2014-2015 CHALLENGE
The 2014-15 Challenge will focus on financial inclusion in the Global South – the facilitation of access to and provision of financial services to poor and developing communities. Low and moderate income people around the world need financial services such as credit, savings, and insurance to assist them in managing and protecting their lives. Unfortunately, very few have access to such services from formal financial service providers. Financial inclusion is increasingly a priority policy goal, but the diverse range of actors who need to be involved, the understanding necessary of the financial needs of the underserved, and the changing opportunities technology presents make global financial inclusion an elusive goal.
WHAT IS FINANCIAL INCLUSION?
What if there were no banks or financial institutions? Where would you keep your savings? Would you put your money under your pillow or hide it in the kitchen cupboard? In India, there are banks – but many people who live both in urban and in particular rural India cannot access these services. The urban poor might not have the minimum deposits needed to open an account or might not know much about the banking system, while the rural Indian might simply live in a village where there is no banking service. If you were one of these people, think about how this would affect your life. Would you be worried that someone would take your savings from under your pillow or the kitchen cupboard? If you were worried that your money would be stolen, would you want to save for the future? If not, then how could you afford to go to university? And what if, some day in the future, you were accepted to university but you had no savings and no bank would give you a loan for your tuition? Imagine one day, you wanted to buy a house for you and your family but no bank would give you a mortgage loan? We often talk about economic development, but it would be very difficult to start your own business if you had no sources of capital? Or the worst case scenario, what would you do if you had an unexpected health emergency but had no cash on hand and no possibility of insurance? Banks and financial institutions play a central role in economies by providing people with a) savings and investment products where they can safely park their money for the future and b) loans for both business use (e.g., a start-up loan to fund a new business through the purchase of equipment or machines) and personal use (e.g., housing loans, education loans). Unfortunately, according to the World Bank’s 2011 Global Financial Inclusion Index 2.5 billion people worldwide do not have access to formal financial services delivered by regulated financial institutions. We talk about “financial inclusion” because we think financial services are important and everyone should be included in being able to access them. Put another way, financial inclusion is the “process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost”.
FINANCIAL INCLUSION IN INDIA
Much has been written and spoken about India’s potential role in the world’s economic order. A major stumbling block to India’s ability to be counted as an economic superpower is the relatively low level of financial inclusion. A recent report issued by India’s central bank, the Reserve Bank of India (RBI) suggests that an estimated 51% of farmer households do not have any access to either formal (e.g., banks) or informal (e.g., moneylenders) sources of finance, and only 27% had access to formal sources of credit. A World Bank financial access survey shows that India has only 30 bank branches and 25 automated teller machines (ATM) per 1000 km; and only 10 branches and 9 ATM’s per 0.1 million population. By comparison, China has 1429 branches and 2975 ATM’s per 1000 km, and 23 branches and 50 ATMs per 0.1 million population. Based on these numbers, access to finance is scarce in India both in terms of geographic density and in terms of per capita branches and ATMs. The RBI recently set up a committee (chaired by Nachiket Mor, hereafter the Mor committee) to evaluate the level of financial inclusion and to provide recommendations on how it could be improved.
The Mor committee’s report included six vision statements:
- Every Indian adult should have access to a basic, full service electronic bank account;
- Every Indian should be within a 15 minute walk of a payment access point;
- Every household should have access to a regulated lender;
- Every household should have access to a provider of investment and deposit products;
- Each low-income household and small business should have access to providers of insurance and risk management products. These products include those in the domains of the following risks: (a) commodity price movements; (b) longevity, disability, and death of human beings; (c) death of livestock; (d) rainfall; and (e) damage to property;
- Every household has the right to be provided suitable (i.e., to their specific needs) financial products, and the right to take legal recourse if suitability was not met.
In general, there are two pillars supporting financial inclusiveness. On the supply side of the equation, questions such as “how can banks and financial institutions extend their reach to the remotest villages in a cost efficient manner,” “how can non-bank institutions such as microfinance institutions help in filling the gap,” or “what is the role of technology in improving access?” have been raised and debated. On the demand side, developing economies like India face the problems of low levels of literacy which has implications for the demand of financial products. Imagine that the Reserve Bank of India engages your team for some fresh ideas on how financial inclusion can be improved. Your main objective is to create a concrete action plan by answering the questions that are posed below. In developing your action plan, choose any one of the questions to develop a detailed plan for, but also provide responses to the other questions. An action plan is different from “vision” or “strategy.” While six vision statement from the RBI’s committee report serve as a good guiding principle for future actions, they need to be supplemented by concrete activities.
CHALLENGE QUESTIONS
1) HOW CAN BANKS IMPROVE ACCESS TO THE RURAL INDIAN RESIDENT WITHOUT SIGNIFICANTLY INVESTING IN ADDITIONAL INFRASTRUCTURE?
A naïve response to this question simply says that the answer is to build more bank branches and add more ATMs to the network. The Mor committee has recommended the setting up of “payment banks” – banks that provide a limited range of products (such as, acceptance of deposits and sending funds to others) but that will have a widespread network of access points particularly in remote areas. However, this poses additional infrastructure costs and the benefits of this added burden are not obvious. For instance, if the rural poor are not educated about the financial system and don’t trust financial institutions, then added infrastructure costs may not necessarily translate into better inclusion. There have been a number of approaches used to augment traditional branch / ATM banking worldwide. One approach is the business facilitator or the business correspondent (BC) model. In the BC model, banks may rely on intermediaries such as post-offices, NGOs or cooperatives to provide basic services (e.g., collection of deposits and applications, provision of information about banking and loan products). In the bank on wheels approach, a van that can provide these services could drive from village to village and act as a temporary branch. Banks on wheels have sometimes also been augmented by ATMs on wheels. A third solution is to encourage mobile phone based banking. Mobile banking tools can range in complexity from simple mobile based payment mechanisms to smartphone apps that offer a larger suite of banking functions. Which of these three (or any additional) approaches would you recommend and why? If you advocate a hybrid approach, please provide some details on how the multiple approaches would work together?
2) HOW CAN MOBILE PAYMENT MECHANISMS BE SCALED UP IN INDIA?
Perhaps one of the most successful projects on mobile payment is the mPesa system in Kenya. M-Pesa was created as a service which allowed microfinance borrowers to conveniently receive and repay loans using the network of Safaricom airtime resellers in Kenya. Today it has grown to become a branchless banking service – it can enable users to complete basic banking transactions without visiting a branch. Despite the sweeping success of mPesa in Kenya, the model has been replicated with limited success in other countries (inkling Tanzania, South Africa and India). Recently, other providers of mPayments have sprung up in South Asia. These include BKASH (http://www.bkash.com/) in Bangladesh and EasyPaisa (http://www.easypaisa.com.pk/) in Pakistan. Why, in your opinion, have efforts to replicate and scale mPesa failed in other countries? Should an mPesa like initiative be rolled out in India? If yes, should it be housed in the payment bank network or should private enterprises be allowed to launch their own products in this space?
3) HOW CAN MICROFINANCE INSTITUTIONS IMPROVE THEIR OPERATIONS? IN PARTICULAR, HOW CAN THEY MAKE THE PROCESS OF FINANCIAL EDUCATION AND TESTING / SCREENING MORE SCALABLE?
While many have help up the microfinance revolution in the country as a success story, others have not been as sanguine in their evaluations. For instance, economist Dean Karlan and his colleagues provided evidence showing that while the financial indicators of the microfinance conveyed a sense of good health, the microfinance was not really living up to its promises of boosting small enterprise, empowering women and increasing welfare. One of the big reasons for why this happens is the lack of financial literacy or sophistication on the part of recipients. Many of the recipients of the loans don’t have the skills or expertise to develop a business from the investment, and do not know much about the basics of how to manage money. Consider the case of Mimo Finance, a microfinance lender that operates in the northern Indian state of Uttaranchal. You will receive a slide deck describing their operations. This deck suggests that they spend a considerable amount of time and effort to set up their loan recipients for success through group meetings, training and follow-up meetings. While this approach works well for a small organization that works in a relatively concentrated geographical area, it presents challenges to scaling. In particular, scaling would be helped greatly if there were a) a standard “curriculum” for training including content and key learning points, b) a operating manual for who trains and how the training is done, c) a method of assessing whether the trainees have learnt and d) a screening mechanism to indicate that they are equipped enough to receive a loan. Based on your research on financial literacy and awareness, develop a curriculum and an action plan that is scalable. Also devise a scorecard / evaluation tool to assess whether the recipient should be given a microfinance loan. To help you create your action plans, you will find at the end of this document a list of resources that are available online. These resources include the World Bank report (and a database) on financial inclusion, the Mor committee report, MIX (a microfinance resource portal), a working paper on mobile money, a book chapter on financial inclusion
[Access to Finance] and the text of some relevant speeches on financial inclusion. You will also receive separately a slide deck outlining the operations of a microfinance institution [Mimo]
and an article on scaling innovation. In addition, subject matter experts will share their knowledge with you and your colleagues through a monthly speaker series organized by the Munk School of Global Affairs. You will also receive readings and discussion questions prior to each speaker session, and you will discuss the literature and your responses with your colleagues and mentors during breakout sessions (which will follow each speaker session). All teams are required to do their own research outside of the assigned readings and speaker series. Your final strategy will be presented in a slideshow (PowerPoint only; or Prezi in static slides) and poster display at the Final Symposium on April 8, 2015. In addition, you will write up your final strategy in a one-page Executive Summary, which will be shared with the Reserve Bank of India. More details will be provided at a later date. Good luck!