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June 2019, No. 91


Special Report: Inclusive Finance | Part 2

Policy Lessons From Global Experience


There is an urgent need to focus on resolving complex problems; on the possible ensuing instabilities; and on people and human development.


The increasing complexity and globalization, adverse climate change, rising wealth gaps and changing power structures have resulted in new processes and have prompted change, multi-dimensionality in function and purpose, and new partnership processes all over the world. Changing power structures and policy approaches mean that solutions, objectives and outcomes can no longer be achieved through previous, singular approaches but also require new, multi-dimensional solutions (and international cooperation). This was more fully developed in Section of this series.

Along with fundamental changes in the global processes of development and finance realities, and in our perceptions of them, “development” is no longer seen as exclusive but as multi-dimensional and relative; no longer a sole state-led process or a private-sector led process. Nor exclusively of a supply sided capital development, trickle-down and convergence process for progress between “developing, third world” nations vis-à-vis “developed” countries, with assured narrowing of the wealth and technology gap. Development and growth processes are also increasingly driving a change towards goods and services that have mixed, public-private qualities. This complexity and change has resulted in new global development and finance approaches, and have prompted a new approach to development finance. Gradually overcoming the traditional boundaries between monetary and fiscal policy; and between public and private concepts, new finance approaches and criteria are forming along with own supportive systems; linking public and private goods, and forming public-private-community partnerships (PPP).

This article (1) presents some policy lessons learnt from international experience.

Challenges in Inclusive Finance

Financial inclusion has attracted development professionals, researchers, economists, policymakers, bankers and academia. Financial inclusion is considered now as an enabler of economic and social development; believed to promise prompting growth, and reducing poverty and inequality, through savings mobilization and providing households and companies with greater access to resources needed to finance consumption and investment and to insure against shock. Financial inclusion can develop labour and firm formalization, helping boost government revenue and strengthen social safety nets; and is a means to measure the growth of an economy as well as human development. Policymakers and central bankers are hoping to develop more financially inclusive economic systems, to achieve equitable and sustainable growth.

Development approaches are now also fully concerned with the integration of economic, social and environmental concerns (or efficiency, equity and sustainability) along with provision of both private and public goods, etc. However, finance and banking are still mainly concerned with money, sole market mechanisms and private returns – as is natural.

The need for a strategy seeking large scale impact in value added, employment and sustainability to meet growth and development challenges, through alternative and complementary approaches that combine monetary and fiscal policy and with selection of appropriate public and private investments – both  appropriately integrated and coordinated, along with PPP – is now globally accepted. The identification of priority private and public investments, along with their complementary programmes and financing, has become a major effort. Such support mechanisms are considered paramount and are being promoted by the United Nations international development goals and indicators (especially the Sustainable Development Goals, SDG’s). These propose targeting rural development, urban development, health systems, education, gender equality, environment and science, technology and innovation – requiring combined monetary and fiscal policy approaches, and public-private-community partnership investment structures and procedures. Highlighting the importance of the role of governance in determining the development quality of growth paths and public investment policies.

To meet such a large scale challenge, both monetary and fiscal policy have to adjust to each others objectives and capabilities – and perhaps to a new standard. Given lack of domestic resources in many countries, significant increases in public investments (in partnership with private and community sectors) are necessary. In stagnation conditions, this may be supported by a quantitative easing of money, and perhaps bond sales and other resource mobilization. If designed to target low income areas/groups, and to set them on a growth path structured to be self-sustainable, these can be successful in stag-flation (through wealth shifts). The usual central banking focus on macroeconomic stability, aggregate fiscal discipline and overall inflation, however, needs to be complemented in stagflation conditions by other criteria for resource allocation, efficiency and effectiveness in public spending that are more structural (that is, at the meso level and with programme type qualities).


Inclusive finance encompasses many new and unusual financial institutions and instruments.


Consistently combining monetary policy, fiscal policy and public investment towards inclusive economic growth outcomes is not easy: i) given the reality of the policy making process of resource allocation; ii) investment choices are usually made on political rather than technical development priorities; iii) without appropriate assessments of development alternatives, and good evaluation usually remains in academic and technical circles. Consistent methodology is need.

Financial stability is a public “good”, while financial instability, on the other hand, is very costly for all. A public “bad”: bankrupting institutions, making people poor and significantly reducing GDP (e.g. global 2007 crisis). Further, development, demographic and economic factors have changed Iranian people’s financial conditions and needs: increased migration and mobility is reducing the ability to rely on family in situations of need; privatization of social services and increased fee for service, such as in health and education, and increasing job insecurity due to unemployment, require new insurance arrangements; while enhanced access to financial services and credit are required to better cope with unemployment and new small enterprise.

Preventing financial crises and raising access, requires improved national capacity: better macro-economic programme design and implementation; more resilient and deeper financial markets; better banking regulation and supervision; stronger legal frameworks, including bankruptcy and property legislation; accounting standards and SOP’s; monitoring of domestic capital movement and market surveillance; orderly debt management; etc. To ensure such enhanced financial market efficiency (stability) it is insufficient to consider only efficiency, but must also think about who the financial markets serve and how (equity), and long term sustainability (stability).

Inclusive finance is about this – and about the quality, transmission and targeting of money and credit. Enhanced financial efficiency not only benefits overall economic performance but also poor and low income persons economic prospects – and needs good inclusive and social finance principles, as well as equitable burden sharing between national banks, lenders, borrowers, and the population. Financial market depth and differentiation also enhances competition among market creditors, brokers, instruments and products.

Finance was originally, always a state managed resource allocation process:  with control of the money supply, interest rates and foreign exchange movements, credit rationing and quantitative control, etc, being widespread in countries until recent times. The collapse of the Bretton Woods system (of fixed exchange rates), the US withdrawl from the gold standard and the UK/US agreements on finance - in the 1970’s and 1980’s - all significantly changed the rules of global finance. Finance and banking took centre stage, global financial liberalization became the rule: also leading to privatization, outsourcing and user fees of formerly state provided public goods and services; and to more macro fiscal prudence concepts and sole market-based mechanisms as ideal solutions. This less restriction system and more finance-cum-market-orientation process has resulted in a financing system that has expanded into an all powerful global driver.

However, it has been a process of both progress and havoc at the same time. The financial sector is now so large that it is immersed fully in its own self: financial market growth rates and procurements of assets are at historical records; with huge debt and debt financing burdens; and with significant financial risks all round. Sometimes requiring large scale support, bail-outs, and price and devaluation changes just to keep the financial sector afloat – and prevent the adverse negative externality spill onto economy and society.

Such globalisation and liberalization have also reduced government revenue sources; financially squeezing countries (e.g. Greece recently) – along with imposed international finance conditionalities and discipline (as EU on Greece).

The rising scale of international activity and growing number of global corporations, commerce, capital and people mobility, and rising informal sectors, have also helped reduce government revenue. Meanwhile public finance needs and burdens have been increasing: global openness requires new costly institutions; businesses need to adjust to trade competition, and so market integration needs expensive policy, legal and infrastructural adjustments; environmental quality needs R&D incentive structures; society demands new approaches to costly education; financial crises and debt burden puts pressure on public budgets and peoples pockets, and bail-outs; etc. A serious dilemma: budget and trade deficits are punished by the global financial markets; cutting national spending risks both the social fabric and future economic competitiveness.

However, both the globalization process and development constraints now prevent a return to full, state-based capital controls and/or to a sole economic growth capitalistic approach. What is to be done? The real issue is whether development and finance are in tandem, supporting each other and to the benefit of people. That is, is development finance inclusive?. A development finance approach is required, combining financial progress with sustainable development – and within a public-private partnerships (PPP) type framework – to ensure inclusion.

Mainstreaming Inclusive Finance

While inclusive micro-finance programmes aim to bring social and economic benefits to the poor and their clients, the approaches and outcomes differ. Poor and low income households, and the unemployed, are typically excluded from the modern formal banking system, for lack of collateral: but inclusive finance programmes have demonstrated that the poor are enterprising and can save in substantial quantities (and they also help each other and cooperate well). In other words, they can be relied upon to borrow and repay. This is an important understanding.

Inclusive finance encompasses many new and unusual financial institutions and instruments. The terms “inclusive finance”, “social banking”, “micro-credit”, “micro-finance”, “conditional cash transfers” and “institutional demand” indicate the wide range of financial services involved. Many countries have also started adopting such approaches: developing social (inclusive) banking/finance systems capacities and infrastructure that prompt services, credit provision and transfers to new investments, projects and initiatives that have combined high labour productivity, low initial overhead costs, and large employment outcomes. Monetary and fiscal approaches combined, mixed with investment PPP approaches.

These are new concepts and methods that need to be supported by a Central Bank, and not just a development planning agency or a social development ministry. The famous success stories were also supported by CB’s, including: Bangladesh (Grameen; BRAC), Brazil (BOLSA VERDE), South America (CCT’s), Africa (AFRACA; Finca), India (Nabard, Share, INREGA), Indonesia (Rakyat), Asia (APRACA), Uganda (FOCCAS), Nepal (WEP), Mexico (Compartamos and Microfinance), Egypt (National Bank), globally (IFA), Thailand (OTOP), South Africa (WfW) and elsewhere. Even small pilot demo’s for micro-credit in Iran have shown relatively well, although they have yet to be integrated into central banking processes: for instance (the social mobilization and micro-credit initiatives in the South Khorassan CSP project and the State Welfare Organisation programme; etc).


Making financial markets work for all people is a challenge that requires one set of institutions for efficiency and another for equity.


Such social banking and inclusive finance initiatives target individuals, as well as groups and small communities, and provide a mix of financial services accessed by low-income and poor people from a variety of service providers, depending on local knowledge, history, context and need. These not only provide loans to establish income generating projects, but also are customer-centred (people centred rather than commodity-centred): encompassing programmes of micro-credit, micro-savings, micro-insurance, money transfers and social enterprise financing. Financial service components include savings, credit and insurance, while financial providers can be informal, formal, and semi-formal. The service may be owned and managed by the users themselves or other providers, while the source of funds may be diverse.

The successful initiatives have a national support framework – that is, CB’s somehow actually support the process. When added up significant national growth outcomes are achieved.

These are also complementary to and in cooperation with non-financial services and capability development actions such as education, vocational training, technical assistance and guaranteed procurement – all crucial to improve the impact of such inclusive, micro-level and local financial services. The trade-off between financial self-sufficiency and sustainability, the depth of outreach, and the social welfare of service recipients are improved: reducing poverty, increasing capability, building enterprise.

These approaches have been successful in both prompting local economic growth and alleviating poverty, while at the same time raising local community capacity and capability (empowerment) and reducing dependency. Developing social capital. The fact that financial services are offered specifically to low-income households, the poor and to micro-small enterprises is seen as an opportunity and strength (rather than as a weakness). An approach that actually prompts inclusive GDP growth and keeps overhead costs low; targeted to low income groups and to micro-small enterprise and leading to employment generation and large local multiplier outcomes. They are attempts to deliver small scale loans that have local multiplier effects and are sustainable; through finding ways to cost-effectively lend money to poor and low income households – by exploiting new contractual and institutional structures and forms that reduce the riskiness and cost of making small, uncollateralized loans. Loans that can lead to local micro-small enterprise development – and hence employment generation and local economic multiplier effects. Loans that are preferably collateral-free loans to usually unsalaried borrowers or members of groups and cooperatives who otherwise cannot get access to credit.

Inclusive finance, then, brings together poverty and financial markets – and State. Sole top-down, centrally planned development has been proven to not work. The Government ought take a complementary role through the interplay of both public and private markets and finance; and ensure rule of law by including representatives of social and environmental concerns into financial negotiations. The broad exclusion of the poor from financial markets is a State failure – not a market failure; even small public funds can be made to make a difference in terms of credit worthiness of poor people, supporting R&D to develop pro-poor financial mechanisms. Once finance is considered as a sub-system of development, it can encompass public and private finance, domestic and external resources, public and private goods: encouraging private initiative and empowering peoples capability. Public support for the evaluation of small-scale investment proposals is also useful.

Inclusive Finance is a Public Good

Successful inclusive finance approaches and lending to low-income and poor people have managed to transform development approaches to poverty alleviation, social enterprise and economic growth. The successes are known widely, and now globally governments and charities spend millions of dollars on contributing to such programmes.

Making financial markets work for all people is a challenge that requires one set of institutions for efficiency and another for equity. Private financial services contribute to this process through self-regulation and by realizing that the poor are a market not to be ignored – perhaps through progress in microfinance.

The lack of provision of public intervention, public financing and public goods in financial markets may also lead to instability. As can a lack of PPP mechanisms. That is, they can be “public bads” (or “public goods” – depending on how one sees it). Inclusive Finance is a public good – and a PPP approach at the same time. Externalities and spill overs are involved in both. There exist different types of public goods (goods with large externalities, not just purely private goods). Also, it is important to determine who benefits: how do different population groups prioritize public goods? usually it is a matter of choice how private or how public a good is – and usually a social convention or a policy choice. Technology and institutional mechanisms can also change the property of a good. The private sector and markets have their own conventions and standard setting on such matters; as do communities and their own civil organisations. None of these types of goods need necessarily be totally state provided or totally private – they may have overlaps.


International aid effectiveness towards moving a country out of dependency and towards development is controversial and questionable.


Basically, public goods are non rivalrous in consumption, and non excludable, collective endeavors. When positive externalities are large, a government can directly provide public goods, and when negative externalities are large, and private returns high, regulation remains the only public action (or tax). However, there may be many initiatives overlapping, and with high positive externalities, but which also have private profitability: so a small public finance support to PPP may be made to mobilise significant private financing as well as community support. Public development finance incentive policies can identify and focus on this win-win overlap in order to achieve high-leveraging, multiplier effects. A tri-partite PPP win win situation. Once local markets and financial markets become more developed, as people become more financially literate and their opportunities for private savings increase (due to increased wealth), the transfer of responsibilities back into the private domain becomes more possible.

But how best to provide incentives to private, community actors to enhance their contribution to the provision of public goods and inclusive financial? Effective incentives, suitably formed and structured, may attract large amounts of private and community funding to projects and initiatives with high public social returns, and conversely, discourage projects that would generate public bads. Such incentives and mechanisms may also allow governments to get away from the mode of correcting public bads later on (down the stream and when a bad investment decision has already been made): preventing financial crises and loss, rather than just alleviating poverty, or meeting some other partial second-best objective (such as maximum growth). To discourage projects that have large negative externalities (but high private rates of return), financial disincentives could be made to dissuade private and community actors. Such PPP approaches can be complemented by many forms of local cost-sharing arrangements.

International Development Cooperation in Inclusive Finance

International aid effectiveness towards moving a country out of dependency and towards development is controversial and questionable. International aid is often used as a substitute of other funds rather than as a means to help a country overcome its resource constraints. Measured usually in terms of the donor GNP, and not in terms of the developing countries resource needs, it doesn’t well indicate realities. Nevertheless, how can aid be made, within the recipient country, into an incentive for inclusive finance and PPP?  Rather than a conditionality.

Public goods provide a reason for government intervention. Some goods are a mixture of public and private, requiring joint public and private provision strategies. Further, and due to globalization, traditional global public goods (e.g. climate), have become national, and requiring national level policy actions and outcomes; while some national public goods have become global as they cannot be provided domestically alone, but depend on international cooperation (e.g.  global market efficiency and financial stability; health).

International cooperation in support of such financial global public goods can take several forms: policy harmonization among countries (SDG’s); country follow up action to international agreements within own jurisdiction (Conventions); assisting poor countries; market based mechanisms (WTO); offsetting arrangements and reimbursement of incremental costs when providing global development services (Clean Development Mechanism; the Global Environment Fund);  cost-sharing of international and regional programmes; etc. However, to finance international cooperation, the money has to come from somewhere. Private money will not flow into international cooperation, unless governments leverage it through public finance. Incentive policies and PPP are important and so the main financing responsibility is with government.

The hope of inclusive finance is that much poverty can be alleviated, and that economic and social structures can be transformed fundamentally by providing financial services targeted to low-income households through innovative institutional mechanisms and cost-effective management structures. The development of inclusive finance parallels the development of non-governmental organizations and attention to social capital over the last three decades. Social oriented advocates of inclusive finance highlight the long term advantages, including: bottom-up processes, empowerment, community development, focus on women, and improving opportunity. This inclusive finance vision has been translated into a series of “best practices” and also adopted widely by the Consultative Group to Assist the Poorest (an international donor consortium focusing on micro finance), the Alliance for Inclusive Finance, the United Nations and other key international agencies or donors. Global evidence suggests that such South-South Cooperation (SSC) solutions have been instrumental in facilitating the adoption of effective practices in a number of areas – including in inclusive finance (2).

A) Platform for Dialogue Between Financial Regulators - Alliance for Financial Inclusion SSC recognizes importance of effective financial inclusion policy; a global knowledge-sharing network, the Alliance for Financial Inclusion, established by 100 countries; Its Global Policy Forum enables regulatory institutions from emerging economies to come together to promote financial inclusion policy, strategy and services to the poor; towards the exchange of ideas, engagement in peer-to-peer learning activities,  assessment of existing cooperation, and identifying options to increase impact of development cooperation; Impact on global inclusive GDP growth rates need to be assessed.

Models of global relevance for this area include institutional arrangements currently in place in Brazil, Thailand, Malaysia, Indonesia, Turkey, and Mexico (with inclusive growth and inclusive finance programmes).

B) Horizontal SSC – Institutional Mechanisms - Mexico-Chile SAA  In 2006, Mexico and Chile established a Strategic Association Agreement (SAA) including political, commercial and international cooperation components; mechanism for deepening bilateral relationships through exchange of technical assistance, enhanced dialogue, and projects that foster development of technical capacities given each one’s comparative advantages; established a Cooperation Commission and a Joint Cooperation Fund, each country financing bilateral cooperation projects.

C) Human Capital Oriented Conditional Cash Transfer - Brazil’s Bolsa Família Programme: 13 million households - nearly 30% of the population - received benefits in 2014, at a cost of less than 1% of annual GDP; Recipient households required to have their children in school and ensure regular medical attention; Imperatives of rural development and protecting natural resources aligned via the Bolsa Verde programme; In 2014 Bolsa offered conditional cash transfers to 73,000 smallholder and indigenous households living in environmentally sensitive areas, who pursue ecologically sustainable livelihoods.

D) Guaranteed Procurement for Rural Economic Growth - Thailand’s OTOP Programme: Rural growth and development initiative; Government-led and supported project; agency-integrated; Undertaken at sub-district level; Carried out to mobilize available resources from all sectors to generate income and prosperity for grassroots communities; involves guaranteed procurement of pre-standardised product; minimal pre-financing; Nearly $100 billion value added in first fifteen years; significant exports and tourism attraction.

Lessons Learnt

The international lessons learnt in inclusive finance are many. Primarily, achieving good outcomes in inclusive finance programmes for broad, diverse and changing populations will require a variety of programmes, and at varying levels of outreach and financial sustainability. Also, confronting the problems of diversity of approach and of action, and of purely financially minded versus development (socially) minded programmes will require that both government, business and civil pay attention to who it is actually being served – and do it together through PPP.

Some general lessons learned that can benefit Central Bank policy makers advocating for inclusive finance include:

  • relatively poor households can save significantly when appropriate financial instruments exist (addressing saving constraints instead of addressing just credit);

  • despite high transactions costs and no collateral, it is possible to lend profitably to very low-income households;

  • development and poverty alleviation outcomes, through inclusive finance, require management structures and a mechanism design that lowers overhead and final cost while maintaining outreach to the needy;

  • difficult to create new institutions, even those that are profitable -  requires leadership and legal frameworks;

  • progress requires more innovation, by encouraging experimentation and evaluation, rather than just replication of existing best practices – while innovation, standardization and replication more easily developed and replicated in such programmes;

  • demonstration effects and experimentation (on subsidy and various mechanism) are integral to success (as the UN experience in Iran shows).

  • successful inclusive micro finance programmes come about by trial and error, open participatory processes and use innovations in incentives and repayment schedules – and most are not optimally pre-designed nor offering desirable financial products;

  • group lending contracts are the innovation of micro finance – and new financial products provide alternative routes to financial sustainability (e.g. flexible savings plans for poor households);

  • inclusive finance can well interact with civil society organisations (as they have energy, dedication and financial resources);

  • micro finance programmes are answer for absolute poor households, and an important aid for relatively poor and low-income households that are considerably below poverty lines;

  • the scale of lending to groups below the poverty line is not likely to permit the scale economies available to programmes focused on households just above poverty lines – and subsidizing may yield greater social benefits than costs;

  • far more costly to lend small amounts of money to many people than to lend large amounts to a few: programmes remain highly cost-sensitive, and still rely on subsidies – while different ways need to be worked out by which subsidies can benefit both poor clients and institutions;

  • success shown when coupling efficient operations with subsidized resources; if subsidies are stopped and costs not reduced, many current micro-finance programmes may close, while the remaining will be among the larger programmes, and they will only help fill gaps in financial markets (not for the poor);

  • credit from micro finance programmes help fund self-employment activities that most often supplement income for borrowers rather than drive fundamental shifts in employment patterns - unless complemented by area based programmes;

  • rarely generates many new jobs for others, and success has been especially limited in regions with low population densities;

  • reducing poverty rates will still require increasing overall levels of economic growth and employment generation – and the ensuring of inclusive growth.

Conclusion

There is an urgent need to focus on resolving complex problems; on the possible ensuing instabilities; and on people and human development. The main lessons learnt from international inclusive finance initiatives and programmes have demonstrated the importance of thinking creatively about approaches, partnerships, contracts, mechanisms, design; forcing a rethink of the nature of linkages between development, finance, growth, poverty, markets, institutions and innovation.

Inclusive finance encompasses diverse programmes, most of which focus on providing financial services to poor and low income households for their development. There is both common ground and critical differences – cooperating and competing approaches in methods and financial arrangements. An important lesson is that a country need not allow high development priorities to go under funded: through utilizing PPP approaches and mechanisms. A multi-partner endeavor is required – and for all to participate and monitor banking behaviour and contribute to financing. The trend toward PPP is a real development: by the changed nature of goods and services, of development conditions, and of money itself.

With increasingly fewer pure private and pure public goods, and more mixed benefits, as a result of technological improvement and strengthened markets, and higher levels of education and information there are now more opportunities exist for combining individual, private, social and public preferences.

These lessons have been documented, increasingly been specified and also made SMART – an important outcome, and of practical use for Iran’s policy makers.        


Endnotes

1 This article is based on Inclusive Finance: Approaches and Measurement for Iran – Working Paper 2018 by this author

2 see the United Nations Office for South South Cooperation: Good Practices in SSTC for Sustainable Development - Vol. 2 (2018).

 

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