By Ali Shakil Khan
Financial inclusion refers to making the financial system available to the economically under-privileged sections of the society. According to the latest World Bank report there are over 2.5 billion people in the world with absolutely no access to banking and financial services. Financial inclusion enables the participation of the economically poor in the financial system, thereby helping in unlocking their economic potential. A higher level of financial inclusion in turn leads to balanced economic growth, and, potentially a more equitable society.
Also, with an increased number of participants, the financial system itself gets stronger and more comprehensive. Additional participants in the formal financial system in developing economies will not only strengthen developing economies but also the world economy. As an increasing number of developing countries move toward middle-income status, financial inclusion can become a driver of continued growth in their economies.
It is no surprise that financial inclusion has been identified as a high priority area by the Group of Eight Developing Countries (D-8). Bank Negara Malaysia along with the Alliance for Financial Inclusion, a non-governmental organization funded by the Bill & Melinda Gates Foundation, are taking initiatives to achieve greater levels of financial inclusion in Malaysia.
Among its D-8 peers, Malaysia has the highest percentage of population with access to financial services. As much as 80% of the Malaysian population at least has a savings account. This is in sharp contrast to another D-8 member, Pakistan, which has the lowest percentage (less than 12%) of its population with access to banking and financial services.
Often, it is seen that in countries with low levels of financial inclusion, unregulated and informal services begin to thrive due to a lack of a better alternative. These are a major drag on economies as they violate banking laws and subject the economically weak borrowers to unfair fees and costs – and financing that is usually too short term for productive investment activity. Moreover, the lack of regulatory framework exposes the borrowers to a potential debt trap as the rate of interest on the debt is typically too high. A debt trap is a precarious situation in which a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal.
Increasing the availability of formal financial services to those who have long been denied them requires establishing a balanced regulatory framework. In terms of regulation, perhaps the greatest initiative that Malaysia has taken is the passing of regulations that permit efficient branchless banking. Branchless banking is the delivery of financial services outside conventional bank branches using information and communication technology and agents appointed by the bank. The concept is definitely taking off and is helping serve previously underserved communities in Malaysia. A customer walks in to a grocery store around the corner in a rural area, and the grocery store owner acts as an agent for the bank and performs deposits, withdrawals or transfers.
Malaysia’s branchless banking concept has recently attracted interest from top bankers and policy makers across the world. In the most recent case, US Secretary of Treasury, Jack Lew, visited GJ Mart, an agent bank and microfinance borrower of Bank Simpanan Nasional (BSN), in Taman Keramat. He spent 15 minutes at the convenience store for a briefing session by the owner, Mohamed Ali Mutalib, 35, on GJ’s work as a BSN bank agent. Surely, there is a lot to learn from the Malaysian branchless banking model.
Another alternative is mobile banking services. Mobile phones can provide great opportunity to achieve greater financial inclusion as more than a billion people worldwide may not have bank accounts, but they do own mobile phones. Some big initiatives have been seen in providing mobile banking services in Malaysia during 2013. However, to make mobile services truly beneficial for the local rural public, in addition to providing an extremely secure platform, the technology has to be extremely user friendly. There has to be an option of communicating with a human being to proceed with a transaction in case the rural masses are a bit reluctant to simply interact with a voice machine. Also, there have to be several safeguards in place, in case, of theft or loss of the mobile device.
I believe that behind every success story several challenges inevitably come along the path. However, the manner in which you tackle them makes all the difference. As new approaches are being applied to enhance financial inclusion beyond the use of conventional brick and mortar bank branches it should be kept in mind that they require the development of a prudential regulatory framework. The central banks need to use a proportional approach to regulation which both enables the use of technology and creativity to enhance financial inclusion while protecting the consumer against all potential risks. A far too relaxed or far too restrictive regulatory environment will stifle all efforts to achieve greater financial inclusion.
Ali Shakil Khan is a lecturer with the Faculty of Business and Design at Swinburne University of Technology Sarawak Campus. He can be contacted at askhan@swinburne.edu.my