Financial Inclusion, Regulation, and Education in Asia

Transcript

Financial Inclusion, Regulation, and Education in Asia

Description: Policies to promote financial inclusion need to be aligned with economic incentives; otherwise the results may miss targeted groups. Simply setting quotas for financial access for target groups is unlikely to ensure access for the neediest groups. Peter Morgan, ADBI senior consultant for research, explains that a thriving microfinance sector can make an important contribution to financial inclusion.

Financial inclusion broadly refers to the degree of access of households and firms, especially poorer households and small and medium-sized firms, to financial products and services. Moreover, it means access at a reasonable cost, and with accompanying safeguards such as adequate regulation and consumer protection.

A large body of evidence shows that increased financial inclusion can significantly reduce poverty and boost shared prosperity. Greater access to financial services by households can help smooth consumption, ease cash shortages, and increase savings for retirement. Greater access by small and medium-sized enterprises can allow them to take greater advantage of investment projects with potentially high returns.

Although substantial progress in promoting financial inclusion has been made, there is still much to achieve. East Asia, the Pacific, and South Asia combined account for 55% of the world’s unbanked adults, mainly in India and the People’s Republic of China. Account penetration is very low in some economies—less than 2% in Turkmenistan and less than 20% in Afghanistan, the Kyrgyz Republic, Pakistan, and Tajikistan. Moreover, the level of financial literacy in Asia is generally low.

Barriers to financial access include the lack of bank branches and ATMs, high costs of small deposits, information asymmetries, identification requirements, lack of funds, lack of trust in financial institutions and lack of knowledge about financial products and services.

Policies to promote financial inclusion need to be aligned with economic incentives, otherwise the results may miss targeted groups. Simply setting quotas for financial access for target groups is unlikely to ensure access for the neediest groups. A thriving microfinance sector can make an important contribution to financial inclusion.

Regarding regulation, a key insight is the notion of proportionate regulation, which means that the level of supervision and regulation of financial institutions should be adjusted to their level of financial systemic risk. Since microfinance institutions tend to be smaller than banks, they can be subject to lighter regulation than banks.

Innovative methods for promoting financial access, such as mobile phone banking and microfinance, require corresponding innovations in regulatory frameworks, perimeters, and capacity.

Issues such lack of funds and lack of trust can be addressed by: (i) measures that increase funds available to low-income households, such as cash transfer programs; (ii) effective supervision and regulation of financial institutions; (iii) implementation of strong consumer protection programs; and (iv) financial education programs.

Finally, countries should establish national strategies for financial inclusion and financial literacy to set priorities and allocate responsibilities.