Daniel Schydlowsky: Banking on Financial Inclusion

LIMA – The 2008 financial crisis highlighted the profound importance of finance for the globalized economy. But 2.5 billion people worldwide still lack access to formal banking services, credit facilities, or savings instruments. Bringing this largely ignored “missing market” into the formal financial system would enrich and strengthen the global economy.

The unbanked, who live primarily in developing countries, comprise nearly half of the world’s working-age population. In some countries, as much as 90% of the population lacks access to the formal financial system. This impedes their participation in the global economy by restricting their ability to buy goods and services, to borrow and save, or to invest in their future and that of their community and country.
Most global poverty-reduction efforts rely on “top-down” solutions – development-aid flows from rich to poor countries – that largely focus on education, food security, and disease management and prevention. But improving access to the formal financial sector is a unique challenge that cannot be tackled with foreign aid or government handouts.

In general, homegrown solutions have proven to be more effective than externally imposed policies. While a single, universal solution will not work, understanding factors that are common across countries provides a useful way forward. For example, populations worldwide are embracing technology, particularly mobile services. However, people throughout the developing world frequently lack proper identification, a fixed address, or a formal employer.
Solutions that capitalize on trends or address widespread challenges are more likely to have an impact. A policy that works in one or two markets can then be shared, analyzed, and adapted for implementation elsewhere.

In developing countries, an estimated 1.7 billion people own mobile phones but have no access to banking services. Harnessing this technology to expand financial inclusion would be economically empowering, particularly for smallholder farmers and merchants in rural communities, who could use their mobile phones to access market-price data, transfer cash, make retail purchases, deposit income, and pay bills – all while tending their fields or shops.
This would encourage saving, which is crucial to building a business and providing investment capital to others. And legal, regulated options for safeguarding savings and accessing credit would reduce reliance on the black market or the informal economy, where financial exploitation flourishes.

In Kenya, regulators have created the conditions needed for an innovative mobile-phone financial-services system, M-PESA, to flourish. Since its 2008 launch, M-PESA has attracted nearly 14 million Kenyans – almost one-third of the country’s total population – who use it for money transfers, savings, and other financial transactions.

Regulators and local private institutions can collaborate to create safe and accessible banking and credit instruments. That is how Brazil developed a regulatory framework that has enabled banks to build a network of 95,000 banking agents. As a result, an estimated 13 million Brazilians – in all of the country’s nearly 5,600 municipalities, from the Amazon to the favelas (shanty-towns) of São Paulo and Rio de Janeiro – have been brought into the financial system.

Similarly, a state-owned Indonesian bank, Bank Rakyat Indonesia, is providing micro-financing services to 30 million people, while in India, new “no-frills” savings accounts have attracted 12.5 million customers. Other homegrown regulatory success stories come from Mexico, Peru, Bolivia, Uganda, South Africa, the Philippines, Thailand, and Mongolia.

Financial leaders have already begun to spread the word about such progress, and the policies that enabled it, in order to bolster and expand financial inclusion. The Alliance for Financial Inclusion (AFI) – a group (in which I participate) of central bankers, regulators, and finance ministers from more than 80 developing countries in Asia, Africa, Latin America, and the Middle East – is sharing knowledge to develop and implement effective policies.

In September 2011, at the AFI Global Policy Forum in Mexico, 17 financial authorities adopted the unprecedented Maya Declaration – a set of specific, measurable commitments aimed at increasing financial inclusion. Since then, seven more institutions have committed to the declaration, and more are expected to join before this year’s forum in Cape Town, South Africa, where experiences will be shared and progress assessed.

The Alliance understands that globalization is not a zero-sum game. Developing countries can benefit from the opening of markets to new trade and investment, while the developed world can benefit from the infusion of new customers, suppliers, and capital (possibly in the trillions of dollars). If the world’s 2.5 billion unbanked join the global economy, every industry will experience innovation and growth.

Rather than waiting for solutions from American, European, or other advanced-country bankers, developing countries are leading the way toward financial inclusion, dramatically reshaping the global economy in the process. Opening the financial system to the world’s poorest people will unlock their economic and social potential – to the benefit of all.


Daniel Schydlowsky was Counselor for Economic and Financial Affairs to the Peruvian president and President of Peru’s Development Finance Corporation, and is currently the head of the Superintendencia de Banca, Seguros y Administradoras Privadas de Pensiones, which oversees Peru’s financial sector.