There are 2.5 billion unbanked adults around the world, mainly in developing economies. Financial inclusion is important because the lack of access to formal financial services limits the ability of poor communities to thrive economically, and also entails greater risks of fraud and theft. This presentation gives an overview of the status of financial inclusion, what it means, and how new technologies such as mobile money services could help give poor people in remote areas better access to reliable financial services.

1. FINANCIAL
INCLUSION
LANDSCAPE
AND
CHALLENGES
April 2014

2. 2
What is financial inclusion?
Financial inclusion means that households and businesses
have access and can effectively use financial services. Such
services must be provided responsibly and sustainably, in
a well regulated environment
(CGAP / World Bank definition)
 In practice, financial inclusion usually denotes a shift
away from the informal to the formal or semi-formal
sectors.
 Financial inclusion is broader than access to finance. It
encompasses savings, remittances etc., not just loans.
”
“

3. 3
How many are unbanked?
Source: World Bank, Global Findex Database
World-wide, there are an estimated 2.5 billion
unbanked adults

4. 4
How many are unbanked?
Source: World Bank, Global Findex Database

5. 5
Who are the unbanked?
Source: World Bank, Global Findex Database

6. 6
Who are the unbanked?
In summary you are more
likely to be unbanked if you
are:
 Young
 Poor
 In a developing economy
 Less well educated
 Live in a rural area
 Female
Source: World Bank, Global Findex Database

7. 7
Reported reasons for not having a bank account

8. 8
Why do the poor need banks?
 The poor need financial services to:
– Transact
– Manage day-to-day cashflow
– Create usefully large sums (savings / borrowing)
– Manage and protect against risk (savings / insurance)
 Financial diary studies suggest that:
– The poor unbanked have at least as many financial
transactions as the wealthy banked – they are just for
smaller amounts.
– Because the incomes of the poor tend to
fluctuate, their need for financial services may actually
be greater than the better off.

9. 9
How do the financially excluded
manage their money?
 Cash transactions
 Cash savings at home – the “mattress bank”
 Borrow from family and friends
 Save in kind – acquire valuable assets such as
land, jewellery, livestock – then sell assets when
cash is needed.
 Entrust others with their cash, for safekeeping or
remittance
 Use informal financial services

10. 10
Informal financial services
Community-based financial services have been around
for generations. Examples:
 Reciprocation
 Susu collectors (West Africa)
 VSLAs
 ROSCAs / Stokvels
 ASCAs
 Marriage and burial societies
A Susu collector in Ghana

11. 11
The ROSCA model
 Every month a different member takes the full $40 pay-out.
The beneficiary can be determined by:
– Prior agreement – e.g. based on seniority
– Agreement at each round
– Lottery
– Auction (with surplus shared among members)
 On the face of it, highly effective and efficient savings
mechanism
 In practice, many are wound up then re-started, either because
of delinquency, or because they have fulfilled their need.
 ROSCAs are widespread, especially in East
Africa. About 40m participants in the region.
 Example: 10 members, each paying in $2 a
month

12. 12
Informal financial services – pros and cons
Informal
Financial
services
Local and
accessible
Simple to use
Adaptable to
community
needs
Trusted and
unintimidating
Unreliable and
clunky Prone to
delinquency
and fraud
Limited
capacity for
lending
Lack of privacy
Inefficient
allocation of
capital

13. 13
Semi-formal financial institutions
 In this category:
– Savings and Credit Cooperative Societies (SACCOs) /
Credit Unions
– Microfinance Institutions (MFIs) – can be deposit-taking
or non-deposit-taking
 MFIs can be independent commercial, bank-linked,
state-owned or NGOs
 Regulated, but not usually as stringently as banks

14. 14
The micro-credit roller-coaster
 Emergence: the Grameen Bank model
– Mohamed Yunus won the Nobel peace price in 2006
– main innovation was to recognise and commercialise the
concept of “group collateral”
– recognised the disproportionate value of small loans to the
economically active poor
– unsecured lending on reasonable (but not cheap) terms
 Growth: MFIs proliferate - NGOs, commercial, bank-
linked
 Disillusion: aggressive collection tactics, extortionate
pricing, give microfinance a bad name (Andhra Pradesh)
 Redemption: More stringent regulation to protect
customers make way for principled NGOs, honest MFIs
and banks seeking a sustainable business model?

15. 15
Formal financial institutions
The players:
 Commercial banks (state and private sector)
 Savings banks / postal banks (often state owned)
The drive:
 The potential size of the market
 Less volatile, less price-sensitive
 Government policy - e.g. social payments and
pensions
 Good CSR image

16. 16
Up-scaling and down-scaling
 The market gaps between the banks’ and the MFIs’
traditional customer bases are now being recognised as
having greater potential
 Banks looking to “down-scale” to SMEs, micro-
enterprises and to poorer retail customer segments, even
the rural poor
 Technology shifts are facilitating accessibility
 MFIs “upscaling” to SME lending
 Although microfinance has captured the imagination,
basic accounts and transactional services are equally
important

17. 17
“The poor” are not homogeneous
Rural
village
Peri-
urban
Remote
ruralUrban
Micro
enterpriseSalaried DependentFarmers
Working
age
ElderlyYoung
FemaleMale
Location
Activity
Age
Gender
 Some segments will be commercially more attractive to banks than others
 There may always be gaps in provision of formal financial services

18. 18
Criteria for pro-poor financial services
Benefits / Literacy
Proximity /
Accessibility
Simplicity /
Usability
Affordability
 Must I have a bank account to receive state benefits?
 Am I convinced of the advantages of being banked?
 Am I confident of my understanding of how it all works?
 How far do I have to go?
 Will I feel intimidated / will the staff be helpful or arrogant?
 Can I get my money when I need it?
 What if I can’t read or write?
 Does the product give me the flexibility I need?
 How easy is it to start? What documents will I need?
 How much will it cost?
 Will all my savings get eaten up in fees?
 Are interest rates on loans reasonable?
Safety
 Could I lose my money?
 How will I know it’s there?
 Can it help me keep my money away from others?

19. 19
 Poor people EXPECT to pay for financial services
 They are very aware of the real current costs:
– Travel costs
– High risks of loss / fraud
– Informal sector and MFI interest rates
 Pricing models for the poor:
– Little or no interest on deposits
– High transaction fees
– No account fees
– High interest on microcredits
Pricing for the poor

20. 20
Supply-side challenges for banks
Financial
sustainability
 Large numbers of low-value transactions
 Lack of collateral for lending
 High levels of dormancy
Customers /
Products
 Developing pro-poor products, appropriately priced, for the
chosen market segments
 Avoiding “contamination” of existing customers/products
Delivery model
 Managing a remote network
 Reaching the remote poor at low cost
 Harnessing technology
Operational
 IT and staff capacity to cope with increased volumes
 Physical security, especially for cash transportation
 Poor infrastructure – power and communications
Cultural
 Staff with negative attitude to the poor and to micro segment
 Banking the poor still often seen as largely a CSR activity
 Financial literacy improving but not perfect
Regulatory
 Difficulty of customer identification
 Inflexible AML/CFT rules

21. 21
Traditional distribution model
 The branch/ATM/online banking model
familiar in developed countries or in
urban centres doesn’t work in a poor
rural environment:
– Revenue streams cannot support high branch
fixed costs
– ATMs are “high maintenance” and need reliable
power, land-line communication networks, secure
locations, and regular loading
– Internet banking is of limited use in cash-
dominated economies
 So, what are the alternatives . . . . .

22. 22
Pro-poor delivery options
Mini-branches and kiosks: work well in higher-density
locations, but costs still too high for remote rural areas.
Banks and regulators nervous about one-person outlets
Mobile banks: Expensive to run, especially in areas with
poor security. Good for image promotion and customer
recruitment.
Non bank agencies: The humble POS terminal serves as
a “bank in a box”. Recruiting and training agents can be
difficult.
Mobile banking and mobile money: Phenomenal
growth, and now ubiquitous in many developing
economies, especially Sub-Saharan Africa.

23. 23
AML/ CFT
 AML/CFT rules can create unintended obstacles to
financial inclusion
 The Financial Action Task Force (FATF) allows for some
flexibility in the implementation of AML/CFT rules - low-
risk activities can have simplified controls
 But national regulators often find it difficult to design
appropriate controls and tend to take a blanket approach
 Specific issues include:
– Inadequate or unreliable ID systems
– Problems faced by banks with international relationships
– Lack of resources and systems to monitor financial activity

24. 24
Lessons learned
 Banks’ traditional distribution model is uneconomic for small
numbers of low-balance accounts
 The costs of compliance with AML/CFT rules undermine the
concept of mass financial inclusion.
 The agency model can work economically, but creating the right
incentives is important. Not all regulators approve.
 Cash transportation and storage costs can be prohibitive
 Important to create pro-poor products with targeted features and
innovative pricing structures.
 Financial literacy campaigns can help, but the causes of financial
exclusion are mainly practical ones.
 The more aggressive the marketing, the higher the rates of
dormancy.
 Closer cooperation between banks and mobile operators has
promise.

25. 25
A fast-changing environment
 Banks and MFIs are no longer the only, nor even the
main, players
 The mobile money revolution, which started in Kenya, is
revolutionising the financial inclusion landscape
 MNOs are now competing head-on with the banks, and
in many markets are winning easily
 Growing “ecosystem” of mobile-based financial
services – including G2P, bill payment, mobile
insurance, mobile credit and savings etc.

26. 26
Mobile Money vs Mobile Banking
Mobile Money
 Does not require users to have a
bank account
 Uses transaction points that are
primarily separate from banks
(e.g. MNO agents for cash-in and
cash-out)
 Typically offers P2P transfers, bill
payments, bulk payments and
international remittances
 Increasingly used for G2P
transfers
Mobile Banking
 Uses the mobile phone as
another channel to access
banking services
 Requires users to be customers of
the bank
 Cash-in and cash-out transactions
still require a branch or ATM
However, the distinction between Mobile Money and Mobile Banking is gradually
becoming blurred. Banks and MNOs are increasingly working together so that, for
example, mobile money services can be used to access bank accounts.

27. 27
The mobile money revolution
What are mobile money services used for?
Source: GSMA

28. 28
Mobile money data
 In June 2013, there were over 203 million registered mobile
money accounts worldwide.
 In Sub-Saharan Africa, there were 98 million registered
accounts; twice as many as Facebook.
 East Africa accounts for 34% of total registered accounts.
 Nine markets have more registered mobile money accounts
than bank accounts: Cameroon, the DRC, Gabon, Kenya,
Madagascar, Tanzania, Uganda, Zambia and Zimbabwe.
 Monthly value of mobile money transactions (excluding cash
in and cash out): USD 3.2 billion (based on June 2013)
 The density of mobile money agents is six times that of bank
branches (28.4 / 100,000 adults vs. 8.6)
Source: GSMA, Mobile Money for the Unbanked, State of the Industry 2013

29. 29
Growth of mobile money services
Source: GSMA

30. 30
Geographic spread of mobile money
Source: GSMA

31. 31
How mobile money P2P transfers work
Sender’s
mobile
money
E-wallet
credited
Sender pays
cash to
mobile
money agent
Sender sends
payment
message to
recipient
Recipient gets
confirmation
message
Recipient’s
mobile
money
E-wallet
credited
Recipient
collects cash
from mobile
money agent
Sender’s
mobile
money
E-wallet
debited
Money transfer using SMS / USSD

32. 32
Mobile money: some issues
 Regulatory rules vary considerably. Some countries still
do not allow MNOs to operate mobile money services.
Others allow them only in conjunction with banks.
 Mobile money E-wallets are being used for savings. Is it
appropriate to save with an MNO rather than a bank?
 Managing liquidity – especially for G2P payments
 Recruiting, training and incentivising huge agent
networks present challenges

33. 33
The future?
 The dividing line between MNOs and banks is already
becoming blurred (e.g. M-Kesho in Kenya)
 More poor people will have direct access to bank
accounts:
– Via mobile banking
– Via mobile money services
– Using low-cost outlets and agency networks
– Regulators will relax KYC/CFT/AML rules for very low balance accounts
 Increased access to credit, from banks as well as MFIs
 Cooperation between banks and informal financial
institutions will increase
 Remittances linked to social networking? E.g. Fastacash
and Azimo.

34. 34
References
 World Bank, Global Financial Development Report 2014 – Financial Inclusion, World Bank Nov 2013
 CGAP, Annual Report 2013: Advancing Financial Inclusion to Improve the Lives of the Poor, 2013
 GSMA Mobile Money for the Unbanked, State of the Industry 2013.
 FATF Guidance, Anti-Money Laundering & Terrorist Financing Measures and Financial Inclusion, June 2011
 World Bank – World Development Indicators, The Little Data Book on Financial Inclusion, 2012
 Collins, Morduch, Rutherford and Ruthven, Portfolios of the Poor: How the World’s Poor Live on $2 a Day,
Princeton University Press, 2009.
 Rutherford and Arora, The Poor and Their Money: Microfinance from a 21st Century Consumer’s
Perspective, Practical Action Publishing Ltd, 2009
 Asli Demirguc-Kunt and Leora Klapper, Measuring Financial Inclusion: The Global Findex Database, World
Bank Policy Research Working Paper 6025, April 2012
 CGAP and CGAP/DFID Focus Notes and papers:
‐ Does Facebook Represent the Future of International Remittances, 2013
‐ Advancing Financial Inclusion through use of Market Archetypes
‐ AML/CFT: Strengthening Financial Inclusion and Integrity
‐ Scenarios for Branchless Banking 2020
‐ Banking the Poor via G2P Payments
‐ Microfinance and Mobile Banking: The Story So Far
‐ Nonbank E-Money Issuers: Regulatory Approaches to Protecting Consumer Funds
 FSD Kenya, The Role of Informal Financial Groups in Extending Access in Kenya, April 2009

35. 35
Useful websites
CGAP
http://www.cgap.org
IMF Financial Access Survey data
http://fas.imf.org/
World Savings Banks Institute (WSBI)
http://www.wsbi.org/
Banking for Tomorrow
http://www.banking4tomorrow.com/blog
Boston University, Financial Inclusion Guide
http://www.bu.edu/bucflp/initiatives/financial-inclusion-guide/

36. CONTACT DETAILS AND FURTHER
INFORMATION
Johnny Rizq, Director
 You can find out more about GBRW
Consulting by visiting our website on
http://www.gbrw.com
 Visit my LinkedIn profile at
 http://www.linkedin.com/in/johnnyrizq
 Email us at mail@gbrw.com