What all regulators must do to promote financial inclusion

Fostering financial inclusion depends on many factors, and one of the most important is effective regulation. Policy-makers have an outsize influence on whether the 2 billion people around the world who lack access to basic financial services can finally join the world’s economy. Helping them make the best possible decisions is one of the quickest routes to full financial inclusion.

The microfinance organisation Accion has sponsored a report by the Economist Intelligence Unit entitled Global Microscope 2015: The Enabling Environment for Financial Inclusion, which we believe can expedite and positively influence supportive regulatory steps. The Microscope report evaluates 55 countries’ policies, regulations and environments for financial inclusion. It identifies how governments promote financial inclusion – or impede it. In this one place every year, the regulatory environment is made completely transparent and comparisons are made readily. This creates healthy competition among top regulators to create the best regulatory environment possible.

Inclusion and growth

By comparing countries on 12 key variables and ranking their performance, the Microscope report essentially provides regulators with a directory for best practices: if your country is putting out new mobile money regulations, use the Microscope report to find out who does it best. It is open-source regulation. 

But perhaps most importantly, this year’s Microscope report demonstrates that long-term national strategy is more significant than any individual programme. It is quite clear that the countries that focus on a comprehensive approach that engages multiple stakeholders (including the government and private sector) are the world’s financial inclusion leaders. This year’s report shows that a comprehensive approach is the key to both rapid short-term gains and long-term results.

Take India, the fourth ranked country in the report, and one of the countries with the biggest gain in overall score (10 points). In the past year, the Reserve Bank of India (the country's central bank) has implemented its decision to create two new types of financial institutions – payments banks and small finance banks – by awarding its first round of licences to new institutions. That decision will support prime minister Narendra Modi’s Pradhan Mantri Jan Dhan Yojana programme, which has already provided hundreds of millions of Indian households with a basic bank account.

Top performers

This year’s Microscope report also demonstrates that sustained work over several years is critical. The top three countries – Peru, Colombia and the Philippines – all maintain their rankings from last year. In fact, Peru has kept its number one Microscope ranking for the past eight years.

Not coincidently, each of these three countries has made long-standing commitments to financial inclusion: Colombia began promoting financial inclusion in 2006, while Peru and the Philippines were two of the original 17 signatories of the 2011 Maya Declaration, the first set of public national commitments to action on inclusive finance. Conversely, Bangladesh, for example, had the largest decline this year and fell 11 places, mostly due to its score for ‘government support for financial inclusion'.

The rankings matter. I have seen regulators cheer when they receive high Microscope ratings, and I have seen them all but threaten the report’s authors when their rankings fall. And the rankings matter for much more than bragging rights: increasingly, we are seeing that Microscope scores correlate with indicators of robust financial inclusion sectors. For instance, a higher score in the Microscope’s 'credit reporting schemes' indicator correlates with a greater percentage of adults borrowing from a financial institution. Likewise, better results on the 'regulation of electronic payments' indicator correspond with more of the population having mobile financial accounts.

These correlations may seem obvious, but they point to a relationship between financial inclusion and broader economic growth. If a higher score in credit report schemes indicates more adults borrowing from a financial institution, it means that more people are finding the capital that they need to launch or expand businesses and purchase homes. It also means that lenders are likely making better informed decisions about borrowers, investing money in local communities, and ultimately receiving interest payments.

These insights are exactly what make the Microscope report so valuable. The report and its accompanying benchmarking model allow regulators to adopt and adapt the best ideas from other countries. It may take a significant effort to formulate and rally stakeholders around a clear national policy that recognises and values financial inclusion, but the effort will pay off in the form of a more inclusive economy.

Michael Schlein is president and chief executive of global microfinance organisation Accion.