Saturday, June 28, 2014

Financial Inclusion

Questions and Answers

Question 1. What is Financial Inclusion?

World Bank Research shows that an estimated 2.5 Billion Working Age Adults Globally – more than half of the total Adult population – have no access to the types of formal financial institutions that wealthier people rely on. Instead they depend on informal mechanisms for Saving and protecting themselves against Risk. They buy livestock as a form of Savings, they pawn Jewelly and they turn to the Moneylender for Credit. These Mechanisms are risky and often expensive. An increasing body of evidence shows that appropriate Financial Services can help improve Household Welfare and spur Small Enterprise Activity. 

Financial Inclusion or Inclusive Financing is the Delivery of Financial Services at affordable Costs to Sections of Disadvantaged and Low Income Segments of Society. In contrast to Financial Exclusion where those Services are not available or affordable. In Sub-Sahara Africa, only about 24% of Adults have a Bank Account even though Africa’s Formal Financial Sector has grown in recent years. In Nigeria, despite the growth of our Banks, how many rural poor and urban poor have Bank Account? It is argued that Banking Services are in the Nature of Public Good; the availability of Banking and Payment Services to the Entire Population – Rich, Middle Class, Poor in both Urban and Rural areas; without discrimination, is the Prime Objective of Financial Inclusion Public Policy.

Question 2. What is the Global Financial Inclusion Agenda?

The Microcredit Revolution showed that poor families in the informal economy are valuable clients and that it is possible to serve them in large numbers sustainably. Today, the US$70 Billion Microcredit Industry that grew from these Innovations with the estimated 200 Million Clients, remain a great success of Sustainable Non Government and Private Sector growth Catalyzed by highly Targeted Public Subsidies. But over the past few decades, we have also learned that Poor Households need access to the Full range of Financial Services to generate income, build assets, smooth consumption and manage risks – Financial Services that a more limited Microcredit Model cannot provide.

The Global Financial Inclusion Agenda recognizes these broader needs. It also recognizes the importance of Financial Literacy, Building Consumer Financial Capabilities and for Consumer Protection Regimes that take the conditions and constraints of Poor Families in the Informal Economy into Account.

The Microcredit Revolution found an ingenious way to provide Credit to the poor without Collateral: using the Joint Liability Loan that replaced Physical Collateral with Social Collateral to allow the poor to Pledge for one another. But the Business Model Challenge for other Financial Services is different. For Small Denomination Savings and Remittances, the Key Challenge is the Need for Ultra Low Transaction Costs; For Insurance, the Key Challenge is the Need to Pool and Manage Risk at Actuarially Relevant Scale.

We need continued Product and Business Model Innovation so that we can reach more People with a Broader Range of Products at Lowers Costs. Such Innovation is already happening in some Countries, for example, Leveraging Mobile Phone Based Business Models. But ultimately, no single type of Provider will be able to overcome the very different Product Specific Business Model Challenges. What is needed is a variety of Financial Service Providers that create an Ecosystem that serves the Poor Profitably. These are the issues the Global Financial Inclusion Agenda seek to tackle and in ways that achieve the following Goals:-

1   1. Access at reasonable Cost for all Households to a Full Range of Financial Services including Savings or Deposit Services; Payment Services and Transfer Services; Credit and Insurance Services.
2. Sound and Safe Institutions Governed by Clear Regulation and Industry Performance Standards.
3. Financial and Institutional Sustainability to ensure Continuity and Certainty if Investment.
4    4. Competition to ensure Choice and Affordability for Clients

Question 3. Can you give example of Financial Inclusion in India?

Reserve Bank of India has planned Aadhaar Linked Bank Accounts for all Adults of India by January 2016 to meet its commitment on Financial Inclusion. It will greatly Transform India by preventing the Poor People falling into Debt Traps of unlawful Money Lenders; improving Cashless Transactions, Eliminating Poverty and Corruption.

A Basic Aahdaar enabled Bank Account is a Basic Savings Account where a Debit Card is issued and the Aadhaar Number is used as the Account Number. It can be Instantly Opened. Transactions Operate with Fingerprint Authentication only, as indicated by the Aadhaar Logo on the Card. PIN is not issues because the Account is aimed at Financial Inclusion of Unbanked Illiterate People in both Urban and Rural Areas. Aadhaar Card Operate at Micro ATM and other ATMs’ equipped with Fingerprint Scanner. Presently Passbook is not issued to these Accounts due to Infrastructure Problem. Transactions like Deposit, Withdrawal, Transfer, Balance Check can be done. Aadhaar Account is used for Direct Payment of Social Security Benefits such as Pensions; Scholarships; Healthcare; Subsidy for Kerosene, Gas, Fertilizers etc

Generally a Micro ATM consists of a Laptop Computer or Smart Phone equipped with 2G Internet, Fingerprint Scanner, Receipt Printer, Speaker and Power Back Up (Solar / Battery). It is Human Operated by a Commission Agent called a Banking Correspondent (BC) so that Illiterate Customers ne not face problems of ATN Machine Operations.

BCs’ are generally Chemist Shops, Provision Shops or Mobile Vans. It is similar to the Commission Agent Model of Prepaid Mobile Phone Recharge.

Some Banks issue Photo Bankcards that are a Boon to Rural People and Migrant Workers because they work not only as Bankcards but also as Identity Cards. Once Bankcards become common in Rural Areas, India will become a Nation of Cashless Transactions like USA with Higher Transparency and Accountability because Cash is largely used for Bribery and Corruption.

The Reserve Bank of India has initiated several measures to achieve greater Financial Inclusion such as No Frills Accounts and General Credit Cards (GCCs’) issued to the Poor and Disadvantaged with a view to help them access easy Credit. Some of these Steps are:-
1.     Opening No Frills Accounts. Basic Banking No Frills Accounts is with Nil or Very Low Minimum Balance as well as Charges that make such Accounts accessible to Vast Sections of the Population. Banks have been advised to provide Small Overdrafts in such Accounts.
2.     Relaxation on Know Your Customer Norms. KYC requirements for opening Bank Accounts were relaxed for Small Accounts, thereby simplifying procedures by stating that Introduction by an Account Holder who has been subjected to the full KYC Drill would suffice for opening such Accounts.
3.     Engaging Business Correspondent / Banking Correspondent, BC. The BC Model allows Banks to provide Doorstep Delivery of Services, especially Cash In Cash Out Transactions, thus addressing the Last Mile Problem.
4.     Use of Technology. Banks have been advised to make effective use of Technology to Support the BC Model.
5.     Use Edges and Value the Marginal – The interface between things is where the most interesting events take place. These are often the most valuable, diverse and productive elements in the system.
6.     Creatively use and respond to Change – We can have a positive impact on inevitable change by carefully observing and then intervening at the Right time.

Question 4. How Can You be Part of Financial Inclusion?

For those who have Good Viable Businesses and need Money for expansion, simply come forward to discuss your needs. If enough people come forward with Bankable Proposals, we would Aggregate these Proposals and open Discussion with relevant Financial Institutions. For the Poor and those just starting out in Business – the Organized Communities Model within NEHAP Initiative is the Way Forward.

As National and International Stakeholders in each Community in each of 774 Local Governments in each of 36 States and FCT in Nigeria JOINTLY seek practical solutions to Unemployment, Underemployment, Unemployability, Hunger, Poverty, Security / Terrorism etc problems on the ground, the Design and Delivery of Financial Inclusion Systems in our Rural and Urban Communities can help accelerate success on sustainable basis.

If you require some clarification or additional information, please send email to:-
Lanre Rotimi
International Society for Poverty Elimination, ISPE /
Economic Alliance Group

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