MICROFINANCE PAPER WRAP-UP: “Financial Inclusion and the Linkages to Stability, Integrity and Protection: Insights from the South African Experience,” published by CGAP

Published by CGAP (Consultative Group to Assist the Poor); November 2, 2012, 47 pages; available at: http://www.cgap.org/sites/default/files/I-SIP%20Report_1.pdf

The authors of this paper challenge financial regulators to consider how to improve the interaction among the following four factors: financial inclusion (I), financial stability (S), financial integrity (I) and financial consumer protection (P); which are referred to collectively as I-SIP. Regulators are encouraged to view these four objectives as mutually interdependent when creating policies. This report introduces the idea that any financial inclusion implementation should seek to “maximize synergies” among I-SIP associations and “minimize tradeoffs.” The authors state however that the “growing body of empirical evidence to substantiate the theory is far from complete and will require econometric research not addressed in this rapid research exercise.” The paper identifies as the main issue that the risks involved with financial inclusion increase when officials “pursue one objective without an awareness of the linkages to the others; and when the objectives are difficult to define or measure.”

Financial sector policies are explored through the following four examples from South Africa: (1) “the passage of the Cooperative Banks Act 2007 creating a new tier of regulated institutions to permit formalization of existing informal providers and the establishment of new financial cooperatives;” (2) “a 2004 amendment to the ‘know your customer’ (KYC) regulations that enabled banks to offer simplified ‘Mzansi’ bank accounts for the unbanked;” (3) “the commitment by banks to provide affordable housing loans;” and (4) “the permitting of payroll deductions for repayment of small loans.” These four examples are examined to determine whether the policies effectively maximized the I-SIP linkages to increase inclusion in the financial sector. In the first and third case, the authors determine that financial inclusion was increased without hindering financial integrity, financial stability or consumer protection. The authors conclude that the two other examples inadvertently brought negative consequences for the financial integrity of the industry and consumer protection.

The paper goes on to offer seven “Guidance Statements” to be used by policymakers to design financial inclusion interventions that will maximize synergies while minimizing tradeoffs. The seven principles are: (1) having an “inter-agency collaboration to identify linkages; (2) use of a linkage framework that “enables linkages to be optimized, helping avoid false and unnecessary tradeoffs between objectives and to maximize synergies;” (3) “a clear definitional framework for financial inclusion that includes definitions at the national, policy and product level;” (4) “segmenting the market according to whether clients are currently served with formal financial services, within reach of but not using [it], outside the current reach…or self-excluded;” (5) regularly collecting policy-relevant data to regulate and monitor linkages; (6) having structured consultation with financial service providers; and (7) “a commitment by policymakers to adapt policy and regulation over time in light of the evidence collected and outcomes observed.”

The authors conclude the paper by stating that although tradeoffs are not entirely avoidable; synergies are achievable by focusing on optimizing the linkages between not only the I-SIP objectives but such broader objectives as economic development and increased welfare.

By Sarah Benali, Research Associate

Sources and Additional Resources

“Financial Inclusion and the Linkages to Stability, Integrity and Protection: Insights from the South African Experience,” CGAP: November 2, 2012, http://www.cgap.org/sites/default/files/I-SIP%20Report_1.pdf

MicroCapital.org story: “MICROCAPITAL BRIEF: FinMark Trust 2012 FinScope South Africa Survey: Banking Population Increased from 63% to 67% in Past Year,” November 7, 2012, https://www.microcapital.org/microcapital-brief-finmark-trust-2012-finscope-south-africa-survey-banking-population-increased-from-63-to-67-in-past-year/

MicroCapital.org story: “MICROCAPITAL BRIEF: South Africa Proposes ‘Twin Peaks’ Financial Inclusion System,” October 29, 2012, https://www.microcapital.org/microcapital-brief-south-africa-proposes-twin-peaks-financial-regulation-system/

Microcapital.org story: “MICROFINANCE PAPER WRAP-UP: ‘Financial Inclusion and Stability: What does Research Show?’; by Robert Cull, Asl Demirgüç-Kunt, and Timothy Lyman; CGAP (Consultative Group to Assist the Poor) Brief,” May 29, 2012, https://www.microcapital.org/microfinance-paper-wrap-up-financial-inclusion-and-stability-what-does-research-show-by-robert-cull-asl-demirguc-kunt-and-timothy-lyman-cgap-consultative-group-to-assist-the/

MicroCapital Universe Profile: CGAP (Consultative Group to Assist the Poor) https://www.microcapital.org/microfinanceuniverse/tiki-index.phppage=CGAP+%28Consultative+Group+to+Assist+the+Poor%29

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