
So much more so for developing economies that were vulnerable to contagion. In the drive to build greater financial inclusion, their understanding of financial literacy is decidedly different. ASEAN itself has extremely diverse levels of financial development. From a global financial center to bastions of expanding Islamic finance—to countries only beginning to establish basic financial institutions—ASEAN spans the gamut of financial development. Financial literacy is a prerequisite for maximizing welfare, both individually and for society generally. That is why this conference is so important—particularly as the clock ticks down to the 2015 milestone of launching an ASEAN Economic Community. Realizing a truly “Our People, Our Future Together” ASEAN depends on it.
I would like to address three issues this morning: first, the elements of financial literacy from a development standpoint; second, the importance of building financial literacy strategies using what ADB President Nakao refers to as the “three I’s”—innovation, inclusion, and integration; and finally, how we at ADB contribute to this process.
The role of financial literacy
In the developing world, the correlation between income and access to financial services remains very strong. But it is also a “chicken and egg” question. Does higher income bring better access? Or does increased access lead to higher incomes? The jury is out and more research is needed. But my instinct tells me it is both. And it tells me that intervening on the side of greater access will help provide impetus for job creation and more income opportunities.
But, importantly, we have found that greater access alone can easily lead to a personal financial crisis if people do not clearly understand how the system works—and what new products really offer. Everyone given the opportunity to avail of these services needs to be financially literate. And this is true whether one is poor, lower or middle-income, or high net worth individuals.
For the poor, the vulnerability is particularly acute. Cash management at the best of times is difficult. Even without access to the system, financial literacy encompasses knowing how to manage income volatility and facing unexpected emergencies without falling into a debt trap—often from unscrupulous usury informal finance. Carefully explaining the benefits of joining the formal financial system is a critical—if difficult—first step.
As one rises the income ladder, literacy means understanding increasingly complex financial products, what they can offer, and the potential risks and pitfalls. It affects individuals and households. But it also has an impact on overall financial and economic stability. At all levels, understanding even rudimentary finance is essential for daily life. Unfortunately, most do not.
Technological advances have led to greater efficiency and made products more user-friendly. Use of mobile phones and ATM systems for receiving income and paying bills is making rural areas far less remote. Cash transfer systems increasingly employ them. Computer and internet banking are becoming ever more common. On the downside—so are threats from unscrupulous agents. Information asymmetries and irrational emotions lead to bad financial decisions. That is why it is so crucial people know what new gadgets can and cannot do. It is why awareness of phishing or other scams is important. And critically, it is why regulators must ensure financial education accompanies financial access and inclusion.
Financially literate consumers can assess risks and make informed decisions about the suitability of financial products to their specific situation. Thus, information disclosure must go hand-in-hand with boosting financial literacy to ensure a level playing field.
As governments face debt and cost limitations, individual responsibility for financial planning takes on greater importance. And it is happening precisely when individuals are seeking better job security—in an environment where financial institutions are wary of providing excessive credit. Unexpected shocks can be devastating. And this is where, for example, micro insurance holds so much potential. Financial literacy programs must incorporate better risk management of credit, savings, and insurance. They need to balance basic math—like calculating interest and real returns, for example—with basic financial concepts and how financial entities like pensions, mutual funds, and insurance works. Most importantly, financial literacy programs need to ensure participants know how to find out more when they need to.
Financial education must start early and continue through adulthood. As several recent ADB conferences stressed, greater financial access combined with financial education creates financially responsible citizens. This mix of financial access and financial education provides a foundation for appropriate market conduct and prudential regulation. A standardized financial education curriculum could be developed in line with the interests and needs of children, teenagers, and young adults. But teachers need to be financially literate first. Improving individuals’ financial behavior has become a long-term policy priority in many countries. And it has notably led to the development of a wide range of financial education initiatives by governments, regulators and various other private and civil stakeholders, often combined with financial consumer protection measures.
As with most development initiatives, establishing effective national strategies appear to work best. But there is a certain amount of harmony required. There are, for example, the challenges of ensuring long-term commitments from all, the need for cooperation in working out competing interests and mandates, allocating sufficient financial and in-kind resources, among others.
That is why financial literacy and financial inclusion have become such prominent global issues. Following the global financial crisis, inclusion moved quickly onto the G20 agenda. The September 2009 Leaders’ Summit in Pittsburgh pledged—and I quote—“to support the safe and sound spread of new modes of financial service delivery capable of reaching the poor”. It also called on financial standard setters to “promote successful regulatory and policy approaches and elaborate standards on financial access”. This was designed to make international financial standards relevant to emerging markets, particularly in building the regulatory environment for products such as micro insurance, and to involve the private sector in the process.
By the 2010 Summit in Seoul, the G20 had developed a “Financial Inclusion Action Plan” and committed to launch the Global Partnership for Financial Inclusion, or GPFI. At the June 2012 G20 Summit in Los Cabos, Leaders endorsed a set of “High Level Principles on National Strategies for Financial Education”—produced by the OECD/International Network on Financial Education. And in March this year, the new GPFI Sub-group on Financial Literacy and Financial Consumer Protection was created.
This has provided global momentum. And it brings the challenge directly to ASEAN’s doorstep. Although ASEAN governments have progressively promoted financial literacy, many challenges remain. These include (i) large rural or remote areas with difficult physical access; (ii) the need for better supervisory capacity among financial regulators; (iii) legal frameworks for financial consumer protection and financial literacy; and (iv) addressing the pervasive “informal” markets that handle lending, insurance, and remittances for those unable to tap into the formal system.
So I believe the trend is set. As the arteries of finance spread, we will see more mobile and branchless banking; electronic retail payment systems; streamlined remittance structures; deeper financial infrastructure in creating financial identities, data flows, and building legal frameworks for secured lending.
However, for these to work in expanding access and promoting job creation, financial literacy and consumer protection are fundamental prerequisites. Together they must be able to instill trust in financial products and the financial institutions that offer them. Trust is the foundation underlying financial products and services. They cannot work otherwise. So how can we ensure this will happen?
The three “I’s”—Innovation, Inclusion, and Integration
During his brief tenure thus far at ADB, President Nakao has been promoting what he calls the three I’s—Innovation, Inclusion, and Integration—as ways of moving the development agenda forward. This is central for financial literacy as well. At a June 2013 ADB Institute conference on financial inclusion—held on Batam Island—speakers stressed that it stems from innovations and new technologies that significantly reduce costs and increase efficiency in offering financial services to the poor, the traditionally unbanked, and to micro-, small, and medium-sized businesses. For small and medium enterprises—which are truly the future backbone for ASEAN development and growth (and rebalancing toward domestic demand)—financial literacy can activate financial opportunities for investment. The development of mobile and branchless banking, improvements in credit information systems, risk analytics, and electronic data security have allowed these groups greater access to finance. Much of its success, however, pivots on the quest for financial literacy.
Innovation is in Asia’s blood—even paper money was invented in Asia. Innovation is at the forefront of the drive toward financial literacy. Services must be offered outside traditional channels to reach a wider customer base. And, in many cases, it is nonbank innovation that has led the way in bringing the message across to traditional financial vendors. Over the past decade, from internet commerce to remittance transfers, financial institutions have played catch-up in accommodating ways of servicing the unbanked. Policy makers face the challenge of how to regulate and guide this evolution. As we know, those who want to subvert the system through greed are usually first-line innovators. So regulators must be savvy enough to stay one step ahead.
Let me just give you the example of two mobile phone financial services introduced in the Philippines—the bank-based so-called Smart Money, and the non-bank based G-Cash system. The two services received initial authorization to launch from the Central Bank even though there was little regulation in place. Instead, the Bangko Sentral chose to allow a carefully controlled pilot phase to test different business models, and used the results to innovate relevant and effective e-money regulations. These now address the risks arising from new mobile channels and allow a variety of models to flourish, while maintaining the safety and soundness of the system. It has not been all smooth sailing. But the Central Bank maintains an open dialogue with industry and civil society to foster an environment conducive to innovation.
Part of that is creating the right risk protection instruments for those new to financial access. Unaffordable and inadequate insurance products, informal insurance schemes, and low appreciation of micro insurance are some of those hurdles ASEAN countries face. The Philippine Government, together with the ADB-administered Japan Fund for Poverty Reduction and German International Cooperation, for example, are working to enhance financial literacy on micro insurance, especially for the poor.
Inclusion has grown to become the development sound bite of this era. Its formal definition is having "universal access, at reasonable cost, to a wide range of financial services, provided by a diversity of sound and sustainable institutions." The nine G20 Principles for Innovative Financial Inclusion together form a set of conditions conducive to drawing in those currently isolated from financial systems, while safeguarding financial stability and protecting consumers.
Estimates vary by country, but it appears some 70%-80% of adults in the region remain outside the formal financial system. Encouraging banks to service rural and far-flung regions, continuing efforts to promote and expand microfinance, building outreach programs, working through local governments and community organizations are all ways to communicate the value-added of financial inclusion. And with available technology, it can be demonstrated on the spot.
But it must be promoted along with an equitable and transparent consumer protection infrastructure—a vital part of any broad financial inclusion framework. For governments, this means that promoting financial literacy is an integral part of inclusion. Best practice indicates that effective initiatives focus on providing practical, easy-to-understand and impartial advice so that consumers can make informed choices.
From the regulatory side, “proportionate regulation” is becoming popular—whereby market development is encouraged by tailoring the regulatory burden to the risk characteristics of business, and creates incentives for future financial inclusion.
Let me give you some examples from our own portfolio. In Thailand and Viet Nam, we are helping finance the development of a strategic framework for financial inclusion through an enabling regulatory framework. In Thailand, current technical assistance aims to research current financial literacy among low-income populations, develop financial literacy standards, and provide recommendations for closing the gaps, particularly for women. In the Philippines, we are also providing technical assistance for enhancing access of the poor to microfinance in frontier areas.
On Integration, cooperation continues through many global and regional forums, starting as I mentioned earlier, with the G20’s response to the global financial crisis. For example, the Alliance for Financial Inclusion, or AFI, is a global network of financial policymakers from more than 80 developing and emerging countries working together to increase access to appropriate financial services for the poor. The Consultative Group to Assist the Poor is a consortium of 33 donors with the common goal of advancing access to financial services for the poor. And financial inclusion is on the APEC agenda later this month in Bali.
ASEAN has also taken a lead through its series of workshops and conferences. The First ASEAN Conference on Financial Inclusion was held in May 2012, one of the first activities under the ASEAN Framework on Equitable Economic Development, or AFEED. These initiatives will help build best practices on policy and regulatory measures to enhance institutional capacity—public and private—covering banking, securities, insurance and pension systems, for example.
I would be remiss if I did not mention one increasingly important, if contentious, issue ASEAN must confront. And that is the migrant, worker, and remittance structures within ASEAN itself. And it must deal with unskilled workers as well. Both remittances and savings of migrant workers represent a huge untapped market. And because they have been politically shy in confronting the issue, much of it still occurs under the radar, so to speak. Regulators should promote the shift from cash-to-cash to account-to-account transfers. Financial education must accompany regulation at both ends to increase awareness and strengthen financial literacy. It could also create a cooperative framework for addressing the more difficult unskilled labor issue post-2015.
ADB has extensive experience in financial inclusion in Asia, including capacity building and consumer protection. We have been very active in financial inclusion, which includes microfinance and SME finance and leasing. We have approved 121 projects amounting to $2.59 billion for microfinance and 92 projects worth $1.5 billion for SME finance and leasing, which includes public sector loans, technical assistance, grants, and non-sovereign operations.
ADB’s past operations on financial inclusion produced many project documents, consultants’ reports, and performance reviews from which experience and lessons can be collated. And we are in the process of doing so. Aside from the five ASEAN countries where we have worked on financial inclusion—Cambodia, Indonesia, the Philippines, Thailand, and Viet Nam—we have projects in Pakistan, Bangladesh, Papua New Guinea and Fiji, just give you an idea of the breadth of our work.
As innovation allows for more inclusion and better integration, clearly our experience in acknowledging financial literacy as a fundamental prerequisite for successful microfinance or micro insurance projects means our own approach is constantly evolving. There is a great opportunity to apply what we have learned.
In sum, ADB is committed to deliver comprehensive support through financial inclusion, literacy, and education. Consumer protection is essential if we are to build trust in the systems we help build. And that is why financial literacy is so important.
To conclude, financial literacy and financial inclusion comes in stages, starting with initial contact, the introduction of mobile transfer and payment schemes, then savings and borrowing, followed by more complex aspects such as investing or insurance. The region’s poor need more than loans—there needs to be the financial literacy for people to choose wisely. As I say, it revolves around trust—whether in the regulatory structure or the system itself.
Innovation, inclusion, and integration flow through ASEAN’s arteries. All three “I’s” are central to building financial literacy across the region, particularly for those still relying on informal finance.
I wish you success during your deliberations over the next 2 days. And I assure you that ADB stands ready to support the innovation, inclusion and integration that will allow financial literacy to help bring prosperity to all ASEAN citizens.