“Were you happy with your service today?” The question that bank tellers often ask customers after a routine transaction might seem commonplace to many. But to a native Ugandan unfamiliar with customer service in U.S. retail banks, it could be a pleasant culture shock.
“Financial institutions in Uganda can be intimidating — for women, they’re even worse,” said Oliver Wonekha, the country’s ambassador to the United States, at a Brookings Institution event last week. “In the U.S. you feel welcome.”
Negative perceptions toward banking experiences are just one reason why so many in the developing world are excluded from formal banking institutions. Low disposable incomes, high transaction costs and a lack of branch banks are also major factors. All told, around 2 billion adults worldwide do not hold accounts at formal financial institutions, according to the World Bank.
Bringing them into the financial fold requires a host of interventions by business and governments to break down the barriers that inhibit financial inclusion. And there has been significant movement over the last year on that front, as innovations in mobile banking and the proliferation of digital payment platforms take hold, according to a new report by the Brookings Institution, a Washington-D.C. based think tank. To keep pace with the wave of mobile coverage, governments have been strengthening regulatory frameworks around financial inclusion and setting bold national targets to increase formal banking channels.
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The new report, released last week, rates the progress of middle income and developing countries in providing affordable, formal financial services to the unbanked.
The report is the second installment of an annual Brookings study that ranks financial inclusion efforts around the world. The study surveyed 26 countries — by no means an exhaustive list — that vary across geographies and national income levels.
Countries were judged on four broad criteria. One was mobile phone penetration, which has become increasingly synonymous with financial inclusion because digital banking services allow the poor to process payments and transfers using even simple feature phones. Beyond the ubiquity of mobile coverage, countries were also judged by their so-called commitments — the existence of national financial inclusion goals, targets or pledges — regulatory environment and, of course, adoption — how much of their adult population actually uses traditional and digital financial services.
The survey results reveal promising trends and important lessons for countries looking to boost financial inclusion.
“Substantial progress has been made toward advancing financial inclusion in many countries,” the report notes in one of its opening lines. Countries generally improved their scores from the 2015 survey, indicating that financial inclusion policies have gained traction. And those that scored high last year tended to maintain or improve their ranking.
Kenya, Colombia, Brazil, South Africa and Uganda were ranked the top five most financially inclusive when measured by all four criteria.
Other countries scored high on individual measures. The Philippines, for example, ranked high in the commitment category due to its recently launched national financial inclusion strategy. Peru and Rwanda rated well for regulatory environment. And the Dominican Republic scored high in adoption.
As the report notes, there is no one single path to financial inclusion. Instead, having a combination of a supportive regulatory environment and a strong blend of buy-in from public and private sector stakeholders will often translate into financially inclusive policies and actions. The study suggests that this is true regardless of a country’s place on the development ladder. Colombia, Brazil and South Africa — all upper middle income countries — ranked in the top five overall. But Uganda, a much poorer country, was also in the top five, and Rwanda ranked seventh overall.
Uganda’s high ranking was driven largely by its decision earlier this year to amend a key piece of legislation that governs financial institutions. Among the changes, the revision allows certain financial institutions to adopt Islamic banking practices, which by catering to a sizable religious population, increases the potential customer pool.
Rwanda, meanwhile, has drawn strong investment from public and private bodies into mobile banking platforms as part of a broad strategy to expand domestic connectivity.
“We have to transform our constraints into opportunities,” Mathilde Mukantabana, Rwanda’s ambassador to the U.S. said at the Brookings event last week. “We are a landlocked country and need to [better] connect our people, so we are investing in technological infrastructure.”
Interoperability — bringing competing banks and telecommunication network providers together into the same payment system — remains a tall hurdle. It is critical challenge in Uganda, Wonekha said, as well as in many other countries.
True financial inclusion, banking experts say, is not just accessing a service digitally to make payments and process transactions, but having the flexibility to do it across an entire ecosystem of banks, merchants and commercial institutions.
“If financial inclusion is having an account at one institution with no freedom to leave the closed loop and compare products and services elsewhere — that’s not real inclusion,” Jeffrey Bower, a former digital finance specialist with the United Nations-based Better than Cash Alliance, told Devex.
A recent standout model among mobile money systems is Peru, which earlier this year launched a digital banking platform called BIM. The platform brings three of Peru’s main telecommunication companies and 32 of its largest bank together into one interoperable network.
But, Bower said, Peru’s model was a perfect storm of factors, precipitated by a legal framework that gave nontraditional banks more freedom to launch digital money systems. Traditional banks, wanting to protect their turf, decided to band together under a single mobile payment project.
In general, fully interoperable payment systems are much harder to come by.
“Everyone talks about collaboration,” Bower said. “It’s one thing to say you want to do something and another thing to actually do it.”
Not surprisingly, promoting an environment that can lead to greater interoperability and competitive collaboration was one of the recommendations that the Brookings report put forward as a way to further financial inclusion in developing countries.
“Regulators should engage in sustained dialogue with private sector representatives and other financial inclusion stakeholders to develop and refine regulations that promote a level playing field for providers and ensure adequate consumer protection for customers,” according to the report.
The report also advocates for greater data collection by governments, civil society and industry to better understand key trends in financial inclusion.
“The lack of consistent, multinational data constrains the ability of researchers to identify what approaches to advancing financial inclusion are working and why,” the report notes.
Digital and mobile services will inevitably continue to gain ground. And with that, the potential of mobile banking to boost financial inclusion will also grow. But ubiquity of coverage alone does not guarantee that inclusive banking models will take hold. For that to happen, governments, business and civil society will need to advocate clear national targets around financial inclusion and collaborate on the regulations to advance them.
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